This is presenting some problems now that the actual aim should, by the theory of Keynesian stimulus, to spend money as fast as possible on almost anything you can find.
It is very obvious, now that we have the stimulus plans, that the Democrats are using stimulus as an excuse to spend money on things they want to spend money on. Their demand for things like alternative energy programs is inelastic; it's just that it happens, right now, to be convenient to bill them as stimulus.
The problem is, that contra the Republicans, Democrats do care that money spent on these important projects is spent well. And spending a lot of money well takes time. It's an inversion of the old engineering aphorism: good. fast. expensive. You can only have two of the three.
Because the bill is massive, because it's focused on pre-existing Democratic spending priorities, it is going to be slow. Matt Yglesias defends it, saying:
With the whole thing done, it seems that two thirds of the funds will flow within 18 months of enacting the plan. Of course it's true that 100 percent would be better. And even truer that if we had passed a stimulus plan back last September rather than experiencing months of delay thanks to conservative intransigence this problem wouldn't be so severe.
But in the context of stimulus, eighteen months is a long damn time. Eighteen months is, in fact, about how long it takes a stimulus to work through the system. If for no other reason, that ought to be a little worrisome for progressives because that means the stimulus won't have even 2/3 of its full effect until after midterms. It is simply not "even truer" that conservative intransigence is causing worse delays than the focus on spending the money on massive new projects. It's not even as true. It's not true at all. No matter how you assess the relative benefits of spending to tax cuts, tax cuts could be 95% out the door in April. So could many other kinds of rapid government spending--preventing fare cuts on transit systems, sure, but also repainting all the faded yellow lines on highways, or repairing park benches, redecorating government offices, etc.
Why does speed matter so much? Because the primary argument for fiscal stimulus right now is not that we need to alleviate the pain of a temporary economic contraction--that's what things like beefier unemployment insurance, food stamps, and housing assistance are for (the first and the last are very good ideas, by the way.) The argument is that we're in danger of a liquidity trap--that we could end up at a permanently lower level of output, as described by Keynes and popularized by Paul Krugman in the story of the Capitol Hill Baby Sitting Collective. (Though it's worth noting that the ultimate solution was to double the money supply . . . )
The basic idea is that if everyone is afraid to spend money because they might be laid off, and sits at home in the dark, all the people who made money selling the things they used to buy will get laid off--and so will they, because they're part of "everyone". The government basically shocks us into a higher level of output by spending the money we're afraid to.
Though you wouldn't think it from the really quite shocking incivility emanating from the pro-stimulus side, the empirical evidence that this works in a large industrial economy like ours is basically nonexistant. The problem is, we have very, very few examples to test on: America during the Great Depression, and Japan in the 1990s. And neither America nor Japan managed to stimulate their way out of their troubles. You can argue--and many do--that this is because we, and they, didn't stimulate enough. That may be true. But unless you can forward test your theory, it's a just so story . . . as we just painfully found out about the "It was all the Fed's fault" narrative of the 1930s banking collapse. There is no excuse for calling people who question your highly theoretical model fools and charlatans.
What we've got, since Japan really never did emerge from its lost decade, is basically one fact: America entered World War II in a depression, and emerged from World War II without one. Hopefully, the relevant variable was the massive, massive amount of spending, rather than any of the other explanations one can plausibly build about the effect of Total War on depressions--like the slaughter of some of your excess labor force, or the substitution of more immediate fears of being killed for panic about the financial future.
But the amount of government borrowing during World War II was truly gargantuan--roughly half of GDP by 1943. All the relief dribbled out over the course of the Great Depression at best kept the Depression from being worse--unemployment was still in the double digits in the late 1930s. Moreover, much of the spending FDR did do was paid for by tax hikes, which cancel out the stimulative effect of the spending. It's hard to tell how much to credit even the improvement we did see to government borrowing, because of course the acute portion of a financial crisis does come to an end eventually even without government action, and by the time FDR entered office the thing had already been running for a good three years.
So if we're going to do stimulus, judging from our not-very-good best example, what we want to do is pack a massive wallop as quickly as possible, to shock those "animal spirits" back into a more normal economic rhythm. I am skeptical that this will work even if tried, for reasons I have outlined elsewhere. But if we are going to try it, we should be focusing less on the Democratic wish list and more on figuring out where money can be most quickly and effectively spent.
Good Fast Cheap not Good Fast Epensive.
You can certainly have something that is good, fast, and expensive.
That's why I said it's an inversion of the aphorism . . .
Comments about the expense of the Iraq war appeaar to be thin on the ground these days.
"It's an inversion of the old engineering aphorism: good. fast. expensive. You can only have two of the three."
I do not think this sentence says what you think it says. The "It[is]" refers back to what you previously said, not what you are about to say, while the colon suggests you are about to quote the old engineering aphorism as opposed to the new inverted form.
Not to pedantically nitpick or anything, but I read it the same way as toxic.
Someone in the comments here a week or so ago wondered why we didn't just declare a payroll tax holiday. The cynical and immediate response (I forget now whether it was from the proposer or a commenter just afterward) was that you can't throw money preferentially at your supporters that way.
I'm speaking as an economic novice, but are there any other reasons not to do this? It seems a quick way to spread a lot of money all over the place half into the hands of anyone with a job, the other half into the hands of anyone providing employment. Can someone spell out the downside?
Dear aMouseforallSeasons,
I understand why you read it that way and I agree that this could stand a re-write to improve its clarity.
However, I think your claim that the sentence doesn't say what MM thinks it says is too strong. This construction *can* be used exactly as MM apparently intends. It's just ambiguous, like almost all English is.
[For the record, I think my comment is a pedantic nitpick of aMfaS's pendantic nitpick. I'm so _meta_!]
--Colin
agreed, it made no sense the first few times I read it. Then again, lots of things don't make sense to me...like rushing another economic fix through.
I think if you were to let the American public spend a trillion dollars, you would find it spent much, much differently; much, much more effectively; and with a vast, vast, vast more dramatic impact on the economy than we'll see with these "shovel ready" programs that The One was saying was going to be ready on day one, and now won't be ready until 2011.
Liberals love to spend other people's money.......and they're about to prove it for the world to see here very shortly.
Well, as long as we're being pedants and nitpickers, it's usually "Pick any two," that being a snappier way of putting it.
On the other hand, I don't have any problem with the sentence as written, and I think putting it "correctly" would have been confusing.
I'd also take issue with this:
Liberals want to spend money on projects that they think will be more valuable than the equivalent usage in the private sector.
No doubt there are many intelligent liberals about whom this is true. But there are also a lot of people to whom the possibility of an equivalent usage in the private sector has never occurred (happy with my structure, grammar police?); that is, people who make their decisions based on benefits with no regard to costs. The political class is rife with such people.
"Democrats do care that money spent on these important projects is spent well".
Yes, but that doesn't mean what a rational being would expect.
From the way they talk, they seem to believe that spending money well means spending it on whatever comes with maximally sonorous rhetoric, rather than on anything any sane person would expect to produce desirable results.
But in practice, when the check clears, it's more like they stand upwind from their friends, throw a bushel of our money into the air, and hope most of it will stick to somebody who votes.
When do we start dragging these creatures out of their offices and shooting them?
P.S. Accidentally edited an important point out of the above: It applies to virtually everybody in government, regardless of party.
You made a big mistake, Megan.
You probably high-jacked your own thread by getting into too many details of the Great Depression.
But in practice, when the check clears, it's more like they stand upwind from their friends, throw a bushel of our money into the air, and hope most of it will stick to somebody who votes.
I rather like this metaphor, and may be compelled to steal it for private use at a later date.
As I understand it, we have two problems here. (Aside from our friends helping us with our grammar.)
1) Banks won't lend, except apparently to the Federal government. The Federal government is in fact vacuuming up much of the available credit.
2) Citizens are less and less willing to spend, because they can't get credit, and they're worried about the economy.
I suggest the Federal government do two things:
1) Stop taxing personal savings of any kind, so that we keep the interest and dividends we earn, and there will be more deposits for banks to lend out.
2) *Stop* running a deficit. That way anyone who wants to invest, whether that be banks, sovereign wealth funds or even individual investors, *have* to invest in the private sector.
What's wrong with this picture, besides the fact that no Washington politician on either side of the aisle would consider it for a minute?
"Democrats [i]do[/i] care that money spent on these important projects is spent well."
Thanks for the laugh. The Democrats certainly care that the money is spent on projects they deem important (by which they mean, projects that will help the electoral prospects of Democrats). Whether they care if it's spent [i]well[/i] is, well...debatable. Does it matter if a program really works if they can say that they[i]tried[/i] it? And then can say, oh, well, we certainly had the best intentions for that project (look how much funding it got!). And all it'll take to fix it is a little more money... It's a vicious cycle.
Some commentator on radio pointed out that the Depression and WWII covered more than a decade and, in that time, most people could not easily replace simple things like shoes, cars,clothes, furniture, etc. So when the War ended, there was a pentup demand for new consumer goods. Today, I'm sure many of us could examine the contents of our closets and kitchens and live without buying one new item for at least a year. Given low consumer confidence, it would not be shocking to see retail sales drop even 20% in 2009, given that many purchases are simply "wants" and not "needs."
I could easily make it through 2009 and 2010 without any new shoes except athletic shoes (which I use up fast). Same with most housewares.
The exception is a new couch. I plan to buy one in 2009 as my contribution to the stimulus. I'm sure everyone else needs to replace one or two specific things like that, but nobody seems to be expanding their lifestyles rapidly. A lot of the recent boom occurred when people decided they needed to go from 7 pairs of shoes to 25, or 2 televisions to 5. I doubt that expansion will happen again because... I mean, really, why should it? Maybe we'll all work our way down to 14 pairs of shoes and 3 televisions, and that will turn out to be a level we can live with.
The problem is what happens while we all wear out our excessive inventory.
For commentors on a blog of someone who voted for Obama, you all seem almost hysterically anti-Democrat/liberal. It doesn't do much good for intelligent discourse to show intense personal hatred towards a party and all of its economic philosophy.
Also, something that really caught my eye here:
"I think if you were to let the American public spend a trillion dollars, you would find it spent much, much differently; much, much more effectively"
Full stop. If you *give* the American public that kind of money (which, by the way, is something like $3000 per person), as we clearly saw with Bush's stimulus, they overwhelmingly choose to either save it or pay down debts with it. Hell, the average American has almost that much in credit card debt alone. What would possibly make you think that money's going to be spent *at all* during a recession rather than into worried people's savings accounts? We saw how well that strategy worked when we gave banks money to stimulate lending.
There's really no way to *make* Americans spend when they'd overwhelmingly prefer to save. And if they don't spend the money you give them, there's absolutely no point to give it to them at all. That's why a stimulus has to be government spending.
"If for no other reason, that ought to be a little worrisome for progressives because that means the stimulus won't have even 2/3 of its full effect until after midterms."
It will, however, mean the economy is picking up nicely just as the next presidential primaries get underway.
This whole thing seems like such a California dreaming fantasy. It is as if Obama ran an ad, 'Wen Jiabao is his name. He is the Chinese Premier. His actual Master Card number is xxx-xxx-xxx. Let us know that you're not afraid to spend. This is the change you have been waiting for.'
Adam: There's really no way to *make* Americans spend when they'd overwhelmingly prefer to save.
No, but there are ways to rather subtly encourage it. Various economists have been talking in the past couple of weeks about studies showing people respond to a windfall as you outline, but respond to a perceived change in income by changing their spending level. This weighs in favor of reducing tax withholding, especially of payroll taxes (Social Security, etc.).
M.D. Thomson: That was Winterspeak, proposing, and me, disposing. (And noting at the time, as you do here, that it was a self-consciously cynical response.) I don't know what other arguments have been raised against it.
I second Michelle Dulak Thomson's comment, and wonder also why we don't at least cut the rate and raise the maximum income taxed to compensate.
"All the relief dribbled out over the course of the Great Depression at best kept the Depression from being worse..."
And maybe that's not a bad thing.
And maybe that's all this stimulus will do as well; keep things from being worse.
There are so many things out of balance in the world's economy today that it probably will take years to get it back on a relatively stable basis. We've got major industries collapsing and countries going bankrupt.
While we wait for that to happen, it's probably a good idea to spread the stimulus out over a year or two. If you over fertilize your garden, you will kill it.
I don't think it is fair to characterize all the spending in the stimulus plan as:
the Democrats are using stimulus as an excuse to spend money on things they want to spend money on.
Sure, they're spending on plans they like but they are also spending on aid to states and unemployment benefits and food stamps. One of Obama's campaign promises had to do with creating green jobs; so why not include funding for them in the stimulus package. If you believe that the best future for America is to get off oil and into alternative fuels, then that type of spending is about the best there is.
It's a lot better than giving it to bankers. And we may get a stronger, more resilient economy out of it when we finally recover.
Liberals want to spend money on projects that they think will be more valuable than the equivalent usage in the private sector.
I think that's overly generous. For example, after the failures of the past few decades no one really thinks we can fix education in this country by throwing more money at it, but that's one of the biggest items in the stimulus. This is most likely because the NEA is a strong special interest group and critical to producing more young socialists.
Shocked by the lack of civility of the pro-stimulus crowd? You mean Paul Krugman, De Long retorts about the truly shocking contributions from Fama, Cochrane and Barro that ignore economic principles they surely know. You are right, Krugman is not making easy for us to like him... but honestly, given that the conservatives are blatantly getting in the way of the stimulus because they think that it will lead to a permanently larger government (which is true, and unfortunate to some degree but necessary to a greater degree). But I would take lack of civility over dishonesty in an adviser ANY DAY. And when Warren Buffet begs us to do anything, then I say conservatives stop playing ideological politics and start becoming constructive. If Marty Feldstein can, I am sorry but every reasonable conservative/libertarian can. So I appreciate Megan's efforts here despite her skepticism but she has to decide which one of the three "good,fast,big/expensive" she has to drop and she herself can't decide which one. Yes, according to the CBO, Obama will not spend fast enough. But then she wants good projects, not Democratic wish lists. We need to calculate whether its better to put off some spending for 6 months in order to put togethr better projects, or spend asap on less productive projects. Calculating ERR is notoriously difficult I get it but I guess that is what Christy Romer is doing.
Chris,
How about this: pick a sum say $850B - split the money 60/40 amongst the the House and Senate Dems and House and Senate Repubs (500B D/350B R) and let them spend it on whatever they wish. Surely it will allow each side to pay off their supports quickly, without letting the inter-party fighting slow it down.
If the R's want a payroll tax holiday - let them find away to drop 350B of the 900B or so we currently collect.
Surely, that setup can be no worse than spending some of it on 2011 and 2012.
Thanks, Lorenzo & Josh Lyle. I am wondering where else the proposal has been aired, since my husband (no blog reader he) had also seen this suggested somewhere, and could not remember any objections being raised either.
How about this: pick a sum say $850B - split the money 60/40 amongst the the House and Senate Dems and House and Senate Repubs (500B D/350B R) and let them spend it on whatever they wish.
How will they allocate credit/blame for the results like that? What will they tell the voters at midterms?
You have to keep what's really important in mind here.
And the arguments by Krugman et al ignoring the economic arguments they surely know too.
Robert Lucas said:
"MV=PY, and when M and V drops, PY must drop. The unsolved question in macroeconomics over the last 30 years is the the split in P and Y."
Yet DeLong insults him.
Most, but not all, modern economic theory and empirical work says that it is probably P, and most of that work also says that fiscal stimulus is not likely to have a big or lasting positive effect on Y.
Most of the work argues that changes in interest rates can manipulate prices in order to change Y. Or that influencing inflation expectations may influence Y.
I don't know the models in the central banks, or the Treasury, so I cannot speak to that.
The bottom line is that we really don't know what the short run effects of increased government spending will be-except that they will move resources (some unemployed, some employed) to new uses. I think that the long run effects will be negative, but perhaps I am wrong-there may well be lots of valuable, yet unfunded public goods to be supported. That is not an argument about stimulus though, it's an argument about the appropriate long run level of government.
I think we're being a little unfair to the party in power. First, if the Democrats do nothing, they're dead. Even if the stimulus does nothing to get out of the recession/depression, any ruling party that sits and does nothing while people suffer will be annihilated by the voters.
Second, while digging holes and filling them in might be the best sort of stimulus (i.e. fast), the voters will heavily punish anyone who is seen as 'wasting' money. Since they're not going to understand how a stimulus is supposed to work, the *only* political option that is in any way practical is (1) spending money (2) on things perceived by their supporters as valuable.
And if the Republicans were in power, they'd be doing exactly the same thing (unless they're politically suicidal, which they're not). The only difference is that they'd be valuing different things.
It seems a little bit rich to criticize politicians for doing what has to be done to survive in a democracy. They're putting the money to the use that they see as best, given the constraints of reality.
Here's a substantive misstep I wish you'd fix in this post so I can link to it and reuse: it's pretty clear you mean preventing fare INCREASES on transit and/or SERVICE cuts. Preventing fare cuts would be anti-stimulative, or - as I prefer to call it - depressing.
Sure, they're spending on plans they like but they are also spending on aid to states and unemployment benefits and food stamps.
As a resident of California I hope to hell they won't spend it on "aid" to my state. The state budget went up 40% in the last five years, and federal money is only going to reward the worst kind of fiscal behavior. I wouldn't want it even if the money was free and didn't come from taxpayers in other states.
Just six months ago, if you'd said to me, "Emit hguorht drawkcab gnilevart mi pleh!" I'd have thought you were crazy.
While the payroll tax holiday (or at least a reduction) is a very good idea, I think something needs to be done for people who are not working at all-- like extending unemployment to pretty much everyone who is out of work but wants a job. Right now only a fraction of jobless people qualify. I'd eliminate pretty much all the rules for the duration of the current crisis. OK, I'd keep a rule that people who are were fired because of criminal activity at work would not qualify, And anyone who quit voluntarily would have a 90 day waiting period (to avoid the small risk that people would quit work to go on the dole). But that's about it. Main benefit (apart from humanitarian concerns): you can be fairly certain all that money would be spent, not saved or horded.
No, Megan, WWI did not get us out of the depression. Check the numbers. Income per capita was recovered in 1937 and growth rates had averaged over 5% since 1033. Thanks to a premature attempt to raise revenue income fell again in 1938 but 1939 was again above the 1929 level.
No one has answered the question of what would be wrong with removal of the payroll tax
Yeah, I'm a little disappointed in the spending masquerade. As normal recessions go, I'm anti make-work, but I was supportive because the gravity of the situation.
I was imagining a stimulus that essentially offered budget fills for every local and state govt (save existing jobs) and offered jobs, however marginal for anyone with 8 hours per day to spare. I thought the D's would be more creative. And the R's are no better offering up the Pavlovian like tax cut response. I guess it's harder to spend 800B responsibly than anyone thought.
On the WWII as depression buster, I've purposely stayed away from that reasoning because it means our lack of creativity leaves us with a Nintendo like reset. You know the one...you don't like the point you're at in the game so you just erase all of the progress you made and start over by hitting reset (this was before PS.)
Anyways I refuse to accept as the only option, a process where we kill massive amounts of men across the globe and obliterate trillions of dollars of assets to reset.
k1
ryanculver.blogspot.com
To what extent does it not matter that the stimulus spending isn't "fast"? I mean, if I am Caterpillar and I know that the stimulus bill is going to raise the demand for back-hoes over the next 18-months, aren't I going to ramp up my production now, even before the actual stimulus money is spent? (Assuming of course that I can get the bridge loan to cover the costs.)
If specific industries know that the money is dedicated to certain projects, why are we fretting that those projects are on a 24-month horizon rather than a 6-month horizon?
Can't disagree with the goal to spend well! We all agree with that. And to the point that democrats fund stupid pet projects, I completely agree.
And both Obama and krugman have agreed with this sentiment, and it does seem the stimulus that Obama's team has asked is trying to get the most bang for the buck.
In terms of how long to spend, krugman made the point that in 2011, the cbo predicts 8% unemployment, so some stimulus that hitsxoverxthe next few years isn't necessarily a bad thing.
As far as the incivility, u need examples. Delong is one, but he's always been that way. Krugman doesn't seem do much uncivil, as telling it like it is. And for such a broad brush being used, you need many examples- the majority - to back ip the strong claimu r making.
At any rate, seems to me u r correct about the 'stimulus' of WWII being so large, and there is nothing of that scalexbeing offered now.
Krugman also thinks there isn't enough stimulus, and is worried the positive effect will not do what it should.
Myself, I think the benefit is two things-
A. Lessens the pain - as roosevelt did in the thirty's
B. Gets nation buy- in to finally create a 21st century electical grid/ efficiency programs.. And tax cuts will NEVER do that.
I just bought a full set of skis, boots, poles, etc. for my wife and myself. So my stimulus contribution is over. But I bought them in Austria and paid 20% Austria sales tax for them...
Pushed enter before getting to the good part...
I just bought a full set of skis, boots, poles, etc. for my wife and myself. So my stimulus contribution is over. But I bought them in Austria and paid 20% Austria sales tax for them...
Since I helped the Austrian economy, maybe they'll be more productive and able to buy more American debt.
If you use the odd reasoning of all these spend-and-stimulate proponents maybe we should stimulate the foreign countries so they'll buy more Tbills! I wouldn't be surprised to see Pelosi suggest that next time.
"We had to increase foreign aid to X, Y, Z because..."
Isn't there a law of diminishing returns to the tax cuts though? I mean, we've been cutting taxes every few years for over a decade now.
At what point do these cuts have little to no effect, particularly if individuals and businesses simply pocket the money and refuse to spend it (or just pay down the debt that everyone seems to have)? It seems to be generally accepted that the last "stimulus" didn't really stimulate. So what will another round of tax-reduction-based stimulus really do?
Some targeted small business cuts (based on hiring and spending) seem in order, but beyond that?
I say "Spend!" Federal government. Spend heartily!
Megan writes: "It is a commonplace among conservatives that liberals just want to spend government money, as much as possible on almost anything they can find. This is, of course, not true. Liberals want to spend money on projects that they think will be more valuable than the equivalent usage in the private sector."
Wrong. Liberals want to spend money on projects that they think will be valuable to their interest groups.
"Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before." -- Rahm Emmanuel
To what extent does it not matter that the stimulus spending isn't "fast"?
If you think the stimulus plan is going to work, all that time-lagged spending will just cause inflation as excess money gets pumped into the system when it's no longer needed for stimulative reasons.
If you think the stimulus isn't going to work in the short-term and we're going to continue to need stimulus out 2 years from now, then there's no need to rush it all through in the next two days. Separate out the short-term stimulus from the medium-term stimulus and take the time on the later spending to do it right. At the very least, in a year or two we'll almost certainly have different priorities for that money.
WWI did not get us out of the depression.
Er, true...
growth rates had averaged over 5% since 1033
I wish. We'd have hit the singularity by 1500. Reminds me of Civ II games where I'd get a lucky start and end up with the SETI program in the Middle Ages.
No one has answered the question of what would be wrong with removal of the payroll tax
Nothing at all. But most liberals will be opposed to anything that exposes the non-linkage between payroll taxes and Social Security benefits.
"Paul Krugman in the story of the Capitol Hill Baby Sitting Collective."
I love that story. I also love the fact that none of them, including Krugman, recognized that the same outcome would occur if they just lowered prices. Freaking Keynesians.
If they want me to keep spending why are the banks jacking my Credit Card rates up 4x, with the result of REDUCING my spending and Increasing my saving?
"And if they don't spend the money you give them, there's absolutely no point to give it to them at all."
Can someone explain this to me? If people get money and use it to pay down credit cards, that frees up bank funds which can then be lent to someone else. Isn't this a liquidity crisis, and aren't we trying to get banks to lend? Yes, the banks might put it all in T-bills, but at some point, to have an ongoing business, they need to do more. How long can they expect to operate at negative spreads?
And if people start saving more, won't many of those funds then be invested in research and development and other projects that can also create jobs? Why is it bad to create jobs in productive ways that will help us in the future, especially since we'll need money in the future to pay for this spending orgy?
You can argue marginal propensities and the multipliers from various types of stimulus (what gives more bang for the buck), but to flatly say that it won't help at all for people to pay down short term debt and invest/save more doesn't seem justified, to me.
Ultimately, the main benefit of the stimulus seems to be to convince people that it will work, so they'll go back to normal. We want a big number to help with the illusion, because it's the illusion that will really do the trick. The proposed package doesn't have a very sound economic basis, but we're pretending it will work, and work quickly, so that people will have faith. If we just want to shock people into living again but don't need a sound, logical basis for the method we choose, then why not choose a cheaper method and just market it thoroughly?
The answer, of course, is that politicians want to do this spending for other reasons.
I'll second Ann's question. Not only does it seem like paying down debts would help the liquidity crisis and improve banks balance sheets, but it also seems like reducing consumer debt load would help with consumer confidence.
I have no problem with the 'we won so we decide' mentality that congressional democrats are displaying. They have the votes to pass the legislation without the GOP, so let them own it.
If the stimulus works as advertised, I'll be happy to give them credit for it.
Someone in the comments here a week or so ago wondered why we didn't just declare a payroll tax holiday. ..
I'm speaking as an economic novice, but are there any other reasons not to do this?
For one thing, the Democrats have just spent the best part of the last eight years denouncing the irresponsible Bush tax cuts. So they would look strange if the first thing they did was follow his example.
For another thing, there were already plenty of things they wanted to spend more money on, so they are not going to refuse an opportunity to do so.
Politics is not about rationally finding new policies to solve the latest problems. Politics is about finding rationalisations to justify implementing already-decided policies by claiming they are solutions to the latest problems.
A true "inversion of the old engineering aphorism" would be bad, slow and expensive. Unfortunately, this stimulus bill has all three. At $900 billion it is certainly expensive. The fact that most of the spending doesn't occur until 2010 (and some as far out as 2114), suggests its too slow. And suggesting that a "stimulus bill" contain funds for the National Endowment for the Arts, reconstruction of the National Mall and for converting televisions to digital suggests that it is bad.
Since I helped the Austrian economy, maybe they'll be more productive and able to buy more American debt.
Sorry, but we have already spent it on a dozen other useless things.
I think this blog can easily be summarized as: the losers whine.
People in this country voted for the current administration while the country was sinking into the worst crisis since the Depression. They clearly had choices: McCain, who would have done a much more Republican approach, and Obama, who would take a much more Democratic approach. They chose the more liberal choice, knowing that the economy would be the big issue for the next four years.
Deal is done, folks: move on.
I'm with Tom West on this one. There's a point where we need to move on from the Depression and deal with the economy we have now. The Obama plan is not only trying to jump start employment - hence consumer spending and then tax revenues - but he is also trying to do so in a way that creates either temporary and/or (hopefully) permanent jobs in these United States. We've already experimented with tax cuts to the wealthy and the resulting US investment and job creation was meagre. Arguably, most of the the money went directly or mostly indirectly to China, India, etc. in the form of investments there, which led to cheap imports that supported our unsustainable consumption driven, no-savings economy. The Obama argument, I think, is that we need to invest in physical (energy, transport, etc) and "software" or services (health care and info, education, research)investments tht are rooted here in the US. What I hope is that the Administration will gradually design these to attract investors and companies ni the form of public-private partnerships that result in new investments in the U.S. not just overseas. Otherwise, we're cooked as a nation. The GOP doesn't understand this at all and simply sees mindless tax cuts as the only solution.
Bottom line: globalization didn't exist in the 1930s-40s - quite the opposite - we had a Smoot-Hawley (GOP) tariff war going on, which destroyed international trade. Let's do away with the reductionist references to the Depression as a poor model for present conditions. We're all experimenting now. Oh, and monetary tools when you are at 0% interest rate....hmmm not so much.
It is clear that there are elements of the House bill that may be stimulative and there are elements which can be more fairly characterized as simply fulfilling Democrat dreams. It is also clear that many of the latter elements are really the down payments on permanent entitlements -- hardly the stuff of stimulus. Whatever. After eight years of Bush persuading us that the pleasure of spending was the only elixir needed to keep our country prosperous, why should we change now?
I have a strong gut feeling that merely opening the taps to credit will get us spending again will not get us going again. Last summer the conventional wisdom was that the economy became constipated as a result of the unavailability of credit (lenders). It is more likely, unless the government actually calls olly olly oxen free on consumer debts, that when the financial system has digested the laxative of government bailouts that it will discover a lack of demand for credit (borrowers). But it is incredibly reasonable that the generation of leaders that we now have, who have never saved anything or invested in anything they couldn't live in while they borrowed money to pay for it, would be so oblivious to the ultimate consequences of borrowing -- paying off the debt.
We now have more Keynesians than reborn Christians. I just wish one of them would suggest, as Keynesian Economics requires, how and when we will repay our loans. I know, a mere detail.
For all I know, the current stimulus legislation will work beyond our wildest dreams. But Democrats can count on the fact that two or four years from now voters who are still in economic distress will look to see how every dime of this stimulus package has been spent. Just like voters looked back on the last big thing the country got rushed into -- the war in Iraq. The Republicans were arrogant and short-sighted when they had the ball. For all of their blather, the voters sorted it out and voted them out. Having the votes is not the same as having viable ideas. The Democrats have made it clear that, as far as they are concerned, it is "my way or the highway."
If their ideas work, they will deserve undivided credit. If they don't, they will have no place to hide. Great theater -- bad politics.
The great Jeffrey Sachs said it best today in the Guaradian:
"Barack Obama's ... macroeconomic stimulus may or may not cushion the recession... but is... reorienting the economy from private consumption to public investments..."
It's not about ending the recession, it's about ending capitalism as know it; less freedom and more central control.
By approving a stimulus package that was larded up with liberal wish-list items, Obama just convinced the Republicans that he's just another tax and spend liberal, notwithstanding all that cr@p about change.
And while Obama may feel that, "I won," so did every single repub congressman, and each now believes that he/she has just as much of a mandate for his/her ideas as Obama has for his.
You can now kiss off any hope of bipartisanship.
1. As to how we're going to pay for all of this in the long run, that's perfectly obvious -- we're going to raise taxes on the wealthy. They've accumulated vast amounts of money over the past eight years while the real wages of most Americans have fallen -- it's only fair to make them cough some of that up. Since tax increases have very little effect on the economy (tax cuts certainly didn't keep us out of THIS mess, did they, nor did they ever provide the level of growth that we had under Clinton after his tax increase), I expect that if the economy stabilizes some time in 2010, Obama will call for a revision of the Bush tax cuts (which expire in 2011 anyhow) to protect those for taxpayers under $250,000 in income but restore the old Clinton rates for those above it. The only reason he's not doing it now is because the stimulus package has priority over long-term financing, and he's trying (to no avail, it appears) to make that a bi-partisan process. And if the economy DOES stabilize before the 2010 elections, it seems clear that the Democrats will receive enough power to do whatever they want in this regard -- blue dogs and/or Republicans be damned.
2. All of the above explains why the Republicans feel there is no reason for them to cooperate with Obama. That base is going to be asked to foot the bill for much of this later on in Obama's term, and his success in turning the economy around is a key part of building the political support for that. It's an enormous gamble for both sides. If the economy doesn't turn around by the 2010 elections, Obama may not get the troops he'll need, not get progressive tax increases, and the deficit will then have to be funded by taxes on everyone. If it DOES turn around, the GOP is looking at a minimum of six years in the wilderness, if not much longer.
You libertarian ideologues are unbelievable. The logic is extremely straightforward.
Deflations are self-fulfilling since, as prices go down, so do profits and, hence, economic growth.
The only way to restore "confidence" is through increasing spending, so that prices can be propped up.
Individuals RATIONALLY wish to save and not spend in periods of economic turmoil, particularly when the financial system does not appear stable and there is little liquidity in the system.
Hence, the government needs to step in and stimulate the economy through direct spending on, hopefully, long-term public goods type projects with immediate prospects for employment, etc. In other words, pork.
This is it folks. Neither individual nor government discipline will do the trick.
Deal with it.
The only way to restore "confidence" is through increasing spending, so that prices can be propped up.
Yes, that's straight Keynesian theory. The problem is that we've also seen examples in history where money is infused, and the people "refuse to become confident", particularly in times when unemployment is rising.
Or, if you prefer, it's entirely possible to spend the money in stimulus and the effort fails. (See "1970's)
Of course, this particular package has no more than 80-100B in actual stimulus, so the point is moot. Throwing money at STD prevention, Head Start, and the National Endowment isn't stimulating anything.
Khadijah,
I absolutely agree that there is no guarantee a stimulus package will work. But there is also no other way to halt a deflationary spiral than by spending. And only the government can spend directly in amounts required, despite the extreme risk. Relying on shady neoclassical microfoundations won't work in any case, though, because individual consumers, lenders, and producers do not evaluate risk the same way in times of crisis as they do in a market upswing. Thus, unless you actually want to move to a purely command economy, Keynesianism is the only way out.
"repainting all the faded yellow lines on highways" gets my vote! Start with Rte 112 from Goshen to Ashfield, Massachusetts please!
This is NO time to borrow a trillion dollars to hastily advance the change agenda.
The point was to get one million construction workers back to work. Repainting this faded yellow lines is a good start. Will keep at least one paint factory going, too. Will restore my confidence so I start spending the money I have again.
This stimulus bill is DESTROYING my confidence that the Democrats (besides the Blue Dogs) ever had a clue as to how the real economy works.
Idolike the federal fleet replacement, but that doesn't seem like enough vehicles. Wouldn't it be cheaper to give one million vehicles to anyone who has one at least ten years old?
This is it folks. Neither individual nor government discipline will do the trick.
Deal with it.
@Unbelievable
This doesn't answer the question Megan asked. We know there's going to be a stimulus package. What needs to be explained is why we're opting for one that will take a couple of years to kick in.
There's a Yes, Minister quote that I think fits this fiasco exactly:
"If you must do this damn silly thing, don’t do it in this damn silly way."
BTW, "throwing money" at public goods programs like Head Start, etc. does have a redistributive effect, though somewhat minimal. And, of course, there is also the little matter of long-term human capital/infrastructural investment, which help provide returns on these expenditures over the long term. They are not perfect nor are they risk-free, but they are better than nothing. I have yet to hear a compelling case as to why we should allow millions and millions of people to simply lose their jobs so that, at some point in a long distant future, we can feel good about our financial discipline during the recession. Take a little responsibility, alright?
@InCheck,
Good point, but there was an article in the Times this morning pointing out that, actually, about 75% of the stimulus bill might be spent by December, since the initial figures did not take into consideration the medicare, tax rebate, etc. dimensions, which would produce relatively quick benefits for consumers.
@unbelievable
If that's true then we've all expended a lot of wasted energy on this thread. Those numbers don't square with the ones Mankiw reports on his blog though (i.e 8% in 2009). That's a pretty big discrepancy.
http://gregmankiw.blogspot.com/2009/01/cbo-on-fiscal-policy-lags.html
btw - I'm glad to see I'm not the only insomniac.
Congratulations on what I think is your first Real Clear Politics link!!!!
As to the article, I'm a registered Dem, and even I think you have a point. But the really scary part, is that when you really think about, the US Government is really very weak in what it can do as a response to this.
I wonder if Paul Krugman has borrowed huge amounts of money and spent it already? If he hasn't done it, then why should we? If he doesn't trust his own theory for his own household, then why should we trust his theory for our country?
The answer is that of course he hasn't done that, because his theory requires that many people behave differently than each person. And yet when the many are made up of individuals, how can that be?
Krugman's theory has no legs. That dog don't hunt.
@unbelievable: indeed, your nick is too true. Essentially, you're saying that prices will fall and fall, and fall and fall, spiraling ever-downwards, and NOBODY, BUT NOBODY, NOT EVEN THE SUPPOSEDLY GREEDY PEOPLE WHO SUPPOSEDLY GOT US INTO THIS, are going to start buying again.
Sorry, but that's an utterly fantastic, simply unbelievable scenario. It's a movie plot. Requires suspension of disbelief.
Russell Nelson: what is good for the individual is not always good for the nation. A key failing of the current strain of conservatism is conflating the two.
Excellent article, Megan, though I disagree with some points.
One problem with the stimulus package is that nothing we do is going to kick in, in any substantial amounts, until late 2009 or early 2010. Krugman's argument (to which I subscribe) is that tax cuts will never kick in (or little of it, perhaps) for two reasons: individuals will not use the tax cuts for consumption, and the multiplier effect will be less than that for public spending.
Given that we really can't force an immediate salutory effect, what can we do? Someone in a prior post alluded to it: generate confidence in both the public and private sector. As a business owner, I can tell you without question that signs of economic improvement, infrastructure spending and credit easing will cause me to reconsider layoffs (it's expensive to train new employees), make more capital expenditures, and continue with R&D. This is true for Intel, Caterpillar, Pfizer and a hundred other large firms.
My two cents.
Since we all agree that World War II got us out of the depression, why not replicate it with a civilian civil service draft?
Since we all agree that World War II got us out of the depression, why not replicate it with a civilian civil service draft?
That's likely insufficient. It wasn't just that people were drafted into the armed forces; factory lines were spun up to produce war materiel - which were then promptly destroyed and needed replacing, the workforce was expanded (Rosie the Riveter), basic goods were rationed, all spare money went to war bonds, lots of labor was killed off, all of the industrial competitor nations were bombed into dust.
A civil service draft would only replicate one (and I'd argue one of the smaller) effects.
Someone in the comments here a week or so ago wondered why we didn't just declare a payroll tax holiday.
This is a good idea, but doesn't address the current economic issue...
This problem started, and will end, in the Finanical sector. Our recession is not about a lack of productivity or competiveness - hence the global nature of the slowdown. Our recession is about instability in the financial sector.
I would much rather have all of this money going directly to the banks, who then can improve their balance sheets, in order to return some sort of normalcy to the credit markets.
You could say that we already did this with the TARP, but my question is: why stop there? Banks lend to everyone. They help us buy homes and cars, and help businesses make payroll. Additionally, infusing this money into the banking system through some vehicle is most likely a fast process that can very quickly get the economy moving again.
I don't understand why they abandoned the original idea of the TARP - troubled asset purchases. Isn't this still a huge problem? Has it been affected by recent events at all? Why do we think that if we spend a ton of money on infrastructure and education that somehow the balance sheets of our country's (and our world's) banks are going to improve?
Marie, such examples are far and few between. The standard example, lighthouses, was proven wrong by the discovery of 19th century lighthouses in the Netherlands which were voluntarily paid-for by the harbor association, and nobody was forced to join the harbor association (just as nobody is forced to join a chamber of commerce).
The problem here is simple: credit is scarce because nobody wants to lend and nobody wants to buy. Why not? Because the Federal Government is threatening to borrow and spend a TRILLION DOLLARS. If you are bank, would you sell your product if you knew that an A-grade customer was going to be spending a TRILLION dollars soon? Of course not. Even if they choose not to buy from you, the price of lending is going to go up. It can't help but go up, not when a TRILLION dollar buyer is showing up. So nobody is lending now.
And nobody is buying anything now. Why would you? You want to be positioned correctly for the TRILLION dollars which is going to enter the market soon. You don't want to invest your money in something, only to find that the market has shifted and your investment is toast.
The failout is not the solution to our problems. It is the CAUSE of our problems, merely by being threatened. Why is this not obvious to everyone?
Russell, with all respect, I don't understand your argument. In the first place (even in caps), a trillion dollars just isn't that much money. But anyway. Banks aren't lending because they don't have to. They can enhance their balance sheets, acquire weaker banks, and generally ride out the current uncertainty. They are face the same marginally unsound customer base as they did 3 months ago (in the case of refi'ers, even more marginal).
Meanwhile, the Fed isn't "borrowing" anything, they are using money that is basically the net present value of future tax revenue. By investing in banks (literally), instead of buying toxic debt at inflated prices, they enhance the banks' ability to loan by the factor that is their leverage ratio. The problem is (as stated above), the banks aren't keen to lend, and the lack of strings on the bailout ensures that they'll stay that way.
As for buying: Buying can take the form of consumer or industrial purchase. Both are severely hampered by the lack of credit. While this may be morally satisfying in the case of debt-ridden consumers, business need credit to smooth out the assemblage of receivables, periodic purchases, capital investment and other financial events/decisions. The real question for the bailout is whether it will spur purchases or not. I would like to see a result whereby we end up with more industrial investment and more public assets.
How exactly is the bailout the cause of our problems? I'm serious, I really don't understand.
Regards,
J
It is a commonplace among conservatives that liberals just want to spend government money, as much as possible on almost anything they can find. This is, of course, not true.
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Wrong. Don't go using the past 8 years as an excuse to rewrite all of modern history.
The only time a liberal will claim to be fiscally responsible or in favor of limiting government is when a Republican's in office.
Am I the only person in the world who finds it curious (or sad maybe)that virtually nobody here or anywhere else sees themselves or their behavior as the proximate cause of our current problems? And that virtually nobody here or anywhere else can suggest anything that they might personally do (other than make suggestions to others as to what they might do)to change things.
I'll tell you how I think you will be able to identify a truly great leader. A truly great leader will start by identifying the things that he can personally change in his/her own life before setting out to exhort everyone else to change. And he will likewise lead those who would follow him to do the same.
We are certainly skilled at finding fault in others and solutions in changes they could make. We are utterly inept at looking into the mirror to find answers.
Physician! First heal thyself.
Jeffrey, why do you think banks don't have to lend their money? How do you think they make money?
The Fed can't create money from nothing. Or, rather, they can create a new number to put on the front of the existing money, but that's the CAUSE of this problem. Hair of the dog that bit ye is what Greenspan did in 2002, and you can see how well that worked.
Greenspan printed up new money before 2000 because he thought people were going to hoard cash (because of the end of the millenium == the end of the world, or so some people thought). They didn't do that. They spent the cash, which lit a fire under an already heated economy. It crashed, and rather than let it crash, he printed up more money (this is just a metaphor for a lower interest rate == more lending == more cash creation on the part of banks). That money chased houses instead of Internet businesses, everybody thought they were living in their own personal bank, and everybody who bought in the last four years is fucked (that's a technical term) because the amount on their cash got a higher number on it, and because they all borrowed money to do this with no money down, THEY are just losing what little principle they managed to accrue. Instead, the BANKS are fucked (which should have been an obvious consequence of the end of the housing bubble with no money down loans; no, I didn't see it coming).
The Fed can't fix this problem. The Fed CREATED this problem (with the help of Congress and the banks, oh, and the people themselves.) In order to STOP it from happening ever again, we need to abolish the Fed, and move to a system of a fixed amount of money. With electronic money, you don't have to worry about a shortage of coins, as happened in the 1700's in England (thank you Isaac Newton).
You still with me? Do you need to do some reading to catch up?
Russell Nelson: if your neighbor looses his job and has to sell all his possessions at fire sale prices to pay for his childrens' health care, it is a good thing for you because you get you new plasma TV for a song. However, it is a bad thing for him and a bad thing for society in general because he is going to end up on the public welfare roles.
In order to STOP it from happening ever again, we need to abolish the Fed, and move to a system of a fixed amount of money.
Sure, that would be terrific. We could have an economic tsunami every decade or so, instead of every 70-80 years or so as we have lately.
The reason that they called it the "Great Depression" is because it was the largest of many depressions that the US had experienced prior to the 1929 crash. The crashing of asset bubbles of their day would lead to runs on the banks, which meant bank failures and massive wipeouts. Read your history books; it wasn't pretty.
Thankfully, these implosions are no longer routine now that someone had the good sense to reduce the role of gold in the monetary system. Since the gold standard played a role in virtually all of those prior "panics", I'm not terribly nostalgic for it.