Its a Case of Murder on the Budget Express
Theres a great scene from the 1974 movie version of Agatha Christies Murder on the Orient Express where her iconic ace detective, Hercule Poirot, wonderfully played by Albert Finney, talks about the number 12.
[IMGCAP(1)]The scene is at the end of the film when Poirot is revealing to everyone on the train how he figured out who committed the murder. He says the number 12 kept popping into his mind and was impossible to ignore. The victim had 12 stab wounds, one of the suspects talked about the fairness of a jury on which 12 people sit, there were 12 main passengers on the train, etc.
This week, the number is $500 billion.
I first noticed it in an article last Wednesday by CongressNows Jay Heflin. According to the article, theres renewed talk on Capitol Hill of a second stimulus bill. The money quote: So far, the cost of the legislation if it materializes has not been decided, but it could go as high as $500 billion.
$500 billion? Thats almost absurd. Its about 16 percent of current annual federal outlays, more than the total currently projected fiscal 2008 deficit, 3 percent of the gross domestic product, and at least in nominal terms a much larger stimulus than anyone has talked about this year or in any other year I can remember.
I was sure it was a mistake until the next day when a colleague forwarded a commentary to me by Bill Gross, the very highly regarded manager of the largest bond mutual fund. If you watch CNBC you know that Gross is smart and very direct. The money quote from his commentary: [T]his economy will need an additional jolt of $500 billion or so of government spending real quick.
So there it was again: $500 billion.
Washington is the kind of place where you can never be sure which actually came first. Its certainly possible that Gross shared his $500 billion number with Congressional leaders before his commentary was published and that its release was choreographed so that it appeared to validate what they told CongressNow. Its also possible that the timing was purely coincidental and that Capitol Hill and at least one highly respected investment manager independently are thinking that $500 billion is whats needed.
But either way, like 12 for Poirot, that number has now appeared repeatedly and is hard to ignore.
There are many reasons an additional $500 billion economic stimulus package is unlikely. Its so large that it would be immediately politically controversial from a number of perspectives, including the dramatic increase in federal deficit and debt. Many will ask whether $500 billion on top of the $150 billion stimulus already enacted and now being implemented is excessive. And the phrase fiscal responsibility would become a virtual mantra for many.
There will also be a great deal of talk about the timing of a stimulus of this size. Unless we want to do the public policy equivalent of standing on street corners handing out dollar bills, it will be virtually impossible to do anything that would quickly result in that much additional federal spending. If, as some are suggesting, the program included major public works projects, the stimulus would occur years after (hopefully) the current economic downturn would be over.
Also, note that Gross said what is needed is more government spending. Its hard to imagine how that could happen in the current political environment. There would likely be a huge fight between those who want to increase spending and those who insist that the stimulus come from reducing taxes that could easily doom the whole effort. Others would insist that federal spending is already too high and that the multi-year increase Gross is recommending is simply wrong. This year, the bill would likely be vetoed in any case.
Two of the most politically sensitive (just ask ex-President Jimmy Carter) economic statistics interest rates and inflation would be projected to rise over the next few years as a result of the additional government borrowing from a stimulus of this size. Given the current weak state of the housing market and the strong possibility that interest rates and inflation could be high going into the next election, would policymakers really want to do this?
Its not impossible to see how the package could come together in an election year. If the economy seems to be deteriorating further, a massive spending increase/tax-cut plan could easily grow in size as everyone adds his or her own ideas to it. A $500 billion target wouldnt be much of a limit at all, and every tax and spending plan sidetracked, delayed and defeated over the past decade would be reclassified as an economic stimulus and brought back to life.
But Gross isnt saying it will be done before the election: His commentary is in the form of a letter to a President Obama about what he should do after hes sworn in next January. Thats six months from now, and there almost certainly will be substantial additional pressure on Washington to do something further on the economy if there are few signs by then that it is starting to pick up.
But a stimulus of this size would still seem to be excessive even at that point unless there were a severe recession or some other type of extreme situation. That would provide policymakers with the permission they need to abandon their promises on fiscal responsibility, spending increases and tax cuts.
In other words, there likely will have to be the economic equivalent of a murder for $500 billion to be a number that everyone starts to see.
Stan Collender is managing director at Qorvis Communications and author of The Guide to the Federal Budget. His blog is Capital Gains and Games.