Attack Of The Son Of Stimulus

Francis Cianfrocca: If The First Stimulus Isn't Helping, Why Believe That A Second Or Third Stimulus Would Do Any Better?

(CBS)  Francis Cianfrocca is a senior editor at The New Ledger.

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Show me someone who thinks he's smarter than most of the people he knows, and I'll show you someone who hasn't met a broad-enough range of people. Rather frighteningly, that seems to apply to the President of the United States, who through his surrogates has been busily pointing out that his predecessor ruined the economy even worse than anyone could have expected.

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.

[HopeforAmerica]

Hold on to your shirts, and give the Stimulus time to work! My god, the stimulus bill was signed barely (5) months ago. The Prez said in January it was going to take a long time to recover from a deep recession, that the stimulus was needed to stop the hemorraging, and that we must have patience! Obama inherited an unprecedented cataclysmic Mess, and to expect the economy to recover after (5) months is unrealistic.

[rbstrcklnd]

At what point is it no longer Bush's fault and that of Obama's? The economy started falling right before the election (interesting) and they needed Tarp. Both McCain and Obama voted for it. How many years and how high does the unemployment rise before it becomes the next man's burden. Obama is making decisions and it is affecting this country. And how does Obama tripling the nation debt become Bush's fault? Why do they need pork in the health care bill? Sorry this in on Obama now. He owns it.

[HopeforAmerica]

TO; rbstcklnd; The economy Tanked in Dec. 2007. No matter how long it takes for this economy to recover, it will go down in history that it Tanked during Bush's second term in office!
And finally, it's been barely 5) months since the recovery bill was signed, and I don't know why people think you can fix an unpredented economic downturn in Five months!? President Obama said in January that it would take a long time for us to recover, that jobs are the Last event in the recovery cycle, and that it was going to get much worse before it got better. He also said that the stimulus pkg was to stop the bleeding, and slow the downturn of which it has! In a recession such as this, it was necessary for the government to inject $$ into the economy to avoid a Total economic collapse. There's No pork in the health car bill... it's not finished.

[creeper00]

How can anyone advocate with a straight face a second stimulus when the first one remains mostly unspent?

Until John Q. Public stops listening to politicians and starts trusting what he sees with his own eyes this economy cannot recover. So long as we are content to allow the people who got us into this mess to profit from it things will get worse, not better.

[whitemale08]

'787 billion' is a drop in the bucket to the 14.8 trillion that Goldman Sucks and JP Morgan got for their absolutely worthless derivatives and credit-default swaps krap.

Anymore 'borrowing' from the Chinese will further push them to dumping the 'dollar'.

Lyndon Larouche tried to warn Obama but he insisted on continuing the Bush/Paulson bailouts.

Obama has to put the entire global financial system into receivership, that includes Goldman Sucks and JP Morgan.

If President Obama would announce tomorrow that he would stop all bailouts to Goldman Sucks and JP Morgan and abolish the Federal Reserve to go back to a Hamiltonian-style CREDIT SYSTEM, then confidence would come back immediately.

But as long as Obama continues the bailouts, there will be no confidence because everyone knows that it is impossible to bail out all 1.4 quadrillion in worthless derivatives and credit-default swaps.

Nobody wants this krap that's on the balance sheets of Goldman Sucks and JP Morgan but they've managed to put Obama in the White House as their corporate puppet to pass on the worthless derivatives to the taxpayer.

IT'S HIGH TREASON AND OBAMA SHOULD BE IMPEACHED FOR THE BAILOUTS!!!!

[pdchapin]

The problem with the first stimulus package is that it's turned out to be harder to spend the money than expected. Only something like 10% has actually been spend. Still, the economy is clearly beginning to turn around so we can debate forever if the stimulus worked or if the relationship is statistically spurious.

A new stimulus, however, makes no real sense since most of the last one is still in the pipeline. Also, now that the public mood has improved somewhat, the idea of redirecting some of the stimulus to a tax cut actually makes sense. At the beginning of the year that wouldn't have worked because everybody was too scared to spend, but now an influx of cash to the average citizen might do some good and would be faster than the spending approach.

Politically, a bad economy at the start of a term isn't that bad a thing. Since the economy can't do anything but improve, the incumbent looks good even if his policies were completely irrelevant to the solution. Think Ronald Reagan who had the economy tank shortly after he got into office.

[Joe_NY_15]

If we didn't go along with his 1st Stimulus plan, it would be a catastrophe.....they passed it.....Nothing...no stimulation....just higher unemployment and crashing markets.....now they want another wasteful stimulus.

Say hello to Republican control of Congress in 2010 !!!!....Yes We Can !!!......Hope for change....LOL

[ubrew12]

Article: "you're wasting time and effort [force-feeding a porker] if he stopped eating because he's overweight and needs to slim down."

I see. So, the 10% of Americans who are unemployed are actually overweight. Gotcha.

Hey America! Cianfrocca says you're bloated with excess humanity. All of you without jobs need to kill yourselves, and save the rest of us from having to figure out how to employ you.

[imnho]

GWB was a disaster as a POTUS. I wouldnot be surprized if we need a second round of fiscal stimulus. The people running for eight years the country are the same people who thought that you could have tax cuts and two land wars at the same time. They took the country to the brink of collapse and the impacts will be continue to be felt long after they leave the scene. If we still have a country four years from now then Obama will have done his job and saved us from the tragic state that GWB created.

Basicaly everything GWB touched was set ablaze and was left burning out of control.

[beaumuff]

Get ready for more to come. Obama has been a dismal failure so far. He does not realize those printing presses don't run for free. He thinks Ego Force One is for family vactions.

[wogerwabbit]

What would have happened if Bush had never started the bailouts last year? What if all these too big to fail companies had been allowed to fail? Where would we be now? An interesting scenario. Anyone?

[Joe_NY_15]

Yes, interesting scenario, and one that was the correct path....free market capitalism would have dealt with bad companies

Since when do you prop up failed companies, only to continue the same practices, with the exception of Obama limiting CEO bonuses.

There is a reason they are bankrupt

[ubrew12]

They needed to do what Norway did. Take over the banks, nationalize them, reorganize them as smaller entities, and reprivatize them. We did what Japan did, and Japan has never recovered.

[clancy49]

Hello wogerwabbit. This is only my supposition and I do not claim to me any of the monetary experts. As a simple working class poor I would say the companies would have been sold, reorganized, a better management system in place, and as the Ford CEO said, (Ford did not take the bailout)"We were so focused on making money from money, we forgot how to make product." So we would once again bring jobs back from overseas, begin manufacturing again, and focus on the quality of product and life. I even see where humanity would care about responsibility once again and less marketing on instant gratification wants. There would not have been the huge job losses, since reorganization would have provided more production jobs. We would not be in debt to China. We would not give debt to our great great great great grandchildren. We would have a stronger retirement package, allowing our 60 plus to retire allowing the younger to come in for jobs. We would have taken care of obsessive greed and actually began a workable health care system by dumping the greedy insurance companies that focus on profit, not health care. Which is what our government is currently trying to do. I mean focus on massive profit for the elite government and forget healthcare for its people. I also see the Federal Reserve would have paid off the debt of the banks so the people still had their money, instead of stolen by Wall Street and handed over to the Federal Reserve to play globally with. Yes, crazy as I am, I would have seen a far stronger and stable world. Don't label me as a Republican either. We have puppet candidates, puppet Presidents, and completely addict controlled Congress. I just believe that if we had let things fall where they might, the American people would have been in a far better position today. Unfortunately the American does not have enough faith in their own power.