More Stimulus and Less Deficit: Together Again
For those of you who aren’t old enough to remember, and for everyone who hasn’t seen the smash Broadway musical “Jersey Boys,— Frankie Valli used to be the lead singer of a group called the Four Seasons. When the three other members of the group stopped performing, Valli hired new singers to fill out what was called Frankie Valli and the Four Seasons. One of that group’s national tours was called “Together Again— even though they had never really been together before.
[IMGCAP(1)]This brilliant marketing ploy came to mind as I watched the federal budget discussion over the past two weeks be dominated by the supposed need both to decrease the deficit and for an additional round of economic stimulus. Even though neither is typically discussed at the same time as the other, the current debate makes you think they are part of the same policy and should be included in a single hearing held by one of the Budget committees — that is, that they should be together again.
The truth, however, is that, like Frankie Valli, whose new and old groups had only one thing in common — the lead singer — these two budget issues also are really only alike in one sense: They’re both being discussed prematurely.
Deficit reduction is the easier of the two to consider because it clearly is still not the correct fiscal policy. Consumers and businesses are not yet spending and the limits on monetary policy in the current situation long ago became obvious. As a result, eliminating the only other economic recovery tool the government has available by taking steps now to reduce the deficit simply makes no sense.
In addition, the No. 1 argument deficit reduction proponents had been making about deficit-caused inflation has all but disappeared. We were told a month ago that the bond market’s supposed concern about the deficit was part of the reason interest rates were rising.
In retrospect, however, that concern seems to have been either remarkably misplaced or extraordinarily misreported. Even though the deficit outlook has not changed at all, long-term interest rates today are below where they were a month ago and are low by historical standards. As a result, the financial news channels that fueled much of the frenzy have moved on to other stories and “deficit reduction now and forever— advocates at least in the short-term have lost an issue.
Even the subtle change in the position deficit reduction supporters have been taking the past two weeks makes little sense. Instead of saying the deficit should start to be reduced immediately, they recently have been insisting that the White House now needs to submit a deficit reduction plan for the future. It’s needed, some say, to convince domestic and international buyers of Treasury securities that the Obama administration is serious about the budget. Others say the administration needs a plan so that deficit reduction advocates will be convinced the president will do what he says he’s going to do to reduce the deficit when the appropriate time comes.
But submitting a deficit reduction plan now makes little sense for a number of reasons. First, Congress likely won’t consider it any time soon. The more likely scenario is that it would sit untouched until early next year when the administration’s fiscal 2011 budget is sent to Capitol Hill.
Second, given the strong likelihood that the spending decreases and revenue increases needed to reduce the deficit will be anathema to at least some Democrats and Republicans, the president will have to put his full weight behind his plan to get it adopted. That will be hard for the White House to do and complicate the discussion of what needs to be done now.
Third, a future deficit reduction plan that was even informally rejected by Congress or generated so much criticism that rejection seemed likely would create far more questions from would-be bond buyers than a plan that has been promised but not yet submitted. In other words, those who say they want to reassure the bond market with a deficit reduction plan might well end up spooking it instead.
Talking about additional stimulus is a bit more complicated than deficit reduction because the expectations are much greater that something will happen far more quickly.
The discussion about the need for the government to do more definitely kicked up a few levels in recent days when unemployment rates continued to climb rather than fall and approached 10 percent.
Here again, however, there are several reasons the discussion is premature.
For example, the economy generally was expected to pick up in the third quarter and all the economic statistics that have been reported so far have been for the first and second. In other words, while the concern eventually may be justified, we really don’t know that yet. In fact, although the higher-than-expected unemployment rate is clearly worrisome, other statistics have shown signs that things are improving.
Furthermore, much of the stimulus that has already been enacted has not yet been spent. From the time it was adopted, it was clear that it would take about six months (that is, until about now) for the spending to begin to have an impact and that much of it wouldn’t be felt until 2010. Given that we now know that both tax- and spending-based stimulus efforts take a good deal of time to begin to have an effect, it makes far more sense to give the program already in place a little more time before moving ahead with something more. Additional stimulus, which will be hard to slow down once it is signed into law, could very well start to have an impact as the existing program is shifting into high gear. That could trigger the inflation concerns next year that worried deficit reduction advocates last month.
In other words, as the original Four Seasons sang in 1965, rather than more stimulus, “Let’s hang on to what we got.—
Stan Collender is a partner at Qorvis Communications and author of “The Guide to the Federal Budget.— His blog is Capital Gains and Games.