It seems like a day does not pass without our hearing about plans for expanding the proposed fiscal stimulus. Apologies to Jerry Lee Lewis, but it seems to me like there’s already a whole lotta stimulatin’ going on. I don’t deny that fiscal policy can be effective, just that, in this instance, it may well be unnecessary. The economy is already getting some healthy doses of support, and it seems likely that those will be impactful well before federal spending can be deployed.
In the past few months, we’ve had 3 significant stimuli for the consumer and the economy as a whole. The first has been the combination of Fed easing coupled with the TARP package, which has finally brought commercial interest rates back under the central bank’s control. Below is a chart of 3-month LIBOR, the most commonly cited measure of short-term commerical interest rates.
While much has been made of restraints on banks issuing new credit, the drop in LIBOR to 1.47% provides a boon to the many consumers with outstanding debt. LIBOR is the most common base rate for adjustable rate mortgages, home equity lines, as well as other forms of revolving debt. A drop in LIBOR means a drop in payments for these borrowers. So too does the massive refinancing of fixed rate mortgages put more money in consumer pockets.
The general drop is commodity prices has created a second source of economic stimulus. In particular, gasoline and heating oil costs have dropped precipitously. In a post on his Carpe Diem blog, economist Mark Perry shows that every penny of lower gas price puts about $1.5 Billion in the hands of consumers. While it may not be fair to use the absolute peak of gas prices this summer as the starting point, prices at the pump have rolled back by years so the effective stimulus is probably still in excess of $100 Billion. The third, related, stimulus, is the general drop in prices, which effectively increases real wages.
Economist Greg Mankiw has written quite recently about his skepticism over a fiscal stimulus package . Among the well known criticisms of stimulus through government spending are: 1) fiscal policy is a one-way street, easy to spend but hard to cut back, 2) the actual injection of money can take months and years to be allocated and have an impact, and 3) spending is politicized and not economically efficient. Interestingly, Mankiw also points out that there is significant evidence that the more effective stimulus route is not through government spending but rather through tax cuts.
It would be one thing if a fiscal stimulus had no associated costs. Unfortunately, there’s no free lunch here. The type of stimulus being discussed would significantly add to the federal deficit, could potentially ignite inflation, and could also weaken the dollar, just as it is trying to stabilize after a 7-year decline. This Panic of 2008 has often been compared to a heart attack in a person. To continue this analogy, the stimulus we’ve already injected (primarily monetary) has done the work of a defibrillator. There’s still plenty of healing needed, more medicine required, and the patient needs some fundamental lifestyle changes. But it’s time to stop using those defibrillator paddles to zap the patient — or we’ll find we end up doing much more harm than good. We’d be better served by a pause, allowing time for the existing monetary-based stimuli to have an impact. Congress certainly has enough on its plate simply addressing the regulatory distortions and lapses which led us here in the first place.