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Stimulus should put cash in poor pockets, by Roger Altman, Commentary, FT: On taking office, President Barack Obama’s first move was the $787bn economic stimulus... There was a classic case for this legislation..., it was supported by most economists, passed Congress in a month and was seen as the right step at the right time.
Improbably, a year later, the programme is decidedly unpopular. In the latest CNN poll, 56 per cent opposed it. Progressives characterise it as too small and conservatives link it to the 10 per cent unemployment rate and argue that it failed. Such attacks go too far, because the stimulus prevented a steeper decline. Nevertheless, there were meaningful flaws in it. Mr Obama’s second stimulus, announced last week, should be designed differently. Why is the 2009 stimulus legislation such a punchbag? It fell victim to slow implementation, the difficulty of aiding state governments, and unrealistic expectations on jobs. Once it passed, Washington’s focus turned to healthcare.
The chance to explain the stimulus, and build support, was lost. ... Now, the administration has proposed $270bn of extra stimulus. ... About $100bn would be dispensed this year, $150bn in 2011 and the balance beyond that. If Congress authorises this, the total Obama stimulus would exceed $1,000bn. The first question is whether a second stimulus is needed. The answer is yes. The economic picture is profoundly weak... The labour market outlook is even worse... It is true that the 2009 legislation already mandates $300bn of stimulus funding this year. But that is too small in a $14,000bn economy. Moreover, it is already incorporated into the low growth rates that are forecast.
The second question is whether this proposal is designed any better that its predecessor. Here, the answer is no. It will again spend out more slowly than it should. This means that the biggest disbursement will not occur in 2010, when it is most needed. The lesson of 2009 is that the best stimulus puts money directly into the pockets of middle- and lower-income Americans. On that basis, extending the earlier unemployment benefits and tax cuts makes good sense. So does the addition of temporary tax credits for employers who add jobs now. But the infrastructure pipeline is already clogged. Adding to it will not provide any near-term boost. Furthermore, additional aid to states will not have a serious economic impact. These flaws, together with the untenable deficit outlook, raise doubts as to whether the full second stimulus can pass. A smaller, faster proposal, which incorporates the lessons of the 2009 bill, would be more appealing. This is the way Congress should go.
He says the stimulus package was "was seen as the right step at the right time." Not so sure about that. It was a step in the right direction perhaps, but not the large step or the type of step many of us wanted. The tax cut component was questioned, including where the tax cuts were targeted, the size of the package was criticized, there were all sorts of objections. Economists who strongly supported the idea still questioned the composition of the package.
He goes on to say:
Improbably, a year later, the programme is decidedly unpopular. ... Progressives characterise it as too small and conservatives link it to the 10 per cent unemployment rate and argue that it failed.
Improbably? Only if you ignored people like Krugman and decided you knew better. This is Krugman writing contemporaneously about the stimulus package:
And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats. I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
Back to the article. He then says of the stimulus package:
Nevertheless, there were meaningful flaws in it.
Good he finally noticed. But I think he is flat wrong about this "flaw":
Furthermore, additional aid to states will not have a serious economic impact.
That's one of the places where the federal government can do the most good.
I like the idea of targeting lower and middle class households, especially with successful job creation programs or programs that ease the recessionary impact on these households in other ways. But I think Altman has his history wrong. Maybe he and others weren't paying attention the first time around, maybe they listened to the wrong people, but the warnings were there. Dr. Mark Thoma Professor of Economics
University of Oregon
http://economistsview.typepad.com/
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Personal Webpage: http://www.uoregon.edu/~mthoma/ Copyright © 2009 Mark Thoma
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