A second stimulus? As risible as it sounds, Pres. Barack Obama entertains the idea. When asked at a press conference Tuesday if another stimulus bill might be necessary, Obama replied, “Not yet.”
How about not ever? People seem to forget that the $787 billion stimulus package enacted last February was the second stimulus — the Bush administration enacted a $168 billion stimulus bill in February of 2008. Neither the Republican stimulus (weighted toward tax rebates) nor Democratic one (weighted toward spending) has delivered anything like the promised results.
Bush’s stimulus, sold as “a booster shot for our economy,” did little to boost consumer spending — consumers tended to save, not spend, their tax rebates. This result did not come as a surprise to readers of Milton Friedman, whose permanent-income theory teaches that one-time windfalls don’t have much of an impact on consumer demand. Permanent tax cuts work better as economic stimulus because people base consumption on long-term income expectations. Permanent cuts also provide incentives to work more — temporary rebates don’t.
Undaunted, the Obama administration made a second stimulus bill its top priority. Without one, Obama’s advisers warned, unemployment would climb to 9 percent by 2010. By contrast, the stimulus bill would cause unemployment to level off at 8 percent before declining rapidly, they promised. Unemployment currently stands at 9.4 percent. At the press conference Tuesday, Obama defended his economic team’s estimates: “Keep in mind the stimulus package was the first thing we did, and we did it a couple of weeks after inauguration,” he said. “If you recall, it was only significantly later that we suddenly get a report that the economy had tanked.”
This must be an example of the president’s famous wit. At the time, even Paul Krugman called the administration’s estimates “kind of optimistic.” The severity of the downturn was widely predicted and widely discussed. Obama wasn’t blindsided; he was selling a rosy scenario.
What dooms the administration’s case for the stimulus isn’t the unemployment rate’s location on the graph, but the steepness of the curve. The administration predicted that the stimulus would cause unemployment to level off almost immediately. Instead, it shot upward on a steep incline. The stimulus has put people to work, of course, but it would be a mistake to look at these jobs without considering the consequences of government borrowing. The government is borrowing enormous amounts of money to pay for the stimulus.
Absent government borrowing, this money could be going into other investments, where it would be directed to more productive uses. As part of the stimulus, the government is spending $3.4 million on an “eco-passage” to ensure that turtles can cross safely under a busy roadway in Tallahassee. Even in an environment where a credit crunch has stymied lending and investment, it’s hard to think of a less productive use of economic resources than that.
And it’s not as though that capital isn’t needed in the private sector: As Eugene Fama has pointed out, in order for there to be no crowding-out effect from stimulus-related borrowing, we would have to locate $787 billion of unproductive private-sector activities for the stimulus to offset. Slackness in the economy has not contributed to anything like that kind of economic dead weight.
Above all, it is important to remember that Obama’s stimulus was not designed to maximize job creation. The administration’s primary goal was to give frustrated Democrats an all-purpose vehicle for pent-up spending desires that the Bush administration had repressed. Obama removed the lid and out came $87 billion in additional funds for Medicaid, $15 billion for Pell Grant scholarships, $3 billion for public-housing improvements, and $2 billion for renewable-energy research.
A second stimulus? A plurality of Americans think this one should be canceled. The fact is that we’re on our second stimulus in as many years, and we have no evidence that either bill has contributed to economic growth. If Obama wants another round of stimulus, he should try something that works: Heed the lessons of Milton Friedman, and not John Maynard Keynes.