Another stimulus? Say it Ain’t So.

By :: July 9th, 2009

Congressional Democrats, having apparently lost patience with the first Obama stimulus, are beating the drum for yet another round of government money to pump up the still-lagging economy. They need to take a deep breath.

Lori Montgomery wrote a nice piece in yesterday’s Washington Post explaining why. Using some data from Mark Zandi at, Lori reports that barely $100 billion of last winter’s nearly $800 billion stimulus has made its way into the economy. Until the rest is spent, why would we want to run up the debt by hundreds of billions more?

The relatively slow pace of stimulus should be no surprise. Shovel ready or not, it still takes time to bid out projects and get them started. On the tax side, the design of many provisions almost guaranteed that it would be a while before cash got into people’s hands. TPC predicted last February that several key tax cuts would be either slow to kick in or have no stimulative effect at all. For instance, TPC warned that the way Congress expanded the earned income credit and the refundable portion of the child credit would slow the flow of cash into people’s pockets, while the nearly $70 billion spent to patch the AMT would have little no impact at all on short-term growth.

Besides, more tax cuts and spending may be aimed at fixing the wrong problem. While the overall economy may have bottomed out, it won’t get rolling until bank balance sheets are cleaned up and the financial institutions begin to lend again. The Obama Administration created a way for them to sell that bad paper but the banks are hanging on, perhaps awaiting a better price. As long as that game continues, the economy will never get back on its feet. And no stimulus I know can accelerate that process.

I understand that Democrats, already looking ahead to the 2010 election, are getting nervous about an unemployment rate that is headed for 10 percent. Why hasn’t employment turned around, they are asking? But the lawmakers need to remember their Econ 101: Employment always lags. Employers will start to hire once their confidence in the economy returns, and not before.  

Btw, for a provocative look at how a tax increase can stimulate hiring, take a look at Len Burman’s piece in this morning's Washington Post.

We Americans are notoriously impatient. During my years at Business Week, we used to joke about regularly dusting off the old “jobless recovery” story. I may have written a version around 1992, but I’m sure whoever is writing the macro story these days will recycle it yet again. 

This recession has been bad and it will take time for us to climb out, but throwing more money at the economy while nearly $700 billion of stimulus remains in the pipeline just doesn’t make sense. 



  1. Anonymous  ::  3:28 pm on July 10th, 2009:

    *Ahem* – unemployment always lags. It's not fair to act as if it's undisputed that employment figures are lagging indicators.

  2. Anonymous  ::  8:26 pm on July 10th, 2009:

    Taxing health benefits is a provocative idea.
    Raising the minimum wage will stimulate the economy. Most job openings have enough barriers to entry to be classified as monopsonistic competitions. In other words, there is no free market for workers and no market clearing of available workers or available jobs. The ways to fight this are to tax employers and distribute some of the proceeds to employees and to increase the minimum wage – or several minimum wages – depending on the labor markets. (Higher wages bring more workers into the market where currently they are discouraged or don't consider work worth the effort – which is why some hold back on getting education – even finishing high school – to sell drugs while others bypass college.)
    As for clearing the financial crisis, the best way to do that is to give people large amounts of money to get current on at least some of their debts. They don't even have to go and run up more debt – just paying off the late credit cards and paying balances down will make lender balance sheets look better – perhaps good enough to not fear writing off the really toxic assets. $750 per taxpayer and $1500 for a family (possibly with bonuses for kids) would likely do the trick. Given the current contraction in credit and money, inflation is not a worry.

  3. Anonymous  ::  10:23 pm on July 12th, 2009:

    why joke about the jobless recovery?
    The Bush recovery was pathetic…the worst since Hoover. That means that when we began the meltdown in 07, we were already way behind in job creation.