Friday, October 08, 2010

In light of the Unemployment report...

...from this morning showing that, in terms of employment, governmental policy has failed miserably...

"TO ME our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness. Vast ills have followed a belief in certainty, whether historical inevitability, grand diplomatic designs, or extreme views on economic policy. When developing policy with wide effects for an individual society, caution is needed because we cannot predict the consequences"
-Kenneth Arrow

In a report that Jared Bernstein and I issued during the transition, we estimated that by the end of 2010, a stimulus package like the Recovery Act would raise real GDP by about 3 1⁄2 percent and employment by about 31⁄2 million jobs, relative to what otherwise would have occurred. As the Council of Economic Advisers has documented in a series of reports to Congress, there is widespread agreement that the Act is broadly on track to meet these milestones…. What the (Recovery) Act hasn’t done is prevent unemployment from going above 8 percent, something else that Jared and I projected it would do. The reason that prediction was so far off is implicit in much of what I have been saying this afternoon. An estimate of what the economy will look like if a policy is adopted contains two components: a forecast of what would happen in the absence of the policy, and an estimate of the effect of the policy. As I’ve described, our estimates of the impact of the Recovery Act have proven quite accurate. But we, like virtually every other forecaster, failed to anticipate just how violent the recession would be in the absence of policy, and the degree to which the usual relationship between GDP and unemployment would break down
Christina Romer

Of course the markets have cheered this news as it spells inevitability for QE2, which comes as no surprise to readers here. However, to the extent that the market believes QE2 will be effective, it is wrong.

Throwing more and more money at the problem will only achieve similar results. This explains my allusions the the Khyber pass and the charge of the Light Brigade. The Fed and the Economic establishment is, once again, mistaken in its belief that asset swaps will stimulate the economy, and I once again sound my clarion call for the only effective measure of stimulus to create ORGANIC growth in aggregate demand; Tax Cuts.

It is a tragedy that so many lives are effected by policymakers whose first calculus when contemplating policy is the retainment and expansion of power. I am starting to think this is by design rather than ignorance or good intentions.

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