Friday, July 10, 2009
BY ANY MEASURE, the current fiscal and monetary policies of the United States are highly stimulative, almost incredibly so. The Obama administration projects that the federal budget deficit for the fiscal year ending Sept. 30 will hit $1.8 trillion, or 12.3 percent of gross domestic product. Mr. Obama's budget plan calls for an additional $1.2 trillion deficit, or 8 percent of GDP, in fiscal 2010. Both figures reflect not only the $787 billion stimulus plan adopted in February but also the countercyclical impact of "automatic stabilizers": During recessions, tax receipts decline and transfer payments such as unemployment benefits increase. The previous postwar deficit record, set in 1983, was 6 percent of GDP.
Meanwhile, the Federal Reserve has driven its target interest rate to nearly zero, opened its discount window to a wider range of financial institutions and expanded its balance sheet by more than $2 trillion through purchases of government bonds and mortgage-backed securities.
In other words, those calling for an additional stimulus package must explain why this is not enough. Yes, the U.S. unemployment rate hit 9.5 percent in June -- on its way toward 10 percent or more by the end of the year. Vice President Biden's admission that the administration might have "misread" the country's economic woes gave ammunition to those, including but not limited to the left wing of the Democratic Party, who always believed that $787 billion in stimulus was too little. Meanwhile, the contractionary effect of tax increases and spending cuts by cash-strapped states is working against the federal stimulus.
So far, though, only about $99 billion of the stimulus bill has flowed, according to the administration; this is consistent with forecasts by the Congressional Budget Office, which suggested that a quarter of the $787 billion would be "on the street" by the end of 2009 and another half would be out by the end of 2010. Congress packed the bill with all sorts of slow-moving stuff from members' long-standing spending wish lists. But if you believe both that the economy will be weak through next year and that the stimulus money can help perk it up, this is not necessarily a bad pace.
More fundamentally, the country may be testing the limits of its ability to borrow its way to recovery. Thanks to America's Triple-A credit rating, the federal government is tapping not only domestic savings but those of the entire world. Still, there is only so much capital to go around. If the United States claims an ever-increasing share of that pie, it may have to pay higher interest rates to get it. And higher interest rates would short-circuit economic recovery -- thus defeating the purpose of the stimulus.
We will publish other views on the need for a second stimulus in Topic A on the Sunday Opinions Page.