The perfect may be the enemy of the good, but the bad has lots of friends among the worse. Right now that’s the situation with the stimulus bill that the House has passed, and is now being sent to the Senate. The stimulus bill has lots of problems, and it mixes and matches many goals which might be better off done separately. But this kind of slow give and take spends a luxury that we do not have: time. We do not have time because while TARP has bailed out the bankers, sufficiently so that they feel they can pay huge bonuses, and redo their offices, the banks have not started lending. As the graph from the BLS shows – employment is in freefall.
That the economy is getting worse can be seen from the most recent GDP figures. On the surface, it does not seem so bad, economists were predicting a 5.5% fall in GDP on average, we saw only 3.8%. But 1.3% of that was inventories that were sitting on shelves. Basically, retailers decided not to cut prices in the face of the down turn, but instead let goods pile up the shelves. In normal conditions, the Federal Reserve would be raising interest rates to deal with an economy that was over-producing. So they taught us back in macro-economics: "A recession occurs when inventories pile up and the Federal Reserve raises interest rates to cool the economy." Ah for the good old days when we had choices about these things.
Since time is the luxury we do not have, passing the bill now, in relatively close to it’s current form is the best thing the political system could do. It’s not a good bill, it is loaded with political compromises and rigid ideology, it could be greener, too. However, those unsold goods sitting on the shelves are going to have to be sold or liquidated, and the companies buying them are going to stop. This is already showing up as an accelerating global recession. Industrial production is down by record amounts in Japan, South Korea, and even China has seen it’s rapid rise slowed, and faces internal pressure. Europe is racked by increasing protests.
What’s interesting is that the national GOP, and GOP governors are at odds. Republican governors, faced with massive service cuts, or raising taxes, or both – having long since "returned to the tax payers" the rainy day money that they should have had, are begging for the stimulus bill to be passed. Republicans are unclear on the concept: stimulus is the government borrowing money that would otherwise not be borrowed, paying to do things that should be done that would not be, and collecting the taxes on the other side that would never have happened. It works if given a chance.
The reality, as Barney Frank has pointed out is that Republicans demand that their wasteful spending be off the table, while even spending that works, such as family planning money – a dollar spent on family planning, on average, saves 3 to 6 dollars of other spending on services – should be gutted for reasons that remain obscure. The other reality is that having pre-compromised by larding the stimulus bill with tax cuts, the stimulus bill is now being attacked by conservative economists for not having enough of a Keynesian multiplier effect. This lack of effect comes from the tax cuts, not the spending.
As sad as it is to say, this bill is probably the best that can be done at this time. The real work of restructuring the American financial system is left undone, and there is still the matter of restructuring the American economy. We have already bet very heavily on a long recovery cycle, which would allow the illiquid assets that the government is backing to rise in value enough to be sold off at at least break even. The longer and deeper the recession is, the harder this is to do, and the more likely that we will end up throwing good money after bad when these same assets fail to bounce back.
The Senate can and should make some changes to the bill, add spending ideas that work. But then, by the end of the week, they should move the bill, and turn their attention to fixing the problems. The Stimulus bill is to buy time, which means we do not have time to waste. That means the public has to tell their senator to vote for the bill, and not to mangle what is already a delicate compromise. Since Clinton era comparisons are all the rage, they can be reminded of how in the 1990’s a stimulus bill died, and part of the result was a long painfully slow recovery, the lingering effects of which gave Gingrich the gavel when the smoke settled after a 1994 wipe out of Congressional Democrats. They can also be reminded of how tax cut driven stimulus failed to pick up employment, as the money went under the mattresses of the upper 1% instead of to the economy.