Times of emergency produce demands for action, and Barack Obama does not need to be urged twice. Weeks before taking office, he wants Congress to pass a fiscal stimulus bill costing half a trillion dollars or so, and his allies on Capitol Hill will undoubtedly give it to him. Amid a recession that some fear will spiral into a depression, no one wants to be accused of doing too little.
Obama's plan is expected to call for a host of remedies—including extended unemployment benefits, aid to state governments, more infrastructure spending, and a middle-class tax cut. It brings to mind the character in Stephen Leacock's humorous novel Gertrude the Governess, who "flung himself upon his horse and rode madly off in all directions."
Even many conservatives, however, want Washington to deploy fiscal weapons. Economist John Taylor of Stanford University and the Hoover Institution, an adviser to John McCain's campaign, says it "would be a significant stimulus to the economy" if the incoming president were to extend the Bush tax cuts.
There are only two drawbacks to the proposals offered by both the right and the left. First, they would cost a lot of money, either in lost revenue or additional federal expenditures, further bloating our gargantuan national debt. That cost would be worthwhile if it were essential to stave off a total economic collapse. But there is a second problem: These plans are not likely to work.
Shoveling cash into various public programs sounds like a surefire way to boost total demand and thus juice the economy. But the money doesn't sprout from trees in Tim Geithner's backyard. Any funds it wants to spend, the government will have to borrow. The people who lend the money will no longer have it to spend. So the total amount of spending may not change much, if at all.
Timing is another glitch. Putting crews to work on roads and bridges doesn't happen overnight—plans have to be approved, bids have to be solicited and contracts have to be signed. The Department of Transportation says that even with projects that are primed and ready, only one-fourth of the money gets spent in the first year. By the time an infrastructure program gets rolling, the downturn will almost certainly be shrinking in the rearview mirror.
If there are worthy projects out there, now is a good time to do them. But all we should expect in return is a better infrastructure a few years from now, not a stronger economy next May.
Tax cuts also promise disappointment. The Bush administration claimed its 2001 tax cut had a tonic effect on a weak economy, but it turns out that most of the money went to increase savings or reduce debt, not to unleash spending. Likewise with this year's tax rebates.
Even some experts who favor keeping tax rates low doubt that extending the Bush tax cuts beyond 2010 would do anything for the economy right now. "As a tool for dealing with this crisis, I don't know," Nobel Laureate economist Robert Lucas of the University of Chicago told me. "It's misleading to advertise them as an anti-recession device."
In fact, it's misleading to advertise any fiscal policy as an anti-recession device. University of California, Berkeley economist Alan Auerbach examined all the different tools that have been tried in the last 50 years and found "little evidence that these effects have provided a significant contribution to economic stabilization, if in fact they have worked in the right direction at all."
Everyone wants to do something. But holding off on a fiscal stimulus package wouldn't exactly mean doing nothing. Monetary policy has historically had a more potent and predictable effect on the economy than fiscal policy, and in recent months Ben Bernanke has been spraying money with a fire hose—cutting interest rates, boosting bank reserves 15-fold since August and taking radical steps like buying up short-term commercial debt.
All those steps will pay off, but they take time. Adding fiscal measures would probably be superfluous. If you want to go to the 10th floor on an elevator, punching the button over and over won't get you there any faster. We can throw a lot of money at the recession, but in the end, what we'll get is no hastening of recovery and a big stack of bills.
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