Counting the costs

The Baltimore Sun

As the fiscal stimulus saga draws to a close, we can ask what this opening salvo of the Obama presidency means economically, politically and internationally.

The economic range of reactions to the stimulus can be oversimplified into three camps. The first camp could be called the "Scientific Keynesians." This group typically looks at what the economy is capable of producing, subtracts what it is likely to produce in this slump, and identifies the difference as a gap to be filled. Scientific Keynesians have confidence that it's possible to bring spending online in a timely fashion and fine-tune the amounts so as to produce the requisite growth and jobs. They tend to view the $787 billion package as woefully inadequate and have been highly critical.

A second group could be called the "Cost-Benefit Covey." For them, federal spending is neither good nor bad per se: It depends what it costs and what it will do. In a time of low interest rates and idle workers, there may be projects that are worthwhile that would not pass the test when the economy is humming. But the number of such projects is limited. Even if there were a $1.2 trillion output gap, it does not mean so much can be spent wisely in the time the gap remains open. Members of this loosely defined group have criticized the stimulus plan as excessive and wasteful. They worry about racking up enormous debts and the high taxes or inflation those debts may bring.

A third group could be called the "Animal Spiritualists." John Maynard Keynes used the term "animal spirits" to describe public confidence in the economy. Such confidence certainly seems to be at a low ebb; the question is how to restore it. In this light, perceptions are all-important. If the package is seen as being significant, it will create hope, people will buy again and the economy will revive. There's not much precision to this approach; it's mostly psychology.

My sympathies lie closest to the Cost-Benefit Covey. I have little faith that the fiscal stimulus plan will revive the economy. There is an output gap, of course, but there are also some big structural problems - such as a collapsed financial sector and a housing sector in a downward spiral. Fixing those will be a prerequisite for recovery and may require all the resources we can muster.

Politically, President Barack Obama seems to have dashed many of his major thematic campaign promises in his very first foray into large-scale policymaking. The crafting and selling of the stimulus package haven't been transparent, innovative, calm or bipartisan. The rush to push money out quickly left no time to develop creative new approaches. The president's dire warnings of doom did little to soothe fears, particularly in those who had doubts about the stimulus package's efficacy. And while Mr. Obama was willing to exchange pleasantries with Republicans, those Republicans were largely excluded from the crafting of the bill and voted overwhelmingly against it. Even Mr. Obama's hand-picked "reasonable" Republican, Judd Gregg, found the process unpalatable and withdrew as commerce secretary nominee.

The bill also portends trouble on the international front. The original excesses of the "Buy American" clauses were trimmed back, but Mr. Obama missed a golden opportunity. Had he embraced Sen. John McCain's amendment to remove the clause, he would have demonstrated bipartisanship, assured the world that America was not embracing protectionism, and still retained existing legal authority to direct some contracts toward domestic producers. Instead, Mr. McCain's amendment was defeated. The remaining clause sends a bad signal, allows protection, invites retaliation and risks provoking numerous trade disputes.

If worried allies wish to call up and seek reassurance, they likely won't find the right person on the other line, as key international economic positions remain unfilled: Ron Kirk, the nominee for U.S. trade representative, has not yet had hearings scheduled, and there is a new vacancy at Commerce. The Treasury, meanwhile, may be otherwise occupied.

President Obama got the stimulus plan that he wanted, but at potentially a very high cost.

Philip I. Levy is a resident scholar at the American Enterprise Institute. This article originally appeared on the "Shadow Government" blog at Copyright 2009, WashingtonPostNewsweek Interactive LLC.

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