This article first appeared in the St. Louis Beacon, Jan. 30, 2009 - "The Obama administration's stimulus bill," notes Columbia University sociologist Sudhir Venkatesh, "reflects the work of those hurrying to meet a deadline." And so they did: Voting along party lines, the House passed the president's $819 billion stimulus package 244 to 188 two days ago.
The accepted wisdom is that not acting with haste would prolong the downturn. Unfortunately, many accepted wisdoms have the nasty habit of being wrong.
An editorial in the St. Louis Post-Dispatch recently proclaimed that "there is little disagreement among mainstream economists that a stimulus package is necessary" to save the economy. In my last column I reported that research by some of the new administration's own economists does not support that view. Many reputable economists, contrary to popular belief, do not believe that the stimulus plan is a good idea.
One such economist is Stanford University professor John Taylor. In a presentation to a national meeting of economists, Taylor weighed in on the question of using fiscal policy to jolt the economy back to normality. His approach was scientific, not emotional.
Taylor finds that previous discretionary fiscal spending plans have had little impact on reversing previous downturns. And he sees no evidence to suggest that this plan is any different. His conclusions obviously are not "mainstream."
This does not mean that all fiscal policy is impotent. The automatic stabilizers built into the system, things like unemployment compensation, food stamps, etc., are critical in reviving a down economy. This means that some of the proposed package, like the increased assistance to unemployed workers, could have a manifold impact on people's incomes and the economy.
But other parts of the $544 billion in spending have more dubious effects.
Proposed spending on transportation only kicks in after several years, after the economic expansion will have begun. It is naive to suggest that this spending will stimulate the ailing economy. It will increase the level of permanent government spending in the future. It will bloat government debt. It will exacerbate the trillions in unfunded mandates that already exist.
The proposed $275 billion in immediate and future tax cuts is one bright spot in the plan passed by Congress. Tax cuts have played a significant role in the success of past stimulus plans. And this one may be large enough to work: Researchers have found that while many recipients of the 2008 rebate actually spent most of it, the total rebated amount wasn't big enough to significantly raise overall consumption spending.
The hoopla over the stimulus plan has overshadowed recent changes in monetary policy. The fact is that monetary policy actions are an important weapon to fight the downturn. And no, it isn't just about pushing interest rates close to zero.
Although ignored for many years, the Fed can stimulate economic activity by increasing the growth of the money supply. Such "quantitative easing" is the course of action taken by the Bank of Japan in 2001 to revive its economy after a decade of stagnant economic growth. The policy worked in Japan, it will work here.
Even though it pushed interest rates lower during most of 2008, the Fed has only recently begun to actively expand the money supply.
But will the public's demand for immediate action and results allow time for such a policy to work? Research by George Mason University economist Garett Jones corroborates past findings that it takes about a year for a significant increase in money growth to fully impact economic activity. The increase in money growth since last October is, by the way, quire large by historic standards.
Increased money growth, not discretionary fiscal spending, revives failing economies. The Fed's easing, like most medicine, takes some time to work. The political necessity to oblige the public's craving for action has, once again, ignored this reality.
Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance and director of the Office of Economic Education and Business Research at Southern Illinois University Edwardsville.