WHAT'S THE USE OF A SECOND STIMULUS WHEN SO LITTLE IS BEING SPENT FROM THE FIRST?
July 10, 2009
With the economy weak and the labor market continuing to decline, there is now talk of a second stimulus (which is actually the third, counting President Bush's 2008 tax rebates). This would be a mistake. The truth is there hasn't been any stimulus to speak of so far this year. Moreover, what's being called stimulus is just a smoke screen for a permanent expansion of government, says Edward Lazear, chairman of the President's council of Economic Advisers from 2006-09.
Let's start with some facts:
- By June 26, about $56 billion was spent on the stimulus from the American Recovery and Reinvestment Act of 2009, passed Feb. 17.
- A large proportion of that actually reflects mere transfers from the federal government to state governments, so the amount that has gotten into the economy is significantly lower.
- But even if we call all of the $56 billion spending, it's still not enough to make a meaningful impact.
By this point of the year in 2008, the Bush administration's tax-rebates got out about $80 billion. Most economists believe the rebates had a positive but hardly dramatic effect on the economy. The Obama stimulus, being significantly smaller, cannot possibly be expected to turn the economy around, says Lazear.
The economy will improve, but it will do so because the financial sector is recovering. Financial recovery is largely due to the Fed policies to enhance liquidity and the success of the Bush administration's Troubled Asset Relief Program, continued by the Obama team, in helping to recapitalize the banks.
Congress and the Obama administration have used the economic downturn as an excuse to expand the size of government. Calling it a stimulus, they have instead put in place a spending agenda that will unfold over the next two years. Although a little over one-third of the American Recovery and Reinvestment Act of 2009 goes to tax relief, the rest is in the form of spending programs that will be difficult to stop once they are up and running, Lazear says.
It's a bit odd that the reaction by the Obama administration and some congressional leaders to a policy that has not worked is to consider putting a similar policy in place. One interpretation is that this is yet another opportunity to spend more on programs that Democrats have wanted for years, says Lazear.
Source: Edward P. Lazear, "Do We Need a Second Stimulus," Wall Street Journal, July 9, 2009.
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