When the electorate is unhappy about something, the hardest challenge for politicians is to do nothing. So as the economy limps along and Americans feel the resulting pain, it’s a good thing that Congress is in recess and the president is about to head off for a vacation in Crawford, Texas. It means they won’t act hastily on proposals to spend money to stimulate growth, which would probably be more effective on the spending part than on the stimulus part.
How do we know? Because we just tried it. In February, faced with a mortgage crisis and a housing bust, our leaders in Washington agreed on a $168 billion package, consisting mostly of $1,200-per-family rebate checks that went out in the spring. Today, it’s clear that expensive palliative solved nothing.
Harvard’s Martin Feldstein, the head of the National Bureau of Economic Research, was one of the many economists who urged this sort of program last winter. But in a recent article in The Wall Street Journal, he announced that he was wrong.
The idea was to put money into the pockets of consumers, who would spend it, providing a needed infusion to companies that make and sell goods and services. But Feldstein says it didn’t work. “Recent government statistics show that only between 10 percent and 20 percent of the rebate dollars were spent,” he wrote. “The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending.”
That’s not really surprising. When workers get a wage or salary increase, they spend more than before because they know they can afford it. But when people get a modest one-time windfall, they usually put most of it in the bank or use it to pay off debts.
Members of Congress should take a look at the evidence before ordering another round. House Speaker Nancy Pelosi suggests laying out $50 billion, and Senate Appropriations Committee Chairman Robert Byrd (D-W.Va.) has a $24 billion package heavy on what normally would be lampooned as wasteful pork barrel spending. Barack Obama has come out for additional rebates.
But if this ploy didn’t work the first time, it’s not likely to perform any better the next time. At a time of uncertainty, Americans are not about to throw caution to the winds regardless of how many government checks they get.
All a second stimulus program would do is enlarge the federal budget deficit, adding to the government debt that Americans will have to repay in the future. The economy is far more likely to get a boost from the decline in oil prices, which have dropped by one-fourth in recent weeks, cutting pump prices by some 37 cents a gallon. The Federal Reserve’s decision not to raise interest rates also helps.
For the moment, though, nothing is going to provide general relief. A fiscal stimulus might be a tonic for politicians campaigning for re-election amid widespread anxiety. But the economy probably wouldn’t feel a thing.
