Put not Your Faith in Stimulus Packages

As Obama, Volker, Summers, and Geithner prepare to ride into Washington to save us all with a stimulus package, Robert J. Samuelson provides a dose of reality in today’s Washington Post. He writes:

The present crisis represents a fundamental break in the recent pattern of American economic growth. For the past quarter-century, the economy has advanced on an ever-rising tide of personal borrowing that supported expanding purchases of consumer goods — contributing to U.S. trade deficits — and a housing boom. But lending became reckless, and many households overborrowed. In its simplest terms, the “stimulus” substitutes the federal government’s superior credit for damaged private credit.

But this cannot continue indefinitely. Rapid increases in the federal debt — much faster than in recent years — would threaten a further loss of confidence that might prolong today’s financial crisis or, someday, trigger a new one. A growing federal debt burden would also compound the problem of paying the staggering retirement costs of aging baby boomers. So: Neither rising household nor government debt provides a plausible foundation for future economic growth.

Even this gloomy analysis, alas, assumes that the stimulus is actually structured in an intelligent way. Obama is surrounding himself with economic grown ups, and I suspect that what they send to the Hill is likely to have some logic to it. (Although all the talk of infrastructure rebuilding makes me worry about gargantuan appropriations on projects that won’t actually start putting money in anyone’s pocket for years.) The problem, of course, is that what comes out of Congress will not be what Obama sends up, and as the run up to the TARP fund and its aftermath shows the high-minded slinging about of hundreds of billions of dollars has a tendency to unleash Congress’s more pork-prone side. Of course, in theory dropping money from airplanes ought to have some short term impact on consumption, so maybe a bit of Keynsian pork would not be all bad. The real problem, however, is that according to at least some projections the federal budget deficit next year could be as high as $1.3 trillion dollars, a whopping 9 percent of GDP. Raising that kind of cash may well push interest rates up, offsetting whatever stimulus effect a big dollop of government spending might have.


It has become popular of late to declare the intellectual bankruptcy of the post-1970s neo-liberal, anti-Keynsian consensus on economic policy. While it is true that we are suffering through the results of a massive regulatory failure in the financial system (a failure both of preventing catastrophe and positively encouraging it through government created incentives), there are reasons why the Keynsian consensus broke down in the 1970s, and those reasons still have their force. Of course, if the economies of the rest of the world are doing even worse than the United States, then the government may be able to borrow its way to a hefty stimulus without shooting up interest rates, as money from abroad flees to the safety of t-bills. This, however, would deliver a hit to American exports, pushing up the value of the dollar in the face of diminishing consumption abroad, and according to Samuelson:

What the United States needs is export-led growth. The rub is that many other countries want that, too. Just as large U.S. trade deficits signified American overspending, large trade surpluses in China, Japan and other Asian countries signified their oversaving. In China, consumption spending is 35 percent of GDP, notes economist Nicholas Lardy of the Peterson Institute. That’s half the American level.

The future of the U.S. economy depends on finding new sources of productive demand. That is partly a domestic exercise, but it also requires that other societies reduce their oversaving and reliance on exports. This is a tall order. Our fate is not entirely in our hands — or Barack Obama’s.

Happy monday!

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4 Responses

  1. Frank says:

    I’ve also been frustrated with the idea that macroeconomic theory can tell us much of use here–I’m tired of both Friedmanian monetarism and Keynesian stimulus theory and austrian school laissez-faire. But I disagree with Samuelson’s “export-led growth” approach, and I have a sense that if we want to have any chance of dealing with the current crisis in the long term, we have to think about whether an ungovernably globalized economy makes democracy and stability impossible.

    I hope we take this opportunity to look at Keynes’s other legacy–questioning free trade orthodoxy. David Grewal has made this point in his book, Network Power; here is part of a talk by him:

    “Keynes says that it was through hard experience . . . that England learned this lesson: Goods, he said, should be homespun as much as possible, and above all, finance should be national, because if you let your debts and your assets fall out of the hands of a single political community and separate them across different political communities, how do you reckon those accounts? There’s only one way. It’s either through complex international negotiation or it’s warfare. Whereas within a single country, you can use laws and you can do all the stuff that national sovereigns are good at doing.”

    at:

    http://www.cceia.org/resources/transcripts/0093.html

    Bob Kuttner makes a similar point about the Samuelsonian elite’s asymmetrical fear of “industrial policy;” tolerable in our trading partners, horrifying here:

    “For several decades, American elites of both parties have been preaching the same gospel of free trade. Supposedly, if we just leave markets alone, different countries will produce and export what they naturally do best, and import products at which their partners excel. In the tidy and oversimplified textbook world, there is no room for questions about pollution, labor standards, product safety, financial engineering, or industrial policy.”

    “But the real world doesn’t work like the Econ. 101 fable. In much of the rest of the world, governments help their industries develop.”

    “However, in the hierarchy of America’s diplomatic priorities, countries like China that subsidize industries (and violate human rights) get a free pass. Other nations like Japan, that basically closed their borders to most imports for several decades while they became industrial powerhouses, got a seal of approval, too. Supposedly, what we lose in jobs and industries, we make up in cheap imports.”

    at

    http://www.huffingtonpost.com/robert-kuttner/will-barack-obama-commit_b_152725.html

    As Kuttner notes, what we really have gained over the past 10 years is a debt-driven mirage of prosperity.

    For those interested in Grewal’s take on Tom Friedman’s The World is Flat, see:

    http://fairerglobalization.blogspot.com/2008/05/david-grewal-on-network-power.html

  2. Nate Oman says:

    Frank: I don’t think that I buy the Keynsian argument you quote against the free flow of goods and capital. The settlement of international accounts is not what is driving the current financial crisis and I don’t see war over account settlements in the offing. The better argument for capital controls is for a small country like Iceland whose economy — and central bank — simply isn’t large enough to deal with huge in flows and out flows of capital. This isn’t something that keeps me up at nights when it comes to the U.S. economy. Even Iceland could have avoided at least some of its problems had it been on the Euro. You can still mark me down as a free trader.

  3. From my vantage point, today we have too much Tom Friedman and not enough Milton and I don’t understand how Prof. Pasquale can be tired of “austrian school laissez-faire” – that Keynes is better known than Schumpeter is one of the great indictments of our educational system.

    But, hey, why listen to any economist – let’s just look at the real life experiences of uber-Free Trading Hong Kong and the ultimate closed economy that is North Korea.

  4. A.J. Sutter says:

    I agree with the main point of not expecting much from the stimulus package, but on some more specific points:

    1. The arguments for less globalization are also political. I don’t think it’s necessarily a strong position for the US that one of its major creditors sees its own historical destiny as being to replace the US as top nation. Similarly I think it’s naive to believe that sovereign wealth funds are all now, or forever will be, run by clones of Larry Summers or other politically-insensitive rational financial maximizers (maybe I’m being unfair to Larry). One flaw of economic analysis is that it gets blindsided all too often by politics.

    2. As for industrial policy, I think Kuttner’s characterization about the US tolerating Japan’s industrial policy is a bit revisionist, or at least late-stage (post-Japanese “bubble era”). As I recall the 1980s and early 1990s, the US complained that Japan was beating it economically because of Japan’s industrial policy, not despite it.

    3. What is “productive demand”?

    4. I wonder anyway whether the focus on trade policy, including telling other countries’ citizens to stop “oversaving”, etc. might be moving the stimulus package debate somewhat off-target. There’s a well-known story in Japan from the end of the samurai era (late 1860s), known as the “kome hyappyo” or “100 bags of rice”. The Nagaoka fiefdom was starving, and the neighboring Mineyama fiefdom sent it 100 bags of rice as hunger relief. Although most of the Nagaoka clan leaders and the general populace wanted to consume it, the chief executive of the clan proposed that the rice be sold and the proceeds used to build a school. His proposal carried, and the town (it had ceased to be a fiefdom on accession of the Meiji Emperor) prospered. The example carries considerable political weight in modern Japan; maybe the US should import it.