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.
For a case example of how not to do it, consider Japan.
That country has spent more than fifteen years stumbling in and out of recession after its own massive real estate bubble burst. Japan's government has tried repeatedly, to use stimulus packages to bring the economy back to life, only to have it backslide each time almost as fast as the checks were cashed. There are many explanations for why the Japanese economy has been so unobliging. High among them is a view that the stimulus applied was poorly timed and in the wrong amount. Netted out for goofy subsequent tax increases and the like, most of the Japan stimulus packages was smallish, less than 1.5percent of GDP. And rather than doing it in big chunks, the Japanese did it in dribs and drabs. Done right, Japan would have spent more money and done it once, or twice at most—not smaller amounts spread out over a decade.
How much is the right amount now in the U.S.?
One way of answering the question is to look at trendline growth in GDP compared to the anticipated size of any looming recession. Let’s call "normal" annual GDP growth in the U.S. 2.5 percent, and let's, for the sake of argument, say that the current recession will be almost as bad as the last consumer-led recession back in 1981-82. That recession caused GDP to shrink by 1.9 percent, but I'll be nice and peg it at—1.5 percent instead. If you want to bring the U.S. back closer to trend, therefore, you could credibly argue that we'd need to see stimulus come close to making up the difference, or 2.5+1.5=4.0 percent of GDP. To that way of thinking, we either need to see one-time stimulus of close to $532-billion (4percent of 13.3-trillion in U.S. GDP) or not bother.
But that's not what's currently being discussed. Instead, we had $168-billion in stimulus six months ago, and there is talk of another $150-billion real soon now. Even if you add those two together, which isn't the right thing to do given how far apart they are, you get to $318-billion in stimulus, more than $200-billion short of the $532-billion or so we'd like to see in a lump-sum support package.
Realistically, you'd want at least $350-billion in checks now, and maybe even more than that given how we've already lost whatever pump-priming power that long-ago $168-billion had.
There's something for everyone in that unhappy conclusion. Stimulus fans can call for more money sooner, and anti-stimulus sorts can crankily point out how loony it is to drop-kick almost a half trillion dollars in more stimulus toward U.S. consumers. Another round of stimulus is a political win-win, in an economic lose-lose sort of way.