Economic Stimulus on The Cheap
For US senators, decreasing the size of the stimulus package may be clever politics. But it's not smart economics
The moderates in the Senate of both parties are very proud of themselves for having negotiated a slimmed down version of the stimulus package. They apparently knocked out more than $100bn in spending, trimming the package to less than $400bn a year.
This led to a round of self-congratulations at what this crew considered a major accomplishment. Those of us who were not a party to the negotiations, and who don't share the peculiar thought processes of the moderate clique, see the primary outcome of this effort as having taken one million jobs out of the stimulus.
The basic logic is very simple. Stimulus creates jobs by spending money. Those who are not in Congress understand this. If the government pays someone $30,000, then that person will be employed. They can be repaving a road, weatherising a building, teaching our kids, providing healthcare to the sick or replacing the sod on the national mall.
The government can employ people to do these jobs, as well as thousands of others. Ideally the jobs they perform will provide real benefits to the public and lasting benefit to the economy, but the main point is to get people working.
This is why the utterances coming from the centrist cabal were so bizarre. Many of the senators indicated that they considered healthcare, education or some other type of spending to be very important, but that the specific category of spending did not constitute stimulus.
In fact, the reality was 180 degrees the other way. Any spending is stimulus, in the same way that any type of bread is food, the only question is whether it is also useful spending. If the centrists thought that additional spending on healthcare, education or some other area was useful, then this should have been a no-brainer for them. They could increase growth and employment with useful spending. What else could they want?
In addition to not grasping the concept of stimulus, these folks still don't seem to appreciate the seriousness of the downturn. The loss of almost 600,000 jobs for the third straight month should have been enough to convince any remaining sceptics that this is really serious. (Actual job loss was probably even more than the data show). When Alan Greenspan sinks the economy, he doesn't mess around.
It's perhaps worth a quick recap of the numbers. The collapse of the housing bubble has directly trimmed approximately $450bn a year from demand due to the contraction of housing construction. The loss of what will soon be $8 trillion in housing wealth will lead to fall in annual consumption demand of more than $400bn through the housing wealth effect. The loss of $7tn in stock wealth will lead to further drop in annual consumption of $250bn. And the collapse of the bubble in commercial real estate is likely to reduce demand from this sector by close to $150bn a year.
In sum, we can expect a loss in annual demand in the neighbourhood of $1,250bn. Against this plunge in demand, the Senate moderates want to put up a stimulus package of less than $400bn, much of which will go to tax cuts that have limited impact on demand.
This would be laughable except that there is nothing funny about the outcome. Millions of people will needlessly go unemployed. People will lose their homes and families will break up. Millions more will be hungry and cold because they can't afford food and heat.
Perhaps the worse part of this story is that none of this need to have happened if our concerned centrists had bothered to notice an $8tn housing bubble. If they devoted half as much effort to containing the bubble as they are now to obstructing an effective stimulus, we could have avoided all this needless suffering.
But, shame has no place in the corridors of power in Washington. Hence, the drive to dilute the stimulus. Like the jogger who finds a shortcut to reduce his mileage, the centrist senators are proud of themselves for cutting back the spending in the stimulus. That may be cleaver politics, but it is not smart economics. And the country really cannot afford too much more by the way of stupid economics from the folks in power.
© 2009 Guardian News and Media Limited