Stimulus spending finally starts to trickle down

It's obvious that the administration's initial economic forecast, produced in January, was wrong. That called for unemployment peaking at 8% with the stimulus and 9% without it. The vow to "save or create 3.5 million jobs by the end of 2010" looks both more difficult to achieve and inadequate to the task.

Administration officials defend their forecasts as in line with the consensus estimates of Wall Street and other professional economists. It's an odd defense to offer amid the wreckage of an era defined by consensus thinking — on housing prices, credit and stocks — that turned out to be so poorly grounded. "They were going with the consensus, but this is a case where the consensus has been consistently wrong," says economist Dean Baker of the left-leaning Center for Economic and Policy Research.

Administration officials hedged their forecasts, alluding to greater-than-normal uncertainty in the wake of an especially fierce global financial crisis. But Summers says even if they had known in January that joblessness would rise as quickly as it has, "We would have made broadly the same choice" about the size of the stimulus.

They may get another chance. Even if the economy begins growing before year's end, as many economists expect, the gains are likely to be weak and unimpressive. The employment picture is generally the last part of a sick economy to heal. So throughout 2010, and likely beyond, the jobless rate is likely to be high and a magnet for political dissatisfaction.

Barry Ritholtz, CEO of investment firm Fusion IQ, says the unemployment rate may not begin declining for 24 months after the economy resumes growing. "If it turns out my forecast of a crappy housing and jobs market is right, then we'll need a second, third and fourth stimulus," says Ritholtz, also the author of the well-read blog The Big Picture.

Republican calls for the administration to abandon hopes of goosing the economy in favor of tax cuts aimed at promoting job growth are met by demands from the left for a second Obama stimulus. The White House officially says it's too soon to talk about more anti-recession spending. But economist Laura Tyson, a member of the president's Economic Recovery Advisory Board, said in Singapore last week the administration may have to consider a second stimulus because the economy remains so feeble.

If it does, the debate later this year is likely to revolve about a perceived trade-off between prolonged unemployment and higher public debt. Baker of the Center for Economic and Policy Research says that with interest rates still near generational lows, the U.S. can afford to increase borrowing to promote more jobs and societal wealth. "You do have a free lunch," he says.

Ian Shepherdson of High Frequency Economics, who favors a second dose of fiscal medicine, says the alleged savings of eschewing a second stimulus are illusory. If the economy remains weak for a longer period, public finances would be hurt by a prolonged episode of depressed tax revenues, he said.

"In order to boost the chance of starting a self-sustaining recovery, which will then generate rising tax revenues, it is necessary to take some fiscal pain upfront," he wrote clients Monday.

Republicans won't see it that way. The big question, of course, is whether voters will.

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