February 12, 2009 Like it or not,
the stimulus bill is now a fait accompli that will probably be passed this weekend. So the question now becomes, will
the stimulus plan help the economy recover faster and keep people employed or will
it become
a millstone around our necks that just causes the deficit, inflation, and interest
rates to skyrocket? No
one can say for certain one way or the other since we are in completely
uncharted territory. What we can be certain of is that the government has
never intervened so deeply into our economy or
experienced as high a level of deficit spending as a percentage
of Gross Domestic Product (GDP), except during World War II. We
are essentially gambling our future on an experiment in fiscal policy
and all of the intended and unintended consequences of this experiment
will not be fully known for years to come.
As every economist will tell you, no matter what their
political leanings, this or any other recession would end all by itself
once prices have adjusted and resources have been reallocated. Most
economists would also agree that it is much better to allow those
adjustments to take place naturally and use monetary policy to lessen
the length and severity of a downturn than it is to risk worsening
the situation with ill-conceived
fiscal policies that just delay when market forces
finally effect those changes.
Fiscal policies are much slower to have an effect than monetary
policies and they can artificially create demand that may be
unsustainable. Additionally, fiscal policies are more cumbersome to
implement and they are much more difficult to reverse once implemented
than are monetary policies.
Left alone, the economy would most likely begin
expanding again well before the end of the second quarter. In fact,
it is quite possible that we would be in a recovery now if the
government had not already interfered in the free marketplace as much as they have.
The bailouts of the financial sector did nothing except allow weak
companies with poor management to continue operating. They should
have been allowed to fail and be taken over by stronger companies,
which would have been able to write down or write off their toxic
assets. Those write offs have to happen sooner or later in order
to stabilize the stock and real estate markets. Further attempts
to prop up the financial sector or other failing companies and
industries, only delays the inevitable adjustments that must occur and
prolongs the pain and suffering of ordinary Americans.
No one yet knows what will be in the final stimulus bill
that gets passed, but
all indications are that it will have a price tag of over $800
billion, not including the interest that will have to be paid to
finance the debt. The bill will likely be composed of about $600
billion in new
spending over the next few years and $200 billion in one-time tax
rebates this year. Government
intervention, even of this magnitude, will almost definitely not speed
up when
the recovery begins because the spending provisions will take at least
a few
months to get started and it is doubtful that the tax rebate
checks will even be mailed by the time GDP turns positive or
unemployment
peaks. The stimulus bill should help to accelerate the pace of
the recovery after it has already begun, but it will not be the reason
a recovery starts. Should the economy begin a recovery in the next
few months as expected, credit for the upturn will be taken
undeservedly as little or none of the stimulus will have even been
spent by that time.
The Congressional Budget Office (CBO)
analyzed
the likely impacts of the stimulus bill and had this to say about the
short-run effects:
The macroeconomic impacts of any economic stimulus program are very uncertain.
Economic theories differ in their predictions about the effectiveness of stimulus.
Furthermore, large fiscal stimulus is rarely attempted, so it is difficult to distinguish
among alternative estimates of how large the macroeconomic effects would be. For
those reasons, some economists remain skeptical that there would be any significant
effects, while others expect very large ones.
The CBO had this to say about the long-run effects:
In contrast to its positive near-term macroeconomic effects, the
legislation would reduce
output slightly in the long run, CBO estimates, as would other similar
proposals. The
principal channel for this effect is that the legislation would result
in an increase in
government debt. To the extent that people hold their wealth as
government bonds rather than in a form that can be used to finance
private investment, the increased debt would tend to reduce the stock
of productive private capital. In economic parlance, the debt would “crowd out” private investment.
In their analysis, the CBO estimates
that the
stimulus bill will increase employment by between 800,000 and 2.3
million jobs in 2009. If the low estimate is correct, each job
will have cost $1,000,000 and if the high estimate is correct, each job
will have cost nearly $350,000. The CBO also estimates that GDP
will
increase by between 1.4 and 3.8 percent in 2009 as a result of the
stimulus bill. Since GDP is projected to be about $15 trillion
dollars
in 2009, that means that spending $800 billion (over 5.3% of GDP) is
only buying between
$210 and $570 billion of increased output. All things considered,
doing nothing and allowing the free market to work out the problems on
its own would be a much more efficient and cost effective alternative,
even if it is not politically palatable.