Short-run vs Long-run Effects of Fiscal Stimulus

I have come to the conclusion that economic policy in the US is made by people with a planning horizon of no longer than four years. The debate on the TARP funding last fall and Obama's proposed stimulus package this year are both good illustrations.

There may be a short-run benefit from either or both of these in terms of easing the severity of the recession. In the case of the TARP legislation, one could (and most explicity did) that without some sort of bailout economy would have go through a long drawn-out recession as banks to sort out the bad debt from the good and curtailed new lending in the process.

On the other hand, there are long-run negative effects, mostly in the area of moral hazard. I see two major types of moral hazard. First, the moral hazard associated with bailing out banks and firms that made bad decisions. If they get rescued when they screw up why should they worry so much about screwing up in the future. The second moral hazard problem is one related directly related to government control (or at least influence). This seems to have a much shorter fuse. As near as I can figure the long-run in this case is less than six months. Witness Barney Frank's bailout of an otherwise unqualified Massachusetts bank via the TARP legislation. Or the strings attached to the auto bailout bill.

As further evidence of the weight policy makers put on the short-run I offer an editorial from today's Wall Street Journal by Jphn Kerry and Kent Conrad entitled, "Congress Needs to Help the Economy Fast: Let's not debate another rescue bill in a few months."

This is all a little astounding given that fiscal stimulus effectiveness is based almost solely on theoretical underpinnings and there is not a much in the way of counterfactuals to give it much empirical support. Put more plainly, we have not had a recession in the past 70 years where the government did NOT engage in fiscal stimulus. (See Rick Evans' post here.) How do we know that not increasing government spending during a recession is really a bad idea?