Economic stimulus: How much is not enough?

John Edwards
REUTERS/Jonathan Ernst
Presidential candidate John Edwards, shown speaking at a Thursday campaign rally in Columbia, S.C., was the first of the three leading Democrats to unveil a stimulus plan to boost the sagging U.S. economy.

Once the New Year’s confetti settled into the carpet, the stock market began to sink nearly as fast. Entrance polls in Iowa showed recession was uppermost on voters’ minds; New Hampshire exit polls confirmed it, and in the past week, politicians have spent a lot more time talking stimulus rather than surge.

On the Democratic side, John Edwards proposed a $25-billion-now, $75-billion-later plan Dec. 22; on Thursday, Hillary Clinton unveiled a $70-billion-now, $ 40-billion-later plan, and Barack Obama‘s $75 billion plan debuted Sunday. Although Edwards supporters crow about their candidate being first and Clinton knocks Obama for being last, the plans are more safety net than substantive stimulus.

“Folks, we have a $14 trillion economy. A one-time stimulus … of $75 billion or $100 billion is too small to do much,” writes economist Robert J. Samuelson in the latest Newsweek. “If the economy is in serious trouble, something much larger is needed.”

Traditional slump-fighting recipe seems weak
If the worst fears about housing and oil come to pass and America enters a non-shallow recession, it will do so with the weakest macroeconomic tools in recent history. The traditional Keynesian recipe for slump-fighting — tax cuts, government spending hikes, lower interest rates — was already tried … during the boom, when it only fueled the housing bubble.

The Federal Reserve talks bravely of half-point interest rate cuts, but at the current — and historically low — 4.25 percent, it could run out of room if the slump lingers, a la Japan’s central bank in the 1990s. And each rate cut will weaken the increasingly puny dollar. While that may boost export-dependent employment, the effects will likely be swamped by inflation on export-dependent American consumers. For example, while lower-cost American exports saw a 0.4 percent increase in November, the U.S. trade deficit surged 9.3 percent to a 14-month high, mostly because of oil prices. Oil producers, who for now are paid in dollars, naturally want more of them when each greenback is worth less. If they decide to start taking some other kind of currency as payment, stagflation will deepen and wipe out any job gains or rebate checks Americans see.

Presidential candidates don’t run the Fed, but appear to be running toward the one opening Bush has left them: increasing the budget deficit. The annual deficit has fallen from $413 billion in fiscal year 2004 to $162.8 billion in the year ending Sept. 30, 2007. It now stands at 1.2 percent of Gross Domestic Product (GDP) — well below the 3 percent target of the European Union, for instance. Of course, the rosy scenario ignores the record national debt from ballooning first-term Bush deficits, which obliterated surpluses that could have offset rising Medicare costs and Social Security IOUs. How leviathan-like has this structural imbalance grown? So big that Moody’s Investor’s Services warned Thursday that the U.S. government could eventually lose its “triple-A” bond rating, which it has held since the first assessment in 1917.

Think tank sees need for bigger stimulus
But, as Keynes famously said, in the long term, we’ll all be dead, and the election is in November. If you’re looking at the Democrats for the most progressive plan, consider these principles laid out by the Economic Policy Institute, a nonprofit, nonpartisan think tank:

1. A stimulus package should generate growth and jobs to offset rising unemployment.

2. A stimulus package should take effect quickly.

3. A stimulus package should raise current deficits but not affect the long-term budget outlook.

4. A stimulus package should target unmet needs.

5. A stimulus package should be fair.

EPI’s white paper pegs the amount needed at 1 percent of GDP, or $140 billion, less than any of the Democrats currently provide. EPI says a specific plan should include three parts: Federal spending for individual supports and accelerated public investments; aid to states and localities, and targeted tax rebates.

Edwards’ plan does not break out detailed costs; New York Times columnist Paul Krugman cheers it for including investments in alternative energy; Clinton’s plan does, too. However, many of Edwards’ specifics — encouraging wind and solar farms, training workers in green-collar jobs, supporting mass transit — lack the immediacy of an effective stimulus.

Clinton focuses almost half of her initial plan on a $30 billion housing crisis fund to forestall foreclosures and help states hit by sagging revenues; Obama spends $10 billion on something similar, and Edwards appropriates an unspecified amount. Obama’s plan, which focuses heavily on middle- and lower-income tax and Social Security rebates, offers the most immediacy, though lefties like Krugman criticize its fairness.

David Brauer has reported for the Chicago Tribune, Newsweek and the American Lawyer, among other national publications. He covers Minneapolis City Hall and Hennepin County politics for MinnPost, and can be reached at dbrauer [at] minnpost [dot] com.

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