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.