San Francisco, CA, July 6, 2010 --  

A second stimulus package won't help America's economic recovery. In the long run, it would only make things worse.

With faltering economic indicators suggesting a double dip recession, some of America's most influential spendthrifts are suggesting a new stimulus package. Backers of a second stimulus include such heavyweights as Nobel Prize winning economist Paul Krugman ¹ and Obama economic advisor Lawrence Summers.²

Their logic goes something like this: The 2008 economic crisis threatened to seize up lending and turn the worst recession since World War II into another Great Depression. Only massive federal intervention via bailouts, emergency lending and a trillion dollar stimulus could stop the depression from coming. And while this has worked so far, the stimulus is now running out. Companies are so reluctant to hire that unemployment remains high, and as a result consumers are reluctant to spend. This is creating a feedback loop that is preventing the economy from growing. Only a new round of government spending can break the cycle and return the American economy to healthy growth.

This argument may sound reasonable, but it is filled with myths and misleading half-truths. Let's tackle them on at a time.

• So far, this isn't the worst recession since World War II. Unemployment peaked out at 10.8 percent in November 1982, significantly higher than the 10.1 percent peak in October of last year.³ Measured by duration, this recession is only the longest since World War II if you separately count the two dips in the 1980-82 double dip recession. Only when judging by total inflation-adjusted GDP decline peak-to-trough, does this recession rank first -- but only barely so, according to the Bureau of Economic Analysis. The economy in this recession dropped by 3.8 percent, compared with 3.7 percent in the 1958 recession.⁴
• Lower consumer spending is not just a symptom of recession. One of the primary causes of the financial crisis was an explosion of consumer debts backed by the housing bubble. During the manic years, millions of home equity loans were used to pay for home renovations and other purchases that boosted consumer spending to insanely high levels. What we are seeing now is a return to less crazy consumer behavior and a return to the old-fashioned idea of actually saving money. Consumer spending is, in effect, stabilizing at a new normal, according to Gallup economist Dennis Jacobe.⁵ America’s economy needs to evolve to grow without the crutch of unsustainable consumer spending.
• Recent job losses are not temporary, and not subject to reversal via stimulus. Job losses in this recession have come heavily from the industrial sector. Since 2008, 1.7 million manufacturing jobs have been lost.⁶ This is part of a long consistent decline in fatory employment in the United States, as production moves to lower-wage countries. These jobs will not come back no matter how much stimulus is pumped into the system. This effect will likely inflate unemployment numbers until unemployed industrial workers age out of the workforce.

The above flaws in the logic of a second stimulus are not the only reasons to be against it. A second stimulus is a bad idea for the same reasons the first stimulus was a bad idea. First, it piles more debt on top of America's huge existing mountain of debt -- a debt that threatens to put America on a Greek-style trajectory toward bankruptcy. Second, by attempting to blunt the painful symptoms of a recession, a stimulus also blunts the creative destruction that a recession brings. It is only by letting sick businesses die (think GM pre-bailout) that resources are freed up to let new businesses thrive. A stimulus may make a recession less severe, but it also slows the recovery and makes the rebound less strong. Think about this next time an interventionist spendthrift complains about the length of the recession.

If America faces a double dip recession, it will not be because not enough stimulus was put into the system. America has been effectively stimulating the economy since the government turned the surplus into a deficit in 2002. If economic growth again turns negative after 8 sustained years of stimulus, then perhaps it is time to try something else.

What America needs now are fewer politicians and pundits seeking easy and popular solutions. Yes, free government money will always be popular with those who receive it, and superficial arguments can always be made that this is a good idea. (Witness Americans who believe in the "Cookie Diet" as a means of weight loss.) Accepting short-term pain in order to achieve a long-term gain may not be popular, but the adults among us should realize that, more often that not, it is the right thing to do.

Notes:

1. Bloomberg Businessweek, Krugman Says U.S. Economy Is Facing a 'Long Siege', July 6, 2010

2. Financial Times, Obama Adviser Calls for New 'Mini-Stimulus', May 25, 2010

3. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, July 2010

4. Bureau of Economic Analysis, Real Gross Domestic Product, Chained Dollars, Seasonally Adjusted at Annual Rates, June 25, 2010

5. Gallup, Mid-June Consumer Spending Returning to New Normal, June 23, 2010

6. Bureau of Labor Statistics, Employees on Nonfarm Payrolls by Major Industry Sector, 1959 to Date, October 2009

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