Obama's Pyrrhic Victory on the Stimulus Package

Philip I. Levy Philip I. Levy As the fiscal stimulus saga draws to a close, we can ask what this opening salvo of the Obama presidency means economically, politically, and internationally.

The economic range of reactions to the stimulus can be oversimplified into three camps. The first camp could be called the Scientific Keynesians, with Paul Krugman at their forefront. This group typically looks at what the economy is capable of producing, subtracts what it is likely to produce in this slump, and identifies the difference as a gap to be filled. They have confidence that it's possible to bring spending online in a timely fashion and fine-tune the amounts so as to produce the requisite growth and jobs. They tend to view the $789 billion package as woefully inadequate (it doesn't fill the gap) and have been highly critical.

A second group could be called the Cost-Benefit Covey. For them, federal spending is neither good nor bad, per se. It depends what it costs and what it will do. In a time of low interest rates and idle workers, there may be projects that are worthwhile that would not pass the test when the economy is humming. But the number of such projects is limited. As Larry Summers put it, this group is looking for spending that will be "timely, targeted, and temporary." Even if there were a $1.2 trillion output gap, that does not mean so much can be spent wisely in the time the gap remains open. Members of this loosely-defined group have criticized the stimulus plan as excessive and wasteful. They are not prone to embrace John Maynard Keynes' idea that we might just as well employ people to dig holes and fill them again. Members worry about racking up enormous debts and the high taxes or inflation those debts may bring.

The crafting and selling of the stimulus package have been neither transparent, innovative, calm, nor bipartisan.

A third group could be called the Animal Spiritualists. The same Lord Keynes used the term "animal spirits" to describe public confidence in the economy. Such confidence certainly seems to be at a low ebb at the moment. The question is how to restore it. In this light, perceptions are all-important. If the package is seen as being significant, it will create hope, people will buy again, and the economy will revive. There's not much precision to this approach; it's mostly psychology. While the Animal Spiritualists may be happiest with the fiscal stimulus package, they would seem vulnerable to the Scientific Keynesians and the Cost-Benefit Covey. If the public believes the critiques from either direction that the stimulus plan won't work, then those critiques will be proven correct.

My own sympathies lie closest to the Cost-Benefit Covey. I have little faith that the fiscal stimulus plan will revive the economy. There is an output gap, of course, but there are also some big structural problems--like a collapsed financial sector and a housing sector in a downward spiral. Fixing those will be a prerequisite for recovery and may require all the resources we can muster.

Politically, President Obama seems to have dashed many of his major thematic campaign promises in his very first foray into large-scale policy-making. The crafting and selling of the stimulus package have been neither transparent, innovative, calm, nor bipartisan. Much of the package was crafted behind closed doors. The rush to push money out quickly left no time to develop creative new approaches. The president's dire warnings of doom did little to soothe fears, particularly in those who had doubts about the stimulus package's efficacy. And hopes for bipartisanship may have been the biggest victim of the endeavor. While President Obama was willing to exchange pleasantries with Republicans, those Republicans were largely excluded from the crafting of the bill and voted overwhelmingly against it.

Of course, a natural response by the Obama administration is that the Republicans were just engaging in rank partisanship. There are certainly Republicans motivated solely by politics, but this is why Sen. Judd Gregg's withdrawal as Commerce nominee is so devastating. Even President Obama's hand-picked reasonable Republican found the process unpalatable.

On the international front, the bill portends trouble. The original excesses of the Buy American clauses were trimmed back, but President Obama missed a golden opportunity. Had he embraced Sen. John McCain's amendment to remove the clause, he would have demonstrated bipartisanship, assured the world that America was not embracing protectionism, and still retained existing legal authority to direct some contracts toward domestic producers. Instead, Sen. McCain's amendment was defeated. The remaining clause sends a bad signal, allows protection, invites retaliation and risks provoking numerous trade disputes.

If worried allies wish to call up and seek reassurance, they likely won't find the right person on the other line, as key international economic positions remain unfilled: Ron Kirk, the nominee for United States Trade Representative, has not yet had hearings scheduled, and there is a new vacancy at Commerce. The Treasury, meanwhile, may be otherwise occupied.

President Obama got the stimulus plan that he wanted, but at potentially a very high cost.

Philip I. Levy is a resident scholar at AEI.

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About the Author

 

Philip I.
Levy
  • Philip I. Levy's work in AEI's Program in International Economics ranges from free trade agreements and trade with China to antidumping policy. Prior to joining AEI, he worked on international economics issues as a member of the secretary of state's Policy Planning Staff. Mr. Levy also served as an economist for trade on the President's Council of Economic Advisers and taught economics at Yale University. He writes for AEI's International Economic Outlook series.

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  • Email: philip.levy@aei.org

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