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