Is The Third Time The Charm?

The dismal unemployment report released last week showing 9.5% unemployment -- and a decline in both work hours and weekly wages -- inspired renewed interest in a second economic stimulus. While Vice President Biden downplayed the idea on the Sunday talk shows, the administration has warmed slightly to the notion.

Economists -- from Krugman to Feldstein -- have led the charge for another stimulus since just after Obama signed the American Recovery and Reinvestment Act into law. Unsurprisingly, though, economic and political realities are at odds and most members of Congress, both Democratic and Republican, are unwilling to consider additional stimulus. That is, except for House Minority Whip Eric Cantor who has called for additional stimulus that includes an income tax cut for small businesses and their employees.

Though it is somewhat heartening to hear that Rep. Cantor is willing to distance himself from the fiscal austerity crowd, there at least two major reasons to reject his proposed version of additional stimulus. First, the very premise of Republican complaints about President Obama's American Recovery and Reinvestment Act is that it has not acted quickly enough to stimulate job creation. Yet, the very spending that has occurred from ARRA has come in the form of tax cuts (and expanded unemployment benefits), not from spending on infrastructure and other public investments. If any piece of the stimulus has actually failed, it has been the "fast-acting", low "bang-for-the-buck" tax cuts forced into the package by Republicans and centrist Democrats.

Second, most commentators seem to forget that an additional stimulus package in the summer or fall would, in fact, be our third stimulus, not our second. Recall that in February of 2008, President Bush worked with Speaker Pelosi to pass a stimulus that included $600 tax rebates and business tax cuts at a cost of about $150 billion. At the time, economic prognosticators were overly optimistic about the economy's prospects, just as the Obama administration was when it predicted peak unemployment of about 9.0%. Indeed, at the beginning of 2005, the Congressional Budget Office, while obviously concerned about the prospect of recession, was open to the consensus view of economists that a "resilient" American economy would "keep the economy from going into recession this year."

There is little evidence that the tax cuts that President Bush signed into law had a significant effect on the economy. Not only has the unemployment rate increased in every month since the legislation was enacted, but only an estimated 20% of households that received a tax rebate increased their spending as a result. Though consumption increased in the second and third quarters of 2008, the stimulus actually decreased consumption by 1.0% in the fourth quarter. In other words, the stimulative effects of the tax rebate were not only inefficient, but the overall economic picture did not improve.

Still, the dismal state of the economy suggests that a third stimulus will be necessary. Mohamed El-Erian, CEO of the giant bond firm PIMCO, worries that policymakers have not yet realized that this dismal economic state is actually a "new normal". When they do, he writes:

They will have to recalibrate fiscal and monetary stimulus to recognize the fact that "temporary and targeted" stimulus will be less potent than anticipated.

The real muscle behind President Obama's economic stimulus package has not yet been flexed. The weakness of tax rebates of the sort Rep. Cantor is calling for, on the other hand, has been exposed. Perhaps now it is time to rethink our definition of what temporary and targeted stimulus looks like. Perhaps now we can consider how best to help struggling households deal with a new normal of persistent high unemployment.

Follow Harry Moroz on Twitter: www.twitter.com/hmoroz

Comments

[JohnPaulJones]

And who is paying for this stimulus? It's bad enough the dollar has been devalued so ridiculously over the last three or four years, printing more money isn't going to help things.

[jmpurser]

We've been funding our economy for 30 years with debt. And it hasn't bothered you until now when we have an actual economic need to do it?

[jmpurser]

Business and personal "tax cuts" count as stimulus packages only in the GOP fantasy theme park. And Obama wasted WAY too much of the last stimulus package on it any way. We probably need a real stimulus package that gets jobs moving right now and unfortunately we needed it last January.

There's a price to be paid for "compromising" on basic intelligence and reality.

[Senzasord]

Yes, and I would like John Boehner to cite exactly how many jobs have been created with all the massive tax cuts for the rich that were forthcoming under the guise of stimulus. I would bet that there aren't very many. In fact tax cuts for the rich have never stimulated anything except the feeding frenzy for aquisitions and mergers which result in net job losses and companies that have become too big to fail. Stop pandering to the rich and start paying attention to the needs of the average Americans and we may become a great nation again.

America was not founded for the purpose of enabling the greedy to satiate their lust for wealth. The job of the American government is to keep the level playing field for all so that we all can partake of the American dream.

[hsr0601]

In regard to the stimulus investment, my understanding is as follows:

1. The current surging fuel cost is overwhelming the market rally.
And the pending clean energy bill might serve as a second stimulus package world-wide boosting private investments.

2. People are so worried about losing their job, coverage, denial of treatment, which seems to increase bank deposit latetly. That means stimulus funding mainly goes toward bank deposit for a rainy day increasing jobless rate. It proves again that a healthy society yields better productivity, prosperity.
It is time to 'Change' the notion of the public health as a fundamental human right and install 'a safety system for all' like all of the other industrialized nations, I think.

3. The stimulus funding begins to mobilize just 11%, meanwhile, the auto industry has moved to its restructuring with the massive job-related impact.

4. The pandemic swine flu has been hurting the global economy seriously.

Thank You !

[wilsonveteran]

The second stimulus that Obama signed was not designed to stimulate the economy it was designed to grow government. Yes you got a check for 250 dollars big wup. Yes you have another 15 in your check every month but that is not a tax cut that is a withholding cut so at the end of the year you will have to pay it back. Why should business expand or investors invest since Obama talks about tax hikes on them to pay for health care reform, and Cap and Trade.

What we have today is a rank amatuer trying to be president. He has no idea what he is doing except for gaining more power. One more stimulus should make our dollar worthless and completely ruin the economy. But he can always blame it on Bush.

[drkazmd65]

That's one of the reasons my 'tax cut' of about $20 biweekly got channeled into buying I-series savings bonds. So I have some money sitting around (or at least a back-up to my 'other' more liquid money) to cover any change in my tax bill/refund come next spring.

If I don't need to tap that extra savings then cool,... I got several hundred other dollars in inflation-adjusted assets lying about for later.

[hsr0601]

The surging fuel price and people's saving by the stimulus money just in case of losing job, insurance, and denial of cure may explain this claim, I guess.