The Limits of Deficit Spending

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The unemployment rate is weighing very heavily on the economy, and on our politics as well. People are getting impatient: the unemployed, of course, but also the people who worry about losing their job, the people who do not count as unemployed because they have given up, the people who are employed and expect to remain employed but have seen their wages, their hours, or their benefits--or all three--slashed. The government has almost given up trying to do anything serious to speed economic recovery and reduce the unemployment rate. The Republican Party has waged an effective campaign against the $787 stimulus bill that was enacted back in February '09 and that is now regarded (mistakenly, as it seems to me) as an economic as well as a political failure. It was a disappointment and only a partial success. It was late in coming, poor in design, slow in execution, poorly explained by our articulate president and his economic advisers, and ineptly defended with unsubstantiated claims about the number of jobs saved. And it has collided as it were with other deficit sources, which has fed concerns with the long-run health of the economy.

The $787 billion has not yet been fully spent, so there will be stimulus spending this year. But predictions are that unemployment will remain at about 10 percent. That doesn't mean that the stimulus was or is a failure, for without it, the unemployment rate would probably be higher, though no one knows how much higher.

The administration's attempts to quantify the effect of the stimulus on employment are unconvincing and no longer widely believed. With unemployment expected to persist at such a high level, indicating a great deal of unused productive capacity in the economy, there is a case for further stimulus, and it is being vigorously pressed by liberal economists such as Paul Krugman. But the administration appears to have lost its case for stimulus spending in the court of public opinion. The only additional stimulus spending will be, it seems, essentially empty gestures of concern. To that camp belongs the $33 billion job-subsidy program that the president has proposed to Congress. If it is enacted, employers will be entitled to a $5,000 tax credit per worker hired if the hire increases his number of employees, and to an additional subsidy for raising wages by more than the rate of inflation, but the total amount of subsidy is limited to $500,000 per employer.

The program is unlikely to have an appreciable effect on employment. It is too small. It will either be gamed (as by firms that fire and then rehire), or the procedures created by the legislation to prevent gaming will entangle the program in red tape, delaying its implementation and perhaps rendering it largely ineffectual, like the program to encourage mortgage modifications. It will not be targeted on industries and areas of the country in which unemployment is highest.

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Richard A. Posner

Richard Posner is an author and federal appeals court judge. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. More

Richard A. Posner worked for several years in Washington during the Kennedy and Johnson Administrations. He worked for Justice William J. Brennan, Jr, the Solicitor General of the U.S., Thurgood Marshall, and as general counsel of President Johnson's Task Force on Communications Policy. Posner entered law teaching in 1968 at Stanford and became professor of law at the University of Chicago Law School in 1969. He was appointed Judge of the U.S. Court of Appeals for the Seventh Circuit in 1981 and served as Chief Judge from 1993 to 2000. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. His academic work has covered a broad range, with particular emphasis on the application of economics to law. His most recent books are How Judges Think (2008), Law and Literature (3d ed. 2009), A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). He has received the Thomas C. Schelling Award for scholarly contributions that have had an impact on public policy from the John F. Kennedy School of Government at Harvard University, and the Henry J. Friendly Medal from the American Law Institute.

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