Belmont Club

How do you know you're winning?

Reuters calls the economic situation “grim”. How grim exactly?  Reuters cites depressing economic indicators, but Obama cited small victories. He says that his plan needs “time and it will take patience” to work.

Obama has shrugged off the critics and refused to bow to pressures from Wall Street, saying he is not concerned with the gyrations of the stock market.

He announced a White House conference next Thursday with officials from all 50 states to come up with the most effective ways to spend the stimulus money.

In Ohio, he again urged Americans to keep their eye on the big picture and give his recovery plan, which he says will save and create at least 3.5 million jobs over the next two years, time to work.

“Because of this plan, stories like the one we are celebrating here in Columbus will soon take place all over this nation,” he said on Friday. “All of this takes time and it will take patience.”

The 25 officers had been expected to be laid off before Columbus received about $4 million in stimulus money, but can now graduate. The city does not have the money for another graduating police class.

Obama said such small victories were being repeated around the country, but admitted “we’ve got big challenges ahead of us.”

“We inherited a big mess,” he said.

How can one tell, from an objective point of view, whether or not the government “stimulus” package is working when many of its components won’t kick in until many months and even years have passed? The answer is that you can’t infer the effect of things that haven’t happened yet. This is the fundamental problem with applying long term, linear solutions to complex systems which react on much shorter time scales. This is why President Obama can’t trot out a chart of figures and say “look here, we’re winning”. Instead he has to rely on anecdotal evidence; on “small victories” which may indicate a trend, but then again might not.

The political problem for President Obama is that the economic monster gets to delivery flurry after flurry of punches to American pocket book while they await his stimulus haymaker. There’s a mismatch in time scales between the effects of the economic crisis, on the one hand, and the policy responses to it on the other. It is as if one were watching two movies. One filmed at 15 frames per second and the other at 300 frames per second. When the reel rolls, its superspeed versus slow motion. The real danger for the administration is that they can only counsel patience for so long. Eventually the mismatch will lead many members of the public to conclude that a delayed response is equivalent to no response.

A no-response strategy wouldn’t be so bad if the President had adopted the strategy of letting the markets work, or to giving them their head until there was a compelling public case for intervention. Because in that case both problem and solution would be operating in the same space. That would have allowed macroeconomists to use the standard metrics for measuring the depth of the recession and look for signs of recovery in the same old way. Then, by restricting intervention to places where the market had failed or there was a discontinuity, the administration could have proposed key indicators as ways to measure whether or not its policies were working in the way that an explorer entering unknown territory puts down survey stakes. One of the best indicators you are actually solving a problem is that the questions “converge”; on the other hand one sign that you aren’t solving a problem is when your theories fly up into the sky and never show any sign of returning to earth.

Unfortunately by a combination of vaulting ambition, as exemplified by loose talk about “global bargains”, “green jobs”, the “end of capitalism” and secretive activity, as illustrated by the AIG bailout, handouts to Detroit, and a huge but delayed fiscal package, the administration has made it look like they’ve invented a whole new economic machine to save us. This new machine, if it exists, may have new metrics that allow us to ignore the “gyrations of the stock market”. But instead of giving us a glimpse into his new instrument panel, President Obama shows us a mock-up, with painted dials. Where are we Mr. President? Does it take time and patience to work or time and patience to find out where we are? Until then, the stock exchanges are the best indicator of the expected value of the economy. Absent any other data that President Obama can present, then a bear market is a bear market is a bear market.