Taking Credit

Democrats have started "taking credit" for the government's initial estimate of 5.7% growth in economic output in the fourth quarter of 2009, saying that the "stimulus" bill was important to the return to growth. This simply isn't true.

It is important to note several things:

• There have been dozens of recession in American history, and we have always resumed economic growth - whether government policies were helpful or not to the recovery. Almost regardless of the policies pursued by the Bush and Obama administrations, we would have recovered from this recession. So the mere fact of coming out of a recession isn't relevant to taking credit for the policies pursued; instead, we have to see whether some or all of the specific policies contributed to recovery.

• There are many policies which are relevant to recovery, of which the "stimulus" bill is just one. For example, for those who believe increasing government spending is important to returning an economy to growth from a recession, there are long-established programs called "automatic stabilizers" which lead to increased government spending in a recession, such as unemployment insurance, food stamps, and welfare payments. They kick in immediately, rather than the long delay associated with the spending under the "stimulus" bill.

• Other government policies have clearly retarded growth. The Democrats efforts to restructure healthcare, legislate against global warming, and raise taxes has profoundly effected business confidence - which means that businesses are more wary of investing in new equipment or hiring additional employees with such risks looming over their business and the economy. The key to economic growth is to get businesses to want to expand again, and they need to understand how their investments can be profitable in the future. Without this, business will retrench. In the 1930s, this was called a "capital strike" as businesses feared the anti-business legislation and pronouncements of FDR. Obama's policies and rhetoric have created a similar situation today.

• The Bush administration also committed hundreds of billions to invest in the financial sector through TARP. While TARP has predictably turned into a political disaster, since it encouraged Democrats to pile on with its spending frenzy, it added a great deal of money to teetering banks. For those who believe government spending helps, the TARP money was spent quickly and in large amounts - as compared to the slow pace of spending under the "stimulus" bill. TARP stopped a modern run on the banks, which would have proved devastating to everyone. Given how TARP has turned into an excuse for government to spend outrageous amounts of money, it would appear to have been better for the government to guarantee banks liabilities - thereby stopping the run without giving Democrats the excuse to spend at unprecedented levels.

• In addition to TARP (or better yet a guarantee of banking liabilities), the most profound government policy to promote recovery was one not taken by elected officials, but instead decided and implemented by an independent government agency. The Federal Reserve undertook extraordinary measures to add liquidity to the financial system and cut interest rates. The Fed was trying to avoid a repeat of government policy 80 years before where the Federal Reserve's monetary policy turned the recession of 1929 into the Great Depression of the 1930s.

Christina Romer, Obama's head of Council of Economic Advisors, did extensive research work at Berkeley showing that fiscal stimulus is generally not relevant to aiding recovery from a recession whereas monetary policy is. While Romer has stated that this recession is different, she of course has to say that to justify Obama's "stimulus" bill.

Note monetary policy was one of the leading causes of the recent financial crisis, with the Fed's low interest rate policy serving to spur borrowing to an unprecedented degree and fueling the housing boom and its subsequent collapse.

We shouldn't be surprised monetary policy has such a profound impact on the economy, since it effects interest rates and the amount of money available to be spent and invested. Fiscal policy, particularly in the form of increased government spending, simply takes money from one person (a taxpayer or lender) and gives it to another person (a recipient of government spending). The impact of this transfer is modest at best, while the impact of monetary policy effects every decision in an economy.

Let's hope that the return to economic growth can be sustained. And let's hope that we can understand what did, and did not, cause it to occur.