The un-stimulus

We’ve gone through the rabbit hole. Yesterday’s House passage of an $819 billion bill to cut taxes and increase public spending was many things. It was technically a victory for Nancy Pelosi and House Democrats in the sense that they advanced the legislation they supported. It was, in a similar way, a victory for the President. But here’s what it was not:

It was not the passage of a stimulus package. History does not support the idea that the $275 billion in tax cuts in the package will actually produce substantial increases in consumer or business spending. Much of the funding for states in the bill meets shortfalls but will not increase economic activity. About a third of the spending in the bill will not be spent in the near-term. Much of what is in the bill is good, necessary even. But it is for the most part an emergency spending and tax cut package, not a stimulus.

It was certainly not a big, post-partisan political victory for the President. While Democratic leaders are trying to saying it was the Republican practicing old-fashioned politics that led to not a single Republican member of the House voting for the bill, the trick of post-partisan leadership is not just meeting with the other guys, it is getting them to follow. That won’t be easy. And as White House press secretary Robert Gibbs said, it is very early in the new administration to expect them to change what’s broken in Washington. But there is much about this bill that gives Republicans legitimate grounds on for criticism: it is not really a stimulus, we are rushing into action without sufficient debate about what will work best and what will not, this will put us in a big financial hole in terms of increasing the deficit, and in the end, there is no guarantee at all that this very expensive package will actually help. While I am all for doubting the sincerity of the Republican leadership and even for often ascribing lousy motives to them, when they have a legitimate case, post-partisan Dems should be listening carefully.

It was not a big step toward solving the economic problems facing America. It doesn’t even address the core problems that sent the economy spiraling downward. Americans, who don’t save, had one big asset on which they were literally betting their futures: their homes. The value of their homes has been battered. (My guess is that given how much real estate values have plummeted in the past year that vastly more homes are technically “under water” in terms of their financing than anyone — including the current mortgage holders — has estimated.)

Foreclosures continue to mount. Many mortgages continue to be much harder to get (like jumbos). There is supposedly $100 billion in mortgage relief waiting in the next part of this big emergency spending parade — the financial rescue package Treasury is working on — but that will probably only help those already in trouble, not help most of them, and it will not be anywhere near enough to restart home buying and construction. Of course, the reason there will be another financial rescue package (besides the fact the first one did not work) is that we have to restore liquidity to financial markets and restore health to financial institutions. Estimates for doing this currently are on the order of several trillion dollars. That may not seem a lot to you with your 2009 eyeballs, but try to look at it in terms of the eyeballs you’ve been using for most of your life. It’s not a lot of money. It is not a gigantic amount of money. It is what economists from Harvard technically call a shitload of money. It is an amount that will be a burden to the U.S. economy for your life, your children’s lives and probably your grandchildren’s lives.

Oh, and then, of course, there is the fact that a) nobody knows what is going to work on the financial rescue front and b) it’s not a U.S. problem, it’s a global problem and coordination on this front is going to be made increasingly difficult as shell-shocked economies start putting up barriers and leaders start pointing fingers at one another in non-constructive ways. (Vladimir Putin and Wen Jiabao yesterday pointed fingers at the United States as the culprit behind the crisis in Davos. While much of what they said is laced with truth, there is plenty of blame to go around for the creation of the opaque, impossibly complex, under-regulated, derivatives-laden, risk-replete global financial system the world has collaborated in creating.)

Do we need a package like the one that has been passed? Probably, we need to help those most hurt by the crisis, we need to keep states and localities solvent, and we need to provide some stimulus now. Could we do better than what was passed yesterday? Of course, and we probably have somewhat more time to craft a better bill than many are arguing, a month or two more would probably not hurt if we saved a few hundred billion here or there or used it to produce more stimulus sooner (what we lose on the front end, we make up for with more effective and fast-acting pain relief once the bill is signed into law.) 

But let’s not lose sight of the whole job of work involved in fixing the economy. It will require trillions more, a vision for what we think a new U.S. economy will look like, a vision for what we think the new global financial system should like, unprecedented international cooperation and, if we really want to avoid waste, an unprecedented focus on accountability.

On this last point the Obama team has been making some initial good progress. But I’d feel better if we beefed up the auditing function within the U.S. government and created a kind of recovery super-inspector general that goes well beyond the token ideas discussed and sends the message throughout the USG and to state and local governments that waste and spillage will cost you your job, will produce an immediate spending hold and that where there is negligence or worse, people will be swiftly prosecuted. To put this in perspective, while our heads still spin with thoughts of the thoughts of the $50 billion Bernie Madoff made disappear, the first TARP program has made perhaps six or seven times that much effectively vanish.

Frankly, with the trillions that are going to be in play, Madoff-level losses would be considered a huge success going forward, but with government spending at that level, they fall to the level of being a completely unrealistic dream of efficiency.

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