Priming the Pump

Sunday, January 25, 2009

THERE IS much that makes sense in the $825 billion economic stimulus plan that the Democratic-controlled House of Representatives is developing, in close cooperation with President Obama's advisers. Several core features -- increased food stamps and unemployment benefits; Medicaid money for state governments; increased infrastructure spending; a tax rebate to low- and moderate-income families -- are either temporary measures that are well calculated to enable quick spending by families and businesses or that could be amended to become so.

However, some in Congress and the new administration apparently see the country's present recession as an opportunity to change the federal government's spending priorities more generally or simply to reward loyal political constituencies. This is understandable, given that the voters endorsed the Democratic Party and its priorities in November. But it's risky to make new, multiyear commitments in the middle of a crisis without debate over competing priorities -- and without paying for them through some means other than borrowing.

Helping hire, equip and pay police, a $4 billion item under the bill, might be a good idea, but writing checks to individual households for the same amount would do more to stimulate the economy. Ditto for $16 billion in Pell Grants for college students, $2.1 billion for Head Start and $50 million for the National Endowment for the Arts. All of those ideas may have merit, but why do they belong in an emergency measure aimed to kick-start the economy? For sheer irrationality, it would be hard to top the $4.19 billion the bill would give to the Neighborhood Stabilization Program, on top of $4 billion authorized last year. This program gives local governments money to buy and rehabilitate homes that have been foreclosed on -- thus giving lenders an incentive to foreclose on more houses.

Much of the stimulus bill does not really claim to deliver a short-term boost to the economy. Provisions to develop a "smart grid" for electricity and to enhance scientific research, alternative energy development and education seek to boost the economy's long-term efficiency, and, hence, its capacity to grow. We are sympathetic to the objective, and there might be much to recommend each of the various proposals. But given their cost, and the inherent difficulty of forecasting their impact, Congress should vet them through the normal legislative process, weigh them against other priorities and pay for them.

Fiscal stimulus is far from a sure-fire remedy. Economists disagree about the efficacy of every pump-priming effort from the New Deal to last year's tax rebates. In general, fiscal policy had fallen out of favor in economics; monetary policy, orchestrated by the Federal Reserve, is considered more efficient. Many economists note Japan's failed attempt to borrow and spend its way out of a recession during the 1990s. That country would have been better off, they say, if government had moved swiftly to recapitalize its banks instead of attempting repeated stimulus packages. As it is, Japan piled up a massive debt and recovered only modestly, leaving it vulnerable to today's downturn.

Fiscal policy is enjoying a political and intellectual comeback but in large part because the government is running out of alternatives; the Fed has already cut interest rates to zero and pumped its balance sheet up to more than $2 trillion. So legislators face a dilemma: They are being told that the stimulus package must be huge to work, but there may be no way to spend so much money quickly and effectively. Given the limitations, Congress and the administration would be well advised to trim the stimulus bill's more dubious spending, or reallocate it and focus on a definitive financial sector cleanup. Fiscal stimulus can be a part of the solution, but only if it is "targeted, timely and temporary." The efforts so far don't quite match that description.

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