Second Stimulus Needed. But Could It Pass?

Ever since the American Recovery and Reinvestment Act passed less than a month after President Obama took the oath of office, some critics have said the stimulus it provides isn’t big enough. Actually, many progressive critics said it wasn’t big enough well before it passed the Senate by the skin of the teeth of three moderate Republicans, one of whom has since become a Democrat.

Those critics were lined up against other critics – Republicans, ConservaDems, Blue Dogs – who said the stimulus was too big or that there should be none at all. Just let the economy come back on its own, devil take the hindmost.

We’ve seen quite a lot of the travails of the hindmost lately, with rising consumer loan delinquencies, horrific numbers in shipping activity, more bad news from the unraveled safety net, more foreclosures, fall-out from foreclosures and fallout from Michael Jackson’s funeral, as well as bad news in just about every other story from California.

Most of the Leading Economic Indicators indicate the economic bottom may have been reached. But as the pain and anxiety of tens of millions of unemployed and underemployed and underwater Americans worsens, talk of another round of stimulus has been growing.

Hurrah for the sentiment, but does anybody really, seriously, truly believe that another round of stimulus stands a chance of passing even with a gargantuan flow of political capital from the White House?

Republicans, true to form, are saying, in effect, See, we told you the stimulus was a bad idea, and we were right, it’s not working. Paul Krugman, about whom progressives are sharply divided, has all along argued for a larger stimulus package, but he put the screws to those GOP talking points this week. The problem, he wrote:

...is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon. The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted. That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.

Krugman also pointed out that those who argued last January and February for a larger stimulus were frozen out in the megamedia, just as bigger-stimulus advocates here at Daily Kos were repeatedly told five months ago to shut up because the administration had everything all figured out. Wrote Krugman Wednesday:

And the voices calling for stronger stimulus are, may I say, sorta kinda respectable — several Nobelists in the bunch, plus a large fraction of the prominent economists who predicted the housing crash before it happened.

But somehow, the pro-stimulus people are unpersons. Who makes these decisions?

Vice President Biden recently gave the stock market some downward pressure when he admitted that the administration "misread how bad the economy was." He has been urging audiences all week, while the President is in Europe, to have patience. Both Biden and Obama adviser Austin Goolsbe have said it is too soon to be talking about another stimulus when the first has yet to get up to full steam. However, Laura Tyson, one of Obama’s outside economic advisers, seems to have joined the second stimulus crowd:

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was "a bit too small," said Laura Tyson ...

The current plan "will have a positive effect, but the real economy is a sicker patient," Tyson said in a speech in Singapore [Tuesday]. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration. ...

"The economy is worse than we forecast on which the stimulus program was based," Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum. "We probably have already 2.5 million more job losses than anticipated." ...

Tyson said the U.S. should shift away from its dependence on consumption to grow, and promote expansion through investment and exports. The dollar will need to weaken in the longer term to promote export-led growth, she said.

As Biden told David Gregory on Meet the Press in mid-June, the reason for the misreading was "We took the mainstream model."

Exactly the problem, responded economist Stephanie Kelton:

For as near as I can tell, the mainstream models have been successful at just one thing: failure. They predicted that: subprime loans would not default at substantially different rates than prime loans; the riskiness of credit default swaps and other mortgage backed securities could be efficiently judged; deregulated financial markets were capable of self-policing; and so on. And they were wrong. ...

The prediction that comes out of any macroeconomic model is, to a very large extent, driven by the assumptions that underlie it. The mainstream models tend to assume things like: efficient markets, rational expectations, infinite planning horizons, and so on. The rosier the assumptions, the rosier the predictions. ...

It's time to abandon the mainstream model and the rose-colored glasses that go with it.

What would a second round of stimulus look like? Assuming, that is, that the administration is willing to try to pass another in the face of potential bond trader freak-out over inflation fears, and in face of political challenges. Not the least of the latter would be a lot of whining about "why didn’t Obama get it right the first time" rather than "he’s doing what FDR did effectively, experimenting until it clicks."

Differences over whether to do another stimulus pale beside differences over what to do. If the key is to get money into people’s hands quickly, which is what most of the complaints are about, then just adding to the $787 billion pot won’t do the trick. L. Randall Wray, a professor of economics and director with the Center for Full Employment and Price Stability has a set of ideas worth discussing:

Payroll tax holiday: About $2500 of tax relief annually per worker, with the same going to the employer. Stimulus: $650 billion per year. Easy to implement and to phase out. Effect: immediate.

Additional state and local government assistance:: Too little money from the Recovery Act made its way to the states and local governments where the suffering is immense. Yes, some of it they brought on themselves; but Wray recommends $400 billion "allocated by population (a bit over $1200 per capita)." This would halt further layoffs and furloughs which have just begun to devastate various state and local governments. Easy to implement. Effect: more or less immediate.

Jobs to reduce poverty:  6.5 million jobs are already down the tubes (nine years’ worth of job creation wiped out), and if the actual numbers of discouraged and underemployed workers are added, we really need 15-20 million more jobs. "A substantial amount of America's poverty problem is really a jobless problem ... direct job creation [can not only] reverse the trend toward ever-higher unemployment rates, but it will also go a long way toward filling the growing holes in the social safety net." At least part of this goal could be achieved in the short run by adopting a 21st Century WPA, as proposed by bonddad and NewDealDemocrat in May. More complex to implement. Effect: Not for at least six months.

Homeowner relief:  "When banks begin to foreclose, the government would step in to purchase the property at the lower of market price or outstanding mortgage balance." These homes would then be rented to the foreclosed owners. "Reducing evictions by offering a rental alternative will help reduce the pain of foreclosure. It might also allow the process to speed up (with smaller losses for banks) since many families would choose to stay-on as renters, with the possibility that they could later buy their homes at more reasonable prices." Complex to implement (how do you determine a fair market price in this environment?). Effect: As soon as a mechanism can be established, which could take a while, but just knowing the mechanism is coming would slow down foreclosures..

How much all this might cost is unknown. A trillion dollars already with just those first two items. But as economists James Galbraith and Dean Baker, among others, have been arguing for some time, it’s better to spend a bit too much and deal with the problems that may cause when people are working again than to spend too little and not put enough of them back to work.

Even without another stimulus, the Great Recession will no doubt end anyway, someday. If the technical recession - as decided by the National Bureau of Economic Research - ends this month and the trend of the past four downturns holds true, we’ll return to the number of jobs we had in December 2007 by around mid-2013. That time frame could be greatly shortened by bolstering the Recovery Act with a second stimulus targeted at both instant and longer-term economic relief.

It’s easy, however, to see why the administration is not eager to take action. A second stimulus could well be almost as tough a sales job in Congress as getting those legislators to do something about the upward transfer of wealth, stagnant wages, unfettered off-shoring and oligarchical manipulations that plague our economy. But the difficulty doesn’t make it any less necessary.