By Clive Crook
Published: July 19 2009 20:22
Unemployment has already risen further in the US than President Barack Obama’s economics team expected, and forecasters agree it will rise for quite a while yet. In fact, it has risen further than in the White House projections early this year of what would happen if Congress failed to pass the fiscal stimulus. A huge stimulus was enacted. Now Republicans point to the weakness of the economy and say the policy failed.
Supposing it did, was this because the fiscal remedy was misconceived in the first place? Or was it because the stimulus was too timid, as some Democrats believe, implying the need for a second round of tax cuts and spending increases?
Respectable economists can be found to defend each of these positions, and no doubt others as well. Unsurprisingly, the administration’s view, as set out by Lawrence Summers, head of the National Economic Council and Mr Obama’s principal economic adviser, is that the stimulus was about right, and that it is working.
In a lecture on Friday at the Peterson Institute for International Economics in Washington, Mr Summers said that he had once advocated stimulus that was “timely, targeted and temporary”. But this unprecedented crisis had persuaded him that a different though equally alliterative approach was needed: “speedy, substantial and sustained”. I do not know that you could call it speedy, but at 5 per cent of gross domestic product the stimulus was substantial all right, and it was phased to act on the economy over several years.
More front-loading, in my view, would have been wise. A stimulus that relied more on tax cuts and less on long-delayed infrastructure investment – much of questionable benefit, except in macroeconomic terms – would have been faster acting. Sadly, on the other hand, the depth and likely persistence of this recession make it hard to argue that when the full force of the stimulus arrives next year, it will be too late.
The administration said all along that the stimulus would build up gradually, peaking in 2010, with 70 per cent delivered in the first 18 months. “Now, five months after the passage,” Mr Summers said, “we are on track to meet that timeline.”
If all is going according to plan, why is unemployment heading for 10 per cent and beyond? Higher-than-expected unemployment is not mainly due to lower-than-expected economic activity, said Mr Summers. Unemployment has risen between 1 and 1.5 percentage points more than you would normally expect, given the severity of the downturn in output. Why companies have shed labour faster than usual – fast enough to keep productivity rising even as the economy tanked – is unclear. It could be a sign of just how scared businesses became. The economy was weak, to be sure, but confidence was destroyed.
Most forecasters agree that output and jobs would have dropped further without the stimulus. The independent Congressional Budget Office, unafraid to torture both the president and the Democratic party’s leaders in Congress last week with vicious assessments of the cost of healthcare reform, supports that view. But the centrality of confidence in the economy does complicate the argument.
Measures of confidence are indeed beginning to pick up. Most companies now say they expect improving market conditions; six months ago they did not. The stock market is no longer contemplating doom. Credit flows are normalising. Output is flattening off. But the role of fiscal policy is ambiguous.
The stimulus this year and especially next directly injects demand, which is all to the good. But the stunning scale of the intervention adds to growing alarm about an approaching fiscal crunch. On present policies, the public debt is on a path of explosive growth. The danger is that when it comes to confidence, what the stimulus gives, the debt projections take away.
Fears about public debt are worsening so much that they make the debate about a second stimulus moot. As a matter of practical politics, it cannot be done – not for the moment, at any rate, certainly not with the exuberant marketing of January. Politics more than economics guided the design of the first stimulus, after all. Democrats preferred public spending because they wanted to widen government’s role and repudiate the Republicans’ instinct to cut taxes regardless of the circumstances. But the politics have shifted. The debt projections are genuinely scary. For now, another daring boost is politically impossible.
The best thing for confidence would have been an even bigger short-term stimulus married to a credible plan to bring the deficit under control. It is not too late for the second part, but on this the administration is failing abjectly.
Impressive as he is, Mr Summers was unconvincing on the long-term fiscal outlook. “The president’s budget contains numerous proposals directed at long-term fiscal discipline.” Yes, but Congress is gutting them and the White House, far from resisting, is saying that is fine. “Containing growth in debt is a central objective of the administration’s healthcare reform proposals.” No, the administration is calling for a fiscally neutral healthcare reform. That does nothing to bring deficits down.
Suppose, optimistically, that a deficit-neutral healthcare reform does pass. The CBO still expects the budget deficit in 2020, after nearly 10 years of steady expansion, to be 7 per cent of GDP. How confident does that make you feel?
Copyright The Financial Times Limited 2009
0 comments:
Publicar un comentario