Is there a Silver Lining in this Economic Carnage?

As we watch the spectacle of the still proud but now impoverished US auto industry come begging to Congress for a rescue plan “just like the banks got”, two thoughts came to mind. First, great—now everyone is getting in line for a bailout instead of helping themselves turn the corner. And second, if we’re going to throw this much money at stabilizing our economy does anyone in Washington care about getting our money’s worth from this when we look back on it 10 years from now?

The pressure on President Obama to come to the rescue on January 20th is enormous. At this point in the year-long (so far) recession the risks mostly seem on the downside. That is it is likely to get worse and feel worse in the near term before it starts getting better. Economists already tell us this will be a deep and painful recession that will last 24 months or so—or about 6 months longer than those of the mid 70’s and early 80’s.

The Bush Administration and the Fed have gone to unprecedented efforts to pump liquidity into the financial system but the predictable response to such uncertainty has been for lenders to take the money but not increase lending for fear of more liquidity problems ahead. Of course, this just makes things worse as the credit crunch ripples through the economy. The first stimulus package of $600 checks flushed a lot of money into the economy but didn’t do much stimulating as people put the check in savings or paid bills.

Pressure is building for another stimulus package bigger than the first, now from President Obama and the Democrat-controlled Congress eager to show the new team hard at work to “fix the economy.” Expect them to throw money at it.  Estimates of the size of this stimulus are $500 to $900 billion—without the earmarks for those waiting in line for bailout. Expect a mix of infrastructure spending, help for state and local governments, unemployment insurance extensions, and earmarks for energy efficiency and a thousand other pet causes.

Infrastructure spending does create jobs and we certainly need it, but it is slow to stimulate the economy and a significant percentage of the money spent flows into the global economy for the products and commodities the US now mostly imports. The good news is that infrastructure actually built will begin to come on line about 2010 when the economy is coming visibly out of this mess and begins to grow again. And grow it must because the near term deficit will be staggering.

If we use the stimulus and bailout efforts to retool, to improve efficiency and reduce further our energy intensity, to reform poor contracts, bad financial structures, replace failed programs and policies and focus on improving the US global competitive position for the long term—it still won’t be worth the pain of such a deep recession—but what does not kill us will certainly make us stronger.

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