The Unstimulating

by Pejman Yousefzadeh on January 29, 2009

Over at The Politico, The Arena had those of us who are contributors discuss whether the stimulus package should have attracted Republican votes. I had no hesitation in answering no. The policy behind Keynesian stimulus is terrible; see here, here, here, here, here, here, here, here, and here, just for starters on why Keynesian stimulus is a bad idea. The fact that House Republicans were cut out of the negotiating process only served to reduce the impetus for Republicans to reward the crafting of a bad bill with their votes.

There are plenty of critiques that can be made of this stimulus bill, critiques that make a powerful argument against its enactment. Phil Levy points out that the stimulus is tremendously protectionist and will counteract trade liberalization–something we would stay away from if we were serious about wanting to stimulate the economy (see also this piece by Levy). This piece reinforces concerns that the stimulus package will turn into a protectionist bonanza (we may in part thank the antediluvian Senator Sherrod Brown for the increased Congressional effort to make a bad economic situation worse through the promotion of protectionism; evidently, the words “Smoot” and “Hawley” mean precisely nothing to Senator Brown). Philip Zelikow reminds us that the crafting of this stimulus package detracts from the spirit of pragmatism that the President promised us he would follow:

. . . the current belief in the healing power of a gigantic stimulus package is substantially faith-based. Once one gets past the need to revitalize automatic stabilizers (like unemployment compensation) and give state and local governments appropriate access to credit, the relevant science and the historical analogies, when probed, are not so deep. Just a few months ago, the International Monetary Fund’s economists acknowledged that, “Perhaps surprisingly, the empirical literature on the effects of fiscal policy does not provide a clear answer to the simple question of whether discretionary fiscal policy can successfully stimulate the economy during downturns.” The new chair of the Council of Economic Advisers, Christina Romer, knows this all too well.

Zelikow doesn’t just critique; he comes up with an alternative proposal as well, one that has a whoe lot more intellectual integrity than does the Administration’s stimulus proposal. Larry Lindsey does so as well; his argument that we ought to cut the payroll tax is well-taken and has not, alas, meaningfully penetrated the inner policy circles of the Obama Administration. Steve Horwitz–via Will Wilkinson–reinforces the fact that the stimulus bill is just a Democratic policy wish list writ large. Jeffrey Sachs argues trenchantly that we ought to be concerned about the degree to which the stimulus bill is a fiscal disaster. Read the whole thing but the first paragraph is especially worthy of note:

The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package.

Sachs opens the door to tax increases. I would prefer that door remain closed but there is no gainsaying his argument that the stimulus will ruin any effort to achieve greater fiscal health. And it will do so to no positive effect whatsoever economically.

The more I examine this issue, the more I wonder why we are engaging in this fruitless exercise. I hope I am wrong and that the stimulus works. But I don’t believe it will and if it does not, then people will need to be called to account.

The accounting will begin in 2010. It should continue in 2012.

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