The best thing you could do is stop the stimulus package. In my opinion, it’s doing more harm than good. The G8 is re-evaluating its stimulus packages as we speak, for fear that the negative consequences of the borrowing have now outstripped the positive benefits of a stimulus.
The economy may in fact be turning around. If that’s the case, then the stimulus isn’t needed, since it had nothing to do with the turnaround. In fact, its effects have probably been negative so far - pushing up interest rates, mostly.
On the other hand, this could be a ‘dead cat bounce’. The main thing the government has done so far that has actually improved the economy is to increase liquidity and make it possible for businesses to borrow. This was not part of the stimulus, but actually part of monetary policy - ‘quantitative easing’, it’s called. The Fed pumped a whole lot of money into the financial system to offset the drop in velocity of money.
The problem is that once the recovery starts in earnest, and velocity picks up, the stage is set for inflation. The only way out of that is to somehow pull back all the money that the fed has pumped into the system. The typical way this is done is with interest rate hikes, and those are anti-growth. So, the biggest risk to the recovery is the return of 70’s style stagflation. That could lead to years of low growth and high interest rates, or normal growth and high inflation, followed by another crash.
The other major risk to the economy is the fact that the government has to raise another trillion dollars in the bond markets in the next six months, and those markets are already beginning to look strained. Britain has had a bond default already. The last treasury auction saw interest rates spike upwards before the government could clear the market. If the U.S. can’t find buyers for its debt, it will have to offer even higher interest rates, or buy the debt through the treasury, monetizing it and further exacerbating inflationary pressures.
There’s a a vicious interaction possible here. Inflation means a devalued dollar, and it also makes it harder to get people to hold debt in a declining dollar. That means higher interest rates. Higher interest rates create higher debt servicing costs, which eat into the budget, which creates a bigger deficit.
The U.S. is in unknown territory here. The last time the debt was this high as a percentage of GDP was at the end of WWII, but that was a temporary debt, and the U.S. structural deficit was nil and the huge safety net that consumes so much of today’s budgets did not yet exist. In addition, the U.S. came out of WWII as the industrial factory for the world, and enjoyed an explosion of trade and exports. Also, the U.S. could raise taxes and get away with it, because it had little competition in the world.
Today, the U.S. is tightly constrained. Raise taxes on the rich too much, and watch capital fly out of the country. Raise business taxes, and watch as foreign competitors eat America’s lunch. And yet, the current deficit is so huge that no one really knows how to pay it down without massive tax increases. In the meantime, the U.S. is becoming hostage to an increasingly hostile and competitive world because it needs to keep selling its debt abroad.
George Bush’s fiscal policy was grossly irresponsible. Obama’s taken Bush’s irresponsibility and magnified it. No good can come of this.
