In the opinion section of Sunday's Oregonian, Bill Conerly makes a number of inaccurate and misleading statements in his attempt to argue against fiscal stimulus. The most egregious example is the claim that most economists believe that the economy will turn around by the third quarter of 2009. Most economists believe that with a stimulus package the economy will turn around by the Fall of 2009. In fact, most economists believe that without stimulus the downturn will be significantly more severe and prolonged, perhaps not returning to positive growth until late 2010 or beyond. Furthermore, economists arguing for stimulus do not believe that there will be a multiplier of 4 or 5. In fact, most empirical evidence suggests we should see a multiplier of about 1.5. It is true that the positive effects of stimulus are temporary and, in fact, we should see a drag on growth in the future from having to service the debt incurred with stimulus. But the very idea of stimulus is to arrest the downward spiral of the economy and get it moving in a virtuous growth cycle again – a temporary jolt to the economy. Lags are a concern for all economists leading to the stressing of the need to avoid projects that would take time to roll-out, but the magnitude of this crisis is so great that even with significant lags, economists believe that fiscal stimulus would still do a lot of good.
Conerly’s description of how an economy self-corrects is also lacking: the current systematic collapse of credit markets has rendered standard Fed policy ineffective, even the multitude of non-standard programs have yet to get any real traction. Eventually Fed policy will gain some traction, yes, but how long are we willing to wait as our economy melts down? And the claim that consumers are not spending but eventually will is naïve: with unemployment rates skyrocketing to levels not seen in 30 years and still going up quickly, there is no reason to believe that consumer spending will rebound any time soon. Finally, leakages exist in all state spending, this is not new nor is it a reason to not spend – the multiplier estimates take these leakages into account. Money spent could be directed to programs that have the shortest time lags and the greatest local impact. Leakages overseas are minimal and leakages from Oregon to other states would be matched by leakages from other states to Oregon.
Conerly’s advice to essentially wait out the economic crisis is not particularly helpful to those 8.1% of Oregonians who cannot find a job. Add in the number of people who have given up searching and people involuntarily working at less than full-time and the number is likely to be well over 14%. These Oregonians cannot wait for two or three years for the economy to self-correct. There is always the risk that stimulus will not be as effective as we hope, but the risk of doing nothing is much worse.