Becker is certainly right that it would be a mistake to enact a further stimulus program. With half the existing $787 billion stimulus package (which has grown to $862 billion while no one was looking—and that’s the figure I’ll use henceforth) that Congress enacted in February of last year still unspent, and given the sluggishness with which our government moves, a new stimulus program would probably not come on line until 2011 or 2012, by which time its principal effect might be to increase our already staggering public debt. Anyway the question of a new stimulus package is thoroughly academic because of the extreme unpopularity of the existing one, which only 6 percent Americans believe has had any positive impact on employment.
I think they’re wrong, and that the original stimulus was, on balance, a justified measure. But I can well understand its unpopularity, and I share many of the reservations voiced by critics.
Because it is being financed by federal borrowing rather than by taxes, by the time the stimulus is fully implemented (probably early in 2011) it will have injected $862 billion into the economy: roughly $400 billion in 2009 and the same amount in 2010. Each figure is a little less than 3 percent of GDP. The economic effect of such an increase in GDP depends on what is done with the money. Suppose all the recipients used it to buy Treasury bonds. Then its economic effect would be zero: the government would be lending the money and then borrowing it back from the borrowers.
Obviously some, and probably much, of the money has been spent rather than saved, though no one knows how much. Since the personal savings rate is less than 5 percent and some personal savings finance private business activities, probably almost all of the stimulus money has been or will be spent. This does not mean that it is or will be well spent, in the sense of financing activities that add more to economic welfare than the same amount used for private investment would do. But the stimulus has not reduced private investment, as it might do if the borrowing to finance the stimulus raised interest rates. Interest rates have been kept very low by the Federal Reserve. Despite that, private investment has been anemic; net of depreciation it was negative in 2009. Banks and consumers alike—heavily indebted and pessimistic about profit and income prospects—have trimmed their expenditures. Banks continue to hoard some $1.2 trillion in excess reserves (lendable cash sitting in accounts in federal reserve banks rather than being lent or otherwise invested), and the personal savings rate, which before the current depression was only about 1 percent, has increased dramatically.
In effect, the Treasury has borrowed from Americans money that wasn’t being used productively, and from foreigners (but mainly from Americans) money that they preferred to lend than to spend, and has recirculated the money into the American economy. Consumption expenditures rose in 2009 at the same time that incomes were falling and saving was increasing because stimulus money financed consumption that otherwise would not have materialized. An increase in consumption stimulates an increase in production (or at least a more rapid drawdown of inventories, so that production recommences sooner), which in turn increases the demand for labor and so reduces unemployment.
No one knows how many people are employed who wouldn’t be were it not for the stimulus money. There are almost 15 million unemployed Americans, and since the unemployment rate is almost 10 percent, this suggests that about 135 million are employed. If the stimulus, which as I said is injecting about $400 billion a year into the economy, has increased the number of employed by 1 percent, that would reduce the number of unemployed by almost 10 percent. Or stated differently, were it not for the stimulus, the unemployment rate might be almost 11 percent rather than almost 10 percent. An unemployment rate of almost 11 percent would cause something akin to panic among businessmen, consumers, and politicians, with very bad consequences for the country. So one can think of the stimulus program as a kind of insurance policy against potential economic and political unrest.
The stimulus has not, not yet anyway, “crowded out” private investment because there is so little demand for such investment at present even though interest rates are extremely low. The Barro-Ricardian Equivalence hypothesis implies that people are reducing their consumption and investment in anticipation of having to pay increased taxes in the future to repay the money borrowed to finance the stimulus. There may be something to this, but probably not much, because no one knows the form and incidence of taxes or other measures (inflation, devaluation, curtailment of government exenditures) that will be necessitated by the borrowing that is financing the stimulus. Probably most people take the view that sufficient unto the day is the evil thereof, rather than curtailing spending in the light of some unknown future prospect of having to pay in some form for their present consumption. The studies by Robert Barro and others that find evidence to support the Barro-Ricardian Equivalence hypothesis are considered unpersuasive by most economists.
The biggest objection to the stimulus is that it adds almost a trillion dollars to our enormous and rapidly growing federal deficit, in a political setting in which measures to reduce the deficit whether by tax increases, spending cuts, inflation, or stimulating more rapid economic growth seem either politically infeasible or economically undesirable, or both. Yet to the extent that the stimulus has increased production, employment, and therefore incomes, it has, by increasing tax revenues, offset some of the increment to the deficit that the borrowing to finance it has added.
The stimulus was poorly designed. A lot of it went to states, and the stimulus supporters brag that it saved hundreds of thousands of state public sector jobs. But without the stimulus the states might have preserved the jobs, or most of them at any rate, by cutting inessential state expenditures. Any such cut would reduce the amount of money in circulation and therefore consumption and therefore production and therefore jobs, but how many and when are entirely unclear.
Moreover, a stimulus that saves public employees’ jobs directly and private employees’ jobs at best indirectly creates resentment among private employees who have lost or fear losing their jobs. They think the government is in effect paying itself, or taking care of its “own” ahead of the broader public, although many of the public jobs saved (policemen, firemen, teachers) may be essential. Federal financing of state employees’ jobs also retards necessary reforms of the swollen public-employee sector.
No effort was made to target the stimulus on industries and areas of the country in which unemployment is greatest; it is those industries and those areas in which the employment effect of the stimulus would have been maximized. Indeed, stimulus moneys spent in areas or industries of low unemployment may not directly reduce unemployment at all, but do so only indirectly through the stimulus that spending imparts to production and hence employment. Becker’s argument that the stimulus reflects Democratic Party priorities rather than national priorities is compelling.
The stimulus was also poorly executed, because its direction was placed in the hands of Vice President Biden, who has no management experience, to oversee; and he allotted only 20 percent of his time to the task. The Administration should have hired an experienced manager, as it did to supervise the auto bankruptcies (which went quite quickly and smoothly), to oversee and expedite the stimulus.
And it has been poorly defended. The critical public relations botch was Christina Romer’s prediction in January 2009 that, without the stimulus that the new Administration was planning, the unemployment rate would rise from its then rate of 7.2 percent to 8 percent. With the stimulus, of course, the unemployment rate rose to 10 percent, though it has now fallen back to 9.7 percent. It’s hard to get people to understand that trying to predict the effect of the stimulus was a chump’s game and that without the stimulus the unemployment rate could well be 11 percent.
Although the President is articulate and intelligent, and Romer and the other members of his economic team are competent and in some cases outstanding (Lawrence Summers, for example), none of them seems able to explain the theory behind a stimulus in words that people who are not economists or financiers can understand. It doesn’t help that neither the members of the President’s team, nor Fed Chairman Bernanke, are gifted communicators, and that Bernanke, Treasury Secretary Geithner, and National Economic Council Director Summers, are implicated (Geithner, and especially Bernanke, deeply) in errors of policy that bear primary responsibility for the economic crisis—complacency, unsound monetary policy, and regulatory laxity. The fact that so few Americans believe that the stimulus saved any jobs suggests a profound failure of communication on the part of the Administration, not to mention financial journalists and public-intellectual economists.