So what’s wrong with the stimulus? Just about everything. But three considerations top the list.
First, the Keynesians did a darn poor job of constructing a stimulus bill. The Wall Street Journal editors point out:
The original economic theory behind this bill was to spend the money quickly to create jobs fast. But even the most talented spenders on Capitol Hill couldn’t find enough projects to fund in such a rush. So they spread out the largesse over several years — long after everyone hopes the recession is over. Some of these “timely” stimulus payments won’t hit the economy until after the 2016 Olympics.
Second, government spending is unlikely to go down anytime soon. (If you doubt how hard it is to remove government add-ons, take a look at the Department of Education and Public Broadcasting — they are now untouchable.) We are setting a new trajectory for spending, one that will take an ever greater share of the economy to sustain. And there is, after all, a rather strong correlation between countries with a large share of GDP devoted to the government and low growth. (Logically, the money is going someplace other than productive economic activity.)
Third, the result of this will be an historically high level of debt in the next few years — perhaps 13.5% of the economy. The editors caution:
The new spending means new federal debt in the trillions of dollars over the next few years, which will test the limits of America’s credit-worthiness. To the extent that taxes rise to pay for it all, the U.S. will become less desirable as a destination for the world’s capital. Perhaps the Federal Reserve will try to inflate away this growing debt, but the world’s bond vigilantes will get a vote on that.
That’s not a very comforting picture. And we haven’t even looked at the banking crisis. It may be small solace for Republicans to say they didn’t vote for this. The reality is that we will all have to live with the consequences — for years to come.