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Stimulus about the right size, says econ prof Richard Schiming

Economy won't heal itself

Economy won't heal itself, Economics prof Richard Schiming says.

2009-02-10
By Mark Fischenich, Free Press Staff Writer [published in The Free Press, Mankato, MN, 2/9/2009]

Richard Schiming would have designed an economic stimulus bill different from the one that passed the House last week and the version expected to pass the Senate today, but the Minnesota State University economics professor said the legislation seems to be about the right size and has a good chance of doing the job.

Schiming said he wishes less of the $800-billion-plus bills was devoted to tax cuts and more was aimed at spending — particularly infrastructure investments. Still, Schiming thinks Congress and President Barack Obama did all right.

"My take on it is the package is good," he said. "And we have to do something."

The "we" in this case is the government. That's the last viable source of a major injection of cash into an economy desperately in need of one, according to Schiming. The other sources of investment that can drive economic growth — ranging from consumer spending to foreign investment — have dried up.

The alternative strategy for boosting a lagging economy is monetary policy, but the Federal Reserve has already reduced interest rates to essentially zero. That leaves government with one remaining option — approve a fiscal stimulus bill and hope it works in getting the economy accelerating again.

"I think it pretty much has to (work) because monetary policy has gone about as far as it can go," Schiming said.

There is one other alternative, but standing pat is a mistake, he said.

"If we learned anything in the Great Depression it's you can't just sit back and let the economy heal itself because it's a long difficult process."

That doesn't mean that all stimulus plans pack the same punch. Schiming would prefer less in tax cuts because, as the rebate checks of 2008 showed, people tend to use them to pay down debt or replenish savings accounts, which doesn't do much to stimulate the economy.

Government spending tends to be more effective, said Schiming, who believes the ideal target is construction spending that creates jobs while also improving the nation's infrastructure.

"You'd hope that the dollars spent would have some useful long-term benefit," he said.

Schiming predicts the economy will begin its recovery later this year, assuming the stimulus bill passes.

"It should be enough," he said. "The one wild card is our economy depends so much on confidence."

If consumers and businesses continue to be extremely cautious about spending and investing, even a massive stimulus bill can lack the potency needed to spur economic growth. If that happens, and the economy is still in a deep recession a year from now, Schiming said the government will have no choice but to try again with another bill.

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