Would it be a disaster if the stimulus package didn’t pass?

All the politicians on both sides of the aisle, from the Presidents (both Bush and Obama) down, have been telling us that we absolutely need a big stimulus package immediately, and that failure of Congress to produce one would be a disaster. I’m not so sure.

First, we are in uncharted territory here. The Federal Reserve has a lot of experience managing economic dips by lowering interest rates, but they have already pulled that lever as far as they can – interbank overnight rates are effectively at 0% now. The world has little or no experience trying to manage a large economy by massive short-term spending stimulus. It may work; it may not work. No one (including the experts) really knows, and Congress is acting mainly because they feel the need to be seen by the voters to be doing something.

Second, if it doesn’t work, we have taken on a truly massive Federal debt – trillions of dollars of added debt – to no purpose. Eventually (perhaps sooner than we like) we will either have to pay it back or start printing money and risking soaring inflation. In fact, if it doesn’t work, the demands to pay it back may come even sooner, when nations like China get spooked and decide it is no longer so safe to buy US Treasury bonds.

Third, it is not likely to work unless the spending is tightly focused on (a) near-term items that (b) drive both employment and demand across broad sectors of the economy. The current stimulus package, in either the House or the Senate version, does not appear to do that.

It would certainly seem reasonable to try a massive stimulus package that (unlike the current proposals) was really shaped to have the best chance of being effective. But if what we are going to get is a massively expensive bill that is not likely to be effective, we would do better to have no bill at all and not assume the massive debt burden. And there seems little prospect of getting Congress, on either side of the aisle, to abandon their parochial interests and ideological stands and focus of shaping a truly effective package.

So failure to pass a stimulus bill may not be the end of the world. If it is going to be both ineffective and massively expensive, not passing it may in fact be the better of two bad options.