What I like about President Obama's Stimulus 2.0 is what all the partisans and ideologues hate about it -- its restraint and its willingness to embrace seemingly contradictory ideas.
The restraint comes in acknowledging that there is only so much the government can do to help a market economy rebalance itself so it can grow again. With a hole of 10 million jobs to fill, if the government could provide 3 million, it would be a singular accomplishment, and Obama has approached this challenge recognizing those limits.
The seeming contradiction relates to his approach to budget deficits. The best idea for reducing them, he argues, is to take steps to shorten a recession -- but only if they don't significantly raise long-term borrowing costs. After all, when you're $9 trillion in the hole, every extra percentage point you add to interest rates translates into an extra $90 billion in interest payments, much of it to foreigners.
What the deficit scolds fail to realize is that government debt isn't the only type of debt that we're passing on to our grandchildren. We also pass on household debt and corporate debt, which are no less onerous but which have been shrinking fast -- so fast, in fact, that they have caused a deep recession. The increase in government debt, while hardly trivial, has to be viewed in that larger context.
On the other hand, what the Keynesian cheerleaders can't quite admit is that a heavily indebted country in a globalized economy can't simply borrow and spend its way out of a deep recession. At some point the old bills must be paid, the imbalances corrected. The purpose of stimulus is to spread the reckoning out over time, so that the economy doesn't get caught into the vicious and self-reinforcing downward spiral that Keynes understood so well.
As the president explained Tuesday in his speech at the Brookings Institution, there is nothing irreconcilable about paying down the deficit and investing in economic growth. The choice between them is a false one, but figuring out the right balance is as much art as science.
It is the unfortunate reality of any recession that the burden of right-sizing the economy and industries is borne disproportionately by those who lose their jobs, often through no fault of their own, while others suffer very little. Stimulus 2.0 recognizes that it is the government's role to compensate the losers by extending unemployment benefits to those who qualify -- and provide health insurance and food stamps even to those who don't qualify for jobless benefits.
The new proposal also restores tens of billions of dollars in infrastructure spending that was cut from the first stimulus bill to make room for across-the-board tax cuts that, as some of us predicted, didn't pack much of an economic punch. The president talked a good game Tuesday about making sure that the best projects with the highest payoff will get the money. To walk the walk, however, he'll need to supplement that with a clear veto threat at the first sign of the kind of political earmarking that he's accepted in the past.
If saving jobs is the goal, there's nothing more effective than sending another big slug of money to the states, which claim to face a collective shortfall of more than $140 billion next year. I'd feel a whole lot better, however, if I knew the money weren't being used to fund pay raises or pension-benefit increases. Some states have already imposed pay and benefit freezes. Requiring that of the rest is a reasonable sacrifice to ask from public employees who claim to care about preserving their colleagues' jobs and maintaining vital services.
Those are the big-money items in the president's proposal, and the ones likely to create and save the most jobs in the shortest amount of time. The same, unfortunately, can't be said for the various tax breaks that the president added to the mix.
The one that has garnered the most attention, and is likely to be the least effective, is the temporary tax break to small businesses that add to their payrolls. For every 10 new jobs, we will be lucky if one results from that break -- and even then, there's a good chance it will be matched by a job lost at some other small business that is losing market share.
More intriguing is the president's idea of offering a capital gains tax rate of zero for investments made in small new start-ups over the next year or two -- if only we could be sure that it wouldn't lead corporations and venture capitalists to discover ways to turn existing activity into a "new" business.
Under the category of truly bad ideas, the president has proposed to increase from 80 percent to 90 percent the share of small-business loans that the government will guarantee. It was loose lending that got us into this pickle, and a recession hardly seems like the ideal time to encourage banks to lower underwriting standards by having less skin in the game. If banks are really refusing to make loans to creditworthy small businesses, the safer and less costly approach would be to ask regulators to temporarily lower the amount of capital that banks must set aside for small-business loans.
And count me among the skeptics about "cash for caulkers," not because saving energy and money is a bad thing but because it shouldn't require a complicated tax break to get you to do it. The idea here is to stimulate the economy, not to micromanage it.
Steven Pearlstein will host a Web discussion today at 11 a.m. at washingtonpost.com.
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