Stimulus

President Barack Obama is about to embark on the costliest experiment mankind has ever invested in. Over the next two years, the new American administration is considering spending about a trillion dollars on what is called the American Recovery and Reinvestment Plan (ARRP).

Incoming US Treasury Secretary Timothy Geithner, principal architect of this stimulus package, said he would rather err on the high side than on the low. A smaller package might completely fail in its mission of averting an economic depression and be, plainly said, a waste of money.

There is enough to learn from the $168 billion Economic Stimulus Act delivered by the Bush administration last year. That amount of money proved short — way too short. It hardly made a dent in the American economy’s plunge into deep recession.

In 1935, Franklin Delano Roosevelt asked the US Congress to pass the Emergency Relief Appropriation Act to pull the US out of the Great Depression. That Act involved a public spending program amounting to $4.9 billion. In present dollars, that would be equivalent to $75 billion — or less than a tenth of the Obama spending package.

Bear in mind, however, that the US economy is definitely more than ten times larger today than it was in 1935. Therefore, a trillion-dollar expenditure package might have less impact than the Roosevelt spending plan had on spurring economic activity.

The ARRP is a package composed of tax cuts for individuals as well as businesses, an infrastructure spending program designed to create or save a million jobs, investment in new green technologies and assistance to states facing budget deficits. In the latter component, the federal government will extend assistance to help pay for Medicaid and education.

Despite the staggering sum being quoted for the ARRP, the program has failed to impress the markets. On Inauguration Day last week, the New York Stock Exchange fell massively.

In the first week of the Obama administration, the global markets appear to be listless. The NYSE slid substantially over the past week, dragging the rest of the world’s markets with it. The slide was driven principally by the dropping stock prices of financial institutions as some of the largest banks reported huge losses. It was also driven by a steady stream of corporate earnings reports showing erosion in the real economy.

The spending plan is, as I said above, an experiment. It carries no guarantee of success, no matter what price tag is attached to it.

Critics of the spending plan contend that an infra program and investments in green energy are too far down the road to matter. What is important is to get money into the system now.

The existing rescue package for distressed financial institutions did drop large volumes of cash into the banks. But the banks, fearful of the continuing volatility, have not lent them out. The net effect, so far, has been to save the banks but not (yet) the economy. This was, to be sure, an imperfect model.

The Bush stimulus package did put cash in the hands of consumers quickly through tax rebates. But that package did not stop the cascade in property prices and the collapse of the mortgage institutions. It did not arrest the subprime crisis. It did not save the banks. Above all, it did not avert a recession.

Over the past few months, the world’s central banks, acting in concert, pulled down interest rates. The object of this concerted action was to bring down the cost of money, encourage investments and, eventually, help the world’s economies create jobs.

With interest rates in the US, the UK, the Eurozone and Japan now nearing zero, the benefits of such a strategy have yet to be seen. The bearishness has not been relieved. The stock markets are still on their backs.

There are obvious limits to this strategy: the most obvious one being that interest rates could not possibly fall below zero. Since, in the major economies, interest rates are now near zero, there is very little room to push this strategy further.

What has happened is that banks, in the face of a dramatic shift in the interest rate regime, are now calling in their own paper which were sold when interest rates were much higher. Instead of lending, the banks are actually de-capitalizing because the cost of their capital has become higher than whatever they would make lending. Surely this was not the expressed intent of the concerted lowering of interest rates.

The point of this discussion is that we are perilously running short of workable strategies as the global recession tightens its grip.

Nearly every government has set up stimulus packages of every variety to pump up their economies as the global economy shrinks. These packages will be executed over the next few months — again in concert, more or less.

Our own 2009 budget, finally passed last week and could be signed into law this week, has its own stimulus component: amounting to the grand sum of P50 billion. That translates into about a billion dollars. It might seem like a vast amount of money but it is, in actuality, a very meager amount.

The worst thing that could happen to that money is that it is deployed without a clear strategy that optimizes its impact on our economic performance and ensures sustainable productive activities long into the future. Some concern has been expressed that our version of an economic stimulus package might pass through the usual pork barrel channels. If they do, they will enrich a few and leave our national economy as vulnerable as it has been.

The President, or whoever is in charge of stimulating our domestic economy, ought to come out and tell us our stimulus package, meager as it might be, actually has a strategy thought through. If there is none, we might as well keep the money in store and avert a massive deficit.