The efficacy of a ‘back-door stimulus’

THE EFFICACY OF A ‘BACK-DOOR STIMULUS’…. For quite a while, a whole lot of political observers have hoped desperately that Congress would agree to some additional stimulus. As investments from the Recovery Act effectively run out, now is the ideal time to inject some additional capital into the economy,

With that in mind, the New York Times‘ David Leonhardt notes today the tax policy agreement between the White House and congressional Republicans amounts to a “back-door stimulus plan.”

A year ago, President Obama and the Democrats made the mistake of assuming that an economic recovery was under way. This week’s deal to extend the Bush tax cuts shows that the White House’s top priority is avoiding the same mistake again — even if it has to upset many fellow Democrats in the process.

Mr. Obama effectively traded tax cuts for the affluent, which Republicans were demanding, for a second stimulus bill that seemed improbable a few weeks ago. […]

Tellingly, economists and Democratic policy experts were largely pleased with the deal. Forecasting firms on Tuesday upgraded their estimates for growth and job gains over the next two years. Economists at Goldman Sachs, who have been more negative and more accurate than most Wall Street forecasters lately, called the deal “significantly more positive” than they had anticipated.

And left-leaning policy experts said the package did more to create jobs than they had thought possible after the Republicans’ midterm election victories.

What kind of results are economists expecting? Moody’s Mark Zandi, an economist Democrats have turned to many times over the last couple of years, predicted the agreement would accelerate economic growth and create more than 1.6 million jobs next year. “It will ensure the economic recovery evolves into a self-sustaining economic expansion,” Zandi said. “Prior to this, I was less sure of that.”

In light of the deal, both Zandi and economists as JPMorgan Chase raised their forecasts for economic growth next year.

All of that’s the good news, but critics of the deal on the left point to the flipside. And to be sure, their arguments have merit.

For one thing, the tax deal may have some positive, stimulative effects, but given the hole we’re in, the improvements will be marginal. It’s not like this one package will immediately get us back to where we were pre-recession. For that, we’d need an even bigger, more ambitious stimulus.

For another, if the goal is to craft a package intended to boost the economy, this agreement includes Republican ideas that offer little, if any, help. Given the price tag of the agreement, this could have been tailored in a far more effective way, were it not for GOP demands.

But then the political realities kick in. A better stimulus almost certainly can’t pass, and the very idea of a stimulus wasn’t even on the table as a possibility as recently as two weeks ago. And while we could better tailor the package, there’s still the matter of the Republican hostage strategy and the broken legislative process in the Senate to deal with.

For some opponents of the plan, I suspect the principles at stake are paramount, and I can certainly appreciate why. But if the question comes down to an either/or scenario — will the economy be better off if the agreement is approved? — there appear to be quite a few credible economists arguing that passage is preferable to defeat.