Unless the country is willing to accept perhaps 10 years of poor economic growth, a second federal stimulus package is needed. Fearful Democrats already are being cowed by Republican protests regarding deficits. Politicians, especially Democratic ones, should realize that a second stimulus package will actually be good politics.
Hateful as it is, between now and the 2010 elections unemployment is going to increase and residential foreclosures will rise substantially. Imagine what most Americans will be concerned about after another year of increased unemployment and foreclosures. Even if they have not lost their own jobs or homes, they will certainly know many more friends and family members who have. By 2010, they will be focused on jobs and economic growth, not on the federal government’s deficits. And they will be right.
Given the amount the economy has contracted over the past year, the first stimulus package probably was only about one-third the size needed to restore economic growth. The first stimulus also suffered from successful efforts by politicians of both sides to shift a substantial amount of the money from quicker projects to projects generating more short-term political talking points. While the good news is that we seem to have avoided an outright depression, the economy is still in the worst shape since the Great Depression.
Under more normal circumstances, the Federal Reserve could drop interest rates to stimulate growth. The problem is that it already effectively dropped those rates as low as possible some time ago. This makes it very likely that, without further federal stimulus money, the U.S. will have little or no growth for the next decade or so. This is what happened to Japan following the Japanese asset bubble collapse, when from 1991 to 2000 the Japanese economy was essentially flat.
Of course, Republicans are arguing that federal deficits will lead to destructive inflation. Under normal circumstances they might well be correct. These are not normal times though. High unemployment is depressing wage increases and will continue to do so. The Consumer Price Index, after falling for roughly the prior 12 months, rose in June, primarily due to increased gasoline prices. With upcoming increases in unemployment and foreclosures, the bigger threat is probably deflation, not inflation. Even if inflation resulted, moderate inflation likely would be beneficial in getting the economy started again – and the Federal Reserve Board can always raise rates in the future to tamp down inflation if it threatens to get too large.
What is astonishing, of course, is that so many Republicans who led the charge for President Bush’s tax cuts (which went overwhelmingly to the wealthy) and for the war in Iraq now decry the very federal spending that is the only practical way to get the economy back to something approaching normal in an acceptable amount of time. And while the federal bailout of banks and financial institutions was necessary to prevent the complete melt-down of the economy, it can be criticized on many points. American in general are angry about the bailout, particularly given that those institutions have not resumed normal lending, and that companies like Goldman Sachs (effectively paid back for its investments in AIG by the government) are planning huge bonuses for its employees this year. Assuming other institutions also announce large bonuses at the end of this year, few should be surprised if the mood of most Americans further worsens.
One place where money from a second stimulus should be spent is grants to states, which are in even worse trouble economically than the federal government, to avoid state and local workers from being laid off or having their hours cut back. Those government workers who lose their jobs, of course, compete for jobs with others, and those whose hours are reduced have less money to spend, which depresses the economy further.
Stimulus money should also be spent to lengthen unemployment benefits. We are not in a normal economy, and people are not able to locate jobs as quickly. Given that unemployment compensation is much less than the wages it is based on, that money will be spent on necessities, keeping the money in circulation and helping the economy.
Also, as has been noted many times before, stimulus money should be allocated that can be spent fairly quickly on infrastructure repair/maintenance and improvement. While the latter takes longer, knowing the money is committed can help avoid some layoffs.
Where Americans will be in a year is worried about jobs and economic growth, not worried about inflation. Smart politicians should start campaigning for a second stimulus package now and press for it through to the 2010 elections. At the very least they will not only being doing the right thing – they will be able to tell their constituents that they fought for measures that would help most Americans.