Goldman On Why A Second Stimulus Is Merely Months Away
Earlier today, Goldman came out with a harbinger piece on why a second stimulus announcement is essentially a formality. The administration has already promptly forgotten the lessons from the recent elections which were a failure for the Democrats, and a resounding vote against incremental deficit spending. The people spoke, and they will have no more of it. Alas, Obama is now stuck: any action he does to create jobs and to rope consumers back into the clearance sale stores, will be met with increased political disapproval and risk of a major failure at both the mid-term and next presidential elections. Yet, courtesy of his economic think tank, he can not leave the status quo as the current situation leaves the economy on an untenable course of 12%+ unemployment. In this case the lesser of two evils is moot as both have the same likelihood of making the "change you can believe in" campaign one for the history books prematurely.
Two More Signs that Additional Fiscal Support Is Coming
Since Congress enacted the American Recovery and Reinvestment Act (ARRA) in February, there has been intermittent discussion of a “second stimulus bill” (never mind the fact that ARRA was in fact the second bill; the first one was enacted in 2008). However, officials who raised the possibility of additional stimulus always quickly backtracked or made clear that they were not actually proposing additional fiscal support. This has begun to change. We point to two particular statements in the last few days:
1. Senate Majority Leader Reid (D-NV) was quoted in The Hill newspaper (a Capitol Hill-focused publication) yesterday indicating that the Senate will consider a “jobs bill” in early 2010. It’s not clear what such a bill might include, or how large it might be.
2. President Obama announced this morning that the White House would convene a "job creation forum" in December. While the event clearly serves a public relations purpose, the scheduling of such a high profile event implies there probably will be some new proposals to go along with it.
This may be the set up for yet another round of springtime stimulus in 2010, to be crafted in December and considered by the Congress in its second session early next year. Interestingly, this is the same timetable we've seen in each of the last two years-- policy formulated internally in December, debated publicly in January, enacted in February. If we do see a replay late this year and early next year, it seems likely to take a bit longer, and meet more resistance than the last two stimulus packages, which moved surprisingly quickly through the legislative process due to broadly held bipartisan concerns over the state of the economy.
As outlined in last Friday's weekly, we expect $250 billion (bn) in further fiscal support over the next three years, including $75bn in 2010. However, we have generally assumed that most of this would come from extension of current law policies, as opposed to new stimulus measures, for two reasons: (1) over the last several months there has been little appetite for explicit "stimulus," though there remains broad support for certain targeted policies, like the homebuyer tax credit and unemployment benefits just enacted into law (worth $45bn of the expected $250bn); and (2) the prior stimulus package included most of the obvious ways to stimulate the economy, so extending them is a more natural next step than coming up with new provisions.
However, last week's employment report seems to have changed sentiment in Washington (and last week's election certainly played a role as well, insofar as it highlighted the electoral challenges for congressional Democrats that were already evident in public opinion polls). So while another explicit "jobs" bill looked like a long shot a week ago, the notion seems to have gained momentum since. While the path such a measure may take over the next few months is highly uncertain, among the (oversimplified) implications of a more explicit stimulus effort early next year we see the following:
1. New measures would become easier to pass. If Congress actually takes up a new stimulus package, it becomes somewhat easier to enact new measures, rather than just extending unemployment benefits or some of the other things under consideration. A hiring tax credit, lending incentives, and some way to provide additional timely benefits to consumers in 2010 appear to be front of mind for staff trying to present options to their members of Congress, though there don't seem to be many concrete ideas at this point.
2. Fiscal assistance to state governments and infrastructure spending becomes more realistic. We have penciled into our estimates $25bn in additional fiscal aid to state governments in 2011 and around $30 billion in additional infrastructure spending over 2010-2011. Doing these on a stand-alone basis is harder than, say, extending the homebuyer tax credit or unemployment benefits, because there aren't as many direct beneficiaries (who vote). Passage of an explicit stimulus jobs bill would raise the odds of more action in this area, particularly with regard to state fiscal assistance.
3. Additional tax relief for consumers becomes feasible, if not likely. An unresolved question has been what Democratic leaders might do to directly help consumers (i.e., voters) next year, prior to the election. So far, the main items discussed have been (1) extended unemployment benefits (incl. health subsidies), (2) another $250 payment to seniors in early 2010. There has been surprisingly little discussion so far of additional tax relief to put money into consumers' pockets, but it is easier to see something like this getting added to a "jobs" package.
4. The rest of the agenda shifts. In the campaign of 2008, the major items on the agenda were healthcare and energy/environment. Both sides of the aisle now realize that if Congress can influence the election at all, it will be through (1) fiscal policy and (2) financial reform. The other issues – the pending health bill, and even more so climate change – may no longer be seen as "must pass" legislation. In the case of health reform, so much time has been invested in it, and in explaining the dire consequences of not passing it, that it is unlikely to be abandoned, but it seems more likely than ever to be scaled back. In the case of energy/environmental legislation, the odds increase further that any legislation enacted in 2010 will focus more on subsidies and renewables and less on increasing the cost of carbon emissions.
5. Increased focus on laying down markers on medium term fiscal restraint. To the extent we actually see a major new push on stimulus; we will probably see additional efforts to show a credible path to fiscal consolidation over the medium term. Note, for instance, that today's announcement of a "jobs summit" coincided with the leak of plans for “setting aside a chunk [of unspent TARP funds] for debt reduction,” according to today’s Wall Street Journal. (This is mainly cosmetic, as TARP funds that have not been spent have also not yet raised the level of debt, though they could do so in the future.) Of course, it also coincided with Treasury's report on the October budget deficit, which showed a $176bn shortfall to begin the new fiscal year.
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