Economic Stimulus and Federal Government and Opinion and Economic Analysis and Government

Stimulus just way too big to spend this year

February 16, 2009

After much debate, the U.S. House and Senate have come together on a stimulus package. Whether it will work remains to be seen. And the long-term impact of spending nearly $800 billion is a big concern.

I support a fi scal stimulus plan. But I am also subject to considerable self-doubt on the matter, given that I erred in supporting the bank bailout. Evidently, few in Congress share my weakened self-assurance on the matter.

I was wrong in supporting the bank bailout. The money was used for an entirely different purpose than announced (interestingly, it was Paul Krugman the economist and columnist who suggested the change). Tim Geithner, who helped craft the changes, is now U.S. Treasury secretary. After weeks of criticizing the Bush administration's response (which he helped craft), Geithner has partially unveiled a plan that does more of the same. The markets dropped significantly Feb. 10 after the news.

The fiscal stimulus plan that just passed is argued by some to be too small. That is silly. If the economy continues to shrink at the current rate, the stimulus package will more than compensate for all the lost output.

Job losses are not accelerating; they have remained constant (but high) for three months. That signals we are at or near the bottom of the recession. But, there can be other shocks, and the bottom can be very long.

We probably need a stimulus in the $200 billion range, not $789 billion. And there's a maddening unpleasantness to the whole debate. It matters not on what we spend the money, only that it be spent fast.

For example, $50 million to the National Endowment for the Arts is better than $50 million on bridges when it comes to stimulus. The NEA can give away taxpayer dollars at lightning speed.

The stimulus is so big that we might as well tack on another three zeroes and make it a $789 trillion package. Congress just needs to add the caveat that the spending has to happen this year. State and federal governments simply cannot spend that much money this year.

Sadly, almost all of the package will bleed into later years. The economy will recover in the short run, but some combination of three bad things will happen.

Either government spending will be dramatically curtailed over the next several years or taxes will be raised with robust abandon. Either of these outcomes will slow the economy, and perhaps generate another recession. But next year is an election year, so the most probable outcome will be an astounding round of inflation. That is the worst-but-most-likely result of this stimulus package.

For those of you who don't read economic history for fun, here's an interesting tidbit. The really bad 1982 recession, of which everyone is so afraid of repeating, was caused by the Federal Reserve's effort to rein in inflation.
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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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