Stimulus Is for Suckers

All those billions don't add up to much. How Obama can get us on track to a real recovery.
James K. Galbraith
Mother Jones

President Barack Obama (how sweet those words) has already transformed American politics. The gop is in crack-up. Obama's coattails in Congress give him leverage, and his vast public support gives him power. There is an economic crisis and a demand for action to deal with it. More than at any time since Ronald Reagan in 1981, what the president wants, he will get.

So, what should he ask for? How big and far reaching should changes to the economy be? Nearly everyone in Obama's circle agrees that more public spending and tax cuts are needed: a "stimulus package." The cautious say $150 billion (about 1 percent of gdp), while the bold and the worried say $500 billion (or just more than 3 percent of gdp). Both focus attention on what is needed in 2009—as if the economic problem can be solved in a year.

That is almost certainly wrong.

When the free fall began, Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke argued that the problem with the economy was frozen credit. Banks were unable to lend, they said, because they could not get the funds. This was not true, as we discovered when Treasury gave the banks the funds, only to realize that banks had no wish to lend them out. Instead they used the money to build capital and on dividends and executive pay. (Goldman Sachs, which received $10 billion as part of the bailout, got good press when it announced its top seven execs would forgo their year-end bonuses. But a government ban on bonuses was likely coming, and by limiting the sacrifice to top managers, the company retains leeway to spend the estimated $6.9 billion set aside for bonuses on slightly lesser employees.)

In any case, banks did not wish to lend, and ordinary Americans, desperately cutting costs, did not wish to borrow, and with their homes underwater many had little collateral to borrow against.

(More here.)