One stimulus too many

October 6, 2009

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.

Comments

While I understand that publicly traded corporations employ a vast majority of Americans, I’m getting a little tired of having policy decisions based on what it might do to the value of a stock. If the company is strong the price will take care of itself. If giving a temporary boost to people who desperately need it is gonna hurt the stock price of a company, but not fundamentally it’s bottomline (which is to say, the market will price-in some negative effects that change the P/E ratio for trading levels) why should anyone really object. Well, except for the people owning the stock. But there again, if the company is strong, then it’s valuations won’t really be hurt. This is more about (again) protecting people who make stupid bets in the market. TO HELL with them… average people need help, not people gambling in the markets not knowing what they’re doing.

And for all the blahblah about how America’s borrowing is so terrible and every other nation will flee the currency… I submit that without the borrowing and the guarantees (which is all that some major banks are standing on right now) there would be no American economy to lend to. And furthermore, the knock-on effect would be felt all over the world – the 30s would’ve looked like a field day. As it is there is 17% unemployment with lots of help; does someone contend that the situation would be better is Citi and BofA and WaMu and Merrill Lynch and Goldman were circling the bowl right now?

It’s a bad solution, sure, but no one is coming up with a better one, and the only alternative on the table – doing nothing and letting them fail – would’ve meant the unthinkable. And as long as America keeps searching in good faith for making the best of this horrible situation, the world will continue to back America. If America starts getting snarky and making demands, I think we lose that good faith scenario.

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