Biggest Stimulus, Slowest Recovery
Country by country, America’s misery is losing company. The recession has ended in Germany and France. Japan too. Also Brazil, India, and China. The Bank of Canada projects that Canada will return to growth in the third quarter of the year. Of the world’s 10 major economies, only those of Italy, the U.K. and the U.S. continue to shrink.
This bad news raises the question: what exactly did the United States buy with the $787 billion President Obama borrowed for his stimulus program?
It’s early yet, but here are some things we can say for sure.
The U.S. spent much more on its stimulus than any other Western economy. Japan’s stimulus cost about two percent of GDP. Canada’s about 1.5 percent. Germany and France did hardly any stimulus at all. The U.S. spent three percent.
In addition, the U.S. has also been spending its stimulus much more slowly than any other country. By the end of calendar 2009, Canada and Japan will have spent all of their stimulus, but the United States less than half.
In fact, the timing of the Obama stimulus seems to be driven much more by the political calendar than by the economic calendar. Despite the administration’s protests last winter that a burst of federal funds was required to avert imminent catastrophe, only about one quarter of the money was spent in fiscal 2009. More than half the stimulus funds will be spent in the 12 months leading up to the 2010 congressional elections.
What price has the U.S. economy paid for the White House’s political calculation? Before the Obama stimulus, the U.S. was among the industrial world’s less-indebted economies, with a debt-GDP ratio that was about two-thirds of the average of industrialized (OECD) nations. But by the time the stimulus wad has finally been spent, the U.S. will rank among the most-indebted economies, with a debt-GDP ratio close to America’s previous peak: 1945.
To put it in plain English, the Obama administration borrowed more money and then spent it later, with less economic benefit, and more political calculation, than the government of any other major economy.
That’s a particularly dismaying record when you consider that Barack Obama had the great strength of a decisive election victory behind him. Much weaker governments -- like Canada’s, where Prime Minister Stephen Harper lacked a majority in Parliament -- managed to behave much more responsibly.
The Obama administration has no shortage of excuses for its mistakes, some of which even have a ring of plausibility. It’s true, for instance, that the U.S. had a much more severe banking crisis than the other big economies. But that makes it all the worse that the administration invested so much in stimulus while utterly failing to develop an effective bank rescue plan. The Federal Reserve reports that U.S. banks actually tightened lending in the second quarter of this year; by any measure, that’s a severe policy failure.
Similarly, it’s true that recalcitrant members of Congress denied the administration the precise stimulus package it wanted, demanding more tax cuts and less infrastructure spending. But the plan preferred by the administration would have produced an even slower stimulus than the one that was adopted.
Anyway, it's disingenuous for Democrats to complain that the package they got was too tax-cut heavy -- even if that complaint made sense. It was Barack Obama’s own campaign promise of a tax cut for 95 percent of American workers that forced the tax cuts. And if a newly elected president who has just won his party its most decisive victory in 45 years cannot persuade Congress to do the spending he actually wants (as opposed to the tax cuts he pretended to want for campaign purposes) -- well that’s an indictment of him, not Congress, which is always recalcitrant. It goes with the territory.
In the end, all of Obama’s excuses do not excuse very much.
President Obama is lucky in one regard. Because the opposition media are ventilating so many wild and false accusations against him - Death panels! Fascism! -- his actual mistakes have received comparatively less attention. Then again, maybe he’s not so lucky. The lack of scrutiny means that his mistakes go unacknowledged and uncorrected until it is too late to recall and repair them.
No president likes criticism. President Obama seems to like it even less than most. That’s precisely why he needs to hear more of it. He might even learn from this criticism the lesson he needs most: to care more for the national economic interest, and less for the political imperatives of his party in Congress.
Originally published August 20, 2009, in The Week.