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Economic Stimulus on The Cheap
For US senators, decreasing the size of the stimulus package may be clever politics. But it's not smart economics
The moderates in the Senate of both parties are very proud of themselves for having negotiated a slimmed down version of the stimulus package. They apparently knocked out more than $100bn in spending, trimming the package to less than $400bn a year.
This led to a round of self-congratulations at what this crew considered a major accomplishment. Those of us who were not a party to the negotiations, and who don't share the peculiar thought processes of the moderate clique, see the primary outcome of this effort as having taken one million jobs out of the stimulus.
The basic logic is very simple. Stimulus creates jobs by spending money. Those who are not in Congress understand this. If the government pays someone $30,000, then that person will be employed. They can be repaving a road, weatherising a building, teaching our kids, providing healthcare to the sick or replacing the sod on the national mall.
The government can employ people to do these jobs, as well as thousands of others. Ideally the jobs they perform will provide real benefits to the public and lasting benefit to the economy, but the main point is to get people working.
This is why the utterances coming from the centrist cabal were so bizarre. Many of the senators indicated that they considered healthcare, education or some other type of spending to be very important, but that the specific category of spending did not constitute stimulus.
In fact, the reality was 180 degrees the other way. Any spending is stimulus, in the same way that any type of bread is food, the only question is whether it is also useful spending. If the centrists thought that additional spending on healthcare, education or some other area was useful, then this should have been a no-brainer for them. They could increase growth and employment with useful spending. What else could they want?
In addition to not grasping the concept of stimulus, these folks still don't seem to appreciate the seriousness of the downturn. The loss of almost 600,000 jobs for the third straight month should have been enough to convince any remaining sceptics that this is really serious. (Actual job loss was probably even more than the data show). When Alan Greenspan sinks the economy, he doesn't mess around.
It's perhaps worth a quick recap of the numbers. The collapse of the housing bubble has directly trimmed approximately $450bn a year from demand due to the contraction of housing construction. The loss of what will soon be $8 trillion in housing wealth will lead to fall in annual consumption demand of more than $400bn through the housing wealth effect. The loss of $7tn in stock wealth will lead to further drop in annual consumption of $250bn. And the collapse of the bubble in commercial real estate is likely to reduce demand from this sector by close to $150bn a year.
In sum, we can expect a loss in annual demand in the neighbourhood of $1,250bn. Against this plunge in demand, the Senate moderates want to put up a stimulus package of less than $400bn, much of which will go to tax cuts that have limited impact on demand.
This would be laughable except that there is nothing funny about the outcome. Millions of people will needlessly go unemployed. People will lose their homes and families will break up. Millions more will be hungry and cold because they can't afford food and heat.
Perhaps the worse part of this story is that none of this need to have happened if our concerned centrists had bothered to notice an $8tn housing bubble. If they devoted half as much effort to containing the bubble as they are now to obstructing an effective stimulus, we could have avoided all this needless suffering.
But, shame has no place in the corridors of power in Washington. Hence, the drive to dilute the stimulus. Like the jogger who finds a shortcut to reduce his mileage, the centrist senators are proud of themselves for cutting back the spending in the stimulus. That may be cleaver politics, but it is not smart economics. And the country really cannot afford too much more by the way of stupid economics from the folks in power.
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18 Comments so far
Show AllYou do not really need to spin and complicate the explanation to see what has happened, what is happening, and what will fix it (not short term, but long term; it's too late to avert more short term pain):
1) Who gave us the foolish notion that we (as a nation) could consume more than we produce, indefinitely?
2) That the decimation of jobs by insourcing and outsourcing within a growing population would not eventually lead to widespread unemployment?
3) That allowing us to buy things on credit (made elsewhere or, in the case of houses, built here) that we could not otherwise afford--at exorbitant interest rates--would not lead to loan defaults and foreclosures?
4) What the hell happened to common sense??
What is presently proposed will not work long term because it:
1) Does not allow for fair trade, spun as protectionism. Does not address insourcing (see H1b and related visas) or outsourcing (we are seemingly not 'allowed' to stipulate that all goods bought for stimulus projects are made in the US, due to fear of 'trade wars'). Thus we will continue to consume more than we produce.
2) Due to (1) unemployment will continue to rise.
3) Credit card defaults will accelerate, bringing even more banks and financial institutions to their knees, as home foreclosures continue to esculate.
4) If China and other nations cease to supply us with goods, shortages will ensue--at least short term. This most likely will lead to social unrest and rioting.
5) Obama and the Dems will be blamed for the worst of it.
Protectionism is part of what caused the 1930's depression. We erected trade tariffs. Our trading partners responded in kind, causing losses in the manufacturing industry. Things may be different now, because our most important export (armaments) would be completely untouched by foreign tariffs. We don't allow China to buy our arms anyway, so there wont be much hurt on our part from tit for tat reprisals if China refuses to by made in USA by erecting tariffs.
However... , if foreign tariffs wont hurt us so much, having China sell $US will probably ruin us in the short term, and if the dollar loses its position internationally, that could ruin us permanently. Also, if we lose global hegemony, our arms trade may suffer. Our arms are probably not good value for money as it is, and if our "friends" no longer feel compelled to buy US armaments, and they buy from our competitors, that will ruin us also.
Here is one plan to improve our economy in the short term:- Open up arms trade to China, making them an economical choice using manufacturing subsidies. China is sure to buy plenty.
There are lots of types of protectionism. One type practiced by the Chinese is to peg its currency to the dollar in such a way as to undervalue it, so they can sell more goods here. You are correct, this is not the 1930's, and jobs are leaving our shores due to an ability to shift capital (workers cannot shift to different locales as easily) that was not present then.
If the trade agreements truly lead to higher wages elsewhere (i.e., leading to equalization in the standard of living), that would have been a good thing, and presumably equalized trade, rather than create such an imbalance; instead, these agreements have been used as a means to maximize profit for a few and a 'race to the bottom' for the worker. Definitely, a kind of protectionism for the short term profits of the corporate elite.
In essence the United States has allowed its manufacturing base to be given away for next to nothing (excepting perhaps cheap wal-mart type goods), which we have been purchasing in exchange for credit debt. Great deal, eh? The race to the bottom is proving to be bad for workers everywhere, and economies in general. This short-sighted approach based on greed is showing its true colors. I wonder if even the elite expected it. You cannot go on forever impoverishing the many for the profit of the few without some kind of negative backlash.
Now Obama tells us that the low-skilled jobs are gone forever, and we need to better educate ourselves for those 'great' jobs to come. Haven't we heard this somewhere before? Many of us DID retrain, only to have those jobs we retrained for shipped away as well! And I'm not sure some common sense regulation equates to protectionism, especially given that the present 'free trade' agreements haven't lived up to their promises. For example, what price does China ultimately pay for lax environmental regulation? Would we be willing to sacrifice our air and/or water quality as they seemingly are doing?
Another thing is that we need all kinds of jobs for all kinds of workers, not everyone will be a scientist, accountant, engineer, or IT specialist. There needs to be opportunity for all levels of employment. The BIG LIE we hear is that we're losing jobs because to foreign sources because there are not enough qualified workers here. What they mean is there are not enough qualified workers to work for a fraction of the local competitive salary.
Big corps and Wall Street interests use the word 'protectionism' like the Bogey man to maintain a status quo so they can continue to rake in the profits at the expense of everything and everyone else. This is becoming abundantly clear as things quickly unravel.
If the final stimulus bill out of committee bears any resemblance to the Senate version the most politic thing Obama could do is to VETO it, because it won't work anyway---as Dean Baker and Paul Krugman and a bunch of other economists note--- and its failure will be blamed on the Democrats, they will lose seats in the Congress in 2010 and Obama will be a one-term president---if he lasts that long...
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"Obama will be a one-term president"
Agreed. In 2013, get ready for President Palin.
--
Eric Patton
Cincinnati, OH
ebpatton@yahoo.com
Ursa
Common Sense ain't so common.
These people are elitist. They don't worry about healthcare, credit card bills, their jobs (they will never get outsourced). They worry about their investments. They want their money to keep growing.
"The moderates in the Senate of both parties are very proud of themselves for having negotiated a slimmed down version of the stimulus package."
Yes, we saw the stupid sh!t-eating grins on their faces.
AH! The real purpose is becoming clear:
"5) Obama and the Dems will be blamed for the worst of it."
What patriots.
War is Peace; Freedom is Slavery; Ignorance is Strength.
Until we change the way money works we change nothing.
A huge portion of this stimulus bill will be immediately offset by cuts at the state level:
http://tinyurl.com/b6clzg
Check out
http://www.worldreports.org/news/194_geithner_to_launch_worlds_biggest_ponzi_scam
for another view on the shenanigans in Washington
you can't pay me to make you a burger, then turn around and charge me for a burger you make me in return...service-for-service is not workable...the only workable economies fundamentally rely on using the living planet as a resource for the production of raw materials, which are in turn refined, via frequently toxic processes, into other materials, which are then manufactured into parts, which are then assembled into products, which are then sold, and then serviced, and then either burned or buried at end-of-life, requiring (in the best capitalistic world) replacement by a new purchased product, assembled from parts manufactured from refined raw materials ripped out of the living planet...
The problem we are facing isn't a dying economy, it's a dying planet due to our economy...the economy could be revived instantly if we want to resume rampant destruction and toxification of what's left to destroy and poison...a short burst of activity it would be, then nothing...
It might have been better to have left the bill as it was before the Repub cuts, however, 7/8ths of it will do more good than nothing, which the obstructionists desire. It is not perfect, as President Obama admits, but how often do we see that in Congress? We do not have the money, but we did not have the money to invade Iraq either, which is part of the reason there is nothing left in the government till. If the rich were still paying the rate of taxes they were before the Bush raid on the treasury, we might be able to get out of trouble. It is said half a loaf is better than none, and beggars cannot be choosers.
dubet---
Brilliant. Concise.
Post-Marxist and Post-Keynesian and most certainly Post-Reagan.
"The problem we are facing isn't a dying economy, it's a dying planet due to our economy..."
If you're into copyright (which I am not), this is absolute speechifying and close to poetry.
We have been profligate and unwise and now the chickens are no longer crossing the road. To get to the otherside of what?
Am I to understand that you are suggesting absolutely no bailouts? You would not be alone.
-30-
Thanks, OleManRiver...I liked that line, too...perhaps I'll start using it as an occasional tag, if I remember, as there's this problem of maintaining focus, anyway...yes, I would favor no bailout...this is just stealing all the water before the well runs dry...I would favor, instead, a program funding food stamps, removing taxes and penalties for withdrawal of retirement investments, and reducing\forgiving mortgages...ha! What we need to do is get busy ripping up streets and parking lots, etc., start living in smaller houses or moving in together, and restoring natural environments so there are enough edibles for local populations...and hope climate and precipitation patterns don't change dramatically...and we'd all have to do it together...I'm afraid it's going to get pretty ugly...
Seriously, if Congress wants more jobs with less money, they need to assist certain innovative products (and not others) from Eureka! through the "valley of death" to production.
Products that cost a dollar or a thousand dollars to make aren't the issue. Look for products that cost $100 million to roll out. My energy-production targets are as follows:
1. Environmentally friendly geoengineering. The world needs to inhibit and to reverse the runaway Arctic methane release. There are real crud "solutions" out there like put a billion tons of soot in the atmosphere, and there are also some cheap solutions with little or no side effects. The classic would be a California law encouraging white roofs on houses, to reflect more light and heat back into space.
There is no free market for such inventions. Make one. Then a coalition of the world's governments will deploy a bunch of small, safe devices and save trillions. In the process Americans will have jobs.
2. Transit. The Eureka! ideas are out there, but the entry fee is $100 million. The government can step in, get auto/transit workers back on the job and break even or maybe make a profit.
3. NASA. The entry fee is higher than for transit, but the Eureka! is waiting.
4. Electricity production. This is the government's shining star. They funded experiments and renewable energy costs are being driven down now. May the best wind turbine win!
5. Electricity storage. No shining star. We need a bit more than a dimbulb here.
6. Electricity peak-load management. If we stop wasting power on those peak-power days, we'll always have enough to run the traffic lights. No blackouts. What's that worth?
7. The unthought-of category. Inventors are going to find new categories just because they're inventors. Right now, if it doesn't fit a bureaucrat's category the inventor can't go forward. Next time, the government should be more prepared. Of course that's what we said about FEMA.
However, the Senate in its wisdom wants to blow $50 billion to bail out the dead (in more than one context) nuclear power industry. Stop that!
When did radical right-wing conservative extremists become "centrists"?