Something Always Changes

While Robert Samuelson offers his softball argument against stimulus spending, Paul Krugman continues to advocate for greater stimulus spending.

Without the recovery act, the free fall would probably have continued, as unemployed workers slashed their spending, cash-strapped state and local governments engaged in mass layoffs, and more.

The stimulus didn’t completely eliminate these effects, but it was enough to break the vicious circle of economic decline. Aid to the unemployed and help for state and local governments were probably the most important factors. If you want to see the recovery act in action, visit a classroom: your local school probably would have had to fire a lot of teachers if the stimulus hadn’t been enacted.

That seems accurate, and highlights the unfortunate effect of the losses of tax revenue by state and local government - rather than having a stimulus boost infrastructure spending, it seems to have largely allowed governments to tread water. It would not be a good thing if more teachers were laid off and more schools closed, and its reasonable to recognize the benefits of the stimulus, but it's no surprise that stimulus spending to date hasn't done much to improve (as opposed to maintain) employment.

Unless something changes drastically, we’re looking at many years of high unemployment.

Krugman alludes to economic growth under Clinton, but recall that the growth was driven by something people didn't anticipate - the rise of the Internet, followed by the Internet bubble. We bounced out of the post-bubble recession thanks to the real estate bubble, and... well, I'm not arguing in favor of building an economy based on bubbles, but I think it's fair to observe that things happen - sometimes good things, like the burst of innovation that grew out of the Internet. While I'm not going to argue that we should build public policy based upon wishful thinking, and on the whole it's responsible to look to general economic trends when advocating tax and spending policy, the (largely¹) unexpected is going to happen.

What I keep hearing from Washington is one of two arguments: either (1) the stimulus has failed, unemployment is still rising, so we shouldn’t do any more, or (2) the stimulus has succeeded, G.D.P. is growing, so we don’t need to do any more. The truth, which is that the stimulus was too little of a good thing — that it helped, but it wasn’t big enough — seems to be too complicated for an era of sound-bite politics.

My concerns are a bit different than those of Washington. I find it unlikely that additional stimulus spending will truly be directed at expenditures that qualify as investment in the future. I am troubled by the concept of bailing out struggling state and local governments to the extent that it enables those governments to avoid revisiting tax and spending policies that contribute to their plight. There seems to be little political will to actually invest in infrastructure improvement, or to invest in schools and colleges to ensure their continued quality and affordability.

I think we're past the point of emergency. To the extent that people advocate for additional stimulus spending, I think it's fair to move out of the bank bailout mode - throw buckets of money on the flames and hope to smother out the fire - and to spell out how much money is being allocated to any particular stimulus goal, along with a responsible argument as to how the spending will bring about a return for the economy.
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1. The real estate bubble was predicted, but the voices of doubt were largely drowned out by those who believed that you really could have perpetual, 20% increases in housing prices and that this should be viewed as a "good thing", not wildly out-of-control housing inflation.