Not so stimulating

The stimulus plan will pass with minimal GOP support and that's as it should be. The plan presents a radical departure from what the Republican Party is supposed to stand for and the best it can do now is to provide principled opposition or, as the President of Unity calls it, "distractions and politics as usual."

There is a sense, however, in which the plan is neither fish nor fowl. It is certainly not animated by supply side principles but neither does it seem to be a coherent effort to make the type of social investments that the left believes will lead to economic growth. There is, to be sure, a little bit for everybody but that's the problem. The Dems are managing to blow through a trillion dollars without coming close to solving any of the supposed "crises" that have come from years of GOP neglect.

We are left then with a sort of unadulerated retro classic Keynesian priming of the pump. Spend money. Spend it on anything. All will be well.

There are two problems. The first is that a stimulus justification would require that the spending be temporary. I suspect that the welfare spending in the bill will not be - at least not without substantial GOP gains in 2010.

The second is that this type of pump priming doesn't work. It didn't end the Great Depression. It didn't work during the post war period. It didn't work for Japan in the 90s.

A friend recently suggested that, well, the problem with the New Deal is that it was too small but WWII, when we really kicked out the jams, shows the power of deficit spending. That, he says, finally ended the Great Depression.

Maybe. But if we wanted to make this like WWII, we'd have to not only engage in massive deficit spending (more than what this package calls for) but we would have to prevent people from spending the money for four years so there would be substantial deleveraging and pent up demand and we'd have to blow up a good chunk of the EU. There would be no transfer payments and no spending on social programs.

When pressed to make a case for the plan, Obama invokes panic (we'll have a "catastrophe) and says "I won." But, as Rich Lowry says, "[i]f he had pledged in October to double federal domestic discretionary spending in a matter of weeks—including increasing the budget of the National Endowment for the Arts by a third, spending hundreds of millions more on federal buildings and throwing tens of billions on every traditional liberal priority from job training to Pell Grants—he’d have been hard-pressed to win at all."

The current economic downturn is serious but it is not - at least not yet - the worst since the Great Depression. The notion that because we have to do something we should do anything is where disasters begin.

As for transfer payments, if you believe in the liquidity trap, then transfer payments are the last thing you want because people won't spend the money. You have to spend it for them.

I'd be shocked if there isn't some improvement in the short run, but it's the longer run that concerns me.