Stimulus Effectiveness Or Not

Andrew's skepticism about fiscal stimulus is well warranted.  The record on fiscal stimulus effectiveness is mixed to say the least.  "Timely, targeted, and temporary" are the correct principles, but, in practice, most fiscal policy actions have been found to be too late (procyclical), too diffuse, and too often permanent.  The Congressional Research Service analysis, the International Monetary Fund analysis, and the Congressional Budget Office analysis are the best overviews of the subject.

Political leaders often act like you can just press a button or pass a law and create a job or boost GDP.  Sometimes you can, but often the law is imperfectly drafted or based upon assumptions that don't pan out.  The gyrations of TARP spending are perfect examples of how what some very smart people at Treasury and the Federal Reserve thought would work didn't, so it had to be revised.  They assumed they could set a price for purchasing "toxic assets" in reverse auctions, but when they approached market participants to work out the details, they were quickly dissuaded from attempting it.  If they proceeded, it would likely have proven a colossal failure.  Now we're considering creating a "bad bank" or another "Resolution Trust Corporation" to segregate toxic assets.  It has a better chance of working, but faces the same problem of setting the right price, when setting the right price is almost impossible.  Pay too much and the taxpayers lose big time.  Pay too little, and financial institutions hang onto the toxic assets, and the financial crisis remains unsolved.

Now we're about to throw approximately $850 b. of borrowed funds, mostly from Asian savers, at a wide range of tax cuts and spending measures in another attempt to get traction to move the U.S. economy out of the ditch.  In my opinion, we need a large stimulus bill, and the one that Congress is formulating has the "usual suspects."  If I were formulating this bill, I have have the same categories of tax cuts and spending programs.  However, I've seen to many of these bills at close hand to believe that every dollar, or even 50% of the dollars, will be well spent and effective in their intended purpose.  As Bismarck once said, "The people should never see how their laws and their sausage are made."

That doesn't mean we should sit on our hands as the unemployment rate shoots over 10% over the next six months and as deflation takes hold.  Sometimes, the best policy is to push ahead as best you can, imperfect as that may be.  I would like to see more care taken in drafting the details.  Legislative language of the spending portion of the stimulus bill was first made public by the House Appropriations Committee last Friday, and the legislative language of the tax portion of the bill was just released late yesterday by the House Ways and Means Committee.  Rushing these bills through the House in one week is too fast.  I'd like to take at least another week, but that makes the bill a political target for too long and risks the votes needed to pass it.  So, like the TARP legislation of last September, which the House modified in a second bill, H.R.384, passed yesterday, we may be back modifying this stimulus bill in six months.