Panic seems to be setting in among some Democrats as the economy continues to falter. Important political leaders, such as Majority Leader Stenny Hoyer (D-MD), and economic commentators, such as Laura D’Andrea Tyson, unofficial economic advisor the President, are calling for yet another stimulus bill. Already we have had two stimulus bills, totaling almost a trillion dollars in the last eighteen months. Both were ineffective. House Democrats especially are worried they will be held responsible in the 2010 election for the failure of the recent stimulus bill enacted during the winter to boost the economy and lower unemployment. Indeed, Vice-President Biden has already said that the Administration misread the economy and that things are not going according to their projections.
Defenders of the stimulus bill claim that that it either was not meant to take effect until later this year or that the stimulus bill will be more effective as more money is spent.
The Administration also claimed that the stimulus bill would have an immediate impact, alleviating unemployment by the end of the second quarter. This was an optimistic projection that ignored the fact that a recovery in the labor market lags the overall economic recovery, and this projection has proven to be utterly false.
The idea that stimulus spending is too slow is not being born out. A report released by the General Accounting Office found that some of the funding to the states is actually being spent ahead of schedule.
So stimulus spending is flowing according to plan: states are spending. The reason that the economy is not recovering, according to the expectations of the big government spenders, is that their stimulus plan was fatally flawed from the start. Perfect execution of a bad plan is still doomed to failure.
The stimulus plan is a failure because governments cannot simply spend the economy out of a recession. If Congress passes a third stimulus bill this year following the same policy prescriptions, that stimulus will be yet another failure that will add to the government deficit and impede future economic recovery.
It is never too late to pass good policy, and so Congress could pursue an effective stimulus bill repealing the remaining wasteful spending from the first bill and focusing on policy proposals to encourage capital formulation and reduce tax rates on successful companies, both large and small. Another positive action for the economy would be to stop raising business uncertainties by threatening disastrous climate change legislation, health care reforms, protectionism, and heavier regulations. If Congress wanted to help the labor market, it should delay implementation of the minimum wage increase scheduled for July. The labor market is already contracting with flat wages, and an artificial wage increase will increase layoffs and reduce the number of hours worked.