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.

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

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.

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

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.

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

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