CEPR - Center for Economic and Policy Research

The Case for No Stimulus

Dean Baker
The Guardian Unlimited, August 10, 2009

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There are a large number of politicians in Washington who are pushing a brilliant policy that will have the effect of leaving millions of people unemployed or underemployed for years into the future. Their policy is called “no stimulus.”

The idea is that we just let the recession brought on by the housing crash run its course, being careful to do nothing further to boost the economy. According to most projections, after 4 or 5 years the economy will be back on track, with the unemployment rate approaching the pre-recession levels. In the meantime – the rest of 2009, all of 2010, 2011, 2012, and probably much of 2013 and maybe even some of 2014 – millions of people who otherwise would be working, will be unemployed or will only be able to find part-time employment, even though they want full time jobs.

The unemployed are likely to experience some hardship during this period since the country's system of social supports is very much oriented around work. Many of the unemployed will lose their health insurance coverage, their home, and will have difficulty providing for their children. Even the temporary extension of benefits only covers 52 weeks of unemployment in most cases. After that, unemployed workers may be eligible for food stamps and their kids may qualify for the State Children’s Health Insurance Program, but they will get little help from the government in meeting other expenses.

This excess unemployment also implies losses to the economy. People who could otherwise be doing productive work will instead be doing nothing. To some extent this lost output is attributable to lost consumption. People will buy fewer cars, restaurant meals, and pay less money for their kids’ health care and education.

However, some of the lost output will also take the form of lost investment in both the private and public sectors. Businesses who see slack demand and have poor earnings because of the downturn will delay modernizing their businesses and expanding their capacity. State and local governments will cut back on maintenance and put off new infrastructure projects under the pressure of recession-induced budget deficits. But the advocates of “no stimulus” are happy to forego these investments in the country’s future.

The cumulative lost output from the housing crash recession is likely to exceed $6 trillion, more than $40,000 for an average family. But this is only 20 times as large as the “huge” budget shortfalls that the media warn could result from President Obama’s health care program. The proponents of “no stimulus” argue that we should not be worried about such trivial sums.

For the “no stimulus” proponents, what is really important is that the United States government issue as little debt as possible. If the government issued more debt, then our children and grandchildren would own more U.S. government bonds. This would mean that future generations would be paying taxes to pay the interest that they receive on the bonds they hold. In some cases, the same people who owned these bonds would be taxed to help pay the interest on the bonds they own. Imagine that.

Some advocates of stimulus misunderstand the proponents of “no stimulus,” and think that the “no stimulus” advocates are worried about foreigners, like the Chinese government, holding our bonds. In fact, the budget deficit has no direct relationship to the amount of government debt held by the Chinese and other foreigners.

Ownership of the government debt by foreigners is determined first and foremost by the U.S. trade deficit, which is primarily determined by the value of the dollar: the higher the dollar, the higher the trade deficit. A high dollar makes U.S. goods expensive to foreigners and it makes imported goods cheap for people in the United States.  Therefore, when the dollar is high, we buy more imports and export fewer goods.

If the “no stimulus” crowd was concerned about becoming indebted to China and other countries then it would be pushing for a lower valued dollar. In fact, most of the “no stimulus” crowd supports a high or “strong” dollar. So they actually want the United States and our children to become more indebted to China and other foreign countries.

Most people would think that it would be hard for politicians to support a policy that will cause tens of millions to be unemployed or underemployed, that will lead to trillions of dollars of lost output, and constrain the investments that would make our children wealthier in the future. But the “no stimulus” crowd are not ordinary politicians. They are prepared to push their agenda no matter how much suffering it inflicts on people today and our children tomorrow.

It’s too bad that there are so few politicians that care about the people who vote for them. If they did, the “no stimulus” gang would be chased out of town.  
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.