Note to Obama: Thinking Small Will Lead to Disaster
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There are three serious dangers in the debate about the stimulus package. The first is that President Obama will think too small. The second is that he will think too bipartisan. The third is that the public will be swayed by myths, such as the claim that infrastructure spending just takes too long to gear up, or that the deficit is the paramount problem.
The economy is now collapsing at an accelerating rate. With the 2008 job loss at the worst annual level since 1945, and even sound businesses unable to get ordinary credit from a traumatized banking system, this will quickly become a classic downward depression spiral unless government acts at a very large scale, and fast. The GDP probably shrank at a rate of at least five percent in the fourth quarter of 2008, and the nosedive will be worse this quarter.
There is simply no good news anywhere in the economy, as the costs of the financial crash keep reverberating. Yet a stimulus in the range of $400 billion a year is less than three percent of GDP. (It's bizarre that the incoming administration uses two-year numbers. They only make the figure sound too large, rather than too small.)
The reality is that we need additional spending of at least a trillion dollars a year for at least two years. The only encouraging sign is that more and more mainstream economists and Democratic politicians are starting to say that the greater risk is that we will aim too low rather than too high. Even Martin Feldstein, who chaired Ronald Reagan's Council of Economic Advisers, is a born-again Keynesian.
My educated guess is that the first stimulus package will be too small, and that as the economy-wide collapse deepens, we will be back for a second one by April or May. That would be a shame. It would be far better to have adequate stimulus now.
The Perils of Post-Partisanship
In the past week, the incoming administration has sounded almost desperate in its eagerness to enlist Republicans. First, Obama offered huge concessions in the form of business tax write-offs. Then he signaled a willingness to negotiate limits on Social Security and Medicare. While it may make some sense to reward businesses for creating jobs or for not cutting them, the idea of allowing corporations to write off more past years' losses on their current taxes is mainly a reward to the same banks that got us into this mess. Tax cuts should be part of the package, but they should go to working families.
Politically, the likelihood is that the Republicans will take whatever concessions they can get from Obama, and then try to block the spending parts of the package. Obama genuinely hopes to reach across partisan divides--it's part of his make-up--but he may have to get bloodied a few times before he realizes the folly of this approach. It would be far better for him to draft the stimulus package that he wants and that the country needs than to compromise with implacably opposed Republicans going in.
The fact is that he has a much stronger hand than the Republicans do. Families and businesses, mayors and governors, are hurting in red states as much as they are in blue states. If a trillion-dollar stimulus package is pending before Congress and unemployment is rapidly heading towards double digits, he should dare the Republican leadership to try to block it. In such circumstances, it should not be difficult to peel off the two or three senate Republicans he needs to break a filibuster.