Stimulus Bill Triggers Legislative Logjams, Perpetuates Credit Crisis

Obama’s stimulus package is the problem, not the solution. No one wants to make any hard decisions until they see what goodies they may get from Obama’s trillion-dollar stimulus package, which many economists oppose for good reason. The result is a deepening credit freeze that makes it difficult for small businesses to meet their payrolls, and delays passage of state budgets.

All the talk of a stimulus is resulting in a logjam in state legislatures as legislators put off hard choices in the hope that Washington will bail them out, delaying passage of state budgets. In Virginia, for example, the Washington Post reports that “Legislators from both parties are guilty of assuming that President Obama will come to the aid of states with a stimulus package, and they aren’t taking the budget gap as seriously as they should.” Meanwhile, Maryland’s big-spending government, which pushed through record tax increases last year, is drawing up an extravagant wish list of new spending proposals it hopes will be funded by Obama’s budget-busting stimulus package. Obama’s package has sent a “thrill” though wasteful local officials, who even the Post has criticized for allowing public-employee pensions and benefits to skyrocket out of control.

The stimulus package is also contributing to the credit-freeze that left some businesses unable to borrow from banks to meet payrolls. Banks are reluctant to lend money without knowing who will be the winners and losers from provisions buried in the stimulus package, which has already grown to more than 600 pages. And the money in the stimulus package will be spent mostly in future years — like 2010, an election year — not this year, when economic relief is most needed.

The same perverse thing happened last year, during the debate over the Wall Street bailout. Credit markets froze, partly because trust had broken down in financial markets, but also partly because it was hard to tell where opportunities for profit lay, without first knowing who would be propped up by the bailout, and who wouldn’t. All the talk of a bailout actually aggravated the freeze. Who wants to look like a sucker?

The stimulus plan will suck money out of productive sectors of the economy, emulate Japan’s failed borrow-and-spend strategy of the 1990s, and cost at least $300,000 for each government-sponsored job it artificially creates.

My brother, a hedge-fund manager, has been appalled by the often arbitrary way that the financial-system bailout money has been used, to prop up irresponsibly managed banks, while allowing more responsible ones to go out of existence in forced mergers (precisely because they took action to rein in their risky loan portfolios, making their potential failure cheaper to the taxpayer). The arbitrary way the government has picked winners and losers — like propping up a failing lender tied to Housing banking committee chairman Barney Frank — has made players in the financial system even more reluctant to take risks that may be needed to restore liquidity to the economy.

Eventually, the economy will recover, no thanks to Obama’s stimulus plan. The economy always recovers after a recession, as part of the business cycle. When it does, Obama will take credit for it, even though he will have as little to do with the recovery as he does with the sun rising.