Second Obama Stimulus Spending Bill Looms On the Horizon

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.

Follow Sheldon Filger on Twitter: www.twitter.com/EconomicCrisis

Comments

[LoveLifeLightLaughter]

Mr Filger, you and so many other deficit hawks fail to grasp both the long term and the short term, by worrying about debt more than income. If our country's economy operates at far less than peak efficiency (as happened in Japan in the 1990s) then our long-term bonds will be downrated anyway; if we have a strong, vibrant economy (even with a huge debt), then our long-term bonds will retain their current rating, if not grow in value. It's the total-debt­-to-income ratio, not just total debt.

If we do NOT stimulate the economy, and let it languish for a long time in productive inefficiency, then we are like any other individual, company, or nation who has a lot of debt and little income. If we stimulate the economy, and provide jobs (ie. GDP boost) then our national income will grow to be far stronger in comparison to our debt-load, and our national credit rating will be as strong as ever, perhaps stronger.

The problem is not how much debt we have, but how we spend the money. So far, it appears that many states are not spending it towards job-growing but instead are putting it towards plugging holes in their budgets.

Which leads me to your conclusion, about California. I would encourage you to avoid comparing a state government with balanced budget requirements to our national government, as the situations they face due to constitutional constraints are often completely different.

[PlasmaX]

If the second stimulus does not include meaningful foreclosure reform we can expect a third stimulus to be needed in another 6 months. Foreclosures were identified as the main cause of the current downturn, remain so, and will continue to drag the economy down until the government addresses the problem directly on behalf of homeowners instead of throwing money at the zombie banks who will not address the issue until forced to do so.

[noaxe397]

Repeal the Reagan tax cuts. Problem solved. Working/middle class will get back all the exemptions­/deduction­s that were taken away in 1986 so they won't feel a thing, probably pay less tax.

And get it straight. The Dems said without a quick passage of the stimulus unemployment would rise to BETWEEN 8 and 9%. It is 9.4%. Ok, impeach the guy for being 4/10ths off. They also said without the stimulus unemployment would EVENTUALLY rise to 11-12%.
The biggest expense in the stimulus plan (35%)? The largest middle class tax cut (275 billion) in US history. Oh, yeah, not ONE Republican in Congress voted for it, but half of them did vote for the largest tax rate increase in US history (35%-90% on the AIG bonuses.)

What got us out of the great depression? In 1942 government spending was 52% of GDP and the unemployment rate was 1%. The top tax rate on marginal income was 90%. Today, that would be on anything over 3-4million dollars in earned income.

[Rayme]

With the Government taxing us 50 cents on the dollar there will be no recovery. The problem with the stimulus is that it only increases the national debt, at some point the stimulus money ends and we have to get on with the real recovery. I don't see Obama's Stimulus creating long lasting jobs that are not dependent on government spending. You cannot grow the economy by borrowing and spending money, eventually we will have to deal with the Zombie banks, deregulate, break up the monopolies and restore the free market if we plan to create jobs for the 16.5% of the population that is now unemployed. I suspect (just like during the Great Depression) we will have 25 to 30% unemployment before Obama finishes his first term.

[therealredstateblues]

50 cents on the dollar where did you get that ridiculous figure?

[noaxe397]

Dude, if you are being taxed 50% you need a new financial planner. Don't be like Palin and blame your problems on others.

[therealredstateblues]

exactly - needs a new accountant or stop going to those cut rate tax preparers.

despite all the tea baggers whining the US still has some of the lowest effective taxes in the industrial world

how much lower do they need to be before it has any postive effect? Perhaps as Laffer suggests lets get rid of taxes altogether and wathc the revenue roll in! (not)

And of course the weatlhier you are the more you can afford fancy lawyers and accountants to help you not pay any taxes at all

[therealredstateblues]

Rather thna dumping more money into the finacial wasteland

why not invest in mfg and do something about the trade imbalance - more bang for the buck if you will since mfg in its sadly dimished state still employs more than the finacial sector

more and more economists of nearly every political stripe are agreeing that this recession can not be borrowed and spent out of, we must produce our way out

[DuganS1]

If Obama wants to pursue policies that would help manufacturing and the trade balance, he would reduce the corporate tax rate to the bone. This would bring a lot of investment back into the US. The "effective tax" rate on corporations doesn't matter. All corporations see is that there are lower tax rates abroad than in the US, thus they chose to invest outside the US. Many companies also chose to list in the US because of Sarbines-Oxley; so we need to cut back on unnecessary regulations. Investing in alternative energy will also help manufacturing and the trade balance, but the cap and trade program is exactly the wrong way to go about it.

[hearmeout]

If Washington passes any more spending bills to compensate for the lack of spending by consumers who aren't spending because they're smothering in household debt then the bond market will be hit in a big way, long term rates will rise and whatever theoretical benefit such a bill might accomplish would be swiftly erased.

Get this through your heads American media: THE AGE OF RECKLESS CONSUMPTION IS ENDING.

Consumer spending has dropped at a faster than any time since the second world war and unemployment is rising faster than any time since the 1930s while the U.S. is bogged down by the highest ratio of debt-to-GDP - public and private combined pushing 400% and rising fast - in its entire history AND the next generation (starting about now) faces $45 trillion in unfunded liabilities because we've been robbing Social Security for decades...

THIS IS NOT YOUR FATHER'S RECESSION!!! It's time to stop bailing out the fools who created this crisis - bankers and consumers alike - and start hunkering down to address the realities. Spending has to decrease dramatically rather than increase and taxes on the very richest must go up! The longer Obama tries to jump start a failed system the more it will taint his Presidency.

[ranchomerced]

Instead of letting the parisites in Washington spend printed money on more Socialist Welfare programs how about a 3 year tax holliday that will cost the taxpayer the same amount eventually?

[Camel54]

So you are suggesting that the government come out from under its debt by eliminating its source of income? Look, it is fact now that Reaganomics don't work. Americans have enjoyed staggeringly low taxes for a long time, and that is unsustainable. I don't want to see incredibly high taxes any more than anyone, but I would rather pay a little more if it meant a continually solvent government that could prevent the 20,000 preventable deaths due to lack of health care every year; provide for seniors so they don't have to worry about dying of starvation or exposure as they did before Roosevelt; children would not go hungry or homeless; vets were properly taken care of mentally, physically, etc. Too many people believe supporting troops or supporting this or that means putting a bumper sticker on your car. If we can't bring ourselves to sacrifice a little of what we have so that others can survive, our civilization is already worthless.

[therealredstateblues]

tarifs is another way to raise govt revenue. before the IRS tariffs was were the govt got ost of its revenue

this would do two things, reduce the trade deficit and encourage domestic production putting people back to work, and help relieve some of the potential increases in taxes on individuals and businesses.

revenue from tariffs could be used in combination of any of the following - increased safety inspection of imports, increased border security, bolster the social safety net - more and longer unemployment benefits, health care for un and under employed, education assistance for displaced workers, and pay down the debt reducing debt service to foreign lenders