To know what’s wrong with the stimulus, let’s look at what Keynesians were saying about what the requirements for a stimulus are.
For example, Larry Summers said that an effective stimulus must be:
[ul][li]** Targeted**. A stimulus must aim spending at idle resources to prevent crowding out effects and economic distortions.[/li][li]Temporary. A stimulus should not grow the baseline size of government, or it will be impossible to pay back without tax increases.[/li][li]Timely. A stimulus has to act fast, because by the time you know you’re in a recession you may already be halfway out of it. A delayed stimulus will just add fire to the next economic cycle, contributing to the boom/bust cycle instead of counteracting it.[/li][/ul]
In addition, he said that a stimulus package must not extend the deficit much past a year or two after the recession ends. A stimulus plan that adds debt with no plan for repayment could fizzle because people simply adjust their spending on the expectation that their taxes will go up in the future to pay for the debt. An effective stimulus must be accompanied by a realistic plan to pay for the spending after the recession is over.
In addition, there was wide consensus from economists that temporary tax cuts do not stimulate, because the Permanent Income Hypothesis says that people spend according to their long-term income expectations. This same effect suggests that if a stimulus just ramps up the debt, people will not spend as much because of uncertainty over how the debt will be paid.
So, given these criteria by the Obama Administration’s own economic advisor, how did the stimulus do?
Was it targeted? Not a chance. The money went to powerful districts, not to the places that were hurting the most. Much of it went to propping up public union wages rather than employing idle resources.
Was it temporary? Nope. Only the tax cuts could be considered temporary, and they’re the one part of it that you don’t want to be temporary. The spending went to increasing salaries for public unions and adding to the infrastructure, which will bring additional maintenance costs. I already posted an example of how a billion dollars of stimulus money was used to give teachers in New Jersey a raise, which just led to a new crisis this year when the stimulus money ran out. The result was layoffs that might not have happened at all if the raises hadn’t been given out in the previous year.
Was it timely? Hah. Two years after a stimulus plan was announced, much of the spending still hasn’t been enacted. Infrastructure projects are snarled in red tape. There weren’t as many ‘shovel ready’ projects as was promised. The recession has officially been over for more than a year, and much of the spending still hasn’t found its way into the economy.
Judged by those criterion, the stimulus was a failure. Judged by Christina Romer’s model projection, the stimulus was also a failure.
And don’t forget that the pain of the stimulus has yet to be felt. Once the money has been completely spent, you get to spend the next generation or two paying for it. Annual Interest on the stimulus money will be at least double NASA’s entire budget. It will be a permanent drag on the economy forever. Every year that goes by, ask yourself “What could we have done with 40 billion dollars that we’re paying in stimulus interest this year?”
For that reason, the CBO originally projected that even if the stimulus worked as advertised, by the end of 2010 the U.S. GDP would be .3% lower than it would have been with no stimulus, because the drag on the economy of the debt accrues year after year. If the stimulus had a much smaller effect than was predicted, and it seems obvious that it did, then the damage it’s going to do over the long term will greatly outweigh whatever benefits came from it now.
So as an opponent of the stimulus, what would I have done instead? I would have used the money to target services for the unemployed. They give you the biggest bang for the buck anyway. I would not have allowed a nickel of it to be used for salary increases anywhere, for any reason. It all should have been targeted at idle resources. Job training programs, relocation grants, whatever. Ease the pain of the unemployed, and let the economy sort itself out. Let companies die if they can’t compete. Help the employees find new jobs or relocate if necessary. Stop propping up an economy that is clearly full of malinvestments resulting from a couple of decades of bubbles and government interventions.
A stimulus like that would have been about half the size of the current one. Maybe a third of the size. I would have accompanied it with a plan to pay it off, probably by taking some of the expiring Bush tax cuts and aiming them directly at deficit reduction.
I would have also implemented an austerity program for government consisting of pay freezes (not layoffs) and a line-by-line examination of programs that had become too expensive and should be dropped - something Obama himself promised to do, but never followed through on. My main priority would have been fixing the long-term entitlement problem and a credible debt reduction program to restore confidence.
)