Larry Summers’ Impossible Stimulus Dream
Larry Summers, former treasury secretary, former president of Harvard and the former head of President Obama’s National Economic Council, made waves yesterday with an unequivocal and passionate call for a new round of stimulus to address what he rightly perceives as a weak recovery for American jobs and economic activity in general. In his view, the U.S. economy is hobbled by weak demand for goods and services, compounded of course, by high unemployment.
For Summers, the only viable tonic for what ails America is another round of stimulus. Absent such substantial and aggressive government spending, the United States risks a “lost decade.” In his estimation, the financial crisis was a caused by overconfidence, over-borrowing and over spending, yet the irony is that the wounds inflicted by that crisis can only be healed by renewed confidence, more borrowing, increased lending and more robust spending.
On the merits, Summers may well be right. The United States is in need of some injection of economic energy. The leading indicators have leveled off; unemployment remains stubbornly high; and confidence is waning. But the idea that government can help jump-start activity has been thoroughly discredited by the events of the past two years. Stimulus may be the right policy; politically, it is all but impossible in the current climate.
The inability to act now is directly related to actions taken two years ago. The Obama administration began 2009 with an aggressive stimulus to stanch the rapid deterioration of the economy. But the way that package was sold to Congress and the public means that a new package is almost certainly D.O.A. in Washington today.
As one of Obama’s early key advisers, Summers was an architect of the $800 billion package passed by Congress in February of 2009. Hailed as a vital emergency measure that would save and create American jobs and yank the United States out of its economic tailspin, the bailout today is widely denigrated and along with the health-care bill stands as article A in the Republican and Tea Party case against Obama and the Democrats.
The 2009 stimulus is reviled by many as a prime example of excessive government spending, adding to an untenable debt and doing nothing to invigorate hiring, energize a moribund nation or revitalize investment and spending. In last night’s Republican presidential debate, Mitt Romney assailed the Obama administration for making the recession “worse and longer” with reckless, misguided government spending.
The problem is that in 2009 Obama, urged on by Summers, promised not just that the stimulus would halt further deterioration but would also create millions of new jobs. Today, those jobs are not evident. The administration contends, and is backed by the Congressional Budget Office, that millions of jobs were saved by the stimulus, but in the rough and tumble of beltway politics, arguing that things could have been worse is a weak stance at best.
The other problem with the first stimulus was that considerable portions were grants to states to fund medical care and education—worthy, yes, but immediately beneficial to economic activity? Yes, there were tax breaks for individuals as well, and extended unemployment benefits, but much of those billions went to pay down debts or augment savings, which may be good for individual balance sheets, but does little to stimulate national economic activity.
The larger point is that the fate of the 2009 stimulus plan dooms a 2011 stimulus, even one on the more modest scale suggested by Summers, and even one that takes from the mistakes of 2009 and crafts a plan that more immediately and more directly creates incentives for hiring, incentives for lending and incentives for spending. It also dooms effective longer-term investment in infrastructure that is the prerequisite for global competitiveness.
Many on the right argue that government stimulus is always wrong, always a mess and never helpful, but rest assured that if the United States continues to drift into the election year of 2012, Congress will spend indiscriminately and ineffectively in bipartisan fashion so that neither party can be accused of ignoring the plight of suffering millions. Ideology matters, but elections matter more. It would be better to spend rationally now than irrationally in the heat of an election year.
Yet the tragedy of the past two years is that a flawed package in 2009 now dooms a better set of policies in 2011. The Tea Party representatives in the House will fight any spending other than on the military as sign of government profligacy, and many free-marketers are using the ammunition of today’s weak economy as proof that the 2009 stimulus failed.
So here we are, in need of marshalling resources to grapple with sputtering growth yet unable to make the political and economic case because the last time it didn’t work. There is no,“If at first you don’t succeed, try, try again” here. There is, “You tried; you failed; you’re done.”
It is somehow depressingly fitting that the most immediate policy debate is not even taking place among those currently determining policy, because those determining it are locked in a battle over debt ceiling and debt levels while tens of millions of Americans face a bleak future being buffeted by forces over which they have little or no control.
The right is right that government cannot solve the structural issues over the long term, but neither can millions simply pull themselves up and make do without some period of transition. As a result of the past two years, however, there will be no stimulus now. There will be only more confusion and more stumbling until there is a genuine crisis. Enjoy the summer.