Attack Of The Son Of Stimulus

Francis Cianfrocca is a senior editor at The New Ledger.

Some people have started exploring the idea of a second or even a third round of fiscal stimulus, on the theory that the $787 billion "porkulus" enacted last February isn't doing enough, fast enough. People in the White House itself, to be sure, are carefully stage-managing the debate while insisting that they're not seriously considering the idea themselves. Politically, it's going to be tough to sell a huge new round of deficit spending, to get benefits that are hard for most people to see.

The two key questions are: is the first stimulus doing anything good at all for the economy? And why would a second or third round do any better?

Democratic leaders in Congress took it for granted back in December that their first order of business in 2009 would be a huge fiscal stimulus. Much of the debate took place even before the new Administration took office in late January.

Back then, the economy was contracting at an annual rate of something like six percent, and job losses were running well over 600,000 a month. The perception was that we were in a full-fledged emergency, and the President himself sold the stimulus legislation by saying that "catastrophe" would ensue without it.

One of the Democratic talking points floating around now is that the new Administration has already created or saved 150,000 jobs. But more than 2 million jobs have been lost on their watch so far. Are they saying that figure would have been more than 2.15 million instead?

And let's go back to the atmosphere of deep crisis which prevailed at the beginning of the year. Rahm Emanuel has been telling people of late that the first stimulus dispelled the gloom and started the economy on the way to recovery. (Implicitly, then, one takes him to mean that some more stimulus now might make things faster.)

But Emanuel is wrong. Remember that the economic recession had its genesis in a financial crisis of biblical proportions. Throughout the period from mid-September to January, there was a palpable fear of a global meltdown, with insolvency and failure cascading through hundreds of banks and other financial institutions.

That fear did not recede because Congress chose to borrow and spend $787 billion. It receded because the Federal Reserve and other monetary authorities undertook to guarantee the obligations of nearly every large financial institution in the world.

In early January, the interest rate on 10-year Treasury notes stood at an extraordinarily low 2%, and by early March the S&P 500 stock-market index had fallen to 670. Interest rates have risen since then and stocks have recovered, as finance professionals slowly began to breathe again and unclench their teeth.

But now that Ben Bernanke and other central bankers have stopped the bleeding in the financial sector, it doesn't at all follow that the broader economy will necessarily recover. When people talk about "green shoots," they're really reacting to signs that the economy has stopped collapsing at such a fast rate, and is now falling more slowly. The end may possibly be in sight, but things may not start getting better for a long time.

What were the Democrats really thinking back in December and January? The new President kept saying that we needed a huge pulse of deficit spending right away or the sky would fall, and speed mattered more than what we spent the money on. (That reminded many of John Maynard Keynes, who famously said that government can improve the economy simply by burying bottles of money in coal mines and paying workers to dig them up.)

So we got an ugly package containing everything that state and local officials and lobbyists could convince Nancy Pelosi's people to spend money on. "Porkulus" is an understatement. But it doesn't inspire love and respect among the American people to borrow and spend large on candy and bubble gum, while they're saving their pennies because they're worried about job losses. That right there is what will make a second or third round of stimulus politically challenging.

Now the criticism of the first stimulus from the Left has always been that we didn't spend nearly enough, and that the package should not have included any tax cuts. To accept this view (which is espoused by some of the most-respected economists in the country), you have to see the economy as a more-or-less deterministic machine, matching the old-fashioned Keynesian view. Throw enough money into coal mines for people to dig up, and you'll automatically get something you can call economic growth and employment.

There are two deep problems with this view. First, you certainly can make work with government spending, but it doesn't necessarily engender permanent, sustainable recovery. Many people, including myself, pointed out in January that if growth depends on fiscal stimulus, we'd soon enough finding ourselves in need of a second stimulus, with more to follow.

That's because of the second deep problem with the Keynesian view: this is an economy that does not want to grow. It's an economy that wants to deleverage, and adjust to lower levels of consumption and investment, congruent with the new realities in the financial industry. If someone's not eating, you can force-feed him. But you're wasting time and effort if he stopped eating because he's overweight and needs to slim down.

And let's talk a bit about the mechanics of government stimulus. You really can't force a lot of spending into the economy quickly through the mechanism of handing money to state and local officials. Local governments are in deep financial trouble all over the country. As always in a recession, their tax receipts are falling rapidly while their commitments for things like unemployment compensation are soaring. A great deal of the stimulus money is being used simply to avoid public-sector layoffs and pay cuts.

Is that really what we want more of? To let public-sector workers avoid the same personal budgetary pain that everyone else faces? What's the economic impact of that? It's not ultimately different from a tax cut, in that the stimulus money simply goes to pay down the personal debts of those government employees.

From the right, the criticism of fiscal stimulus has been largely incoherent, focusing on the politics of the issue. House Minority Whip Eric Cantor has been talking about doing things to benefit small business, instead of stimulating further. That would be an interesting line of attack if only there were some specific proposals to it. The condition of small businesses is very hard to discern on a macro level, but I'm confident in saying that many are suffering heavily from both a lack of demand and a lack of the bank financing on which they depend. Federal stimulus does little to address either problem.

To sum up, there is no case that a new round of fiscal stimulus will do anything substantial to improve economic conditions. Especially not if the key measure of success is a reduction in unemployment. It's going to take several more years to work off the effects of the housing bubble. It takes a belief in magic to suppose that borrowing and spending can do anything to make that process run better or faster. A new round of stimulus will merely add to the public debt without permanently improving growth or employment.

By Francis Cianfrocca
Reprinted with permission from The New Ledger