Everyone Has an Economic Stimulus Plan This Week
Clinton, Obama, maybe even President Bush
By blackhedd Posted in Democrats | Economic Stimulus | Economy — Comments (18) / Email this page » / Leave a comment »
The political discourse turned to economic matters in the last few days. We got the usual spate of bizarre and uninformed questions from MSM journalists to all of the primary contenders. These are ignorable for the most part. We also got proposals for "fast-acting economic stimulus packages" from the two Dem frontrunners and co-dependents, Hillary Clinton and Barack Obama.
Their proposals are worth picking apart, mostly by way of showing how mired in the past these two people are when it comes to economic policy. President Bush has also threatened to propose a "stimulus" package, but nothing has leaked out yet.
Does it even need to be said that, with these proposals, the Democrats are trying to solve not an economic problem but a political one?
More...
If you pay attention to the world of global finance, you know that it's undergoing the most severe and sustained disruptions since the collapse of the Bretton Woods system in 1971. Tectonic plates are moving rapidly, but well under the surface, and this promises to be a momentous year.
But how does that affect ordinary people, and why do the politicians have to wade in now?
Three basic reasons: the US stock market has taken it on the chin since the New Year; the price of oil briefly traded above $100/bbl last week before backing down; and the December employment report from the Bureau of Labor Statistics suggested significant weakness in private-sector hiring. Add this to the news background about recession fears, and you have the ingredients for ordinary people to feel frightened that they might lose their jobs.
This is mother's milk to politicians, who live for opportunities to prove that we really need them after all.
So if you fear that the economy is going to start throwing millions of people out of work, what do you propose? Well, if you're a good Keynesian, circa 1965 vintage, you propose what's called an economic stimulus package.
What the heck is that? Well, you start by reasoning that people are going to lose their jobs because other people aren't spending enough money on soap and car payments.
So you take a big pot of money and you hand it out to people, hoping they'll... well, stimulate the economy.
That's the essence of both the Clinton proposal (which contains five specific points) and the Obama proposal (which sounds audaciously hopeful but is of course very short on detail). Both of them are talking about handing out sums of money ranging from $75 billion to over $100 billion.
Let's analyze some of the rhetoric a bit.
Both Clinton and Obama are saying that their proposals are not to be understood as things they would seek to enact upon becoming President in 2009. Rather, both are suggestions of what they would do right this minute. The idea is that the economy needs help now, and that President Bush isn't giving it. (Of course the President, who answers to the same idiots in the MSM that the Democrats do, will end up proposing something broadly similar.)
Hence, you hear the term "fast-acting stimulus." As near as I can figure, this is why both of the Dem packages propose one-time tax credits, subsidies for heating-oil bills (in Clinton's case), "counseling" for people who can't afford their mortgages ($10 billion from Obama for that), and "tax relief" (ie, Federal handouts) for cities and other localities where housing distress has reduced property-tax revenue.
What no one is proposing, obviously, is to make the Bush 2001 and 2003 tax cuts permanent.
What no one is talking about, either, is where all the money is going to come from. Let's be honest about this, kids. It's going to be borrowed and added to the deficit. That's the whole idea behind Keynesian economic stimulus: to induce the consumption of resources that would otherwise remain invested in savings or capital assets.
I suppose there's half a chance that if either Democrat is pressed on where the money for the stimulus will come from, they will both show their ignorance and say "from higher taxes on the rich," rather than the true answer, which is "from the bond market." One can only hope.
A key feature that has been stressed is that the stimulus will put money into the hands of "lower-income" people. One assumes these are the people most subject to the fear (justified or not) of losing their jobs, and therefore might be most politically responsive to the message. I even heard Gene Sperling, of Clinton's brain trust (if you'll pardon the expression), say that "most economists" agree, economic stimulus works best if you give money to people who are likely to spend it rather than save it.
So we would prospectively get a one-time pulse of $75 billion or so in consumer spending, using money borrowed from global investors. By my figures, that's seven-tenths of one percent of total consumer spending by Americans. Yeah, I think that'll help. (Not!)
So now we know that the whole idea is not economically serious, but rather a standard pandering appeal to the fears of people who don't know any better, abetted by journalists who should know better but probably don't.
There's another interesting wrinkle in Clinton's plan, which emerges because unlike Obama, she had the presence of mind to give some detail on how she'd spend the money. It's largely going to be dispensed in packages to be distributed by state and local governments. (Heating-oil subsidies, mortgage-payment relief, relief for local governments with lower tax revenue.)
Are you reading between the lines? Most of the people who will get to spend Clinton's booty are local politicians, who are usually Democrats. Pretty clever way to pay off the people on the ground in those tough primary and general-election battleground states. Say what you will about Mrs. Clinton, but she's not stupid.
Economic split personality
Finally, let me explain to you why Keynesian economic stimulus isn't going to work on the economy in the first place: in short, because it addresses the wrong problem.
The US economy has a split personality these days. Wall Street, the financial sector, and the housing sector are all in terrible shape. There is a lot of fear, probably justified, that consumer durables and related sectors will slow down significantly this year. Meanwhile, other sectors of the economy (including export-related businesses) are roaring ahead and expect a great year in 2008.
Now how do recessions happen, since everyone is so heated up about the subject? Recessions are most reliably predicted by constrained availability of credit. (This can happen in a variety of ways, and that's another long post in itself.) Bottom line, many sectors of our economy are facing just this problem, and they will slow down as night follows day.
But businesspeople make investment decisions on relatively long time scales, often a year or more ahead. Neither they nor their reluctant sources of credit (traditionally banks but these days more likely the commercial paper market) will be affected by a one-time burst of consumer spending. Permanent tax cuts would be a totally different story.
And no policy can address the reluctance to provide credit in the first place, which is rooted in risk aversion by global investors, better opportunities outside the US, and other factors.
For Hillary Clinton and Barack Obama to propose a "fast-acting stimulus," which does nothing more than borrow $100 billion to spend on candy and bubble-gum, shows that neither one knows the first thing about how to deal with policy in our complex and challenging economy.
Let's do our best to keep both of them from having to learn on the job, at our expense.
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Everyone Has an Economic Stimulus Plan This Week 18 Comments (0 topical, 18 editorial, 0 hidden) Post a comment »
1. Drop sarbanes oxley
2. Drop corporate income tax completely
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Tax cuts (another way of giving people money) don't stimulate the economy.
...the economy, all else equal. That should make sense, because they reduce the proportion of money that government diverts to less-productive uses (such as buying votes and paying for Social Security and Medicare).
The one-time tax rebates that Clinton and Obama are proposing (and that President Bush did once, early in his Presidency) don't do any such thing, because they don't affect long-term investment patterns.
This is all complicated by the realities of why our economy is not performing as well as one might hope. Some of these are cyclical, and some are secular. Since Keynesianism by definition is concerned with countercyclicality, it has nothing whatsoever to say about the larger, deeper changes that are happening in the economy,
Doesn't that simply suck credit out of the private sector and into the public sector?
Assuming you're correct that government uses its money less productively than the private sector, at least one other condition has to hold. That is, permanent tax cuts will improve the economy if such cuts lead to reduction in government spending.
Permanent tax cuts that target investing work, because by targeting investing they stimulate economic growth which results in higher government revenues. It's how Reagan pulled us out of the Carter disaster. Reagan failed (because of Tip) to maintain federal spending at previous levels, but revenues went up.
Permanent tax cuts that target consumption don't work because those cuts either don't have, or have significantly smaller multiplier affects than investment. Which means letting the rich get richer, because they are the people with the money to invest in the first place. But those of us who are working stiffs also get richer, because the economy grows as well.
Both Clinton and Obama are proposing to hand money out to lower-income people in the expectation that they will spend it (they will) and that this will improve the economy (it won't).
Neither of them have said where they would get the money. Since both have made clear that these are straw-man proposals, it's not too likely that they'll get called out on this.
But the only possible answer is deficit spending. If you raise taxes on high earners in order to give rebates to low earners, you haven't fulfilled the basic requirements of Keynesian stimulus.
I think you're making the often-heard point against deficit spending, which is that it "crowds out" private uses for money that is instead loaned to the government.
That ignores the extremely unusual dynamics at work in global credit markets today. No one wants to lend any money for private investment anywhere. (The emerging markets are being fed with current-account surpluses and with equity capital.)
On the other hand, everyone still wants yield. The US government is one of the only places left in the world to get it. There's no "crowding out," and the obvious proof is that interest rates for govvie debt continue to be extremely low.
I know that handing out money as Clinton and Obama have suggested won't stimulate the economy.
What I'm wondering is why are permanent tax cuts any different if they do not bring down the amount of government spending overall? That is, as with one time hand outs, there's no stimulus effect.
If I'm not mistaken, the credit issue is cyclical. Presumably, at some point, people with capital are going to have to put it back to work. If that's the case, I'm fine with letting things play out. It seems to me more damage will be done to credit markets, at least on the mortgage side of things, if the feds start interfering with even more regulation of the mortgage market. I'm especially leery of moves to prevent scheduled adjustments in ARMs from occurring.
You are dead-on about the credit issue. The threatened interference with existing loans is a bigger problem than almost anything else, as it introduces a huge amount of uncertainty into the credit market. Things should, as you say, be allowed to play out.
On tax cuts, the reason permanent (or at least long-term with an expectation of permanancy) do stimulate the economy is that they tilt the risk/reward calculation by investors towards making greater investment is riskier but potentially more rewarding ventures. That capital today largely goes towards innovative companies that find new ways to do things better, faster, or cheaper than before, or to do totally new things. It is this innovation that drives economic growth.
Also, leaving wealth in the hands of those who create it (which is at its core what a tax cut is) allows the wealth creators to direct its use, rather than a clumsy and occasionally corrupt government directing that. The incentive for a wealth creator with extra money is to use it to create more wealth (investing it into an existing or new business), or convert one form of wealth (cash) into another form of wealth (a new house, a fine steak dinner for the family, a trip to Disneyland, etc.). The incentive for a politician or bureaucrat is to convert wealth (received in the form of taxes) into votes, job security, or personal betterment.
To a degree we're arguing over a discredited theory, because nowadays people only embrace Keynesianism when (as with Clinton and Obama) they feel like they have to say something, even if no one really believes it.
Having said that, countercyclical stimulus traditionally is done by reducing marginal tax rates. Since this puts more money in the hands of wealthier people (who also are often smarter people), the positive effects on the economy of the additional money are multiplied.
You get nowhere near the same effect from putting a one-time rebate into the hands of poorer people (who are weak economic actors). But reducing marginal tax rates is anathema to Democratic politicians, who are irrevocably committed to what they call "tax fairness," since cuts in tax rates benefit wealthy people directly. Can't have that.
I said at the end of my post that the constraints on available credit as a driver of recessions is a big subject needing another long post. (More like a long book, actually.)
One of the causes is the need to repair balance sheets after a period of overinvestment and deteriorating credit quality. The mortgage debacle qualifies for this, and would argue that the current distress is cyclical.
Of far greater concern to me, however, is the fact that the world now realizes (after two unforeseen financial disasters within a decade) that the risk-modeling upon which all modern portfolios are constructed contains very deep flaws.
No one has invented the mathematics to understand these flaws yet, and this will change the behavior of investors for a long time to come. It's not entirely a cyclical phenomenon.
What I enjoyed most about my theoretical econ days was that I could always construct a model that skewed towards my conclusions.
Anyway, I think you are right in diagnosing the current economic problems and therefor why the kinds of stimulus that has worked at other times would be inappropriate now. But, it's hard to fault Clinton and Obama (noting that of course they are intended as political suggestions) when they are just following Paulson's lead.
From a near-term economic perspective (that is forgetting the long-term question of making the '01&'03 tax cuts permanant and restructuring our tax code etc.) the best thing congress and the president can do is nothing at all.
...stimulus-package proposal. They're still just talking about it.
Do you have any better information you can post here?
But did say taht whatever is done need to be ,a href="http://www.reuters.com/article/businessNews/idUSWAT00864720080111?feedType=RSS&feedName=businessNews">quick and temporary. If i were trying to preemptively interpret that I would expect something like the rebate checks this administration sent out back in '01.
to stimulate the economy. That's part of how we wound up in wage-price inflation spirals under Keynsianism. Bush (can't remember if it was I or II) tried it with tax refunds, but it didn't help the economy. The next round of tax cutting, which targeted investment, did.
I don't know if they do or if they don't; blackhedd knows far more about these things than I. All I would add is that for me, as a fiscal conservative, I don't care. To me, cutting taxes is about empowering the individual over the collective: the power to direct my life should lie with me and not with the government via the tax code.
Oh, and BTW tax cuts don't correspond to "giving" anything. They permit me to KEEP more of MY money that I already EARNED.
Tax cuts can stimulate the economy unlike "tax rebates" (or whatever else they are calling passing out the loot these days), because they lead to wealth creation. "Rebate" schemes are really just a matter of redistributing existing wealth, so whatever boost might occur in the short run will be offset in the long run.
Real tax cuts, however, lead to future wealth creation as the risk/reward ratio shifts in favor of additional investment.
More important, though, if Hillary and Barrack really wanted to ease the credit crunch (which Blackhedd rightly points out is the real problem here) then they would stop calling for rate freezes, a halt to foreclosures, and other measures that essentially tell suppliers of credit that if they lend money, there's an increased risk that the government will step in to rip up the credit agreement and re-negotiate terms to be more favorable to the borrower. Yeah, that's a good way to increase funds flowing into the credit markets...
On why I believe the current downturn will be small and not last long, that is unless the government gets too involved.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
is to send everyone in Georgia a check for $10000.
And, oh yeah, I happen to live in Georgia.
If that's too expensive, I'll settle for everyone in the 30062 zip code