The Stimulus Stalls?

I find it unnerving to watch Washington wrangle over legislation at the best of times. While I understand the essential nature of politics and the compromises that need to be made to build sufficient votes to pass a law, the debate over the stimulus package is a shameful and potentially disastrous shambles. Anyone with any sense of urgency and probity has to be screaming, at least on the inside.

Let me frame the discussion:

Aggregate demand, a measure of the size and therefore the level of economic activity, has fallen dangerously below what economists call its ‘potential’. This means that the economy is simply not creating jobs or wealth at the rate it could were we fully utilizing all the resources, like workers, factories, computers, and so on, that we have at hand. It is this gap between actual and potential GDP that needs to be bridged to get us back on track. This is no mystery. Nor is it a peculiar theory of a renegade sect of economists. It is as textbook as we can get.

The gap is around $1 trillion in 2009 alone and looks like it will be that much next year to in the absence of any action to fill the breach. So the current suggestion of a stimulus of about $875 billion over two years is under half of what we need.

The cause of the gap is the collapse of private activity. People like you and me and the private firms we work for are simply not buying as much as we could. Instead we are saving, either by reducing debt, or by accumulating cash. Of course this is an aggregate problem and there must be plenty of people who are spending as much or more than before. They are just too few to overcome the pulling back by the vast majority.

There is one way to fix this: stimulate demand. We can do this by getting the private part of the economy to stop hoarding cash and start spending again. Or we can admit that raising savings is a decent medium term objective, and therefore use non-private spending to fill the gap. Non-private spending is the government. Hence the stimulus package.

So that’s the issue at hand.

This is all straightforward. Or it should be. Instead we are witnessing incredible partisan infighting where some Senators even go so far as to question the need for any stimulus. They are concerned about the level of debt a dramatic increase in government spending would cause. That appears laudable until you realize that most of those same Senators had no similar objection when taxes were cut dramatically a few years ago and a gaping hole in the Federal Deficit opened up. Deficits were OK then, but not now. This sudden conversion to fiscal conservatism is coming at exactly the wrong moment. The time to build or protect surpluses was back in 2001 through 2007. Not now. Deficit spending is how we can fight this battle. Indeed it is the precise moment when the benefits of fiscal conservatism best come into play. A responsible fiscal policy would have built reserves we could now use to offset the gap in GDP. That we squandered our surplus was a national disgrace. That the people who enabled that disgrace are now holding up our attempt to save the economy is just plain horrifying.

Having said that I find it hard to praise anyone in the Senate. Both sides are culpable. One side is simply obstructionist. the other oblivious to the real goals. Some of the items being attached to the proposed legislation by both House and Senate Democrats indicate that they don’t understand the purpose of the legislation. Far too many of the recommendations are for things that will have neither immediate impact nor substantial effect. They appear to be ‘pet’ projects rather than great public works.

In my rant yesterday I criticized the intellectual and ethical failure of our elites. I see that failure as one root cause of our malaise. The debate, or pseudo debate, in Congress is a vivid illustration of my point.

There is remarkable coherence in the economics profession, both conservative and liberal, about what to do. Only a few ideologically entrenched outliers dispute the principal policy available to us. That level of agreement in a notoriously fractious community like economics is surely an indicator of the severity of our problem. Anyone who looks at the data flowing from Washington knows what we have to do.

So why doesn’t the Senate?