Stimulus Should Not Be a Dirty Word

5 November 2009. Conventional wisdom, it seems, is that the US stimulus passed by the Obama administration soon after coming to office was a waste of money. It was pork laden (ie full of ‘bridge to nowhere’ type pet projects) and will take years to spend, hence not providing the immediate uplift to the economy that was intended.[br]

5 November 2009. Conventional wisdom, it seems, is that the US stimulus passed by the Obama administration soon after coming to office was a waste of money. It was pork laden (ie full of ‘bridge to nowhere’ type pet projects) and will take years to spend, hence not providing the immediate uplift to the economy that was intended.[br]

So ingrained has this thinking become, that ‘stimulus’ has become some kind of dirty word. And if that is true, then ‘second stimulus’ is distinctly rude, should not be mentioned in public, and may be an act of political hari-kiri.

Take Commerce Secretary Gary Locke, for example. Hapless Gary said something to Bloomberg TV which should be pretty obvious to any thinking observer:

[quote]If there is to be another stimulus — and that’s being hotly discussed and very seriously considered within the administration as well as members of Congress — it needs to be very targeted, very specific and we need to be very mindful of the deficit as well[/quote]

So policy makers are looking at the economy, which is still in a pretty fragile state, and having heated discussions about whether more help is needed. Forgive me for being naive, but isn’t that their job? And if there is call for stimulus, it should be carefully designed to have maximum impact on jobs & the economy, and minimum long term impact on the deficit. Sounds like a motherhood statement to me. [br]

And yet it has caused uproar. Talking heads on TV are turning purple, mobs with pitchforks are forming, and his spokesman was forced to say that Gary was ‘imprecise’.

Pur-leeeeease. That wasn’t his crime. No, he was being very precise. His crime was he was being honest.

Amid all the Happy Clappy noise coming out of the Fed – after all, who cares if official unemployment is close to 10%, and in reality may be nearer 22%, since all that matters is GDP going and banks appearing to be healthy, right? – you might be forgiven for thinking talk of a second stimulus is ridiculous.

Thankfully, there is one voice in the wilderness prepared to say the unfashionable – that not only is a second stimulus to be ‘hotly discussed’, it should be actioned. Now.

That voice belongs, of course to Nobel Laureate, Princeton Economics Professor and NY Times Op Ed columnist, Paul Krugman. In ‘Too Little of a Good Thing‘, he says

[quote]The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would. But that’s also the bad news — because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems. Unless something changes drastically, we’re looking at many years of high unemployment.[/quote]

Paul reminds us what everyone seems to have forgotten – that before the stimulus the economy was falling off a cliff. The stimulus wasn’t perfect – in fact many parts of it were not at all pretty – but it did include immediately impactful components, such as tax cuts and aid to states. If you want to know how the stimulus has helped, he says, go to school. Your local teacher may not still have a job without it.

As Mark Zandy of Economy.com put it,

[quote]The stimulus is doing what it was supposed to do: short-circuit the recession and spur recovery.[/quote]

Unfortunately, Paul’s analysis shows that even with the robust GDP growth of the 3.5 percent for the US economy in Q3 2009, it could be ten years before unemployment drops back down to pre-crisis levels.

If you want to get people back in jobs, you need more government stimulus, becuase the private sector is not yet strong enough to take up the slack.

Paul goes on to show that the notion that stimulus is like robbing your children is wrong – high unemployment is what really robs them.

[quote]Deficit hawks like to complain that today’s young people will end up having to pay higher taxes to service the debt we’re running up right now. But anyone who really cared about the prospects of young Americans would be pushing for much more job creation, since the burden of high unemployment falls disproportionately on young workers — and those who enter the work force in years of high unemployment suffer permanent career damage, never catching up with those who graduated in better times.

Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue.[/quote]

No, if you really want to stop the rape and pillage of future generations, you should back stimulus and universal healthcare while going after the two-thirds of companies in the US who pay no federal income tax.

But of course that won’t happen. The banks and big business will be protected, stimulus help for the unemployed will be abandoned by ‘moderate’ Democrats thanks to political expediency, and Americans will continue to get poorer and angrier.

Hosni Afleck

EconomyWatch.com