Thursday, July 1, 2010

Stimulus Burnout, Summer, and Escapism

People are now seeing why I was so skeptical about the stimulus aspect of the economic stimulus measures of the last two years.

It’s not that the stimulus didn’t work. It’s that all the stimulus we can pay for is not nearly enough to get the economy on an even keel again.

The amount of stimulus that would have required would have been the equivalent of at least 2 years of GDP. We’ve spent or committed more than 1 year of GDP for stabilizing the economy, but most of that was lost, sunk into a failing financial system that, two years later, shows no sign of ever righting itself. There was almost no stimulus effect from that spending.

The stimulus itself, the tax cuts, tax credits, and incentive payments, amounted to less than half a year of GDP, because that was all we could spend after blowing the budget year after year on foreign military adventures. Now the stimulus effects are fading, and the economy is groaning in response.

The home buyer tax credit expired, and we saw the largest one-month decline in home sales ever. Meanwhile, real estate values continue to fall, foreclosures continue to rise, and construction has to fall from here, because it is still far above any rational, sustainable level.

As for the broader economy that the stimulus was supposed to help, employers continue to fire half a million workers per week. By one estimate, around 3 million workers will have exhausted their unemployment benefits by the end of this month — and that will lead to more foreclosures next year.

But it’s more than just stimulus burnout. In the last 1 1/2 weeks, economists have been writing about “consumer fatigue.” I have noticed myself a tendency in that direction. Since last week, I have been hearing stories of people wanting to escape from the financial pressure of their lives. They are doing it, in part, by staying home, not going to restaurants, movies, festivals, or anywhere else they might spend money. This morning I helped someone cancel an online subscription (which, perversely, had to be done over the telephone). This spending cut was not made under duress — it just seemed safer to keep the money in the bank. People are becoming more passive about their monetary lives. And why wouldn’t they? If the paycheck goes directly into the bank, and the banks end up keeping most of it to pay the mortgage, why pretend you’re making money you can spend?

This pattern, though, is not just escapist — it is depression thinking. If everyone holds on to their money, then we won’t have an economy anymore. I’ve been saying that a classic economic depression probably couldn’t happen now. People have so many more resources, such as problem-solving web sites, that they couldn’t get alienated enough from the economy for a depression to happen. But if the current stories about people withdrawing from the economy becomes a trend, then a depression could happen.

I don’t want to turn 10 days of anecdotes into a trend, but there is something going on with people conserving their money and energy, and it’s hitting just at the same time as massive government layoffs and the end of most of the economic stimulus money. And at the same time, it’s hard to find any sign of the usual summertime increase in activity, never mind a repeat of last year’s summer bounce that made people say the recession was over.

The focus on stimulus has kept people from addressing the economy’s problems. Now the stimulus is wearing off, and the economy’s problems still need to be solved.

I see reason to hope we won’t waste any more money on economic stimulus. Politically, stimulus spending that doesn’t fix the economy’s problems is a losing game. But the economy cannot really recover as long as the foreign wars and the energy-related trade deficit continue. The wars will end eventually, one way or another, but the energy deficit will keep going until we take steps to cut the cost of energy. If we have money to spend, this would be a good time to spend it on solving the energy problem. I still believe the right place for the federal government to start is by improving the energy profiles of its own buildings. Oh, and by the way, any spending on energy improvements will stimulate the economy at least as effectively as all the stimulus spending did.