By Robert J. Samuelson
Wednesday, January 16, 2008
You have no doubt heard the well-worn dictum of Karl von Clausewitz, the great Prussian military strategist, that war is the extension of politics by other means. Well, the same is true of economic policy. As often as not, it's politics by other means -- and the looming debate over whether the country needs an "economic stimulus" program will, if nothing else, reaffirm that. The debate promises to be more about politics and public relations than economics.
"Economic stimulus" is shorthand for tax cuts or increases in government spending designed to accelerate economic growth and job creation. We need that now, say advocates, because the economy is on the verge of a recession or already in one. House Democrats are reportedly discussing a package of $100 billion or more in temporary tax rebates and grants to states. Not to be outdone, the Bush administration is exploring its own plan. Inevitably, presidential candidates are offering proposals.
Call this Lollipop Economics. It's an election year. Voters feel anxious about a weakening economy. Send them economic lollipops (say, a $500 tax rebate for most families). Make them feel better. Show them you're concerned. Prove that you're trying to improve the economy.
Superficially, the case for "stimulus" seems plausible. In December, the unemployment rate rose from 4.7 percent to 5 percent, a huge one-month increase. Jobs are not keeping pace with the growth of the labor force. Lawrence Summers, Treasury secretary in the Clinton administration, has proposed a $50 billion to $75 billion stimulus to be enacted in the next few months.
Every day, the housing situation seems to worsen. Jared Bernstein of the Economic Policy Institute, a liberal think tank, likens a stimulus package to insurance. "The important part," he says, "is to prevent a bad situation from getting worse." Bernstein worries that Federal Reserve policy alone -- cuts in short-term interest rates -- won't suffice to spur the economy.
All this sounds sensible, but it stumbles on a stubborn dilemma. Folks, we have a $14 trillion economy. A one-time stimulus (rebates aren't permanent tax cuts, and grants to states would probably be temporary) of $75 billion or $100 billion is too small to do much. If the economy is in serious trouble, something much larger is needed. But if the outlook is not so dire, then a modest stimulus plan is mostly political symbolism.
The truth is that there's a touch of hysteria to much current economic commentary that is, as yet, unjustified by what's actually happened to the economy. Yes, the housing slump is vicious, but at its peak, housing was only 5.5 percent of the economy, and the present slump is still only the fourth-worst since World War II.
Whether a recession occurs -- a determination made by academic economists, usually after the fact -- probably won't affect most people. Economist Richard Berner of Morgan Stanley expects a "mild and short" recession, with peak unemployment of 5.6 or 5.7 percent in early 2009. According to economist David Wyss of Standard & Poor's, the average unemployment rate of the past 50 years is 5.6 percent. This would be a setback, but not a disaster.
Only time and patience will cure some economic problems. Though few mention it, rising inflation is a threat. For the year ending in November, consumer prices increased 4.3 percent. Slower economic growth -- even a recession -- would dampen prices and incipient inflationary psychology.
The housing predicament is similar. Inventories of unsold homes are high; monthly sales are low. When there's a big gap between supply and demand, prices must adjust. That has to happen in housing. Home prices must drop further, so that houses become more affordable and revive both sales and new construction. True, falling home prices would probably lead to more mortgage losses and foreclosures. But the more the adjustment is delayed, the longer the housing market will remain moribund.
In an election year, politicians inevitably try to show their sensitivity to voters' economic worries. A slowing economy does suggest a few common-sense and responsible steps: for instance, lengthening unemployment benefits from the standard 26 weeks to 39 weeks. But a big exercise in pump-priming, which is all that a "stimulus" package is, would be justified only if the economy deteriorated considerably more.
It's not possible, or desirable, to correct every twist in the business cycle. The great danger of a stimulus package is that once proposed in a modest lollipop form, it would quickly be expanded to include many other tax breaks and spending increases, the fiscal equivalents of candy bars and peppermint sticks. This would bloat its costs and confuse the public about the long-term budget problem, which is, not surprisingly, just the opposite: to control the huge spending increases of baby boomers' retirement.