By Jeffrey Sachs
The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package.
We are told that we have to rush without thinking lest the entire economy collapse. This is belied by recent events. The spring 2008 stimulus package of $100bn (€76bn, £71bn) in tax rebates was rushed into effect in a similar way and we now know it had little stimulus effect. The rebates were largely saved or used to pay down credit card debt, rather than spent. The $700bn troubled asset relief programme bail-out was also rushed into effect and its results have been notoriously poor.
The Tarp has not revived the banks or their lending, but it has supported a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions. Some of those transfers – as in the case of Merrill Lynch using its government-financed sale to Bank of America to enable $4bn in bonuses last month – are beyond egregious. Yet the US is now inured to corruption and in such a rush that even billions of dollars of public funds shovelled into Merrill’s private pockets in broad daylight barely merited a day’s news cycle.
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