WSJ-Welcome to the Era of Nonstop Stimulus

Spending didn’t speed the last recovery, but Biden’s team is keen to keep the money flowing endlessly.

By Phil Gramm and Mike Solon

Jan. 3, 2021 1:18 pm ET

When President Obama’s last Treasury secretary, Jack Lew, made the extraordinary claim that the Obama economic recovery failed because Washington “stopped [spending] too soon last time, and fiscal tightening after 2010 slowed the recovery” it sounded like another over-the-top argument for more stimulus. But with President-elect Joe Biden now making it clear that the recent $900 billion stimulus will “at best only be a down payment” and the now $3.3 trillion of total stimulus spending “is just the beginning,” it sounds like America is headed into a program of permanent stimulus.

Did the Obama recovery atrophy because spending tightened after 2010? Tightened compared with what? Between the start of the subprime mortgage crisis and the end of the recession in mid-2009, net new spending of $1.6 trillion was enacted. In 2009, federal spending as a share of gross domestic product surged by an unprecedented 4.2 percentage points to reach 24.4%, the highest level since World War II. Spending was 23.3% of GDP in 2010. In the entire postwar era through 2008, federal spending averaged 18.9% of GDP. For comparison, consider that the Korean War pushed federal spending only to 19.9%, even as defense spending made up 13.8% of the economy.

But what happened after 2010? At 23.4%, 2011 had the second-highest level of federal spending as a share of GDP since World War II—almost one-fourth higher than the postwar average before the Obama era. This is the year when, according to Mr. Lew, federal spending started to plummet. In 2012, federal spending was 22% of GDP, less than the stimulus years but still the fourth-highest level in the postwar period to that point. And 2012 was 3½ years after the recession ended.

When the recovery began some six months into the Obama administration, the Office of Management and Budget and the Congressional Budget Office both confidently predicted an economic boom, with real GDP growing an average of 3.6% from 2010-13. Meanwhile, the Federal Reserve projected 3.4% growth for 2010-11. These predicted growth levels were well within the historic norm for postwar recoveries, and were buttressed by the largest stimulus package in U.S. history—larger than all previous postwar stimulus programs combined. Since this spending surge was financed entirely with debt, the stimulus impact should have been maximized as the Keynesian multiplier worked its miracles.

To further help the economy, the Fed initiated a massive monetary easing. The Fed purchased, or offset by purchasing other securities, more than 55% of all federal debt issued during 2010-13—far more than the 10% of government debt the Federal Reserve purchased during the entirety of World War II.

Yet the greatest stimulus, the biggest deficits and the largest monetary accommodation were no match for the negative onslaught of Mr. Obama’s program of tax, spend and control. Economic growth from 2010-13 averaged less than 2.1%, half the 4.2% average growth rates in the four-year periods following the previous 10 postwar recessions. The Obama recovery didn’t falter for lack of sustained stimulus; it was shackled from the beginning by his economic program.

The argument that spending tightened too soon after the last recession implicitly assumes that it should never drop below stimulus levels. When Congress belatedly reacted to the four-year explosion in federal borrowing that doubled the national debt, the March 2013 sequester of $111 billion didn’t even begin until halfway into the fiscal year—four years after the recession ended and three months after Mr. Obama’s massive tax increase. And since there is always a bipartisan majority for spending, the brief commitment to restrain discretionary spending growth quickly faded.

The suggestion that anything less than stimulus levels of spending is economically harmful is effectively a call for a new era of permanent stimulus. This appears to be what Messrs. Biden and Lew, and future Treasury Secretary Janet Yellen, are now proposing.

Because Mr. Biden’s proposed program is little more than Mr. Obama’s tax, spend and regulate agenda on steroids, and because his appointees are merely grayer retreads of the Obama administration, it is excessively optimistic to believe that his stimulus will do any more good for the economy than Mr. Obama’s did.

In reality, stimulus spending has nothing to do with good long-term economic outcomes and everything to do with political outcomes. What is socialism except a permanent stimulus? When private investment buckles under confiscatory taxes and productivity falters with the decline of private innovation, socialism employs unending stimulus to substitute public “investment” for real private investment, and public initiative for private initiative in research and development funding. Mr. Biden and Bernie Sanders’s “Unity” document is a ready-made playbook for this program.

The case for another stimulus appears entirely political. The most recent Commerce Department estimate for the third quarter of 2020 has real GDP up at an annualized rate of 33.1%—largely offsetting the record decline in the second quarter. The Atlanta Fed estimates that the economy grew 10.4% in the fourth quarter, up from its initial forecast of 2.2%. Household income is higher than it was before the pandemic, retail sales rose from Nov. 1 through Christmas by 2.4% compared with last year, total household savings are near a record level, the economic harm of the latest wave of infections is far less than the damage from earlier one, and consumption, based on all economic indicators, is set to leap when pent-up demand is unleashed as the vaccine reduces the virus transmission rate. Further stimulus combined with an accelerating vaccination rate could in fact produce an overheated economy.

With or without permanent stimulus, if tax, spend and control policies are about to return, the economy won’t stay strong. And if private investment and individual initiative falter under such a program, a permanent stimulus will be demanded. How does it end? With Treasury debt already set to reach 108% of GDP, and Fed assets to finance that debt already 7.8 times the precrisis level in 2008, it isn’t a question of if government is going to run out of other people’s money, but when.

Mr. Gramm is a former chairman of the Senate Banking Committee. Mr. Solon is a partner of U.S. Policy Metrics.