One stimulus too many
After last week’s terrible U.S. employment report, reports surfaced that the Obama administration was considering a “second stimulus.” Dreams of new green investment spending or tax cuts danced momentarily in the heads of many inside the Beltway.
The reality, so far, is far more prosaic. What the administration is actually considering has little to do with stimulus or recovery or reinvestment.
A probable package might include temporarily extending various unemployment benefits and perhaps the housing tax credit. So when White House Press Secretary Robert Gibbs said on Monday that there were “no plans” for a second stimulus, he was being economically accurate, since those ideas wouldn’t stimulate much of anything.
Still, expect some in Congress to pressure the White House to propose a more expansive package. Remember that the entire House of Representatives and a third of the Senate are up for reelection in little more than a year. Incumbents from the party in power surely don’t relish the idea of running amid double-digit unemployment.
But the White House should stand firm and reject calls for any pricey new spending initiatives, given both the huge budget deficits and the hundreds of billions of original stimulus that are still in the pipeline. Team Obama may want to review the criteria it used when planning the original stimulus plan, later called the American Recovery and Reinvestment Act.
First, what could pass Congress? Back in January, advisers like Rahm Emanuel thought that any plan over $1 trillion was a non-starter. That probably still holds true today, given the shell-shock among Republicans and moderate Democrats over trillion-dollar budget deficits.
Pushing a large second stimulus plan would absorb political capital needed next year for other Obama priorities such as financial regulatory reform and cap-and-trade legislation.
Second, how much money could be quickly deployed? Smart economists, like the ones in the White House, know that stimulus packages usually take too long to pass and then put into effect to cushion a downturn in real time.
Now a big payroll or investment tax cut might provide some immediate economic juice, but the Democrat-controlled Congress would likely have little interest in such ideas, especially since many have been critical of the original Obama tax cuts.
Third, how big could a package be without spooking the markets? White House economic advisers have told me that worries about bond and currency vigilantes helped keep the original stimulus under $1 trillion, or $787 billion. And those concerns have hardly gone away.
Could the White House get away with a new $100 billion package? Perhaps. But with the dollar already on the decline, it’s doubtful the White House would want to risk doing anything much bigger. And former Clinton officials have warned the White House that they are underestimating how desperately Wall Streets wants deficit reduction — and sooner rather than later.
Add it up and doing nothing more to “boost” the economy may be the best policy option of all.