Levy on a Second Stimulus

hil Levy, a resident scholar at the American Enterprise Institute, argues that there is no need for a second stimulus in "First Stimulus, We Hardly Knew Ye," for the American dated July 10, 2009.

As unemployment rises ominously toward 10 percent and the economy continues to appear listless, leading economic voices have begun to call for a second fiscal stimulus. The first stimulus was controversial among economists; it seemed to discard a great deal of what had been learned about macroeconomics in recent decades. The calls for a second stimulus seem to discard logic altogether...

So now we come back to discussions of a second stimulus. We have presumably exhausted all reasonable possibilities for discretionary project spending in 2009 and 2010. We know this because we’re still planning to spend hundreds of billions of stimulus dollars in 2011 and beyond.

There is no economic theory by which spending money years down the road stimulates the economy now. There is a theory by which it hurts: it stokes market concern about debt and drives up interest rates in the present. In fact, interest rates did rise fairly dramatically in the wake of the stimulus package, slowing an essential revival in the troubled housing market.

The extent of spending in 2011 and beyond under the initial package can have one of two interpretations. Either this was the excess that spilled over after all sincere attempts at near-term stimulus were exhausted, or there was a serious misallocation of resources in the initial plan.

And this is exactly the logical problem with a second stimulus. If we accept the premise that the Democrats did the best that could be done and exhausted all stimulative spending possibilities for 2009 and 2010 on their first try, then there’s nothing left to be done in a second stimulus. Additional spending would just pour uselessly into the out-years. If there are still good near-term options available to be funded by a second stimulus, that just speaks to the poor design of the initial stimulus package that passed them over in favor of ineffectual spending years later.

Neither of those possibilities argues for opening up the public coffers for hundreds of billions of dollars more.

There is a way out of Levy's logical trap.  A bill designed to provide a stimulus over a long period of time need not include all possible spending for any given year.  This is not how I remember the administration selling the stimulus.  The catchphrase was "shovel ready projects," and the administration claimed that there were enough to provide immediate relief to the economy.  All administrations oversell their legislation and it seems only a peccadillo.