The Return of “W”

Fear not Lefty lurkers, I don’t mean that W; I mean the growth curve. It looks as though the porkulus package, as some on the conservative blogosphere have dubbed it, will be pushed through after some rigorous late-night maneuvering. I haven’t read through all of the details of the package, but depending on which news outlet you read and the time of day, cost estimates run anywhere from $780 billion to $926 billion. Only in America can politicians claim to have cut spending while adding to overall costs.

Will it work? For possible answers to that, see my previous post on the Japanese experiment. My own feeling is that it will have a minor placebo-like effect in the short-term; that is to say that it will be difficult to discern if any recovery we experience toward the end of the year was due to the efforts of Washington, or the natural machinations of the business cycle. Whatever the case, the deal appears to have been done, so we need to hunker down and make the most of it.

My concern with the package is more on the longer term impact to the economy. Despite assurances by President Obama and democrats to the contrary, I don’t believe the spending provisions of this bill are “stimulative” at all – many of them appear to be here to stay.

Which leads to the title of my post. While economists appear to be split on which letter of the alphabet the eventual recovery will take – some favoring an “L” and some a “V” – I submit we are more likely to experience a “W”, where short term gains in growth are quickly offset by higher inflation, tightened credit markets and a weaker dollar. At some point, Obama will need to pay for this spending spree – he can raise taxes, take on more debt, or continue to print more money. None of these options is desirable, and may actually be counterproductive to any growth the economy may be experiencing at the time.

With most economists predicting recovery either in the latter part of this year or beginning of next, it wouldn’t be unreasonable to conclude under this scenario that another downturn may be waiting in the wings just about the time Obama gears up for re-election. And with Medicare and Social Security storms on the horizon, we may not be able to spend our way out of that one.