Reprinted with permission from The New Ledger.
of The New Ledger.
Chris van Hollen (D-Md) just scored House Republicans this weekend for attending lots of groundbreaking and ribbon-cutting ceremonies in their districts after having voted against the $787 billion stimulus package last year. His point is part of a big story that Democrats are deeply dependent on selling effectively: that fiscal stimulus is the reason why we're not experiencing a second Great Depression.
It isn't. The financial system was saved from a deflationary spiral (which indeed would have resembled another Depression) primarily by the bold and creative responses by Ben Bernanke, Hank Paulson and others, in the depths of the acute crisis of late 2008. Most of this work was done before the current president was inaugurated.
(Sidebar: to those Senators of both parties who looked past their legitimate objections and voted to confirm Bernanke, thank you. You did the right thing.)
But there are two crises: an economic one as well as a financial one. And the economic crisis, with stubborn high unemployment and reduced personal consumption expenditures, continues as strong as ever.
It's certainly true that deficit spending as large as the current administration has done, and will propose to continue doing, provides a lift to GDP. All of those groundbreaking and ribbon-cutting ceremonies in various Congressional districts do indeed come with some kind of job creation.
But is it permanent job creation? There's convincing evidence that fiscal stimulus gooses current-period GDP. The latest is in last week's GDP report. You saw a clear decline in consumer durables-spending relative to Q3, which correlates to the end of the Cash for Clunker automaker subsidy.
Yet there's no sustained evidence, either now or in history, that fiscal stimulus does what the Keynesians claim. They think, intuitively enough, that government-generated demand kickstarts private demand and *causes* economies to recover.
It's probably much closer to true that economies recover on their own, *coincident* with government stimulus efforts. Government efforts, which include "automatic stabilizers" like lower tax payments and higher unemployment benefits, perform a useful stopgap function, but don't actually cause recoveries to start.
And here we are in a deep recession that differs from recent ones because it's a balance sheet recession. The powerful downdraft in stock market and home-equity values has made it impossible for households to access as much credit as has been the norm for roughly the past two decades. Households therefore simply have no choice but to consume less. You can't lose a large fraction of your life savings without changing your spending habits at least somewhat.
And guess what? Fiscal stimulus by the government does very little to repair this damage, except by the normal, unleveraged process of keeping a few extra people in their jobs. What many people are saying now is that we failed last year by not borrowing and spending nearly enough, and we have to do more now. Fine, but the results won't be any different.
It would make a lot more sense for policymakers (Bernanke among them) to acknowledge that it's not a good idea to fuel incremental private consumption with growth in credit. At some point, there is too much debt for householders to sustain.
It would also be an excellent thing if policymakers would acknowledge that the same applies to public credit. We're using deficit-driven fiscal stimulus as a countercyclical tool against a balance-sheet recession. That means we're replacing the borrowing and spending that consumers and businesses used to do, with borrowing and spending by the federal government.
Government borrowing and spending is deeply seductive because it's so much cheaper. The US taxpayer is still by far the best credit in the world. But that just postpones the day of reckoning.
It's going to take several years, maybe longer, for consumers to repair their balance sheets. Consumer spending, which is 70% of the US economy, will take that long to recover. *This is a structural effect, not amenable to improvement by the government.*
Instead, the Keynesians persist in thinking that fiscal stimulus will wake up the animal spirits. And as I said, their spending indeed does goose current-period GDP. But you have to keep stimulating year after year, because the jobs that the government creates aren't permanent.
How long can we keep it up? Are we going to keep enacting trillion-plus dollar deficits for another decade, while we wait for the economy to get stimulated? Oh wait, yes we are. The current president has already said so.
But public deficit spending isn't going to stimulate private credit formation and consumption-growth until consumers get their balance sheets healed. People who want you to think that a much bigger stimulus last year would have magically fixed the economy are deeply deluded. Or deeply mendacious.
And Congressional Republicans shouldn't take this bait, either. Let's recognize that deficit spending is primarily useful for enabling cities and states to avoid enforcing their own fiscal discipline (which is far more painful because they can't borrow, as the federal government can). And let's recognize that there is some point in doing that. (If nothing else, it pays off the public-employee unions that keep Democratic officials in office.)
Let's avoid the trap of thinking that stimulus will bring the economy back all by itself.
By Francis Cianfrocca:
Reprinted with permission from The New Ledger.