Commentary Type

Too Much Stimulus or Not Enough?

Op-ed in the Fiscal Times


It was never easy to love the fiscal stimulus. The consensus of many private economists, however, is that its tax cuts and spending have moderated the Great Recession-though perhaps not as much as the Obama administration maintains. With the president now urging Congress to approve a second phase, the argument over the program's worth won't die down soon-certainly not with the midterm elections on the way.

The unseemly horse trading surrounding efforts to assemble a package of tax cuts, unemployment relief, infrastructure and state aid last year upset even the bill's supporters. The $787 billion price tag provided an easy target for critics who called it the prime example of wasteful big government gone wild, a point that has resonated and probably contributed to the GOP resurgence this year.

On the other end of the political spectrum, many economists and activists are recommending more ambitious stimulus efforts than Obama has called for. With US unemployment remaining stubbornly high, New York Times columnist Paul Krugman and Columbia University economist Joseph Stiglitz, for example, argue that more funds should be allocated to deficit-ridden state governments, homeowners, and infrastructure projects that might create more jobs.

Obama's approach includes such smaller initiatives as extension of unemployment benefits and tax breaks to small businesses (by tapping the existing Troubled Asset Relief Program, or TARP) and more spending on infrastructure green technology.

Though its impact is hard to measure, Obama told Congress in his State of the Union message that the recovery act added or saved 2 million jobs. His economic advisers maintain that it has added about 2 percentage points to the national output, even though only a third of the total ($263 billion) had actually been spent-another source of criticism for the White House.

The White House also asserts that the stimulus will eventually add as many as 3.5 million jobs that otherwise would not be there-a significant number, but not enough to offset the more than 8 million jobs lost since the beginning of the downturn.

The package, as calculated by Moody's, comprised five basic elements:

  1. $87 billion to keep taxes from rising under the Alternative Minimum Tax;

  2. $250 billion in individual tax cuts and transfer payments to Social Security recipients and the unemployed;

  3. $150 billion in aid to state and local governments, designed to help avert layoffs of government employees;

  4. $200 billion in tax cuts to businesses;

  5. $200 billion in infrastructure investment, including projects in the environmental sector.

Of these elements, the state and local aid and some of the transfer payments account for most of what has gone out the door already.

Indeed, the administration maintains that what looked like a hodgepodge was actually designed to kick in at different intervals, and despite all the talk of "shovel ready" projects, construction work-which has the potential for the biggest ripple effect-would occur later.

"We always knew that part of the package would be things we could do quickly, such as the tax cuts, and part would be things that pack the biggest bang for the buck, such as the direct government investments," Christina Romer, chairwoman of the Council of Economic Advisers, told me. "That was the logic of a multi-pronged approach."

Mark Zandi, chief economist of Moody', testified to the Financial Crisis Inquiry Commission in mid-January that the stimulus did its job in short-circuiting the recession, and that its impact will continue, though he also expects unemployment to continue to climb.

"Criticism that only about $250 billion of the $787 billion stimulus plan has been distributed to date is misplaced," Zandi said. "What matters for economic growth is the pace of stimulus spending, which surged from nothing at the beginning of 2009 to over $80 billion in the fourth quarter. That is a big change in a short period."

But as talk turns to the next steps, dissenters insist not only that Americans cannot spend their way out of a recession but that this particular package was not the way to do it. These critics find voice at the Wall Street Journal editorial page, the American Enterprise Institute, and other sources that Republican leaders follow.

Michael Boskin, a Stanford economics professor and former economic adviser to President George H. W. Bush, argues that a stimulus was needed because the Federal Reserve had already lowered interest rates to near zero. But he said that a reduction in the payroll tax that pays for Social Security and Medicare would have averted more layoffs than the slower-moving Obama program.

"I am sympathetic to the idea of a fiscal stimulus to combat a deep recession if the Fed is out of ammo," Boskin said in an interview. "But this was always very poorly designed to deal with a deep recession."

Globally, the US stimulus was in line with what major advanced and developing countries carried out. The Organization for Economic Cooperation and Development estimates that the United States will have spent the equivalent of 5.6 percent of its 2008 GDP on stimulus from 2008 to 2010, close to amounts spent by countries like Australia, Spain, and South Korea. Only countries with perilously high debt, such as Ireland, Iceland, and Greece, did not invest in significant stimulus.

That said, the United States and others are struggling to decide when and how much to pull back. Dominique Strauss-Kahn, managing director of the International Monetary Fund, has urged that so-called exit strategies-spending cuts, increased taxes, and higher interest rates-"should be designed today" but not implemented until the economy strengthens further.

In the new political climate following the blow to Democrats in the Massachusetts Senate election, it is hard to know how far a new effort to create jobs can go, or what it would include. But given the uneasy feeling that Americans have about what happened a year ago, one thing is certain: None will dare call it stimulus.

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