Sunday, February 08, 2009

"Economists Agree Time Is of the Essence for Stimulus" (Washington Post)

Not all of them agree, of course, but an increasing preponderance do, and the ones that don't are probably wrong. A (somewhat sprawling) roundup in the Washington Post sums up the emerging consensus on the scale and urgency of the accelerating economic emergency. The main thrust:
While economists remain divided on the role of government generally, an overwhelming number from both parties are saying that a government stimulus package -- even a flawed one -- is urgently needed to help prevent a steeper slide in the economy.

Many economists say the precise size and shape of the package developing in Congress matter less than the timing, and that any delay is damaging.

"Most of the things in the package, the big dollar amounts, are things that are pretty quick stimulus and need to be done," said Alice Rivlin, who was former president Bill Clinton's budget director and who criticized aspects of the proposed stimulus in congressional testimony two weeks ago. "Is it a perfect package? Of course not. But we're past that. Let's just do it."

Economists who initially rejected the need for fiscal stimulus have warmed to the idea, too. Several months ago, Alan Viard, a Bush administration economist now at the American Enterprise Institute, thought the right size for a government spending bill was "probably zero." He favored reliance on the Federal Reserve to slash interest rates and existing unemployment benefits to bolster the jobless.
That was probably before the Federal Reserve cut its interest rate almost to zero, without much visible effect. That particular economic lever is clearly broken right now.
Now Viard shares the view that a stimulus package is needed, although he would prefer one limited primarily to tax cuts and direct benefits for victims of the recession, such as increased unemployment benefits.

"Things have gotten so bad so quickly," Viard said. "We have now lost 3.6 million jobs, a stunning loss. But what's more horrifying is that half that loss has occurred in the last three months. This is a severe recession. There's no doubt about it." [....]
Though the article is not as clearly written as it might be, it does bring out the fact that not all economists agree on the need for urgent action:
N. Gregory Mankiw, a Harvard University economics professor who was chairman of former president George W. Bush's Council of Economic Advisers, supports cuts in payroll taxes partially offset by gradual increases in gasoline taxes. He says more time should be taken to craft spending programs that would not be wasteful.
In general, there is a lot to be said for careful deliberation, and for passing legislation after open and serious debate. That would mark a dramatic and valuable change from the standard modus operandi of the Bush Congress of 2001-2006, which specialized in slapping together big, complicated, poorly designed, substantively irresponsible, and often disastrous measures pretty much in secret, springing them on Congress to be rammed through quickly without serious consideration (or even time to fully read them) ... and then blatantly misusing the House/Senate "reconciliation" process to rewrite the legislation in ways that got around Senate procedures.

But one can't always be leisurely when emergency measures are necessary, so the question is whether this is such an emergency. That is, is quick action required to stop the accelerating downward spiral of the economy before it's possible to take the time for planning for the medium and long term? The answer appears to be yes.
Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University and former chief economist at the World Bank, said that the stimulus package was "probably too little, especially given that it is badly designed [and] we haven't yet fixed the mortgage problem so the financial sector is likely to continue bleeding."

Stiglitz said that most households would save rather than spend the money from tax cuts and that the business tax cuts were not closely enough linked to new investments. He said that while plans for infrastructure spending were flawed, it was "unlikely to be wasted as badly as the private financial market has wasted resources in last five years." [....]

In Hawaii on Friday, San Francisco Federal Reserve Chairman Janet Yellen added her voice to the supporters of quick action on a stimulus measure.

"In ordinary circumstances, there are good reasons why monetary, rather than fiscal, policy should be used to stabilize the economy," she said, citing lags in adopting and implementing government spending programs. "The result is that fiscal stimulus sometimes kicks in only after the need has passed. However, the current situation is extraordinary, making the case for fiscal action very strong."

Yellen said, "There is -- and there should be -- vigorous debate about the form it should take and about the likely effectiveness of particular fiscal strategies. However, it is critical that decisions on these matters be made on a timely basis so that the economy's downward spiral is not allowed to deepen."
And so on. You get the picture.

=> But even if timely and effective first aid (however imperfect) manages to stabilize the patient's condition, the real challenges are just beginning.
With the deal cut late Friday in the Senate, both chambers of Congress have settled on stimulus packages with about $820 billion of tax cuts and spending increases. [....] The hodgepodge of tax cuts and spending programs won't solve the country's basic problem of rot at the heart of the banking system and excessive borrowing by large numbers of people and corporations, economists say, but it might blunt some of the effects by putting cash in the hands of hard-pressed individuals and state budget planners. [....]

Despite Obama's plea, this week promises more haggling over the package. The Senate is expected to pass its version Tuesday, but then leaders must reconcile sharp differences with the House on a number of issues. [....] "If this is a harbinger of the future, God save us," said Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office. "Here we are shoveling out the goodies and we can't agree on that. What happens when you have to shift the car in reverse, or deal with something like health reform or energy policy."
Stay tuned. Meanwhile, the rest of this article is HERE.

--Jeff Weintraub

P.S. The article also notes that "Most economists agree that the Senate alterations in the plan would undermine stimulus aims." For some explanation, see What happened to the "economic stimulus" package in the Senate.