Washington's 'Stimulus Package' Is Politics, Not Economics

I make no prediction about the final shape of this bill. Some people “don't do windows.” As an economist, I “don't do forecasts.” But I can tell you something about how to interpret the process.

The events of Sept. 11 demonstrate the folly of one of the old-fashioned theories about fiscal policy. The old-style Keynesian theory (based on the formulations of English economist John Maynard Keynes, who died in 1946) claimed that deficit spending, for any purpose, and funded in any fashion, would stimulate consumer demand and therefore stimulate the economy. It is a tribute to our common sense, if not our economic wisdom, that no one today claims that rebuilding the World Trade Center and the Pentagon will stimulate the economy by giving people jobs.

Some of the more doctrinaire Keynesians used to claim that the government could stimulate the economy by paying people to dig holes and fill them in again. The people employed in this useless task receive paychecks. They feel wealthier. They will spend the money, thereby stimulating consumer demand and keeping the economy rolling. No matter that no one placed any economic value on useless hole-digging and refilling. No matter that the taxpayers who implicitly paid for these holes feel less wealthy and thereby spend less. The Keynesians claimed that the mere act of spending government money would be good for the economy.

The most extreme and foolish version of this idea is the argument that war stimulates the economy.

Many people will still tell you, for instance, that World War II ended the Great Depression. But surely people would have preferred to have the government spend money on roads, bridges or dams than on bombs and tanks. It is true that the unemployment rate plummeted during the war. But a huge number of men were drafted into the military. It is no attack on their patriotism to observe that most of those conscripted soldiers would have preferred a job in the private sector to being drafted into a dangerous job with low pay and poor working conditions. The lower unemployment rate during the war was obtained in part by moving people out of the ranks of the unemployed and into the ranks of the Army.

Everyone can see that the terrorist destruction of Sept. 11 is just that: destruction. It represents a huge loss of wealth. Whether the public or private sector does the rebuilding, there is no question that we are worse off for having to face this massive reconstruction task. We have to rebuild, just as we had to fight the Nazis. But we would have been far better off in a world without any Nazis or suicide bombers. Coping with destruction is a loss, a necessary but unpleasant expenditure. It's never an economic gain.

This background is important for understanding the probable impact of the proposed economic-stimulus package. My opinion is that, after all the horses have been traded and all the logs rolled, the policy will not move the economy much one way or the other. The real question is whether the spending or tax cuts or reflect sound policies in and of themselves. If the tax cut wouldn't survive the light of day without the “stimulus” label hanging around its neck, then it is probably a bad idea. If the proposed spending would not pass critical muster during ordinary times, it is probably a bad idea in a recession, too.

You might be persuaded by the idea that, since people are hurting during a recession, the government needs to do something to help. That may well be true. But we already have a variety of insurance programs to cover the unemployed, the disabled and so on. Funding increases for existing programs are legitimate, but mostly automatic. A big, new spending program is not ordinarily necessary to keep existing programs funded.

The attempt to create new programs, specifically tailored to this particular recession, is likely to backfire. The National Bureau of Economic Research announced in December that the economy has been in a recession since March of 2000. The provisions of this bill will not take effect immediately. By the time they are actually enacted, and begin to have an impact on people's decision-making, the worst of the recession is likely to have passed. In other words, passing an economic-stimulus package would be like closing the barn door after the horse is out. In the worst-case scenario, the effects of the package could kick in after the economy has already begun to recover on its own. The additional stimulus could overheat the economy, causing excessive, unsustainable growth.

Economists have understood for a long time that tax and spending policies are blunt instruments for fine-tuning or even jump-starting the economy. So why are the politicians making such a big deal out of something that is not likely to affect the recession much, and may actually do harm?

You guessed it. Political posturing. It's never too soon to think about the next round of elections.

The recession is a convenient cover for pursuing political and philosophical agendas. The Democrats tend to favor government spending because their predisposition is that all the money belongs to the government. They want to collect it in taxes and decide how it will be spent. The Republicans tend to favor tax cuts because they believe that the money belongs to the people. They want to give as much money back to as many people as possible whether the economy is booming or busting.

This debate in political and economic philosophy is legitimate, and should take place in good times or in bad. How it is resolved does have long-lasting and important impacts on many areas of our lives. But don't let the politicians kid you: The length of the recession is not one of them.

Jennifer Roback Morse, a research fellow at the Hoover Institution, wrote Love & Economics: Why the Laissez-Faire Family Doesn't Work.