Posts Tagged ‘Stimulus’

A Generational Bargain (in which we are getting screwed)

Thursday, June 18th, 2009

Back when California’s looming bankruptcy was in the news, George Will wrote:

California’s perennial boast — that it is the incubator of America’s future — now has an increasingly dark urgency…California has become liberalism’s laboratory, in which the case for fiscal conservatism is being confirmed.

Will may be right about fiscal conservatism – but he’s wrong in laying the blame for California’s problems on liberalism. The fault in California, like the fault in America, is deeper – a refusal by the Baby Boom generation to make tough choices to create a sustainable world, economy, or government. Bill Maher summarized California’s trap best:

We govern by ballot initiative – and we only write two kinds of those: spend money on things I like and don’t raise my taxes.

California’s initiative system aggravated a tendency that has been dominant in American politics for some time now. The problem with California – and America – is a combination of two factors:

  1. a kind of accidental unholy alliance between liberals who push for more government spending to alleviate poverty and better the nation and conservatives who want to cut taxes – with neither group having the power or political will to be fiscally responsible at the same time as they push for their pet projects1
  2. the deliberate plan of the right-wingers who want to “starve the beast” – by which they mean encouraging the irresponsible system above of  increasing spending while cutting taxes (and these right-wingers do this knowing that the system is unsustainable and will crash, which is the only way they see to get rid of popular programs.)

This is a story of the cowardice of politicians and the idiocy of people.

This idiocy – in almost all of its forms – can be traced to the ascent of the Baby Boom generation as they took power with the Reagan administration. By increasing spending exponentially while cutting taxes – creating enormous deficits – Reagan supercharged (stimulated) the economy out of the stagflation of the 1970s. At the same time, he began the American government’s practice of becoming dependent on East Asia – relying on Japan to lend vast amounts of its money as our trade deficit with them grew. Reagan also began the trend of deregulation of industries – allowing them to take greater risks and reap greater profits if they succeeded – which also allowed companies to kick off a merger boom, leading more and more companies becoming too big to fail while they were regulated less and less. All of these steps led to an economy focused more on finance than industry – leading, along with factors due to globalization, to America’s industrial decline. The dominance of the financial sector in the economy, which is well known for its boom and bust cycle, led to a series of economic bubbles – and in fact, an economy in which growth was maintained through bubbles rather than real worth.

Beginning with Reagan, president after president stimulated the economy constantly – to avoid having to take the fall. But this system was unsustainable. As the Baby Boomers “surfed on a growing wave of debt” – both public and private – they sought to use debt to meet their rising expectations in the absence of creating real value. This was the generational bargain at the heart of the Reagan presidency – a bargain that allowed America to spend the Soviet Union into the ground and jumpstart the economy from the stagflation of the 1970s – but that, unchecked, thirty years later, now threatens our future.

The Baby Boomers pissed away the prosperity their parents bequeathed them and squandered the opportunities presented to them – and now are busy using their children’s future earnings (our future earnings) to buy their way out of the mess they have created. They avoided the challenges of their times and found people to blame. They focused on OJ Simpson, Britney Spears, Madonna, and Monica Lewinsky – on abortion, Vietnam, gays, and religion – and not on global warming, on campaign finance, on the corruption of our political process, on an overleveraged economy.

After decades of avoiding systematic problems – as the solutions became embroiled in the ongoing culture war – we now must face them. With two wars in the Mid-East, a failing world economy, a growing threat of catastrophic terrorism, and whatever else may come our way, procrastination is impossible. Now it’s time for us to try to salvage this wreck. It remains to be seen if we’re up to it.

David Brooks explained this grave situation facing Obama and the difficult tasks ahead (focusing especially on the growing deficit). Brooks concludes with reasons for hope and despair:

The members of the Obama administration fully understand this and are brimming with good ideas about how to move from a bubble economy to an investment economy. Finding a political strategy to accomplish this, however, is proving to be very difficult. And getting Congress to move in this direction might be impossible.

Your cards do not improve if you complain about the hand you have been dealt. But it is essential to understand how we got here. We also must not be complacent now that a leader who we admire has been given power. Individuals are empowered to a greater extent than ever before in history – for good or ill. Which is why it is never enough to get the right man or woman into public office – even if this is a useful initial step. What we must do – as individuals – is to see the world around us clearly and take steps to effect what changes we can, to live the values we hold in our hearts, to reach out to those affected by our actions.

[Image by orangejack licensed under Creative Commons.]

  1. This is a bit unfair on the national level – as George H. W. Bush and Bill Clinton – with opposition Congresses checking them – proved to be exceedingly responsible, putting America on a sustainable course after the tax-cutting, free-spending Ronald Reagan and before the tax-cutting, free-spending George W. Bush. []

Stimulus and Stability (cont.)

Friday, March 27th, 2009

Nicholas Kulish in The New York Times explains how “Europe, Aided by Safety Nets, Resists U.S. Stimulus Push.” 

I wrote a few weeks ago that:

…there seems to be some sort of inverse relationship between a society’s social safety net and the amount of stimulus spending they are proposing. 

This makes sense on a number of levels. Automatic stabilizers which should take some of the pressure off a need for a stimulus are not included here. On another level, these nations without a strong safety net must rely more heavily on economic growth for societal stability. 

If this is true, China and America would be more reliant on constant economic growth to relieve social and political pressure and would be more likely to have larger stimulus packages. France and Germany with stronger safety nets would feel more insulated and be less likely to push for large stimulus packages. This is exactly how this matter is playing out on the world stage today – with some exceptions due to political leadership. 

But both states with strong social safety nets and those without them are dependent on growth over time. But those states without strong safety nets feel the economic bumps more strongly – and downturns end up being more disruptive.

Kulish writes now that:

The Europeans say they have no need for further stimulus right now because their social safety nets, derided in good times by free market disciples as sclerotic impediments to growth, are automatically providing the spending programs that the United States Congress has to legislate…

Mr. Posen and others argue that while Germany may be doing more stimulus spending than others in Europe, it is counseling other European countries — many of which share the euro as their common currency — not to spend their way out of recession either, but to count on their safety nets to do much of the job.

Nothing groundbreaking on either of our parts – but it’s an example of how fundamental societal agreements – the social bargains underpinning the state – affect everyday policy.

Stimulus and Stability

Tuesday, March 10th, 2009

This Wall Street Journal article by Bob Davis accompanied by this graph to the right illustrates just how far from world opinion the Republican right is in it’s rejection of stimulus spending. This is not necessarily a bad thing – but it should give pause to those who are defending the fiscal austerity Republicans are proposing in the middle of this crisis. This issue is not considered a partisan issue for most of the world – and it is mainly Republicans in power today who see stimulus spending during a sharp downturn as something “liberal” or controversial.

David Brooks’s expressed his fair-minded exasperation this Sunday – as he pronounced the idea of the Republican-proposed government spending freeze “insane.” 

The International Monetary Fund – not normally known as a squishy, leftish organization as it promoted free trade and capitalism around the globe – is in favor of large stimulus packages:

The IMF has been urging nations to increase fiscal stimulus by at least 2% of gross domestic product to boost growth. Of the G-20 nations, only the U.S., Spain, Saudi Arabia, China and Australia are expected to reach that goal in 2009, according to the IMF.

More importantly, and more interesting then discrediting an almost powerless political party, is to notice that there seems to be some sort of inverse relationship between a society’s social safety net and the amount of stimulus spending they are proposing. 

This makes sense on a number of levels. Automatic stabilizers which should take some of the pressure off a need for a stimulus are not included here. On another level, these nations without a strong safety net must rely more heavily on economic growth for societal stability. 

If this is true, China and America would be more reliant on constant economic growth to relieve social and political pressure and would be more likely to have larger stimulus packages. France and Germany with stronger safety nets would feel more insulated and be less likely to push for large stimulus packages. This is exactly how this matter is playing out on the world stage today – with some exceptions due to political leadership. 

But both states with strong social safety nets and those without them are dependent on growth over time. But those states without strong safety nets feel the economic bumps more strongly – and downturns end up being more disruptive.

Jimmy Fallon Slow Jams the News

Friday, March 6th, 2009

I have to admit – I had my doubts about Fallon as a late night host – but he seems to be off to a good start – not least of all with this.

Best non-Jon-Stewart take on this weeks events I’ve seen.

Bobby Jindal’s Soapbox (cont.)

Wednesday, February 25th, 2009

The New York Times explains what was going on with the “strings” that Bobby Jindal was complaining about on Sunday’s Meet the Press:

States that accept the stimulus money aimed at the unemployed are required to abide by new federal rules that extend unemployment protections to low-income workers and others who were often shorted or shut out of compensation. This law did not just materialize out of nowhere. It codified positive changes that have already taken place in at least half the states.

To qualify for the first one-third of federal aid, the states need to fix arcane eligibility requirements that exclude far too many low-income workers. To qualify for the rest of the aid, states have to choose from a menu of options that include extending benefits to part-time workers or those who leave their jobs for urgent family reasons, like domestic violence or gravely ill children.

The Partisan Eruption During Obama’s State of the Union

Wednesday, February 25th, 2009

I thought this was the most interesting moment in yesterday’s speech – as the partisan feelings of the Republicans erupted, and then were responded to by the Democrats.

Throughout the speech, Obama seemed to want to talk through partisan lines, trying to minimize the applause. But here the Republicans took the first half of an Obama antimonic device and interrupted his speech – their only real excitement of the night. They seemed to relish in the fact that Obama was “admitting” that the deficit was a worthy issue, jeering. Of course, Obama has planned to pivot to the deficit and entitlement spending all along – speaking of a forthcoming Grand Bargain even before he took office. In the end, this demonstration made the Republicans look rather petty. But then, as Obama completed his antimonic device, stating that the enormous deficit was “inherited,” the Democrats took advantage of their opportunity to pettily respond to the Republican jeering.

This exchange captures the dynamic of Obama’s Washington so far – as Republicans and Democrats jeer each other and posture against one another while Obama tries to explain what he’s doing and to get a serious response.

Jindal’s Soapbox

Tuesday, February 24th, 2009

Governor Bobby Jindal, 2012 contender and current governor of Louisiana, argued on Meet the Press this past Sunday that he opposed the stimulus bill and would refuse some to accept some of it’s monies for his state despite it’s looming budget deficit. He gave a few reasons – echoing the established conventional wisdom that Obama should have taken it upon himself to craft the stimulus bill instead of allowing Congress to play it’s part as a coequal branch of government and stating that there was too much spending that Democrats wanted in the bill. This, of course, is a standard politician’s trick, used by Democrats such as Obama as well as Republicans such as Jindal – be outraged at the “the very chaotic, decentralised and often irrational mess” that is American politics while at the same time demonstrating a healthy respect for the distinct advantages of this politics, with the knowledge that, “What keeps America behind is also what keeps pushing it relentlessly, fitfully forward.” In other words – Jindal is railing against the system itself as a political weapon while only taking positions that would keep the system intact. His opposition then clearly has a political component – rather than being a matter of pure principle. There’s nothing wrong with this – but it’s important to acknowledge. 

Jindal gave another reason for rejecting federal stimulus money –  because:

You’re talking about temporary federal money that would require a permanent change in state law.

He continued, using a rather sneaky phrasing to make his point:

[T]he federal law, if you actually read the bill–and I know it was 1,000 pages, and I know they got it, you know, at midnight, or hours before they voted on it – if you actually read the bill, there’s one problem with that.  The word permanent is in the bill. [my emphasis]

Hearing especially that last phrase, with it’s seeming definitiveness yet clear allowance for the opportunity to weasel out of what it seems to be saying, I was rather convinced that only a politician trying to exaggerate a point would use the phrase. Regardless of whether the policy was positive or not, it would have been nice to 

Yet, upon reading the bill, I found that Jindal was right – the law did require unemployment benefits be calculated in a particular way – and that the state law establishing this be permanent rather than temporary. At the same time, the bill offers what seems to be an escape clause – in which the Secretary of Labor is allowed to judge whether states have met the criteria set forth in the law. 

If Jindal’s objection were merely that he did not want to change the state law permanently in order to receive the monies, he could just apply for the funds and see what happened. There are enough ambiguities in the text that a clever lawyer could probably find a loophole allowing the monies to be given to Louisiana. More important, this would provide better political ground for Governor Jindal to make the case against this provision – he would have clearly focused the political debate on whether it was right for the stimulus bill to impose permanent changes. I personally think it unlikely that the Secretary of Labor would provoke such a conflict – which is probably why Jindal is making his case this way.

He chose to reject the funds because he wanted a soapbox issue to helped cement his national opposition to the plan. 

Jackie Calmes and Robert Pear wrote in the New York Times last week that Jindal was joined by a number of other Republican governors in vocal opposition to the plan:

The harshest critics include Mr. Sanford and Govs. Bobby Jindal of Louisiana, Haley Barbour of Mississippi, the national chairman of the party in the 1990s, Rick Perry of Texas, and Sarah Palin of Alaska, the party’s 2008 vice-presidential nominee.

Interestingly, all seem to have national ambitions – and designs for 2012. 

The point I’m trying to make is one I’ve made before – the Republican opposition to the stimulus is clearly a matter of politics rather than principle.

What Are Republican Principles Again? (cont.)

Tuesday, February 17th, 2009

Jonah Goldberg acknowledges how the political motives of the congressional Republicans may well backfire (h/t Andrew Sullivan):

Despite their successes in the newscycle, I think congressional Republicans made significant mistakes in how they attacked the stimulus bill. First, their recently discovered hatred for deficit spending is long overdue, but hardly persuasive given the previous eight years. The disconnect between their past actions and the requirements of the present crisis lend credibility to the charge that Republicans are just being petulant and partisan.

Previous post on this subject here.

Interpeting Obama’s Stimulus Strategy

Thursday, February 12th, 2009

Noam Scheiber at The Plank:

Barack Obama is nothing if not a master rope-a-doper. For months last year, anxious liberals pleaded with him to respond to John McCain’s lacerating attacks. And, for months, Obama soared above the fray. Then, in early September, the McCain campaign squeezed out two ludicrously dishonest ads—accusing Obama of force-feeding sex education to kindergarteners and of calling Sarah Palin a pig. The press screamed bloody murder—Joe Klein labeled the former “one of the sleaziest ads I’ve ever seen;” Joy Behar of “The View” personally told McCain they were “lies.” At which point Obama saw an opportunity. With the media having pronounced McCain the aggressor and him the victim, Obama began to whale away—on healthcare, on McCain’s age, even Charles Keating—with virtual impunity.

My sense is that we’re seeing something similar play out with the stimulus.

Andrew Sullivan quotes one of his readers:

What many do not understand is that the government is playing for time, not some brilliant economic miracle. We do not have the money or political leverage to solve this problem from the top down by divine fiat. We have to buy time — literally — for the ten-thousand smaller acts of restoration and renewal to take place. All this flow of money, this vast seemingly indiscriminate transfusion of economic blood, has one purpose: to keep the patient’s heart pumping until the systemic crisis is past — another 6-12-18 months. It is messy, sloppy, gross heroic medicine.

Andrew Sullivan has his own just slightly less optimistic interpretation.

Yglesias points out some of what Obama is dealing with as Representative Steve Austria explains his opposition to Obama’s stimulus in historical terms:

“When (President Franklin) Roosevelt did this, he put our country into a Great Depression,” Austria said. “He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That’s just history.”

“That’s just history.” The article Yglesias cites points out the slight problem with this “history”:

Most historians date the beginning of the Great Depression at or shortly after the stock-market crash of 1929; Roosevelt took office in 1933.

Reading the Independent Congressional Research Service Reports on the Stimulus So You Don’t Have To

Wednesday, February 11th, 2009

According to Wikipedia, “the Congressional Research Service (CRS) is the public policy research arm of the United States Congress. As a legislative branch agency within the Library of Congress, CRS works exclusively and directly for Members of Congress, their Committees and staff on a confidential, nonpartisan basis. CRS reports are highly regarded as in-depth, accurate, objective, and timely, but as a matter of policy they are not made directly available to members of the public.”

Which makes the reports it has prepared on various stimulus measures extremely interesting – as their reports strive to give the consensus expert view of the issues involved, without partisan affiliation. I’ve prepared some highlights from the non-partisan (and confidental) CRS reports on the effectiveness of tax cuts and other stimulus measures (available thanks to Wikileaks…H/t Marc.)

CRS – RS21126 – Tax Cuts and Economic Stimulus: How Effective Are the Alternatives (PDF)

The summary:

While temporary individual tax cuts likely have smaller effects than permanent ones, temporary cuts contingent on spending (such as temporary investment subsidies or a sales tax holiday) are likely more effective than permanent cuts. (Sales tax holidays may, however, be very difficult to implement in a timely fashion).

The report offers a quick explanation of why tax cuts aren’t ideal short term stimulus on page 1:

A tax cut that is saved will have no short term stimulative economic effect (or long term one, if the cut is financed by a deficit, since increased private saving would be offset by decreased government saving). Thus, in general, tax cuts received by individuals will not be successful as a short run stimulus if they lead to additional saving, and tax cuts received by firms will not be successful unless they lead to spending on investment (or lead quickly to spending on consumption by shareholders).

The problem in this instance is that private virtue – saving money – undermines the public good stimulus seeks to achieve – stimulating the economy – which can only be achieved by spending money. The report discusses corporate tax cuts on page 5:

General corporate rate cuts are less likely to be effective than investment subsidies because they have a smaller “bang-for-the-buck.” because much of their cost is a windfall that only affects cash flow and not the return to new investment. Since even temporary investment subsidies do not appear to have worked effectively, a corporate rate cut would be expected to have a small effect.

CRS – Report R4104 – Economic Stimulus: Issues and Policies (PDF) (It appears the Wikileaks link is down, so try this.)

The summary:

Economists generally agree that spending proposals are somewhat more stimulative than tax cuts since part of a tax cut may be saved by the recipients. The most important determinant of the effect on the economy is the stimulus’ size. [my emphasis]

The report describes the cause of our current panic/crisis as the ripple effect of the sudden collapse of Lehman Brothers, the near miss at Merrill Lynch, and the government rescue of AIG – all following upon the failure of other large institutions over the months before hand – from Bear Stearns to Fannie Mae and Freddie Mac.

These actions eroded market confidence further, resulting in a sudden spike of the commercial paper rate spread from just under 90 basis points to 280 basis points, a spike that in times past might have been called a panic. If financial market confidence is not restored and private market spreads remain elevated, the broader economy could slow more due to difficulties in financing consumer durables, business investment, college education, and other big ticket items.

The report doesn’t get into telling the story of how the world economy almost came to an end at 2pm on September 18. One of the problems the report explains with stimulus is that we can only design it to be effective based on our economic forecasts. As the report explains on page 8, economic forecasting has its problems:

Economic forecasts are notoriously inaccurate due to the highly complex and changing nature of the economy, so it is difficult to accurately assess how deep the downturn will be, and how much fiscal stimulus would be an appropriate response.

But the report nevertheless ventures a guess, on page 2, based not on any particular forecaster, but only the consensus among them:

Forecasters now predict that GDP will continue to contract until the second half of 2009 and the rate of decline will accelerate.  If correct, this recession would be the longest in the period since World War II.

The report discusses three elements by which to judge the stimulus – how fast it works; how effective the stimulus is per dollar paid; and the size. Predicting the right size for the stimulus must primarily be based on the economic forecasts – which the report notes are “notoriously inaccurate.” But the first two measures should be maximized no matter what the forecast is. The report describes why effectiveness is important in a section called “Bang for the Buck” on page 8:

If the goal of stimulus is to maximize the boost to total spending while minimizing the increase in the budget deficit (in order to minimize the deleterious effects of “crowding out”), then maximum bang for the buck would be desirable. The primary way to achieve the most bang for the buck is by choosing policies that result in spending, not saving. Direct government spending on goods and services would therefore lead to the most bang for the buck since none of it would be saved…

One non-spending measures the report analyzes is seen to have a good “bang for the buck” but to take too long to act:

Investment incentives are attractive, if they work, because increasing investment does not trade off short term stimulus benefits for a reduction in capital formation, as do provisions stimulating consumption. Nevertheless, most evidence does not suggest these provisions work very well to induce short-term spending. This lack of effectiveness may occur because of planning lags or because stimulus is generally provided during economic slowdowns when excess capacity may already exist.

On page 10, the report cites Mark Zandi of Moody’s Economy.com, and an advisor to John McCain, and includes a chart of his estimates of the multiplier effect of the various policy proposals. The report qualifies it’s endorsement of Zandi’s work, saying, that there is significant disagreement about fundamental matters among economists, but that:

Qualitatively, most economists would likely agree with the general thrust of  [Zandi's] estimates, however—spending provisions have higher multipliers becausetax cuts are partially saved, and some types of tax cuts are more likely to be saved by theirrecipients than others.

I’ve graphed the values Zandi provides to give a visual measure of the different in the types of stimulus:

[Click on the image for a larger version of the chart.]

As you can see, the spending measures have far greater “bang for the buck” values. The report acknowledges that Zandi’s and most other economic models might understate the stimulus from tax cuts – but the alternate explanation for the data given by defenders of tax cuts is that they take longer to have an effect:

there is a behavioral lag, since time elapses before the recipient of a transfer or tax cut increases their spending. For example, the initial reaction to the receipt of rebate checks was a large spike in the personal saving rate… It is unclear how to target recipients that would spend most quickly, although presumably liquidity-constrained households (i.e., those with limited access to credit) would spend more quickly than others. In this regard, the advantage to direct government spending is that there is no analogous lag.

These reports seems to provide a good deal of information mainly missing from the public debates – as Republicans talked about tax cuts, tax cuts, tax cuts as the best type of stimulus. Whether the stimulus bill we end up with works or not, these reports at least help explain the assumptions underlying it.