Economist argues for larger stimulus package

Moderates in the Senate who have negotiated a slimmer version of Pres. Obama’s stimulus package are missing the boat, says economist Dean Baker, co-director of the Center for Economic and Policy Research (CEPR). They have managed to reduce the total cost of the package by about $100 billion, he says, but in doing so they have also reduced the number of jobs it will create by about one million.

Baker has proven to be remarkably accurate with his economic predictions. For several years before the housing market and mortgage industries collapsed, bringing down the U.S. economy and dragging the entire world economy with it, he warned people this was going to happen. He also warned the nation that unregulated derivatives would eventually destroy our financial sector. Had policy makers been listening to him for the past 20 years, we might not be in the current economic mess.

“Any spending is stimulus, in the same way that any type of bread is food.”

— Dean Baker, Center for Economic Policy Research

“Stimulus creates jobs by spending money,” he said in an article published in the Guardian Unlimited Feb. 9. “If the government pays someone $30,000, then that person will be employed. They can be repaving a road, weatherizing a building, teaching our kids, providing health care to the sick, or replacing the sod on the mall... but the main point is to get people working.”

Baker expressed dismay at the logic many senators used to oppose specific provisions in the package. He noted that while these senators felt certain areas targeted for spending were important — health care and education, for example — they did not constitute stimulus. That understanding of what belongs in a stimulus package is too narrow for Baker.

“Any spending is stimulus, in the same way that any type of bread is food,” he explained. If senators believed the additional spending would also improve health care, education, or any other aspect of our society, the decision to support it should have been a “no-brainer.” They could increase growth with useful spending. “What else could they want?” he asked.

Baker also lamented the fact that many in Congress do not seem to grasp the seriousness of the economic picture. The numbers are staggering.

Baker estimates the collapse of the housing bubble and subsequent reduction in housing construction has cut about $450 billion a year out of the economy. Housing prices are still falling and will likely reduce housing value by $8 trillion, reducing home-value-based spending by about $400 billion a year. An additional loss of about $7 trillion in stock wealth will cut consumption another $250 billion a year, and the collapse of the commercial real estate bubble will further reduce demand by about $150 billion a year. That adds up to a reduction in demand of about $1.25 trillion (or 1,250 billion dollars) a year.

Next to those numbers, the stimulus package, at $400 billion a year, begins to look small.

“This [amount] would be laughable except that there is nothing funny about the outcome,” he wrote. “Millions of people will needlessly go unemployed.”

Cutting the stimulus package may be good politics, he says, “but it is not smart economics. And the country really cannot afford too much more in the way of stupid economics from the folks in power.”

Baker’s observations on the economy and politics can be seen at CEPR’s Web site — He also has a blog on the American Prospect, Beat the Press, in which he discusses the media’s coverage of economic issues. He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people’s lives.