Credibility Is Key in Crafting Stimulus

Over the weekend, the President sent a letter to the Hill urging Congress to pass new stimulus measures. As we have written, we think the costs of stimulus should be offset over time to avoid adding to the debt.

But beyond that, it is critical that any stimulus — jobs, loophole-closing, whatever you want to call it — package (and there is a strong case to be made that more should be done to help the economy) be credible. That involves two things: a well-designed, economically-motivated package, and pairing it with a medium term fiscal consolidation plan.

First, there is the obvious risk with any stimulus package that all sorts of non-stimulative policies are given the stimulus label as a “Get Out of PAYGO Free” card.

But to be credible, a stimulus package has to be designed with one purpose in mind — to generate the most “bang for the buck”. If it is used as a vehicle for a host of unrelated items, credibility is shot, and the ability to pass future measures is diminished. When a bill becomes overly political by including policies that are really meant to be permanent but are stuck in a package temporarily to get a foot in the door (see this warning), or policies that have little hope of doing much to aid the economy (uh, the doc fix), credibility is compromised. The result, as we are seeing, is that there is less appetite for future packages even if they are warranted.

Second, the emphasis now has to be on balancing 1) the need to continue to help the economy strengthen and 2) the need to take measures to control the burgeoning debt.

In order for a coordinated suite of policies to be credible, both sides of the equation need attention and action. So far, hundreds of billions of dollars have been thrown at the economic recovery side of the equation, and little more than lip service has been devoted to the fiscal piece. Credibility is at stake, and if it is not regained, it will make taking future actions to help the economy in the short-run all the more difficult.