- The Washington Times - Tuesday, July 21, 2009


Although the U.S. and global economies are showing numerous signs of bottoming out soon, they remain in recession, and a recovery is still in doubt.

Questions remain about when a recovery will happen and whether it will be just “statistical” or really “functional.” Will the recovery be a lively one? Or a dead one? Also, what kind of recovery will occur: Will it be like previous ones or different?

Massive fiscal stimulus in the U.S., including sharply higher federal government outlays and tax reductions, is integral to answering these questions. However, with substantial increases in unemployment and with the U.S. economy becoming less alarming but still in recession, the question of whether more fiscal stimulus might be needed is alive and on the table in Washington, in the minds of Americans and elsewhere.

Little, if any, tangible evidence yet exists to demonstrate that the Obama administration’s $787 billion fiscal stimulus is having any noticeable effects. Consumption remains quite weak, with figures ranging from flat to slightly positive. The business sector continues to slash expenditures, output and inventories, and is massively slashing jobs. The unemployment rate is headed toward 10 percent or more. Polls indicate that Americans are less confident about the federal government’s ability to turn the economy around and are concerned about the economic programs and approach of the Obama administration, in particular.

It is still too early to tell whether the stimulus, 65 percent of which was in the form of federal government outlays, will fail to do its job. Quite typically, once tax cuts and increases in federal spending are set into motion, expectations rise for quick actions and positive effects.

But there was no reason to expect that the increased outlays and tax reductions would be showing noticeable effects on the economy this soon. Fiscal stimulus amost never acts quickly, as consumers typically wait to spend additional money.

Federal government purchases show up quickly in real gross domestic product, almost dollar for dollar. But only $83 billion of the stimulus program was in federal purchases, and the spending will occur at a fairly slow rate. Nevertheless, in the second quarter, a sizable increase in government purchases, perhaps at a 10 percent annual rate, should show up in the Bureau of Economic Analysis (BEA) calculations of real GDP.

Federal government outlays in the form of purchases can have a quick impact, but the Obama administration program was light on purchases and heavy on transfer payments, involving state and local governments as well as individuals.

The bulk of the government outlay, in fact, is in grants-in-aid to states and localities, as well as transfers to individuals, including, for example, extensions in unemployment benefits. Considerable delays sometimes occur before any economic effects, as these funds are unlikely to be spent much before later in the third quarter of 2009 and beyond.

Actually, the leading edge of the fiscal stimulus is showing up in income statistics, reflecting transfers and reductions in taxes through lower withholding. But consumers just are not spending the money, at least not yet. Lag time in spending after tax cuts and transfers can be as long as two or three quarters.

The bulk of the fiscal stimulus program’s effects thus should hit in 2010. It never should have been expected to do much in the first quarter after enactment or much more even in the second and third quarters after passage of the legislation.

Thus, watching and waiting to see whether the fiscal stimulus does its job remains the best course. However, as in any situation, contingency planning in case something does not work or does not have the intended effects makes sense.

In that spirit, considering another fiscal stimulus program and what it might be is worth doing, with policymakers standing by ready to pull the trigger, if necessary, later this year if the economy does not recover.

When will we know whether the fiscal stimulus is working or not? Certainly shortly after Labor Day, the evidence and statistics should reveal whether it is or if more stimulus is needed.

Americans and Congress may not wait that long, however. Already, there are cries for more stimulus, larger and sooner, as patience wears thin after not seeing any results yet.

Indeed, if the future follows the patterns of the past and the unemployment rate really does go to 10 percent or more, a quite likely occurrence with another “jobless recovery” and anemic economic upturn unfolding, Washington probably will do another fiscal stimulus whether or not it is needed.

Economic policy does not operate outside of politics. Political forces and rising unemployment seem to be pushing Washington inexorably toward another stimulus.

However, a wait-and-watch approach is the appropriate course, not another stimulus program fashioned in panic and haste, like so many of the policy actions taken so far in this unusual business cycle.

• Allen Sinai is the chief global economist and strategist at Decision Economics Inc.

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