Whether or not we have a stimulus package or financial bailouts, the US and world economies will recover. Effective policy will severely mitigate the pain, which is why we use them. That is why I supported the original bank bailout and why I changed my mind on the need for a second stimulus package late last year.

I was wrong in supporting the bank bail-out. The money was used for an entirely different purpose than announced (interestingly, it was Paul Krugman, the economist and columnist who suggested the change). Tim Geithner, who helped craft the changes, is now Treasury Secretary. After weeks of criticizing the Bush administration’s response (which he helped craft) he has partially unveiled a plan that does more of the same. The markets dropped significantly after the news.

I support a fiscal stimulus plan. But, I am also subject to considerable self doubt on the matter, given that I erred in supporting the bank bail-out. Evidently, few in Congress share my weakened self assurance on the matter.

The fiscal stimulus plan that just passed is argued by some to be too small. That is silly.  If the economy continues to shrink at the current rate, the stimulus package will more than compensate for all the lost output. Job losses are not accelerating, they have remained constant (but high) for three months. That signals we are at or near the bottom of the recession. But, there can be other shocks, and the bottom can be very long.

We probably need a stimulus in the $200 billion expenditure range. And there’s a maddening unpleasantness to the whole debate. It matters not on what we spend the money, only that it be spent fast. $50 million to the National Endowment for the Arts is better than $50 million on bridges when it comes to stimulus. The NEA can give away taxpayer dollars at lightning speed.

The stimulus is so big – at nearly $900 billion – that we might as well tack on another three zeroes and make it a $900 trillion package. Congress just needs to add the caveat that the spending has to happen this year. State and Federal governments simply cannot spend that much money this year. Sadly, almost all of the package will bleed into later years. The economy will recover in the short run, but then some combination of three bad things will happen.

Either government spending will be dramatically curtailed over the next several years, or taxes will be raised with robust abandon. Either of these outcomes will slow the economy, and perhaps generate another recession. But next year is an election year, so the most probable outcome will be an astounding round of inflation. That is the worst, but most likely result of this stimulus package.