It Didn't Work In Japan and It Won't Here Either

Washington is working from the Japanese playbook on stimulus spending and that's not a good sign.

After having spent $168-billion trying to resuscitate the U.S. economy last spring, to minimal effect, there is a push for more money. Led by Nancy Pelosi and others, the idea is that the badly faltering U.S. economy needs another financial jolt to keep it from falling into a deep and long recession.

So, is further financial stimulus in the U.S. a good idea? If so, how much is needed, and will it work anyway?

Realistically, you'd want at least $350-billion in checks now, and maybe even more.

Let's start by saying that there is little point in trying to spend kilo-billions stimulating the U.S. economy unless you think things are going to be really bad. Using fiscal (or monetary policy) to fine-tune an economy this size is silly and destructive, like trying to play doubles ping-pong with sheets of dry-wall. Sure, it's fun to watch, but it's also messy and highly prone to causing unintended injuries.

How bad is it out there? Well, the current economic numbers in the U.S. are…epochally awful. Forget the credit crisis for a moment and just focus on consumers. The various sentiment surveys—University of Michigan, Conference Board, etc.—are newly hitting levels last seen in the early 1980s. The current conditions measure in the Michigan figure is the weakest it has been since the survey started in 1978.

Of course, the damage doesn't stop there. Retail figures reported last week were dreadful, with a recent Mastercard release putting the September decline in just one category, consumer electronics, at more than 13 percent year-over-year. To put that in context, on an annualized basis that's like two chains the size of Circuit City simply disappearing from the U.S. retail landscape. Poof. These aren't just bad numbers; they're abysmal. Notice, of course, that we haven't touched on housing starts, the continuing high rates on long-term mortgage loans, and all that sort of consumer-facing thing. Rest assured, they too are bad, bad, and bad.

So, in answer to our first question, whether some stimulus is needed, the answer is "yes"—unless you're of the view that stimulus is never a good idea. And, to be fair, there are plenty of credible economists who think economic stimulus is a waste of money, like fanning air around in a closed room. To others, however, stimulus can be useful, if done properly, in the right amounts, and at the right time.