The second stimulus debate

Seldom is there such a clear-cut ideological difference in economics as we are currently witnessing in the current “second stimulus” debate.

The question is simply whether or not the government ought to do a second round of economic stimulus. Put aside the issue of whether the first round was effective enough. Is the economy flagging enough –and in enough danger of a “double dip” recession – to warrant another trillion dollars or so in a second stimulus package?

The Keynesians, led by Paul Krugman, argue that we need a second stimulus package to keep us from falling back into recession as the first stimulus payments end. They acknowledge that it piles yet more debt on the nation, but argue that in the long run a faster return to productivity and economic health, and the increased tax revenues that would come with it, will more than offset the cost.

The opposition, led by Thomas Friedman, argue that we are already way too far in debt as a nation, with red ink projected as far as the eye can see. The worry is that at some point the financial world will suddenly see us as a nation as economically sick as, say, Greece or Spain, and will suddenly begin to demand a hefty risk premium to lend us more money. A huge new stimulus package (it would have to be huge to have any effect) might well hasten that day, as we plunge ever deeper into debt.

I would offer a third point of view – that even if a second stimulus were desirable, recent history gives no assurance that Congress will appropriate the money wisely. The first stimulus bill was loaded with Congressional sops to special interests, which seriously diluted its effectiveness. It also phased the money in far too slowly (most of it wasn’t actually scheduled to be spent until the second or third year). Why would one expect the same Congress to behave any differently with a second stimulus package?

Clearly the current political winds are against a second stimulus package, especially with mid-term elections coming up and the Democrats already on the defensive because of the massive spending bills they already pushed through. But that doesn’t mean the Keynesians are necessarily wrong. Nor does it mean that the financial markets may not still decide to push up our borrowing rates sometime soon, whatever policy we follow.

As I have noted before, previous empires (British, French, Spanish, etc) began to crumble when they let their domestic finances get out of hand. Ours are now right on the verge of just that point, with entitlement programs due to bankrupt the nation in just a few years. And there is no evidence that our political leaders in either party are up to the difficult task of handling this problem.

As the Chinese curse says: “May you live in interesting times”. These are certainly interesting times.