Doing something is not necessarily better than doing nothing. Flu-like symptoms are never improved by drinking Drano. And invading Russia in 1812 was a poor choice for Napoleon’s geo-political strategy.
Unfortunately economic policy-making is still dominated by the illogical “do-something” mentality. The U.S. federal government has committed an estimated $11 trillion into bailouts and stimulus packages according to CNNMoney.com. The primary result has been a skyrocketing national deficit. Unemployment rates continue to hover around 9.6 percent of the labor force— roughly twice the rate associated with healthy “full employment”—and annualized GDP growth for the third quarter of 2010 is estimated at a lackluster 1.8 percent which is much lower than average for an economic recovery.
True to the definition of insanity the Obama administration is calling for another round of economic stimulus packages and expecting completely different results. But the recent proposals which include $50 billion in an infrastructure stimulus and $130 billion in tax breaks for businesses are unlikely to have any significant impact on the overall economy.
Paul Krugman of The New York Times pointed out that Obama’s stimulus proposals are “much too small” to have any significant impact on the economy. It is unlikely that $200 billion in deficit spending could stimulate economic recovery when $11 trillion a sum 50 times larger failed.
According to Krugman prior stimulus efforts were unsuccessful because they were “[n]ot nearly big enough to restore full employment.” This begs the question— what level of federal spending would be sufficient to restore full employment?
Blogger Megan McCardle of The Atlantic contends that even “if Keynesian stimulus works” in theory perhaps “no one [could] ever actually afford to do it” in practice.
Previous stimulus efforts have reduced the unemployment rate by somewhere between 0.7 and 1.8 percent according to the Congressional Budget Office. Assuming that stimulus benefits increase in a linear fashion these numbers suggest that reaching full employment or an unemployment rate of 4.5 to 5 percent would require a stimulus package three to six times larger than previous stimulus packages.
There would be many serious problems associated with passing such an enormous stimulus package including political impossibility. The public has grown increasingly skeptical of current levels of stimulus spending and only one quarter of Americans surveyed by CBS News in July believed stimulus efforts had improved the economy.
Even the word “stimulus” itself has become taboo. In a press conference last Friday journalist Chip Reid cornered the president asking “[s]o this is a second stimulus?” Apparently it depends on what your definition of “is” is. Barack Obama refused to call the recent proposals for infrastructure spending and tax breaks economic “stimulus but he did agree that his administration’s policies were all designed to stimulate growth and additional jobs in the economy.”
A new multi-trillion dollar stimulus package would also be fiscally dangerous. A 2010 report by the Congressional Budget Office warns that the United States will risk becoming the next Greece— a nation with an imploding government an unemployment rate of 11.6 percent and rising and ongoing violent riots in its streets— unless federal spending is tightly controlled and/or tax revenues as a proportion of the GDP increase substantially in coming years.
The CBO admits that it cannot pinpoint the exact level of deficit spending that would trigger a fiscal crisis. But even if poor vision might be an argument for exercising caution near the edge of a cliff it doesn’t excuse reckless abandonment of fiscal discipline. A stimulus package large enough to create full employment could also be large enough to bankrupt the U.S. federal government which has already accumulated over $13 trillion in national debt.
Advocates of a second stimulus package forget that “doing something” could in fact make America’s economic situation worse. Nobody wants America to become Greece.
Inaction may be the most reasonable approach to America’s economic problems. At a minimum a heavy presumption should rest against those who would try to “stimulate” the economy through trillions of dollars in deficit spending. We all know that drinking Drano or invading Russia is unproductive. It is time for politicians and voters to reject the equally nonsensical “do-something” school of economics.