A call for a New Stimulus

The Los Angeles Times carried a page one editorial from writer Michael Hiltzik today in which the writer called for a new stimulus program to rescue the economy.  NY Times columnist and Princetron economics professor Paul Krugman’s crticism of the previous stimulus effort was that it wasn’t biog enough.  In times of economic crisis, not even the free market can pull the economic out of the dump without support from the federal govenment.

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It’s sad to watch the U.S. government so enthusiastically overlook the lessons of the 1930s.

Then, as now, the White House and Congress stood by complacently as government stimulus got drained out of the economy. A spike in economic activity from government bonus payments to World War I veterans ended in 1936, as did heightened dividend payouts designed to avoid a new federal corporate tax. And in 1937 appeared yet another new tax, to finance Social Security.

In short, although the private sector had not yet stepped up hiring and the Federal Reserve was tightening credit, the government stopped priming the fiscal pump and instead took water out of the bucket.

The result of the new austerity was the severe recession of 1937-38 — the double-dip sequel to the Great Depression. Congress and the Roosevelt White House responded with the most aggressive stimulus program of the New Deal period — stepped up public works construction and housing assistance, and a $3.75-billion relief program.

The new spending evoked shrieks of dismay from conservatives — Democratic Sen. Harry Byrd of Virginia condemned the “present orgy of spending” and demanded a balanced budget and a ruthless purge of relief rolls. But it halted the recession in its tracks.

Unlike Obama, Roosevelt was not shy about expressing the principles and goals at stake. To abandon the quest for jobs and growth would be “to miss the tide and perhaps the port; I propose to sail ahead,” the nautically minded president told America in a Fireside Chat in April 1938. “For to reach a port we must sail — sail, not lie at anchor, sail, not drift.”

From Hiltzik’s column:

One of the flaws in the administration’s approach to economic policy is its failure to push back against the notion that its stimulus program, enacted in February 2009, failed.

In fact, it has been an unmistakable success, a point that bears repeating, and repeating.

The Congressional Budget Office, which is known for its bipartisanship, determined in May that in the first quarter of this year alone the program had raised gross domestic product as much as 3.1%, lowered the unemployment rate as much as 1.8% and increased employment by up to 3.3 million workers.

But the program’s impact had already begun to wane, the CBO said — not a surprise to anyone examining the fading economic growth numbers for the first part of this year.

Yet remarkably, many stimulus options that the White House and Congress seem determined to forgo today are among those that the CBO said were the most effective. These include stepped-up federal purchases of goods and services for public works, and assistance to state and local governments for infrastructure improvements.

Along with unemployment benefits, the CBO found, these have the highest multiplier effect on the overall economy — that is, the highest potential to spur growth beyond the initial outlay. The payroll tax cut and (especially) tax cuts for wealthier people bring up the rear on that measure.

The withdrawal of federal help for state and local governments has produced perhaps the most visible sign of the stimulus ending: the sharp falloff in government employment. Since May, state and local governments have pared their payrolls by about 60,000 workers (and the federal government another 11,000). In a period in which the private sector added only 234,000 jobs, that’s a big helping of sand in the recovery gears.