The San Francisco Chronicle recently wrote that only $9.4 billion of the $50 billion earmarked for the state has made it to the treasury. California has to wait for the rest during a period when its $24 billion deficit is scuttling its economy. The trouble may have started with California’s profligate spending, but the sharp drop in its tax revenue due to unemployment and plunging real estate values were largely beyond its control. California’s economy is by far the largest of any state and unemployment there is already 11.5%. National unemployment may be heading to over 10%. California’s will probably go above 13%.

President Obama’s main economic advisor, former Harvard president and Secretary of the Treasury Lawrence Summers told the FT last week that “I don’t think the worst is over … It’s very likely that more jobs will be lost. It would not be surprising if GDP has not yet reached its low.” That is a remarkably grim and pessimistic statement by a man who is supposed to be the primary cheerleader of the efficacy of the government’s fiscal policy. The economy is getting worse. Nearly everyone sees that. Honesty is taking the place of posturing and the difficult evidence that the recovery is not at hand continues to roll in.

One of the questions repeatedly asked by the media is why the $787 billion stimulus program is stalled here unlike programs in other countries. The Administration’s spin is that the stimulus money is seeping into the economy slowly and its effects will not be felt in any large part until next year. This could just be a naive view or worse it could actually be disingenuous. China’s GDP is $4.4 billion. Its stimulus package is $585 billion, or 13% of its annual output. The American figure is only a little over  5% of GDP. Economists have been amazed at how quickly the French stimulus programs are working. The $37 billion that France is spending is modest, but the plans for the money have been to help short-term employment and consumer demand based on the assumption that the global economy will get better and a rising tide will lift all ships. That may seem like a reckless way to spend money, but it may turn out to be less reckless than “carefully” placing money into the American economy in the hope that the changes that the capital makes will become permanent. “Permanent” and “economy” are not words that belong in the same sentence.

The Republican members of Congress have said that they will resist any efforts to add stimulus money to the existing package. They are regularly out-voted, so their opinion may not matter. The Administration may not be in any rush to increase the $787 billion. It would be a potential political nightmare to have to go back to the taxpayers and say “we were wrong.” But, the Administration may have been wrong. And, acting slowly to rectify that could end up being a mistake that keeps the economy from a swift recovery.

The government’s biggest mistake in bailing out GM is that it gave the car company too little capital. GM may fail now because the recession may last longer than the Administration believed it would. GM may fail because the Treasury would not give it the capital it needed to run a large enough operation to match the model lines and product development prowess of Toyota (TM), Honda (HMC), and Ford (F). The policy of providing too little capital is nearly as bad as providing no capital at all.

The entire American economy faces the GM problem writ much larger. The amount of the stimulus may have needed to be double what was allocated. The recession may be that bad. The risk all along is that the stimulus, healthcare reform, and large increases in the budget could make it impossible for the Treasury to raise enough money in the global capital markets to support all three.

The risk, which the government may shortly find will be worth taking, is to push a great deal more money into the economic system and push it in much faster. This action is like that of the French stimulus plan which was based on the economic principle that a short term solution was all that would be needed to solve this long term problem. The French philosophy includes the concept that the global economy will be fine if it can only last through the critical and severe beginning of its illness. Then, it can manage on its own.

The American stimulus may not only be too late, it may be much too little

Douglas A. McIntyre

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