Only a few weeks ago, the cheerleaders from the financial community and Obama administration were preaching the gospel of "green shoots," those supposedly subtle indicators that the U.S. recession was bottoming out, and a recovery was just around the corner. However, amid a flood of dire economic and financial news, not the least being the bad unemployment numbers for June, there is increasing talk in Washington that a second dose of deficit-driven stimulus spending will be required from Washington if the nation's severe economic contraction is to be reversed.
Not surprisingly, the Republicans are already labeling President Obama's economic recovery spending package a failure. They point out that Barack Obama's economic team had envisioned the unemployment rate stabilizing at 8% during 2009, as the impact of nearly $800 billion in borrowed money being unleashed by the Federal government would arrest the free fall in employment numbers. The June statistics released by the Labor department reveal that nearly half a million Americans lost their jobs in June, a significantly higher number than was posted in the previous month, taking the official US unemployment rate to 9.5%. However, the disastrous economic performance of the George W. Bush administration, aided and abetted by a Congress under Republican domination for most of the previous president's term of office, undercuts the credibility of the GOP's criticism of the Obama administration on economic policy. Of far greater significance is that much of the criticism is now coming from the left-of-center of the Democratic Party.
Many neo-Keynesian economists were critical of the original Obama stimulus package for allegedly being too small. Their position was that the contraction brought on by the Global Economic Crisis required governments across the world, but especially in the United States, to borrow massively in order to compensate for the diminution in private sector economic activity. In a recent op-ed piece in The New York Time, economist Paul Krugman represented this point of view forcefully in labeling the current stimulus package as being totally inadequate, and emphasizing that a second stimulus spending bill of sizable dimensions was essential if the U.S. was to avoid slipping into an even worse economic crisis. He drew parallels with the economic downturn that occurred in 1937, when the Roosevelt administration pulled back from New Deal pump-priming in order to bring the Federal budget back under control.
While the Obama administration has been hesitant thus far in committing to a second stimulus spending bill, the growing calls for more deficit spending combined with political realities, namely the 2010 mid-term elections, will likely create accelerating momentum towards another so-called "economic recovery act." No Democrat wants to run in 2010 with unemployment continuing to rise.
Putting aside political factors, is a second stimulus spending bill a wise course to follow? In my view the answer is no. Just as I disagreed with the wisdom of both the original $800 billion spending bill and the $700 billion TARP Wall Street bailout package of last fall, I fail to see how the at best short-term enhancement of certain economic indicators outweighs the massive liability of further damaging the already frail fiscal health of the country. The neo-Keynesian economists fail to understand that the United States no longer has the luxury of engaging in counter-cyclical economic policy when its bank balance is mired in red ink. The global bond market is already providing early warning signs that profligate borrowing needs on the part of the U.S. government are simply unsustainable in the long-run. Not only would another stimulus spending orgy probably not improve the nation's long-term economic health; the further deterioration in the fiscal viability of the U.S. government will inevitably create its own negative feedback loop, further exacerbating the underlying weaknesses in the American economy.
The fiscal catastrophe underway in America's largest state, California, should serve as a brightly-lit red warning lamp for the entire nation. Endless debt by the sovereign does not guarantee long-term economic equilibrium. It is a roadmap to financial and economic Armageddon.
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