Obama's Bailout

But that's not as much of a problem as it may seem, because almost everyone expects the economy to remain depressed for years. The minutes of the latest Fed meeting, for example, tell us that "all participants anticipated that unemployment would remain substantially above its longer–run sustainable rate at the end of 2011."

And it would also have been possible to provide a lot more aid, both to distressed individuals and to hard– pressed state and local governments. Before the bill was passed, state governments were projecting deficits of $350 billion over the next two and half years — deficits that will have to be closed with spending cuts and tax increases, which in turn will reduce vital services and further depress the economy. The stimulus bill makes up about 40 percent of this shortfall — a significant help, but it could have done more.

The fact that the bill doesn't do more reflects politics — and, arguably, some important misjudgments on the part of the president and his advisers.

THE GOP ATTACKS

From the start, the Obama administration proposed a stimulus that was at the low end of what independent economists thought was necessary and was relatively heavy on tax cuts. This seems to have been done in the hope of gaining broad bipartisan support: According to news reports from early January, Obama aides hoped they might get as many as 80 votes in the Senate.

Instead, Republicans rejected Obama's overtures en masse. Not a single Republican in the House voted for the plan. In the Senate, 36 out of 41 Republicans voted for the DeMint amendment, which would have scrapped all of the spending provisions and replaced the whole thing with permanent tax cuts.

To listen to critics on the right, the stimulus was a terrible idea. First, they claimed that it was filled with pork — but in order to make that claim, they had to denounce things that were not, in fact, in the bill. An aide to John Boehner, the House minority leader, claimed the stimulus would spend $30 million protecting a marsh mouse near Nancy Pelosi's district; no such provision was in the bill. Boehner and other Republicans insisted it would spend $8 billion on a high–speed rail link between Los Angeles and Las Vegas; no, it wouldn't. In a way, the apparent need of Republicans to invent wasteful spending out of thin air was a demonstration of how clean the bill really is: They obviously couldn't find enough real waste to complain about.

Second, Republicans claimed that the bill will impose huge costs on future generations — that it's "generational theft," as Sen. John McCain put it. Now, the U.S. government does indeed have a long–term fiscal problem. Recent estimates by the nonpartisan Tax Policy Center put the long–run "fiscal gap" — the difference between spending and revenue under current policy — at between four and six percent of GDP. But the cost of the stimulus will add only slightly to that gap — around 0.12 percent of GDP. That's nothing compared to policy initiatives that Republicans in Congress enthusiastically supported over the past eight years. The Bush tax cuts will ultimately cost at least $2 trillion; the Iraq War at least $1 trillion. The stimulus will be a much smaller burden, especially when you bear in mind that by helping the economy, it will also raise tax receipts, offsetting at least a third of the measure's cost.

But anyway, all the stuff about burdening future generations is pure hypocrisy. The tax cuts in the DeMint amendment, which was supported by 36 Republicans — including McCain, the self–proclaimed opponent of "generational theft" — would have cost $3.1 trillion over the next 10 years. That's four times as much as the Obama stimulus.

One last line of attack was the claim that fiscal stimulus, in principle, simply can't work. You hear this from conservative "experts" like Brian Riedl of the Heritage Foundation, who declares, "Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You're not creating new demand, you're just transferring it from one group of people to another." Borrowing from domestic lenders, the argument goes, cuts into the money available for investments; borrowing from foreigners curbs exports.

What's wrong with this claim? The answer lies in the very nature of our economic crisis. When the economy is at or near full employment, government spending does indeed come at the expense of private spending. But right now, we're suffering from a problem known as the "paradox of thrift" — everyone is trying to save more at the same time, even as investment demand is falling. Those vast quantities of potential savings — from consumers, corporations and institutional investors — have nowhere to go. By borrowing that excess money and using it to finance temporary budget deficits, the government can put it to good use, helping to sustain the economy. In a crisis like this, government spending is actually a way of getting unemployed resources working again.