The Obama Stimulus

January 19, 2009

On the day before President Barack Obama's inauguration it seems fitting to comment on Obama's stimulus package and the bold vision that lies behind it compared to the tight fisted anti stimulus fiscal conservative ideology that still prevails among leading commentators like Jeffrey Simpson of the Globe and Mail and some of our politicians in Ottawa. I sent this in to the Globe and Mail last week after another of Simpson's
critiques of a Keynesian strategy led the opinion page.

Of course, as usual the Globe did not publish it preferring   a fairly cautious tepid endorsement of a moderate stimulus by a representative of the Conference board and a more conservative column by Scott Reid.Reid was wrong about the state of public opinion and apparently out of touch with the shift in opinion. So his advice, undoubtedly well intentioned, is not exactly appropriate for the times.

In fact, recent polling shows that Canadians overwhelmingly prefer a stimulus package to a balanced or surplus budget in the current circumstances. John Kenneth Galbraith pointed out long ago in The Affluent Society that it is changing circumstances rather than ideas alone that eventually alters the conventional wisdom.In any case here is the piece that I wrote.


The Obama Stimulus by Harold Chorney January 10, 2009

As President –elect Barack Obama prepares to assume the Presidency he has begun to lobby Congress to pass a substantial stimulus package of more than 300 billion dollars worth of tax cuts and more than 400 billion dollars of   investments in infrastructure, job retraining, aiding the unemployed and other job creating measures. This roughly 800 billion dollar package amounts to about 5 % of the American GDP which is 15 trillion dollars. The current debt to GDP ratio in the US is 70 %. To put this in historical perspective during the Second world war   in 1943 the United States ran a deficit that was over 30 % of the GDP and their debt to GDP ratio reached over 110 %.

This   stimulus is a very wise policy which may still not be sufficiently large to keep the American unemployment rate from rising over the coming year to rates above 9 %. But it is a major step in the proper direction. It will lessen the impact of the shock and recessionary forces that the financial crash unleashed.

Critics of deficit finance like Jeffrey Simpson at the Globe and Mail continue to write and argue as if the collapse on Wall Street, the bankruptcy and near bankruptcy of major global institutions like Lehman brothers, Merrill Lynch, the big three automotive firms, and the Ponzi finance scandals connected to   the 50 billion that Bernard Madoff is alleged to have   stolen in his Ponzi scheme and the dozens of other lesser frauds and financial collapses that have dramatically dominated the news during the past year never happened.

Simpson and others seem to think that economies right themselves if only you give them enough time. This was proven false during the early years of the 1930s after the great 1929 crash.

John Maynard Keynes proved it false by showing   that an economy could be stubbornly stuck at high unemployment for a long time unless there was deliberate intervention   to push it out of its depressed state.

If the United States did not undertake this stimulus there is a very strong possibility that unemployment could rise to levels higher than those during the great recession of 1981-82 when the annual US unemployment rate peaked at 9.7 %.

In fact, the laissez-faire school that markets know best   and need little regulation brought us thirty years of deregulation and privatization that delivered us this mess in the first place. Simpson argues that the Canadian experience teaches that deficits are a hole you cannot easily escape from and that there is much hardship ahead for the US if it follows the path of stimulating its economy through deficit spending. In fact, there is plenty of evidence to show that this outcome need not be the case and that the Canadian experience is not an exemplary one.

The United States faces falling prices and possible deflation. In such circumstances it is is possible to finance a stimulus package by selling treasury bills and bonds at very low even close to zero interest rates. The flight to treasury bills and safe government bonds after the stock market collapse has been a flood. The Federal Reserve has also been injecting additional liquidity which keeps the interest rates very low by buying some of the government paper itself.

Some economists believe that this could be inflationary. But in deflationary circumstances that could be a good thing. In fact, the evidence is not clear that the Fed doing so will cause prices to rise as opposed to slowing the rate at which they drop.


There is also little to be learned from Canada's experience with deficits in the current circumstances since our central bank followed perverse policies which were tightly monetarist during the decade from the early 1980s until the mid 1990s. Interest rates were kept higher than they should have been and excessive unemployment resulted.

When you are experiencing high unemployment and an economic slowdown the central bank should try to keep the real rate of interest below the rate of growth in the economy in order to stabilize the debt to GDP ratio. The Bank of Canada failed to do this and thereby aggravated the situation.

Whenever the rate of unemployment fell below 8 % the central bank thought   it prudent to tighten interest rates. This was a bad policy that contributed to harsh economic circumstances in the country. Furthermore, cuts to spending in pursuit of reducing the deficit rather than growing our way out of the problem severely damaged our health care system, our infrastructure and the life chances of an entire generation of young people.

The Canadian puritanical tradition of being tight fisted has little positive to offer in tough economic times.

Barack Obama has a vision of a better way for America, an intelligent understanding of macro-economic policy and a proactive strategy for getting America back on track.

He can do it. America can do it. We ought to do it as well.