Obama Thinking About Stimulus II

Largely lost in the wake of Barack Obama’s press conference yesterday is the news that he is apparently still considering another ‘stimulus’ bill to try to get the economy moving again:

President Obama said he is “not yet” ready to ask for a second stimulus package even as polls show Americans growing increasingly more skeptical of how effective the president’s first attempt to create jobs has been.

In his fourth press conference from the White House since taking office, Obama told reporters Tuesday that he is not ready or even sure he needs to ask for a second stimulus package to complement the $787 billion package Obama and Democrats pushed through Congress not long after the president took the oath of office.

The president said Tuesday that he thinks “it’s important to see how the economy evolves” and how effective the first recovery plan will be.

The president seemed to be making some wiggle room for a second request, though, noting that when he requested the first package from Congress, “nobody understood what the depths of this recession were going to look like.”

At the time, Obama and his advisers said they needed the stimulus to prevent unemployment numbers from jumping about 8 percent. Earlier this month, Obama conceded that the national unemployment rate would likely eclipse 10 percent by the end of this year, a belief he restated Tuesday.

When asked how high the number might grow, Obama, conceding that he had been wrong before, declined to offer a guess.

The deficit is headed to levels unimaginable a few months ago, investors are speaking of the inevitable return to high levels of inflation, and the nation has lost 16,000 jobs per day since the ‘stimulus’ was signed into law. Yet Obama seems to think that things are going so well that we might need to spend a whole lot more. And according to Paul Krugman, most of Obama’s economic team supports the effort. Krugman seems to be the intellectual father of the ‘more stimulus’ movement, with his call for nearly doubling what has been spent so far.

But if Obama is tempted to request another trillion or so in spending – an act which would split his Congressional majority – then all he need do is look to his own economic advisers to see why that’s a bad idea. Recall what Budget Director Orszag said about fiscal stimulus bills, before he came to the Obama administration:

Practically speaking, however, public works involve long start-up lags. Large-scale construction projects of any type require years of planning and preparation. Even those that are “on the shelf” generally cannot be undertaken quickly enough to provide timely stimulus to the economy. For major infrastructure projects supported by the federal government, such as highway construction and activities of the Army Corps of Engineers, initial outlays usually total less than 25 percent of the funding provided in a given year. For large projects, the initial rate of spending can be significantly lower than 25 percent.

Some of the candidates for public works, such as grant-funded initiatives to develop alternative energy sources, are totally impractical for countercyclical policy, regardless of whatever other merits they may have. In general, many if not most of these projects could end up making the economic situation worse because they would stimulate the economy at the time that expansion was already well under way.

Orszag warned that a ‘stimulus’ package could probably not spend enough money fast enough to do any good. And the growing unemployment rate shows that he was right. But if the spending rate was not fast enough with the first ‘stimulus’ bill, it will be even slower for the next one. That’s because all the ‘low-hanging fruit’ is gone. The Obama team claims they made every effort to focus the first spending bill on shovel-ready projects; the next one is bound to take longer to have any effect.

And of course, there’s no reason to think that another spending bill would be as effective as tax cuts anyway. Recall that Obama’s CEA Chair, Christina Romer, believed in tax cuts over public works spending – at least until she joined the administration:

By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars. The puzzle is that, taken together, these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favorite textbook, spending multipliers necessarily exceed tax multipliers.

This suggests an interesting political tack for Obama to pursue: if he feels another ‘stimulus’ bill is necessary, and if he recognizes that a spending bill really won’t do any good, would he push for a package of tax cuts? It would be hard for Republicans to reject a package built around the pro-growth tax cuts that they proposed earlier this year. And even Democrats concede that they have gotten much of the spending they wanted (though of course, they’re happy to spend more).

But if Obama got Republican to vote for a significant tax-cutting stimulus, it would be seen as making good on his promises of bipartisanship, and it would give Republicans part ownership of a terrible economy. Both those factors would make it harder for them to make gains in the midterm elections.