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When good policies look bad


Two stories came out today that deserve to be thought of as one -- and that get to the root of the Obama administration's most frustrating problem.

First, Jackie Calmes reports on TARP, which is set to expire Sunday. Ask your average voter how much the bailout cost, and they'll probably tell you $700 billion. Wrong. It now looks like taxpayers are going to lose either very little or nothing -- and there's a good chance they'll actually make some money. Sen. Bob Bennett, the Utah Republican who lost his primary in large part because he voted for the bill, has the best take. “My career is over,” he told Calmes, “but I do hope that we can get the word out that TARP, number one, did save the world from a financial meltdown and, number two, did so in a manner that, I believe, won’t cost the taxpayer anything.”

Second, Lori Montgomery reports on various assessments, including a White House report, showing that the stimulus spent its money at about the speed it promised, generating -- at least according to the CBO -- about the numbers of jobs it promised, and did so with remarkably little waste, fraud and abuse. "Certainly, the fraud and waste element has been smaller than I think anything anybody anticipated," said Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan watchdog group. "You can certainly challenge some projects as questionable economically. But there haven't been the examples of outright fraud where the money is essentially lining somebody's pocket."

Of course, the comments will inevitably fill up with people saying that unemployment is at 9.6 percent, and the administration predicted it would be beneath 8 percent, and so the stimulus failed. This is essentially the same as saying that if I eat an apple, and the apple doesn't fill me up, the apple has failed. Just as you can be hungrier than your meal is big, a recession can be larger than the stimulus designed to confront it. And ours was.

leonhardtstim.jpgFor all that Republicans are dismissing the CBO's estimates on the stimulus, you can bet that they'd be perfectly happy to trumpet those same estimates if they were suggesting the stimulus failed. They're also saying that an economy in recession needs continued low taxes, which is a form of stimulus (tax cuts, of course, made up about a third of the stimulus bill). And as far as concerns over debt go, extending the Bush tax cuts will add about five times as much to the deficit as the stimulus did. So that's not a consistent objection, either.

Now, you can argue that there were better ways to do the stimulus. That's almost certain. Here, for instance, is some evidence that the attempt to use behavioral economics research to design better tax cuts didn't work. You can say the stimulus was too small. That's quite clear. But the unemployment rate is not a verdict on the stimulus. It's the unemployment rate in the absence of the stimulus that we need to think about. I'm open to an argument over where the stimulus, at this point, has created 700,000 jobs rather than 2.5 million. But the argument that's taken hold in the political discourse, where Sen. Mitch McConnell says that “by any measurable index, the stimulus package has been a failure," and then brags about stimulus projects in his back yard, is just politics.

That has consequences. Both the TARP and the stimulus appear to have done their jobs quite well. TARP probably averted a depression, and the stimulus gave the economy a big shot of demand when it was most needed, and has created millions of jobs. Given the chaos and confusion that reigned amidst the financial crisis, that's pretty good. But because the economy is still in terrible shape -- in part due to the stimulus's size, though I'm not sure that Democrats would be much more popular if a large stimulus had brought unemployment down to 8.2 percent -- both the stimulus and the bailout have been politically, if not substantively, discredited.

That's not only bad as a matter of politics, as politicians who did the right thing, like Bennett, are being turned out of office, but it's bad as a matter of policy, as it'll make it harder for future leaders to follow and expand on an apparently successful template. Discrediting good policies now increases the likelihood of bad policies later.

Photo credit: Justin Sullivan Photo. Graph credit: David Leonhardt/New York Times

By Ezra Klein  | October 1, 2010; 5:02 PM ET
Categories:  Economic Policy  
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I agree on TARP. But the real question is the accuracy of the models for the stimulus. They have certain Keynesian assumptions built into them, and if this crisis has taught us anything, it's that our knowledge of macro-economics is very limited.

Posted by: jfcarro | October 1, 2010 5:22 PM | Report abuse

TARP saved the US financial system and probably the global financial system. It was a bailout and it worked. The problem is that the main beneficiaries were the players who created the mess in the first place. And there was no assessment of blame and no one held accountable. Instead, all 'Wall Street Bankers' got tarred and feathered. Broad brush or what? It's not quite the same but go back ten years when the likes of Worldcom and Enron went bust. The gov't eventually passed Sarbanes-Oxley but imagine if they hadn't sought retribution against Bernie Ebbers and the gang running Enron. The average Joe would be upset at the gov't even though the greater good was served by SOX.

Posted by: tuber | October 1, 2010 5:26 PM | Report abuse

The tea partiers/Republicans succeeded in demonizing both TARP and the stimulus and the Obama administration did a terrible job in explaining the need for the stimulus and for continuing TARP.Now, most Americans believe that it was Obama who bailed out the banks,when, in fact,it was the Bush adminisration and most voters believe the stimulus didn't work,although every objective analysis indicates that the Great Recession could have turned into another Great Depression if there had been no stimulus or TARP.Too bad the stimulus wasn't bigger and that Obama did not look to FDR's fireside chats to create his own modern equivalent to explain his policies.FDR was able to clearly and simply explain his policies and in the process instill trust in the government's ability to confront the depression.In fact,after the fireside chat in which he explained the need for a bank hliday,when the banks reopened,instad of a run on the banks,Americans lined up to put their savings back in them.

Posted by: johnbird1 | October 1, 2010 6:14 PM | Report abuse

Can we stop with the 1/3 of the stimulus was tax cuts meme and the whining that Republicans should have voted for the stimulus because of this?

Calling the make work pay credit a tax cut and calling a marginal rate reduction a tax cut as well is conflating two entirely different things. Make work pay credit is closer to giving a welfare check to people with a job, not a tax cut.

Posted by: cdosquared5 | October 1, 2010 6:17 PM | Report abuse

The opposition to TARP doesn't care that almost all of the money will be returned, they don't care that millions of jobs were secured in multiple industries, but they do care that the program existed as a matter of capitalist principle. Moreover, the federal government has a history of bailouts on a large scale(Airline Industry), and on a moderate scale(tax breaks,import limits,etc). Are these really the middle class tea party people who oppose TARP or some right wing elite?

Posted by: photek00 | October 1, 2010 6:20 PM | Report abuse

"Both the TARP and the stimulus appear to have done their jobs quite well."

Correct, and the guy who is supposed to tout this; is he doing it - President Obama?

We have Sen. Webb crowing (to certain extent true and definitely true to my original reaction of differing Health Care for 're-tooling of economy based on Carbon Energy) today that Obama was wrong to do Health Care.

So really the question is - are these Dems and the President, who have paid all the price needed, going to defend all these policies / passed bills or not? So far feel like running away and that is itself tell people that Dems hardly believe in anything.

Go and face people telling that they would adopt the same policies today too and unpopularity of these laws is the measure of capacity of Dems in sustaining 'stones thrown' for the larger and longer goals.

About the theoretical opposition of market intervention in TARP - try telling those elementary school stories to children and those with lesser brains like Sarah and Tea Party. Try finding our when and where has that 'ideal Capitalism' existed except for Ayan Rand's novels?

Real world is different and that is why you need 'grown ups' to deal with that.

Pass that brandy...

Posted by: umesh409 | October 1, 2010 8:44 PM | Report abuse

I know we're all supposed to ignore the fact that the stimulus didn't deliver anywhere near the numbers that the administration promised, but the significance is inescapable: If he administration can't model the recession correctly, why should we believe the figures it is producing about number of jobs "saved" or created? In other words, why should we believe that you're any less wrong now than you were back then? Or that your numbers are any less pretend?

Posted by: tomtildrum | October 2, 2010 12:03 AM | Report abuse

And when you say "little fraud or abuse," are you counting the $100 million that went to a Congressman's brother?

Posted by: tomtildrum | October 2, 2010 12:13 AM | Report abuse

The stimulus is a failure because it didn't keep unemployment under 8%. But it wasn't signed until the end of February 2009. The March 2009 unemployment rate was 8.6% and rising.

So there was no way the stimulus could possibly have succeeded. What was the point of even trying?

Posted by: suehall | October 2, 2010 12:17 AM | Report abuse

The proper title of Ezra's article should be:

When Weak Policies Are Oversold

Posted by: mitchellfreedman | October 2, 2010 11:21 AM | Report abuse

The proper title of Ezra's article should be:

When Weak Policies Are Oversold

Posted by: mitchellfreedman | October 2, 2010 11:22 AM | Report abuse

The issue is less about whether TARP worked and more about the moral hazard of rewarding those who got us into this mess instead of sending them to the poorhouse. For some TARP now seems like a good idea. Will it when the banks come hat in hand for TARP II?

Posted by: fakedude1 | October 2, 2010 2:52 PM | Report abuse

The problem Obama has is that he can't admit the success of TARP without admitting that Hank Paulson was the one responsible for it.

Posted by: krazen1211 | October 2, 2010 3:36 PM | Report abuse

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