Why The Stimulus Story Isn't Resonating: No Transparency, No Participation
from the politics-as-usual dept
There are some interesting theories as to why that might be. My favorite economics reporter, David Warsh, has proposed an interesting (and somewhat compelling) theory: which is that most of the economists in Obama's inner circle believe in an economic theory of boom/bust cycles that the rest of the country doesn't believe in. Specifically, the new Keynsians don't put much weight in the "hangover theory," which is what Paul Krugman nicknamed the Austrian theory of business cycles, greatly simplified into:
In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity -- of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes--investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.Now, Krugman then goes on to suggest why this theory is wrong, but Warsh and I both have trouble with his explanation. It's not very convincing (though, I'll be the first to admit that I'm pretty sympathetic to the arguments from the "Austrian school" of economics). I could go through why I think our most recent Nobel Prize winning economist is wrong, but this post is already getting pretty long (short answer: he ignores how certain parts of the economy are interconnected, and incorrectly brushes off the time that it takes to understand where new investment opportunities lie). In fact, as Warsh points out, the "hangover theory" makes an awful lot of intuitive sense to most people. But the problem is that the stimulus plan doesn't seem to be responding to the hangover effect. Instead, it's very much focused on what Krugman and the "new Keynesian" economists believe the real problem to be (everyone wants cash). Thus, the stimulus idea is get cash into the economy, pronto. But for everyone who believes in the "hangover theory" this sounds just awful. It just prolongs the problem by dumping cash into a system that's still adjusting, and simply fuels the next boom (and, eventual bust).
I think Warsh is definitely correct on the gut reactions many people are having to the stimulus package -- which is that it doesn't seem to be addressing the real problem at all, and seems ripe for abuse. I don't deny that getting more money into the system will stimulate something -- I'm just afraid of what.
However, I think there's also a second reason why the country remains incredibly apprehensive towards the stimulus package. That's because for all the talk about how this was a new era of transparency and how Obama was going to use the same participatory tools that help got him elected to govern, this stimulus package didn't do that at all. Instead, it was done in the same old way. The details were all worked out in the backrooms by the same beltway insiders, and then presented to the public as something to take or leave -- or maybe argue about at the margins. We were never invited to participate in the process at all. We weren't really given a chance to weigh in with our thoughts.
And, thus, we feel that this is politics as usual -- something many people were hoping would go away for a while -- on one of the biggest, most important efforts to deal with a huge economic mess. The best the administration could do was ask everyone to help support the plan he handed down -- rather than having everyone help him build the plan. That was a huge mistake, and it's reflected in how the plan has been presented and how it's been debated.