Entangled Alliances

photo credit: AComment

When Barack Obama’s economic stimulus package passed into law last month, it was mostly greeted by economists as a much needed influx of government spending that should help to get the economy back on track . But among the plaudits were concerns about the effectiveness of the stimulus: specifically, it should’ve been bigger.

Now you might well question whether an $800 billion package could be described as “not big enough”. But it’s important to remember that around $300 billion of it was in the form of tax cuts – helpful to the families they were aimed at, no doubt, but not particularly useful in terms of job creation. Therefore, only $500 billion was actually in the form of direct government spending, and so when considering how much is needed to create enough jobs to get the economy back on track, only two thirds of the stimulus is actually “stimulus”. But even so, surely $500 billion is enough to get the job done?

Well, uh, no actually. It isn’t. The inadequacy of the stimulus, however huge it was, is made clearer every week as increasingly disastrous figures about the economy continue to be released. In his Monday New York Times column, nobel-prize winning economist Paul Krugman, calling for a second stimulus, points out that:

The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast.

But isn’t Obama’s stimulus meant to make 3.5 million new jobs by the end of 2010?

3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.

Oh. Bummer. Okay, so the situation’s really bad, but do we really need another stimulus package? Martin Feldstein, professor of economics at Harvard, has looked at the numbers and concluded that yes, we do. His article’s worth a read but I am nothing if not a prolific summariser, so here’s the cliff notes version, which includes the “things Feldstein doesn’t say because he forgets we’re not all economists”:

America is looking at an annual shortfall in demand of $750 billion. In other words, every year the US will be another $750 billion short of what it should be producing in a normal, crisis free environment. So for the stimulus to work properly, it needs to boost spending by $750 billion dollars a year. Now the stimulus is spread over two years. As I noted above, the actual stimulus part is $500 billion. And only around 75% of that will actually take effect over two years.  So that  leaves around $200 billion per year. Which is rather less than $750 billion. Of course, this neglects to take in the “multiplier effect” – that is, the chain reaction that follows from government spending which means you actually create more demand than you put in. Obama estimated the multiplier effect at 1.6. So that becomes $300 billion a year .

But that’s still nowhere near $750 billion.

So you can add my name to the illustrious list of commentators calling for another stimulus package, albeit in very small writing right at the bottom.  But what about the politics? Congress, bruised from the last stimulus battle, is hardly going to appreciate another punch-up, are they?  Krugman, as always, is ahead of the game, and sounds the alarm:

So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.

In retrospect we can see the flaws inherent in Obama’s attitude to the stimulus package. In order to secure a none-too violent passage through Congress, the administration settled for a none-too impressive figure rather than the much larger amount ($1 trillion, not including tax cuts) that economists suggested were necessary. The advantage of this is that, well, it passed; and passed without any notable dent in Obama’s political capital. The disadvantage of this is that it was always going to leave open the possibility of a stimulus package mark 2, and if you thought the last one was difficult to pass, then you’re going to be as fascinated as the rest of us to find out how Obama’s going to shoehorn another one in whilst in the middle of an epic battle for healthcare reform.

Hopefully it won’t come to that. But in case it does, Obama might want to spend some quality time with his political capital because like Citibank, Wall Street bonuses and the American car industry, it might not be around for too long.