I will get to a very good Samuelson article in a moment, but I want to relate a very heated discussion that I had with a coworker yesterday on the subject of the just-signed $800 billion stimulus package. This guy is an Obama supporter who sincerely wants to believe that Obama’s group of smart guys is going to do what it takes to get the economy rolling again. Our main point of disagreement was on whether the approach taken by Pelosi/Reid/Specter/Obama is an approach that will indeed stimulate the economy but we further discussed whether the people who crafted the legislation believed that it would work (or even wanted it to work). I contend that it will not stimulate the economy in any meaningful way but my colleague professed faith (and he used that word “faith” several times) that Obama’s people are doing the right thing. However, in the same breath he admitted that he did not know enough about economics to know for sure nor would he concede that I knew enough to know. Fair enough. My main interest is history so let’s turn to that for a moment.
The main thrust of my argument to him, and now to you, is that while things look bad and the President is making things worse with his talk of economic doom, this is far from unprecedented. This country has had serious economic resessions many times in the past and the government has responded in different ways with differing results. For example, in the 1930’s FDR took his time, experimenting with all sorts of different methods of fiddling with the economy, most of them disastrous. And he spent money like Obama and Co. are spending it now while admiring the then-Soviet model. The results were continued economic stagnation and job loss. Contrast that with Reagan’s response in the post-Carter era: cutting taxes got the economy going again. Not only that, but the capital that was generated by those Reagan tax cuts were the funds used to create the subsequent internet boom (for which, inexplicably, Clinton gets credit). So we have two recessions, both worse in terms of the current unemployment numbers, with two different responses and two very different results.
It seems that when a recession like this hits, the government is going to go into debt either way but both the short term economic recovery and the long term results of that debt will depend on what the debt is used for. If the government accrues that debt because of lost revenues associated with smart tax cuts then the economy will rebound much more quickly than if the government borrows money to spend, even if that spending is all job-creation, which this non-stimulus package certainly is not. The Democrats chose the FDR model, though without the make-jobs focus that would actually leave us with something when this is all over. I truly have to ask myself, as I asked my colleague, if the majority party expects this to work or even wants it to work, given how successfully their wonder boy FDR seized powers and increased the size of the federal government while taking advantage of his crisis (made into the Great Depression by his missteps).
So Robert Samuelson, a fantastic economic writer who almost always avoids anything even remotely partisan, wrote a piece today about the economic stimulus package titled Obama’s Stimulus: Colossal Waste?. In this article Samuelson points out what many have been saying, that the huge spending package is just that and is by no means structured to have a stimulating effect on the economy:
Judged by his own standards, President Obama’s $787 billion economic stimulus program is deeply disappointing. For weeks, Obama has described the economy in grim terms. “This is not your ordinary run-of-the-mill recession,” he said at his Feb. 9 news conference. It’s “the worst economic crisis since the Great Depression.” Given these dire warnings, you’d expect the stimulus package to focus almost exclusively on reviving the economy. It doesn’t, and for that, Obama bears much of the blame.
The case for a huge stimulus — which I support — is to prevent a devastating downward economic spiral. Spending is tumbling worldwide. In the fourth quarter of 2008, the U.S. economy contracted at a nearly 4 percent annual rate. In Japan, the economy fell at a nearly 13 percent rate; in Europe, the rate was about 6 percent. These are gruesome declines. If the economic outlook is as bleak as Obama says, there’s no reason to dilute the upfront power of the stimulus. But that’s what he’s done.
See, that is the part that really bothers me. Obama is reportedly so smart that he knows that the economy needs stimulating and he goes around in permanent campaign mode talking down the economy at every turn and sternly warning us of the consequences of inaction…. then he signs off on this bill that should be called the Collectivist’s Wet Dream Generational Wealth Transfer Bill. Comparing what Mr Obama says to what he does leads me to the conclusion that either the President does not think that things are that bleak or he does not want a full economic recovery. Which is it? Again, don’t forget how much power and government growth their hero FDR acquired while taking advantage of his crisis.
Samuelson continues with some reality on the “AMT relief” bone allegedly thrown to the Republicans who voted for the bill:
Worse, the economic impact of the stimulus is already smaller than advertised. The package includes an obscure tax provision: a “patch” for the alternative minimum tax (AMT). This protects many middle-class Americans against higher taxes and, on paper, adds $85 billion of “stimulus” in 2009 and 2010. One problem: “It’s not stimulus,” says Len Burman of the nonpartisan Tax Policy Center. “(Congress was) going to do it anyway. They do it every year.” Strip out the AMT patch, and the stimulus drops to about $700 billion, with almost 30 percent spent after 2010.
Pointing out that the spending package will also result in a lot of permanent new spending, Samuelson just dishes out the reality:
No one knows the economic effects of all this; estimates vary. But Obama’s political strategy stunts the impact from what it might have been. By using the stimulus for unrelated policy goals, spending will be delayed and diluted. There’s another downside: “Temporary” spending increases for specific programs, as opposed to block grants, will be harder to undo, worsening the long-term budget outlook.
Politics cannot be removed from the political process. But here, partisan politics ran roughshod over pragmatic economic policy. Token concessions (including the AMT provision) to some Republicans weakened the package. Obama is gambling that his flawed stimulus will seem to work well enough that he’ll receive credit for restarting the economy — and not blamed for engineering a colossal waste.
But my point is this: if we all have seen what spending versus tax cuts does during a severe economic recession, what is the motivation for some to choose the side of massive not-necessarily-stimulating spending?