August 4, 2009
But can additional health care and educational spending be efficient stimuli?
I didn’t say these were necessarily efficient investments. But these systems aren’t systemically broken either, and much good can come from expanding their reach. Lower-income Americans have an undeniable need for improved health care access. Additional spending on health care would be good for the economy as well, while also freeing up the spending power of individuals and families whose resources would otherwise be swallowed up by health care costs.
On the educational front, preventing the firing of large numbers of teachers and making necessary infrastructure repairs to school buildings would help sustain educational levels. This would promote spending directly and indirectly, through monies spent by teachers and workers who may otherwise be laid off. And all of this will help preserve our future prospects in both health care and education.
Larger picture: we’re seeing savage cuts in state and local government involving education, health care, fire-prevention, and infrastructure. And that makes no sense from any point of view.
When will we see the major impact of the stimulus package?
By the end of the second half of the year, I expect we’ll see positive growth over the next few quarters. And that wouldn’t be happening without the stimulus package. But it’s not at all clear at this moment if the stimulus is large enough to keep unemployment from continuing to rise. Despite that metric being a lagging indicator, fear of higher unemployment is just one part of the reason I still don’t think the existing stimulus package is big enough.
You don’t believe that a portion of projected second-half growth is related to the economy having made some major corrections, which may now be abetting reinvestment and growth?
I don’t think there has been any fundamental correction. Yes, we will have a big inventory bounce in response to manufacturers having slashed production. As their inventories get depleted, they will need to gear up production to sustain supply levels. However, without additional government involvement, second-half growth would still be flat or negative. A reasonable guess is that with the stimulus, we will be seeing 2 percent GDP growth over the next several quarters. So I think whatever positive growth we see this year will be largely the result of government spending.
Should we reprioritize our national budget to reallocate resources to better propel recovery?
Reallocating budgetary priorities does nothing to generate more demand. Whether you spend a billion dollars on a jet fighter that doesn’t work in the rain or preserve elementary education—either way, it’s a billion dollars spent.
There’s always this temptation to mix macro- and microeconomics. There is a clear distinction between what will help sustain spending and employment now and what will help sustain long-term growth. These are not the same issues. The Great Depression was only broken by totally destructive spending.
So you don’t want to think that doing the right thing in terms of long-run budgetary priorities has much to do with whether we get a recovery right now. That said, we do need to cut useless and unproductive spending so that we have a better chance of achieving long-term goals given our limited resources.
Is the stock market responding to the potential second half growth?
God knows. I think Nouriel Roubini’s variation of the Paul Samuelson’s line has it about right: - the stock market has forecast six out of the last zero recoveries. The stock market is right where it was in January, when we were already in a severe economic crisis. All that’s happened is that “end-of-the-world” scenario has given way to a bit more realistic but still fairly negative view.
Are valuations then excessive?
By historical valuation standards, stock prices don’t look wildly undervalued, nor do they look overvalued either.
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