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During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Was there enough stimulus money in the first place?


By Lakshman Achuthan, Economic Cycle Research Institute

Question: Was there enough stimulus money in the first place?

Answer: To be clear, we’re talking about the $787 billion stimulus enacted in early 2009, not earlier efforts by the Fed to rescue the financial system in the fall of 2008, which certainly served to pull the economy back from the abyss.

That said, if we look at the objective data, it’s clear that the economy began to improve before the 2009 stimulus began to hit the economy. The major driver of the economic recovery remains the massive rebuilding of inventories, which was guaranteed once Armageddon was taken off the table in late 2008.

This is reminiscent of when FDR first took office in March 1933. That very month, before any of his policies took effect, the economy blasted off on a four-year expansion that boasted 10% average annual growth, slashing the jobless rate by 14 percentage points. Believe it or not, that recovery began nine months after President Hoover raised the top marginal tax rate from 25% to 63%.

All of this is to say that the power of the business cycle dwarfs virtually all short-term fiscal policy initiatives by politicians. Please also recall the first bipartisan stimulus package that sank without a trace in the spring of 2008, because the business cycle simply overwhelmed it, and the outcome would have been the same even if it had been twice the size. Likewise, for the second (2009) stimulus, size doesn’t really matter.

Bottom line, politicians will either take the credit or the blame for whatever happens, regardless of their efforts. In the same way, pundits will keep pushing their respective agendas regardless of the facts. To be fair, I too have an agenda which I strongly believe in - which is to highlight the importance of the business cycle.

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