We now have the stimulus package, a flawed mixture of tax cuts, spending, pork and, dare it be said, the earmarks that Barack Obama had promised to consign to the dustbin of history.
And we have the cheers of the spending-will-save-us Keynesians, and the derisive hoots of the spending-will-break-us monetarists and traditionalists.
All this chortling and groaning despite the fact that no one really knows what the effects of the package will be.
We do know that those effects will be late in coming: it will take two months to review bids for repair work on bridges and roads — much longer for new infrastructure projects — and an additional four months to get the work started and the pay checks cut.
With all its flaws, the stimulus package should add some pep to the economy. More important, it is only the first step in an overall recovery package.
Next comes some help for the housing market. Again, only the brave or the foolish dare predict the effect of the President’s proposal, aptly unveiled in Phoenix, where the housing market is struggling to rise from the ashes.
One thing is certain: the President learned from the fiasco after Geithner’s no-details speech, and loaded his plan with a mind-numbing list of features, at an estimated cost of up to $275 billion.
Critics moan that the 92% of homeowners who are paying their mortgages will have to pick up the bill for the small minority who bought houses they can’t afford.
Defenders claim that even the 92% will benefit from the reduction in the number of foreclosed houses hitting the markets and depressing the prices of all homes.
The third piece of the plan is the hardest: fixing the banks. Poor Tim Geithner was hung out to dry by the President when Obama led markets to believe that his Treasury Secretary had a fully formed plan.
He didn’t, and the markets are still reeling. But a plan there will be, and there is reason to believe that it will help.
That reason: the much-maligned TARP, and actions taken by the Fed have indeed eased credit conditions. The interest rates banks charge each other have come down.
So have rates on short-term commercial paper, a key market for many firms. Issuances of investment-grade corporate bonds sold without government guarantees are rising.
Mark Zandi, an economist in whom congress has considerable faith, told The Wall Street Journal, “There are some signs of stability in the financial system.”
And there are signs that words like “nationalization” no long conjure up the sound of tumbrels rolling down Wall Street.
Everyone seems resigned to the fact that the taxpayer will get stuck with some of the toxic assets now resting on bank balance sheets.
No one knows what the total cost will be, since we don’t know the value of those assets (if they have any value at all), or what the government might be able to sell them for when markets are calmer.
But experience with past efforts to ease the credit crunch suggests that financial markets just might respond to another set of interventions.
Politicians here like to talk about the three legs of the recovery stool: stimulus, a boost for the housing market, and a banking fix.
They forget a fourth leg — if stools can have four legs. The President has promised to put social security, Medicare and Medicaid on a solid footing.
These entitlement programs, unless reformed, will send deficits up and drive the dollar into territory lower than it has ever explored.
Piled on the recent spending splurge, entitlements as now constituted can bring the nation to ruin. But if — and this is a big “if” — the President can convert his rhetoric into reality, and usher in an age of bipartisanship that includes more than pleasant chats with Republicans at cocktail parties, entitlement reform just might be possible.
None of this should be taken to mean there is a free lunch out there. The stimulus package will waste billions.
The housing program creates serious moral hazard problems, and in the long run might make lenders more reluctant to make funds available to the housing sector.
The banking bailout invites politicians into the business of allocating the nation’s capital among competing uses.
Anyone who professes certainty that the benefits of the recovery programs will offset those negative consequences is more ideologue than professional forecaster. As is anyone who takes the opposite position.
Examiner columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.
