Simon Johnson: Why the Stimulus Worked

[ProSense]

Simon Johnson was chief economist of the International Monetary Fund from March 2007 through August 2008. He is a professor at the M.I.T. Sloan School of Management, a senior fellow at the Peterson Institute for International Economics and a regular contributor to the Times’s Economix blog. He testified before the Joint Economic Committee on Congress on the stimulus; testimony and broadcast of the hearing can be found here.

Why the Stimulus Worked

The fiscal stimulus played a decisive role in reducing the depth and pain of the recession and is now helping to get a recovery under way.

Much of the debate about the stimulus misses the critical global context — remember that our fiscal stimulus enabled President Obama to play a decisive leadership role at the G20 summit in April, bringing along both appropriate stimulus in other countries and timely support for the International Monetary Fund.

Most other industrialized countries have substantially stronger “automatic stabilizers” than does the United States so that, when they slip into recession, tax revenues fall and government spending rises (e.g., on unemployment benefits) without any need for special legislation.

In the U.S., the standard automatic response to severe recession exists but is weaker and an act of Congress is needed if we want to support total spending and maintain confidence.

Critics of the stimulus are right to point out that much of the stimulus was not spent quickly — and only now coming on line. This is part of the reason why discretionary fiscal stimulus generally has little effect and is not encouraged for most situations by the I.M.F., among others: it doesn’t act quickly, and it’s hard to calibrate the effects exactly.

But the Great Recession of 2008-09 was not like “most situations.” It was a generalized collapse in production and employment brought on by a financial panic. Maintaining confidence in the future is essential in such situations, otherwise businesses refuse to invest and consumers stop spending.

The I.M.F. saw at least part of this coming — and this is why it started to call for pre-emptive and precautionary fiscal action in January 2008. The initial push back from both the Bush administration and almost all European governments was intense, and, in retrospect, completely inappropriate. Fortunately, the top leadership of the fund persevered and increased the urgency of its call for fiscal stimulus into late 2008.

Global crises need global responses. The Obama administration and current Congress recognized the challenge and stepped up in a sensible and responsible manner. Now they, and the rest of the G20, need to tackle the still urgent problem in our financial system, including the “too big to fail” banks. If this is not addressed — and progress so far is very limited and the prospects do not look good — we remain vulnerable to another debilitating crisis. And next time, we may lack the political will or credibility or luck to pull off another appropriate set of fiscal countermeasures.

[ProSense]

1. No comment? n/t

[Cha]

2. We were fortunate that Obama won after

the bush-cheney years..can you imagine what mcpalin would have done?

"Global crises need global responses. The Obama administration and current Congress recognized the challenge and stepped up in a sensible and responsible manner. Now they, and the rest of the G20, need to tackle the still urgent problem in our financial system, including the “too big to fail” banks. If this is not addressed — and progress so far is very limited and the prospects do not look good — we remain vulnerable to another debilitating crisis. And next time, we may lack the political will or credibility or luck to pull off another appropriate set of fiscal countermeasures."

[ClarkUSA]

3. As usual, "Obama=Bush" poutrage bloggers ignore expert commentary like this.