From the February 15, 2009 Sunday Times
February 17, 2009
by Irwin Stelzer
If, like John Maynard Keynes, you believe that spending, any spending, will revive a flagging economy, the freshly minted, 1,000-page American Recovery and Reinvestment Act of 2009, calling for $504 billion in deficit-financed spending, is for you. Well, not quite. It seems that most of the money will not be spent very soon. About 30% won't hit the economy until 2011, and the balance is likely to be tied up in the procurement processes of the federal and state governments until well into 2010, and beyond. Besides, much of the spending will end up boosting other economies — subsidies for wind machines will benefit workers in the other countries in which such machines are manufactured, not our very own horny-handed toilers. And much of the spending will not create jobs for the unemployed: laid-off car workers do not have the skills to design the software to manage the "smart grid" that is the apple of the greens' eye.
If you have not jumped onto the new Keynesian spending bandwagon, but believe with Christina Romer, chairman of Barack Obama's Council of Economic Advisers, that tax cuts are more certain than spending to turn the economy round, you should love this bill, with its $286 billion in tax cuts and credits. Well, not quite. True, individuals earning less than $75,000 a year and families earning less than $150,000 will receive credits of $400 and $800, the earned income-tax credit for working families with three or more children is increased, and there is something for pensioners, disabled veterans, families of college students and a host of others.
Reflection suggests, however, the tax-cut contingent is doomed to disappointment. Much of the money will be saved or used to pay down credit-card balances, not bad things, but not very stimulative. Much will be spent in Wal-Mart, earning Congress the applause of Chinese trainer and t-shirt manufacturers. And much will never be claimed: the specific subsidies for college education are simply too small to have much effect on college enrolments.
If you are a supply-side enthusiast, a reading of this bill will add your personal depression to the national recession. Reforms that might increase employment in the oil and gas industries by removing restrictions on drilling are nowhere to be found. Environmental restrictions on the sorts of cars that Americans want to buy remain in place, consistent with Congress's drive to have the begging-bowls-in-hand car companies produce Schumermobiles, named after the New York senator whose passion is electric vehicles and cars too tiny to need much petrol or to survive in a serious crash. A change in rules that would permit the construction of needed transmission lines without lengthy court reviews initiated by environmental groups remains off the Obama agenda and out of the bill. Most important is the absence of steps to encourage the flow of private capital into toll roads, an alternative to government-financed highways, and into schools free to compete for vouchers, rather than schools built by governments in towns that already have too many classrooms.
The explanation for these omissions was simply stated by the president, responding to those who want even more tax cuts and some supply-side stimulus, "We won." Not very satisfying intellectually, but who needs intellectually satisfying arguments when his party controls the White House, the Senate, and the House of Representatives?
Enough quibbles, though. If, like any sensible person, you're not sure spending will work, but not sure it won't; not sure that the bulk of tax cuts will be spent on US manufacturers, but not sure they won't; and not sure that doing nothing is a good, though tempting idea, this bill is about the best that can be extracted from a Democratic Congress.
So Obama has his stimulus bill, but he has paid a very high price. He now owns the recession. He has asked to be judged by whether this bill and other measures he will propose create or "save" 3.5m-4m jobs, the number lost so far since unemployment turned up. Forget "save" — if unemployment keeps rising, voters are not likely to rally round the slogan "It would be still worse if I hadn't spent your trillions". What the president has done is to promise what he certainly can't deliver in time for the congressional elections next year — a reversal of job destruction, and millions of new jobs. If the voters prove patient in 2010, they are unlikely to remain as forgiving when the presidential election rolls round in 2012. Since employment is what economists call a lagging indicator — employers are not confident enough to start hiring until economic recovery is well under way — Obama will have a lot of explaining to do. Unless, of course, the Republicans find a candidate so inept the president can once again rely on his very attractive persona to see off challengers.
Finally, there is what is now being called the Tim Geithner no-plan. The president used a nationally televised press conference to announce that his Treasury secretary would the very next day reveal to the nation, and indeed to the world, a plan to save the banks and provide relief for troubled homeowners. But Geithner's speech was so lacking in detail the stock market plunged by about 400 points. The administration's economists have not solved the problem of valuing the toxic assets on the banks' balance sheets — pay too much for those assets and the taxpayer gets the bill; pay too little and the banks have to take bankruptcy-producing writedowns.
By the time you read this, Geithner will have met with his G7 colleagues in Rome. Unless he has worked out some effective way of spending the $2 trillion that Washington rumour says new bailouts will cost, a gaggle of finance ministers will head home disappointed. For in between their public attacks on America, they privately say that only America can lead the world out of its current difficulties.
However, with Congress whipping up popular hatred of bonus-grabbing bankers, Geithner & Co will have a hard time persuading the legislators to spend taxpayers' money to prevent the banks from going not-so-gently into that good night in which Lehman Brothers resides.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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