Don't Expect Much Stimulus

“The Economic Stimulus” (caps intentional) has of course become a regular topic on CNBC, Fox, and CNN, and in the pages of the New York Times and Wall Street Journal. With some disagreement, it seems to me to be fairly widely assumed that the legislation in congress will actually stimulate the economy. What squabbling there is appears to be around the periphery: More tax cuts, or less? What’s pork and what’s public works?

But will it actually do anything at all? About 40% is in tax cuts, including forbearance of some increases that the new administration and congress would otherwise like. Does extending something that already exists – still temporarily – stimulate economic activity “on the margin” (meaning new)? Economic evidence suggests it does not. Much of the rest is the tax cut plan Obama stumped for in the recent campaign, including payroll tax (that box labeled “FICA”) cuts of $1,000 for “middle class families” (for Republicans, that’s “non tax-payers”). But what did we learn in the 2008 check distribution “stimulus?” It wasn’t spent, and won’t be, unless there’s a change in the psychology of the U.S. consumer – which there hasn’t been. The kinds of change that have been shown to actually be stimulative in the past (the Kennedy and Reagan cuts) are reductions in marginal (which means the higher ones) tax rates, politically unpalatable to the current administration and congress.

If there isn’t much to be gotten from the tax cuts, then what about spending, “infrastructure” and otherwise? Stimulus aside, increased spending on roads, bridges, power lines and such isn’t a bad idea. In fact, it’s long overdue. Pork has gotten an undeserved bad name recently, in part because our electorate can seemingly only grasp the simplest of concepts and the shortest of sound bites. Such spending is the traditional provenance of government in support of commerce and the general welfare in ways that directly funding UAW jobs is not.

Last week the Congressional Budget Office (by congressional rule, staffed by appointees of the majority) reported only $26 billion of the $355 billion “investment” part of the package will be spent in 2009, and by the end of 2010, that will still total just $110 billion. In closer-to-home terms that’s just $230 per U.S. household in 2009 and $750 in 2010.

Much of the rest of the proposed spending is concentrated in increasing and accelerating “transfer payments” between governmental units. The problem is there may be no net increase in actual expenditures. For instance, the legislation contains $142 billion in various education payments to individuals, states and localities. That’s undoubtedly good for education (we’ll suspend disbelief and assume here that all education spending is good), but in large part it will simply replace cuts already planned. State budget cuts will be about $100 billion in 2009, and local government units will cut more still. So increased government spending in education, medical payments, and other areas in mostly will just replace cuts elsewhere. There’s no stimulus in that.

Historians generally agree that similar programs in the New Deal of the 1930’s had only a marginal impact on economic activity, as unemployment, 25% at its peak in 1933, took four years to decline to 15% in 1937, the spiked back to nearly 20% in 1938. Only World War II finally ended the malaise.

The American electorate believes “all will be well” – or at least clearly improving – in about six month’s time. There is nothing on the current (or historical) record to suggest that expectation is realistic.

Even so, government does need increase investment in a renewal of the underpinnings of our economy. There’s even argument to be made for fundamental change in delivery of medical care, and improved public education. In economic terms I remain a Keynesian – nothing would be worse now than government trying to avoid deficits.

None of that will pull us out of this global economic malaise, however. Mostly, that will just have to run its course, while governments (hopefully) follow the Hippocratic oath and “do no harm.”