Stimulus Gets a Second Wind in Washington

More spending might be needed, as Laura Tyson admits the Obama Administration underestimated the depth of the recession

By Peter Coy

There's probably nothing more politically radioactive right now than another fiscal stimulus package, considering that the first one will cost $787 billion and hasn't done much apparent good so far. Still, many economists say more fiscal stimulus is precisely what the U.S. economy needs to keep the recession from getting deeper and lasting longer.

At a speech in Singapore on July 7, Obama adviser Laura Tyson, stressing that she was expressing a personal opinion, said the package approved in February was "a bit too small," according to a Bloomberg news report. Tyson, who was President Bill Clinton's chief economic adviser, said: "The economy is worse than we forecast on which the stimulus program was based," according to Bloomberg. "We probably have already 2.5 million more job losses than anticipated."

The argument for more stimulus is simple: American consumers have abruptly switched from spending to saving in an effort to fix their sorry-looking household balance sheets. While that's healthy in the long run, in the short run it's disastrous for people who work for a living and need people to buy their goods and services.

A Collapse in Demand

In essence, there's a big shortfall of demand in the economy. Appetite from abroad is weak. The Federal Reserve has already cut short-term interest rates to virtually zero, so there's not much more that monetary policy can do. And state and local governments are required to balance their budgets, which means they have to match the shortfall in tax revenues with big spending cuts—which only worsens the spending decline. That leaves the federal government as the only entity capable of spending enough to prop up demand and protect jobs.

BusinessWeek foreshadowed the emerging debate over a second stimulus package in a story published on Jan. 7, before the first one was even passed: "Fiscal conservatives in the U.S. worry about huge deficits, but one lesson from Japan is that halfway recovery measures lead to years of subpar growth that make deficits even bigger," the story said. "As big as it seems, Obama's stimulus is likely to be just a down payment."

The Obama Administration certainly isn't eager to push for another stimulus package, given the political unpopularity of the idea. Rasmussen Reports said on July 6 that 60% of U.S. voters oppose the passage of a second economic stimulus plan this year, up five percentage points from March. The share favoring a new plan was flat at 27%. And Senate Majority Leader Harry Reid (D-Nev.) dismissed the need for a second stimulus bill on Tuesday, telling Roll Call, "Just over 10 percent of the [original] stimulus money has been generated out. We're in the process of doing that." And on July 8, Robert Nabors, deputy director of the Office of Management and Budget, told Reuters, "No one in the administration is talking about a second stimulus at this point."

On the other hand, the Obama Administration may embrace further stimulus if it concludes this would help fight unemployment, which is even more politically toxic. The U.S. economy lost 467,000 jobs in June, and unemployment rose to 9.5%, the worst rate since 1983. The average workweek fell to 30 hours, the shortest since record keeping began in 1964.

Too Much, Too Late?

The U.S. could probably learn a thing or two from Japan, which has been mired in off-and-on recessions since the beginning of the early 1990s.

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