The Stimulus Worked

The election sniping is heating up both inside and between the parties. The Tea Party has lost the spot light to OWS but look for a bounce back. Here's the hard truth: the stimulus plan worked. In fact, it worked to historical proportion. The massive hoard of corporate profits is the result. My friend Gerard Minack at MS Asia has shown that transfer payments are running high enough to bring disposable income back to peak, while ex TP only 50% has been recovered. The implications are huge.

First, the global anti-deficit shift will be a significant headwind to growth, not a supply side positive. The second, and more complicated, aspect is do corporate profits matter? Extreme cost cutting during the crisis set the foundation for bottom up benefits that accelerated in the recovery, now what? The profits have not morphed into a self sustaining expansion and heavier cost cutting in a stall will be difficult. Only government is up for cutting.

OWS has yet to realize the paradox in their message. Likewise, the neo-free marketers have not come to terms with who (what) actually made them profitable. After spending the majority of the year tossing around with international headlines, the US capital markets will wind down 2011 contemplating their own navel. Corporate profits have been driven by the stimulus. The stimulus has been vilified as a mistake and a failure. Corporate profits will be the consequence in 2012.

3 thoughts on “The Stimulus Worked

  1. Ivan

    Whether the stimulus “worked” depends on your reference point. The stimulus supplemented aggregate demand which was required in our consumption-driven economy, as household deleveraging on a massive scale crimped consumption spending. In that respect it worked to avoid a complete collapse in GDP.

    The fact that it was not self sustaining is a function of its inadequate size and its consumption-heavy (as opposed to investment-heavy) composition. I think Kevin is spot-on regarding how the amplified grassroots rhetoric has shaped the anti-deficit mantra.

    I’d like to see the mainstream media shine light on the policy and economic activities of 1937. The crux of the debate is exemplified here. My view is that the lesson of 1937 is that timing matters. If we’re too soon on (necessary) deficit discipline, more than corporate profits are at stake.

    As the US starts navel gazing, we need meaningful debate on this point, not electioneering. Otherwise, 2011-12 will be the future classic case study of economic policy mismanagement.

  2. Tuvaorbst

    How can you say the stimulus worked when it is simply funded by debt and transfered to corporations as a one off with bureaucrats taking their cut in the middle?

    It gave a boost to GDP sure, but its not sustained, its been spent and the debt is left. It is only sustainable if the stimulus results in increased productivity (which it hasn’t)

    Or are you arguing for the case of perpetual stimulus and perpetual borrowing/debt monetization?


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