TCS Daily


A Very Stimulating Crisis

By Arnold Kling - January 24, 2008 12:00 AM

"Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where noneconomists see the destruction of jobs, economists see the essence of economic growth: the production of more with less."
--Bryan Caplan

Does the U.S. economy in early 2008 need a stimulus? If so, will tax cuts or attempts by the Fed to lower interest rates do the trick?

I used to be able to answer such questions with confidence. Now I cannot.

The theory of the causes of unemployment, interest rates, and inflation falls under the subject known as macroeconomics. Macroeconomics is like astrology or Freudian psychology, in that a lot of people used to believe it, and a lot of people still do, but many with a scientific bent tend to stay away from it.

Upside-down Economics

In ordinary economics, goods and services are scarce, and leisure is preferable to work. From that perspective, saying "we need to create jobs" or "consumers aren't spending enough" would be as silly as saying that "we need to burn down our house" or "people aren't wasting enough gasoline."

John Maynard Keynes called his seminal macroeconomic treatise The General Theory of Employment, Interest, and Money. It could well be called "The General Theory of Make-Work Bias." Bryan Caplan, quoted above, sees make-work bias as a naive fallacy. But Keynes used make-work bias as the basis of his entire treatise, which in turn became the foundation of what we call macroeconomics.

Once you accept the notion that jobs can be scarce, you can turn the rest of economics upside-down as well.

--In ordinary economics, the choice to save or consume is only important in that more saving raises long-term productivity. In macroeconomics, more saving is "contractionary" and more consumer spending is "expansionary."

--In ordinary economics, a good trade is one in which the value of what you buy is higher than the value of what you sell. In macroeconomics, it is bad to have foreign trade in which the value of what we buy is greater than the value of what we sell. Thus, a trade deficit is "contractionary" and a trade surplus is "expansionary."

--In ordinary economics, government should only borrow as a last resort, because borrowing generally crowds out private investment. In macroeconomics, a balanced budget or surplus can be "contractionary," while a deficit is "expansionary."

No wonder first-year economics students end up knowing very little economics. What they learn in micro gets canceled out in macro.

History of Thought

If I were to teach a course in macroeconomics, I would teach it as history of thought. Beliefs about macro have evolved in interesting ways.

Keynes was part of a general intellectual trend in favor of centralization and strong government, a trend which culminated in socialist experiments prior to World War II in Russia, Italy, and Germany and after World War II in Western Europe as well as the Soviet sphere. Keynes himself was not a believer in the sort of nationalization of industry and central government planning that took hold in the middle of this century, but he strongly favored government public works projects long before he developed his General Theory.

Keynes' basic thesis was that investment and saving are not regulated by market incentives. Instead, consumers have natural propensities that govern their desire to spend or hoard their incomes. Businesses are driven by "animal spirits" to invest in new ventures. When these spirits wane, investment dries up, plants have to shut down, and unemployment ensues.

The Great Depression converted many economists to the view that market economies are subject to involuntary unemployment that should be alleviated by government policy. In fact, economists expected that after World War II the United States would require extraordinary government intervention to maintain full employment. The mainstream theory was that "secular stagnation" had set in, with a perpetually dim outlook for private investment. Government would have to step in to maintain demand.

In the event, the market economy of the 1950's worked much better than expected. This was a period where American households accumulated housing and durable goods (cars, televisions, household appliances), and there were plenty of "animal spirits" among entrepreneurs such as Ray Kroc (McDonalds), Kemmons Wilson (Holiday Inn), and William Levitt (Levittown). In spite of an absence of government "stimulus," the economy maintained high levels of employment.

In the 1960's, macroeconomics came to be dominated by multi-equation models, which soon reached the point where they could only be solved by computers. As Greg Mankiw has pointed out, these computer models continue to be the basis of macroeconomic "engineering" by policymakers, even though they are largely rejected by the academic and scientific community outside of Washington. What Mankiw calls "engineering" might otherwise be called "faith."

What Causes Unemployment?

Textbooks on macroeconomics used to say (and probably still say) that there are three types of unemployment:

1. Structural unemployment is unemployment caused by institutional flaws, such as minimum wage laws and other regulations that make it uneconomic to hire some people who otherwise would like to work.

2. Frictional unemployment is unemployment caused by temporary imbalances of supply and demand in different sectors. If the Internet reduces the demand for traditional travel agents, then until travel agents adapt their services or switch careers, some travel agents will be unemployed.

3. Cyclical unemployment is everything else. Macroeconomics says that cyclical unemployment is caused by a general drop in demand for goods and services. The term "cyclical" comes from the term "business cycle," which suggests that aggregate demand goes up and down.

Classical economics does not allow for such a thing as a "general drop in demand for goods and services." Again, in classical economics, we have unlimited wants. There is never a need to increase demand.

Moreover, classical economics says that there is nothing that government can do to affect demand. As Don Boudreaux put it,

Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created.

If it comes from taxes, the value of Jones's stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed - whether from foreigners or fellow Americans - for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government

The problem for classical economics is to explain the high unemployment rate of the Great Depression. As the late Nobel Laureate Franco Modigliani said in a famous address, are we to believe that the Depression was a massive outbreak of laziness?

Further evidence against classical economics is the fact that increases in unemployment tend to follow what appear to be Keynesian events. The recessions of the 1970's could be explained in Keynesian terms by the "tax increase" imposed by higher oil prices. The recession of 1980-1982 could be explained by tighter monetary policy. The recession of 2000-2001 could be explained by the collapse of the dotcom bubble. The incipient recession expected for this year could be explained by the problems in the housing market.

Still, there is an element of selective memory at work. The standard prediction in 1981 and 1982 was that the Reagan tax cuts would be highly inflationary, not contractionary. Macroeconomic forecasting and policy in the 1970's was so bad that graduate school courses more or less threw out conventional Keynesian macro (although it was retained in the undergraduate texts). Over the past twenty years, Keynesian forecasters, such as Morgan Stanley's Stephen Roach, have predicted many phantom recessions--slumps that never took place. In order to remain attractive, the picture of Keynesian economics has to be heavily airbrushed.

My current view is that what we call "cyclical" unemployment is in fact a severe version of structural and/or frictional unemployment. During the Great Depression, many government policies, such as the National Recovery Administration, served mainly to create structural unemployment. There also was an unusually high level of frictional unemployment, as the spread of motorized road transport greatly altered the efficient structure of production.

Given this theoretical outlook, I would be inclined not to forecast a severe recession in 2008. There have not been any major developments that would have an impact on structural unemployment. Frictional unemployment should not be extensive, either. The housing construction industry needs to be smaller than it was two years ago, but much of that contraction has already taken place. Higher oil prices will cause some shifts in our mix of goods and services, but these do not need to be terribly drastic or terribly rapid.

But I may be wrong. There is a chance that the Keynesian story is correct. If unemployment were to spike up toward 10 percent, I would be very sympathetic to attempting Keynesian remedies, including monetary expansion and deficit spending. But for now, the main "crisis" motivating "stimulus" is the fact that this is an election year.


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51 Comments

"If unemployment were to spike up toward 10 percent, I would be very sympathetic to attempting Keyne
That last comment pretty much shoots to complete hell whatever credibility Kling had in my eyes.

why is that?
anyone that ends their column by this:

"the main 'crisis' motivating 'stimulus' is the fact that this is an election year."

seems preety damned credible to me.

The cure is the disease.
The cures listed in the macro-economic books, adhered to by the previous and current Federal Reserve are simply wealth transfers and the cause of the problem in the first place.

Investors have used the cheap credit to make bad investments like mortgages, or other investments that they can not pay off the loans or have not turned a profit. Until the economy can liquidate the remaining value in these mis-investments it will not recover.

Using this stimulus approach the Fed and Washington spring forth a wealth of money from nothing, actually it is from future tax payers or from current savers. Supposedly people will forget we are in a recession using this new money and not save but spend like crazy. Unfortunately this will do nothing but prolong the recession.

All of this was tried with ZERO success in Japan in the 1990s. Of course their problem was that ZERO interest rates were not low enough. They went crazy building stuff as well. Of course real estate prices in Japan never declined to levels where borrowers could pay for the mortgages and so their recession went on for 12 years.

Productivity and prices
Here's a longer-term question on employment, productivity (the opposite of employment for its own sake) and the value of the currency.

Let us say, for the sake of argument, that we have a shrinking, aging population. Let us say that all the people about to retire have a couple million bucks in investments, ensuring that they won't outlive their money and probably won't draw it all down. They will have that money to spend BUT there will be fewer wage earners. Does that mean that wages will go up, and that all that invested money will be devalued by self-created inflation? What does that do to the present/future value of the money?

Keyne is discredited
History has shown that Keynes solutions not only don't work, but make the situation much worse.

If Kling doesn't know that, then his entire expertise in economic matters is called into question.

A Free Market Economy or Not?
So the Feds tinker again. They create these problems with mismanagement which is to say trying to manage at all. If the stupid politicians would just keep out of it the recovery will be stronger and more fit. Like excising cancer from the body. If they had not encouraged banks to make stupid loans things might have been more forgiving. I have no sympathy for those who borrowed ARM's knowing the chickens had to come home.

How does giving everyone 1200 buck help anything long term? It is simply a transfer of wealth payment, more redistribution. A feckless joke by pandering politicians. A shopping trip to boost retail sales numbers.

My question is, how does a tax rebate make us more productive? How does it create new industries and wealth? In fact, anyone who actually is in the job creation market AKA over 75K in income doesn't even qualify. Yet those who pay nothing do?

More socialist dribble pandering to buy votes.

If they were serious about boosting the economy they could have offered additional tax incentives to hire (although unemployement is not very high) and cut federal spending.

Are we a wealth producing nation or a net consumer? Does anyone actually think that if we fall behind countries like China are going to cut us some slack?

Were in a highly competitive world now and we compete or lose. Someday were going to wake up and finally realize these left over hippies like Pelosi have no clue as to economic reality but by then their re-distribution policies will have broken the bank.

Can we feed the poor if we cannot feed ourselves?



A good remedy for illiquidity
Dbt-- We do always have that option, to just let things fall apart as they may. We can just let the free market rule, and let the imprudent banks that got themselves into trouble flounder and go under due to a momentary lack of liquidity.

Of course that sets off a domino effect that will go around the world. You can't just let outfits like Citibank get the bends without expecting some shakeout. So instead, expect the Bush administration and Congress to go the route of extending low-cost liquidity to one and all, via lowering the prime and lending to the banks on E-Z terms. This will at least get the world markets over the hump.

2. "My question is, how does a tax rebate make us more productive? How does it create new industries and wealth?"

What we're aiming at right now is not creating new businesses and more wealth. We're just trying to keep the existing businesses afloat. And for that, we rely on something they may not have taught you in your economics class:

Businesses are founded on the principle that they can sell their wares-- either products or services-- to others at a profit. But when everyone's short of cash, they don't buy anything. That means the businesses that depend on sales volume don't make a profit.

What;s a quick fix, to stave off insolvency? A fresh injection of cash into the pockets of consumers.

This gives businesses a fresh jolt of actual business, so they have some motivation to not lay off the employees they already have. And those employees, keeping their widget-making jobs, get to add to the economy by buying, not take away from it by being unemployed.

Besides, if you target low income folks for your free money giveaway, it all gets spent immediately. That added taxable moment alone means a third of the cash you ave away comes right back in the form of tax revenue.
If it gets spent three times over the next twelve months, in fact something close to 100 percent of the money you gave away all comes back as tax revenues.

Get out your slide rule to check this out. An infusion of cash gives everyone a boost, right when they need it most. And it doesn't cost the federal government as much as an uncorrected recession would, in terms of lost revenues. Look it up in John Maynard Keynes.

Attention gold bugs
Gold is shooting through the roof these days-- a problem that would not be the case if the dollar were linked to gold. The Fed could just step in and start sucking up all that excess cash in the system... and restore some balance to...

Wait a minute! What am I saying? That's the worst thing we could be doing now. Markets are collapsing as it is. We need a fresh supply of cash pronto, to survive this bump in the road.

Could it be there's something wrong with the whole linking gold to the dollar idea? Nah! Let's just repress this thought, and forget we ever thought it.

We don't save enough - so, let's stimulate spending !
It is no wonder that the public sees Congress and the President as a bunch of morons.

On the one hand, both branches bemoan the low savings rate of the typical US household, on the other, they quickly came to a bipartisan agreement to stimulate the economy with $300 checks to (almost) everyone so that they would spend them.

I plan to stuff any stimulation funds received (show me the money Uncle Sam) into an IRA for the day I retire. I know social security will not be there notwithstanding the dishonesty of Nancy Pelosi and Harry Reid stating that the fund is solvent and Americans "don't want or need individual retire accounts."

TS

illiquidity
There's no illiquidity problem, having more debased dollars doesn't help at all in that discredited Keynsianism. Imagine, the government says people don't have enough money to buy things so we'll just go print some more bebased fiat money and keep the inflation going.
There should be separation of economy and state, and all this couldn't happen.
And here's the answer to your qestion number 2. Having low, or no taxes means people can spend their money on what they want thus making investments, consuming etc. instead of the government wasting it on crap like PBS/NPR, council of arts grants, and supporting countless usless bearocrats creating more harmful regulations.

gold bug?
Maybe that's some humour or whatever, or it just doesn't make sense. If the money was gold backed it couldn't be inflated or manipulated, like politicians printing more in an election year. They created the problem and guys like you and Paul Krugman advocating more of the same is what's pretty dumb.

Government meddling got us into this mess and they'll get us out?
The convoluted tax code, continual Congressional meddling, Presidential candidates excoriating successful smart-working entrepreneurs, a Federal Reserve which continually devalues the US dollar by "expanding liquidity" got us into this mess. And we expect that some or all of the above will get us out?

Are ya nuts?

Throw in the law of unintended consequences which allowed the rise of "tax arbitrage" and inept, yet over-compensting regulators who are always years behind the profit-sector and lets not forget an exponentially increasing woefully un- and under-educated underclass more interested in slacking than getting a minimal education and of course, the wholesale importation poverty from Mexico all combined to give us this mess.

The Constitution directs the government to "...promote the general welfare..." of the citizenry. That doesn't mean it should cause or contribute to the problems we currently have. Nor that it should through demonstrated incompetence extend their effects.

TS

gold bug?
Maybe that's some humour or whatever, or it just doesn't make sense. If the money was gold backed it couldn't be inflated or manipulated, like politicians printing more in an election year. They created the problem and guys like you and Paul Krugman advocating more of the same is what's pretty dumb.

Calling on Zyndryl
You're not following me. A gold bug is just slang for someone who thinks gold is the answer to everything.

Now... I would recall you to last week when our conversation was about linking the dollar to gold. Zyndryl patiently gave you and I both a very good explanation of what that meant. It meant that the price of gold was to remain stable in dollars. That is, the value of the dollar was to remain stable in relation to gold.

Okay? Now follow this. We are currently in a situation where two things are happening. The first is a crisis in banking, that we can only eae our way out by INCREASING the amount of money in circulation-- that is, temporarily increasing our liquidity. The second is that the price of gold in dollars is rapidly going UP.

The remedy for the first problem is to inject more cash into the economy, by lowering the prime rate. The remedy for the second is to remove cash FROM the economy... by hiking the prime rate.

There's a problem there. Can you see it?

Pumping up the economy
The magic might be easier to understand if you start with the fact that most working Americans don't make as much money as they need to spend. The difference is debt.

And it has been rising. Household debt including mortgages is now 97% of GDP. 25 years ago it was half that.

http://captaincapitalism.blogspot.com/2007/09/household-debt-as-percent-of-gdp.html

People strapped this close are not dummies. When it looks like times are going to get tough, they stop buying. And when they do, stores can't sell as much, suppliers can't supply as much, shippers can't ship as much... you get the drift. Everybody lays off workers.

Then they can't buy anything, and they start losing their cars, their homes... it's a big problem.

The cascading effect also reflects itself in lower federal revenues, whereas priming the pump causes more cash transactions to be generated-- increasing federal revenues.

Even if people having trouble meeting their payments just use the cash to pay down debt, it does the economy good. They're that much further away from having to declare personal bankruptcy, and stiffing their creditors.

Besides.. it's only money. :)

Where is Z when we need him?
Yeah, that guy is the only other one but me who understands about gold, but not you. Gold isn't an answer to everthing, but it is the answer to having a stable currency and no inflation. But I know that socialists, and Paul Krugman, and Lenen and Lord Keynes hate the stuff. The price of gold is high now because the stupid government has been debasing the dollar for so long.

My subject line got cut off
The full quote is:

There is a chance that the Keynesian story is correct. If unemployment were to spike up toward 10 percent, I would be very sympathetic to attempting Keynesian remedies, including monetary expansion and deficit spending.

Anyone who knows as much as Kling does yet still would sign on to Keynes 'demand side' economics is an idiot, simple.

Then again, Kling doesn't know what embedded taxation is, either.

Answer: nothing
The prices of their assets will fall since there isn't as many people behind them in the life cycle to create demand for them. This includes their houses. A lot of boomers are in for a a real shock when they find they can't cash out their houses to move to Florida like they planned.

Of course, the Chinese might save them. The above only applies to domestic demand from the generations behind the boomers. But if the Chinese and other foreigners keep investing in the US, that might bail out the boomers. Ditto for all those illegal aliens paying FICA on someone else's SS number (every wonder why the government turns a blatant blind eye to that?).

Wages should go up, but the same globalization forces that are beneficial will keep most wages in check. The threat of outsourcing will extend out more and more to professions that it hasn't touched yet. Only those jobs that need to be absolutely local like plumbing and nursing will remain immune for long. Thing is, automation has been more of a job killer so far than foreign competition for our workers. Either way, productivity will go up regardless of who pays and who benefits from it. Boomer assets in stocks should raise in value (or at least not fall as much) as a result.

In the end, my take on this vs your take or Roy's really is up in the air. We'll just have to watch and see.

Roy is on his socialist kick away from Reality again
Here we go:

"We can just let the free market rule"

Oh, yes we can.

"and let the imprudent banks that got themselves into trouble flounder and go under due to a momentary lack of liquidity."

Ummm...there is no problem with liquidity, Roy. No wonder you state the most bizarre things. The problem is one of transparency and legal confusion as to what part of what tranched collateralized debt obligation has bad loans and what doesn't. This affects the investors who realize that they have been lied to as well as the homeowners who can't easily re-negotiate the terms because off all the buy in from multiple investors involved. Whereas banking liquidity involves strictly the condition where banks don't have enough MONEY to meet the credit demands placed upon them. I don't see too many bank runs going on right now, do you? And don't quote Citi and the others who were overleveraged and took loses. They were not illiquid, just taking severe losses.

"of extending low-cost liquidity to one and all, via lowering the prime and lending to the banks on E-Z terms. This will at least get the world markets over the hump"

Uh...no. Again, the problem is not that people don't have the money to invest/loan. The problem is that nobody knows what exactly is in the sausage. Another problem coming up is all the ARMs made in recent years -- and not for just sub-prime loans -- that will reset and not many lenders willing to refi them if the collateral asset value is lower than the amount. Everyone thought the asset values (home values) would keep going up and up. Neither of those problems will be solved with 'easy credit' any more than they were solved in Japan in the late 1990s.

Basically Roy, you seem to think that using a hammer instead of a screwdriver is going to work.

"What we're aiming at right now is not creating new businesses and more wealth. We're just trying to keep the existing businesses afloat."

Boy, are you completely out on left field. Uh...any government policy directed towards future economic growth (and they all are or should be) IS for creating new businesses and more wealth. In such an environment, the existing businesses 'staying afloat' problem becomes a moot point. If a business is in trouble, sure they will be in 'less' trouble than they otherwise would be. But the new jobs will always be coming from the ones that aren't in trouble or new ones because the investment climate is optimal.

"What's a quick fix, to stave off insolvency? A fresh injection of cash into the pockets of consumers.
This gives businesses a fresh jolt of actual business"

THAT total BS has been thoroughly discredited, Roy. Businesses don't make plans based upon just one quarter, for one thing. That is why when this was tried in 2003 it didn't work at all. Furthermore, people generally treat such rebates as they do with ANY windfall -- by putting it into savings or paying off debts. Only those very few who feel they have ample savings while simultaneously having low/no debts will take their money down to Circuit City to by a new HDTV.
Basically, the rebates do nothing to change people's behaviors going forward for at least the next year and thus do nothing to change the business' assumptions of the same people's behaviors in planning whether to expand and hire or lay people off instead.

"Look it up in John Maynard Keynes."

The root of your intellectual problems. Not even Keynes agrees with how you describe this -- most of his ideas were hijacked and warped by the power hungry into the exact BS you are spouting. America's suffering for an entire decade of the Great Depression was the result. ONLY fiscal stimulus that directly targets reward for FUTURE work and investment actually works. This has been proven over and over again. How did we get out of the Great Depression? The government GUARANTEED 'cost plus' earnings to all those companies that switched over to war production starting in 1942. They were more than happy to invest and expand as possible in that environment.

Your retarded Keynes fallacies reminds me of the fools I work for. They figured out the details of our bonus plan for 2007 in August. August! So much for incentivising us towards a targeted behavior throughout 2007, eh? It is the same thing with this 'rebate'. The exact same thing.

Roy is on Planet Clueless once again
The fresh supply of cash will only increase the problem of 'too much money chasing too few goods'. And I trust you know what that leads to, eh Roy?

We need more goods (and services) PRODUCED. The Cheerios just don't magically appear in aisle #12, you know.

Gold is not shooting through the roof. It is the dollar price for gold that is shooting through the toilet. Get your apples separated from your oranges, Roy.

" forget we ever thought it."

One, YOU, not we, thought of it.
Two, how does this have to do with the topic at hand? We don't have a gold standard currency, so none of this happening now is impacted by one.

Roy has a problem, just not the one he identifies
"he first is a crisis in banking, that we can only eae our way out by INCREASING the amount of money in circulation-- that is, temporarily increasing our liquidity"

That is about the most inaccurate description of our problems as I've heard -- and I see a lot of bizarre things written by reporters who are as economically literate as my cat, too. Also, even IF there WAS a liquidity crisis, that wouldn't stop a government from maintaining a gold peg. First of all, the money they would make available to the banks in such cases is always short term (30-90 days) as to not make any real difference to the over all money supply. And, even IF it WAS an issue, the government could simultaneously sell bonds and soak up cash while they were giving liquidity loans to the banks.

"The second is that the price of gold in dollars is rapidly going UP"
Yeah, because the demand for dollars is falling. Duh!
The Fed doesn't currently give a damn about that, remember? If we had an official gold peg, they would.

"The remedy for the second is to remove cash FROM the economy... by hiking the prime rate."

Hahahahhaha! The prime rate doesn't ADD money to the economy (either way). Oh boy, Roy! No wonder you are soo confused. It increases LENDING activity, which in turn *could* increase demand for money, which in turn increases a money's velocity. But given the well-detailed systemic problems in the lending industry, it is not going to do anything for real estate except at the edges and only for future loans, not the existing CDO messes that need to be unwhinded out there.

Roy needs to go to Planet Reality
"People strapped this close are not dummies. When it looks like times are going to get tough, they stop buying"

Yeah, and when they get a windfall, they either put it away under the mattress or pay off those aforementioned debts.

"Everybody lays off workers."

Which is STILL going to happen, since businesses can quite clearly see that after this one shot in the arm (if it even happens) isn't going to make one bit of difference.

"whereas priming the pump causes more cash transactions to be generated-- increasing federal revenues"

Again, no pump will be primed. Except in Roy's fantasies.

"Even if people having trouble meeting their payments just use the cash to pay down debt, it does the economy good. They're that much further away from having to declare personal bankruptcy, and stiffing their creditors."

The only logical thing you've said -- in addition to proving my main counterpoint.

pure fantasy
Lets see. Too many people buying things they can't afford so they go deeply into debt.

The government is going to encourage the deeply indebted to continue their self-destructive behavior by spending money which is not their's.

Said money must come from somewhere and the broken window fallacy comes to mind. (Breaking a store window is good for the economy (!) because the store window must be replaced so the glass-man makes money, the window caulker makes money, the window frame maker makes money... A zero-sum game comes to mind: taking from Peter to pay Paul (and Bubba, and joe 6pack, 8-kid betty). That this is good for America is pure fantasy.

How to fix it? The threat of debtors prison comes to mind. But if not that, I'd love to see a daily public service announcement that states something like

"As a good American, it is _YOUR RESPONSIBILITY_ to remain debt free. But if you are indebted, it is not your neighbor's responsibility to pay your debts, it is your's alone!"

But, that is also probably pure fantasy too.


Government run economy: tried that in Russia
Whenever the government intrudes in the market to "correct things" or worse yet, "to make things better" things never work out. So, I have to wonder why should anyone believe the net benefits will exceed the net costs?

We have a newly interventionist President (must be WMDs in that darned economy) and a proven economically incompetent Congress (not enough money? we'll spend more!) who are going to stimulate the economy with no analysis of the long-term consequences and certainly no willingness to accept responsibility for any failure.

Government directed fiscal and monetary policy are only the best guesses and hunches of a few hundred supposedly smart or experienced people. But Russia had the same enlightened concept. It took around 7 decades for that experiment to crash and burn. But the USA has always been able to do things faster and in far grander fashion than anyone else.

A barter system based around real money (not that fiat krap we have) like the liberty dollar would shake things up.

Something doesn't add up here
I'm trying to understand this.

On the one hand, you advocate letting the market solve its problems, unaided by an intrusive government. Yet on the other hand, you've just advocated this:

"The Home Owners' Loan Corporation (HOLC) or Home Owner's Refinancing Act, was a New Deal agency established in 1933 under President Franklin Roosevelt . Its purpose was to refinance homes to prevent foreclosure. It was usually used to extend loans from shorter, expensive payments of 15 year loans to lower payments of 30 year loans. Through its work it granted long term mortgages to over a million people facing the loss of their homes. The HOLC stopped lending in June 1936 by the terms of the HOLC act. HOLC was only applicable to nonfarm homes. HOLC also bailed out mortgage-holding banks. The HOLC was a tremendous success, making about one million low-interest loans between June of 1933 and June of 1936. When the HOLC ended its operations in the 1960s the corporation not only paid all its bills, it even returned a small profit to the federal government."

So I guess I'll ask the same question. Are you now advocating solution A, solution B, or just splitting the difference, and letting the federal government bail people out just a little bit?

Me? I like the idea of the feds taking over the obligation by buying up all the shaky loans and putting them on a more reasonable basis, so people can stay in their homes and make such payments as they can afford.

But on the other hand, the feds always seem to be dumber than anyone else when they step in to run those kinds of games... because the people in charge have no direct financial interest in the outcomes.

Such programs end up being stupidly, poorly implemented by GS-14s in the bowels of some nameless cubicle on Southwest Washington. You know, the guys who wear their government IDs on chains around their necks, and sport bad haircuts and five dollar ties?

Look at how Alan Greenspan even, a step far above the people I'm lampooning, got us out of the last recession. He let the good times roll far too long, and left us awash in a sea of loose money. Real estate was the obvious next port of call for the USS Irrational Exuberance.

What we need is for the current holders of all this wallpaper to suddenly get smart, and figure out for themselves a formula to reset all those ARMs before they self destruct. If someone's able to make the payments on an overpriced house with a six percent note, why knock him out of the water by raising it to eight? Don't you just end up with an empty, unsalable pile of bricks that needs to be winterized and is always getting graffiti covered or set on fire by the neighborhood thugs?

In other words-- why are you always looking to the government to bail us out?

Retarded Keynes fallacies?
I just have to address this extended rant of yours:

Me: "What we're aiming at right now is not creating new businesses and more wealth. We're just trying to keep the existing businesses afloat."

You" "Boy, are you completely out on left field. Uh...any government policy directed towards future economic growth (and they all are or should be) IS for creating new businesses and more wealth. In such an environment, the existing businesses 'staying afloat' problem becomes a moot point. If a business is in trouble, sure they will be in 'less' trouble than they otherwise would be. But the new jobs will always be coming from the ones that aren't in trouble or new ones because the investment climate is optimal."

So we should then write off Ford and GM because they're already in trouble? Let me remind you that you and I live in different zip codes.

In my zip code, back in 2002, the car loan rates were zero percent, and still there were no takers. Instead, every major intersection in the county had cars and trucks sitting there with "for sale" signs on the windshield. And everyone's Ski-doos and ORVs were in the front yard, sporting the same legend. Money was in short supply, and no one was buying.

Now let me ask you a multiple choice:

a) Would the car makers have benefitted more from easier access to low cost loans from banks or investors? or

b) Would they benefit more from their buyers having a little more cash in their pockets?

There's such a thing as too much profit. When all the available pocket money in the country goes up into corporate profits and lender profits (Chase Manhattan's credit card division, say) and none is left on the street, what happens?

Answer: It's a business downturn precipitated by short money among the bill-paying consumer set.

You don't understand that, because you seem to think business is only a pastime engaged in by businessmen. And you're wrong. They all rely on customers before they can make their living.

You take the customer for granted, as always having more money to spend-- when in fact he is synonymous with the wage earner, who's always getting the short end of the shaft. Let's continue.

Me: "What's a quick fix, to stave off insolvency? A fresh injection of cash into the pockets of consumers.
This gives businesses a fresh jolt of actual business"

You: "THAT total BS has been thoroughly discredited, Roy. Businesses don't make plans based upon just one quarter, for one thing. That is why when this was tried in 2003 it didn't work at all. Furthermore, people generally treat such rebates as they do with ANY windfall -- by putting it into savings or paying off debts. Only those very few who feel they have ample savings while simultaneously having low/no debts will take their money down to Circuit City to by a new HDTV.
Basically, the rebates do nothing to change people's behaviors going forward for at least the next year and thus do nothing to change the business' assumptions of the same people's behaviors in planning whether to expand and hire or lay people off instead."

Got news for you. While your neighbors Winston and Buffy may just use their $1,200 to beef up their bond holdings, MY neighbors, Wayne and Becky, will be using their $600 to help make their March house payment. And such a use, I believe, is well within the spirit and intent of the bill Mr Bush says he will be signing.

Bottom line: businesses should above all remember to make their money the old fashioned way: by selling products or services at a profit. If they can't do that, no amount of fancy shenanigans on the part of the Fed or the USG will be sufficient to afford them long term stability.

pump it up
Just listen to yourself a second, "americans don't have as much money as they need to spend!!!" Isn't that what used to be called being poorer than you wish you were? If you don't have enough money, you can always live poorer, or increase your erning capacity; nobody has to go into debt. Yet you want the government to print more dirty paper, which they'll need even more of. How dumb is that?

I advocate what ACTUALLY works, as proven by history
1) Numero Uno, don't screw up the market.
2) There has been SOME (very few) examples of the government doing something that actually worked as planned and even under budget. Those PROVEN remedies are my second choice, yes.

"But on the other hand, the feds always seem to be dumber than anyone else when they step in to run those kinds of games... because the people in charge have no direct financial interest in the outcomes"

Occasionally, you come out and say something that makes sense and is logical. It surprises the hell out of the rest of us Roy. The above quote is one of those.

"In other words-- why are you always looking to the government to bail us out?"

I'm not. I just realize that I am always outvoted by folks like you or those in the Republican party who are really 'socialist lite' when it comes to the rubber hitting the road. Hence why I prioritize in the above.

No to both a and b because you misidentify what the problems are
"a) Would the car makers have benefitted more from easier access to low cost loans from banks or investors? or

b) Would they benefit more from their buyers having a little more cash in their pockets?"

If their fundamentals made them inherently uncompetitive, the answer to both is 'no.' In the first case, easy credit would only prolong the necessary liquidation of the assets of the mismanaged. In the second, consumers would simply pay off their debts or put it in savings. Those FEW who would actually buy cars would most likely buy Toyotas, not GM.

"You don't understand that, because you seem to think business is only a pastime engaged in by businessmen. And you're wrong. They all rely on customers before they can make their living."

Oh, I understand all right. You just are clueless as to how that plays out is all.

"You take the customer for granted, as always having more money to spend"

No, I do not. In fact, haven't I repeatedly stated so by insisting that they put whatever windfall cash into the bank or pay off debts long before they spend? WINDFALL cash is not treated by the recipients as regular income is -- whether they be consumers or producers who get the extra spending passed on to them, Roy. You seem to have a real hard time wrapping your head around that concept.

"While your neighbors Winston and Buffy may just use their $1,200 to beef up their bond holdings, MY neighbors, Wayne and Becky, will be using their $600 to help make their March house payment. And such a use, I believe, is well within the spirit and intent of the bill Mr Bush says he will be signing."

Uh, for one, you just DISPROVED your entire Keynesian thesis and PROVED mine, yet fail to even realize that.
More specifically, you just PROVED that Wayne and Becky will pay off their mortgage and not go spending at Circuit City and thus DISPROVED your entire notion of how that money will 'pump up' businesses, which is what I've been saying (and 90% of economists out there have been saying) all along. Two, get off the class warfare kick. You assume too much and it is entirely wrong, let alone relevant. Three, Bush KNOWS the rebate checks won't do jack. Pelosi and Reid know it (or should, I dunno about those two sometimes). It's all an election year gimmick to 'show that the people's politicians CARE'. The expanded appreciated writeoffs WILL help somewhat, but not really until next year.

Bottom line: Lay off the mojitos while posting to this forum, Roy. Please?

Attention Keynes Bugs! Attention Keynes Bugs!
Your pet 'demand side' theories that have been thoroughly disproven are being bandied about by politicians voted in by irrational voters clueless about even the basics of economics!

And now your greatest advocate - Roy - has embarrassed himself by (a) actually advocating the discredited Keynesian policies of the failed past in the first place and (b) contradicted himself by disproving them in the course of this article's forum's postings.

Keynes himself must be smiling in his grave, has he despaired how his theories were warped and misrepresented by the Liberals of the West just as Karl Marx's were by the Bolsheviks of the East.

And then you wonder why we don't take your 'logic' on AGW, Roy?

Need for a global economy
Other countries are growing and need that couple of million bucks investment the baby boomers have to build their economies to first world status.

retarded Keynsianism
I wonder if you like it the time they bailed out Chrysler some years ago, just to save a few union jobs? They should let everything go under if it's not viable on its own.

not just clueless public
It's not just the public but also most politicians and journalists, and economic journalists, and economists too.
One asked his prof why he didn't mention the Austrian School theory of the business cycle, and apparently he answered: "it isn't in the book".

Targeted stimulus
"People strapped this close are not dummies. When it looks like times are going to get tough, they stop buying"

"Yeah, and when they get a windfall, they either put it away under the mattress or pay off those aforementioned debts."

You really do live in a different zip code. Sorry, I'm very familiar with the spending habits of the bottom half. They're a case study in suppressed demand due to inadequate access to funds. When they get a little cash, they spend it on necessities.

The more fortunate among them may use it to pay down debt. But even then, the money shows up as a credit on someone else's ledger. The money is in no case just socked away. That only happens among the Upper Percentiles.

This is the reason pump priming gains in effectiveness the more it goes to the bottom dwellers. I would advocate first paying those eligible for EITC and those getting Social Security. Virtually every dime going to those populations ends up in someone's cash register. And that's the kind of stimulus that keeps companies from cutting back their work force.

The basis of our economy
The misconceptions in your comment are hard to enumerate. But I'll give it a try.

The people I would give the stimulus to would be the working poor. Not the over-75 Ks, nor your ridiculous "8-kid Betty". I'm thinking you actually don't know any of these people, but their problem is not "self-destructive behavior". It's making inadequate paychecks, which have remained stagnat while the price of everything keeps creeping up. They're not in debt because they live frivolously. They're in debt because it costs more to support their families than they can manage to make.

In this position, any extra money they receive gets spent immediately on necessities. And this spending does double duty, occasioning a taxable moment (where a third of it comes straight back to the government) and increasing profit margins in every business that sells a good or a prodcut to a consumer.

If you would like to do your part in reducing the amount of family debt in this country, go around to the high schools and tell everyone "Don't get married! Don't try to raise a family!" Because most of those who do and who fail to go through college end up being just more families who can't ever quite pay their bills without going into debt.

That's just the kind of country we live in. Personally, I would prefer if they were paid a little more, the companies they worked for made a little less, and debt were not the basis for our personal finances.

stuck on "socialist stupid"
Lets not forget dbt, we have a R President and a slim D majority in Congress. This stupid rebate couldn't happen without Bush's and the minority's blessing. So you can whine about socialists and Pelosi all you want, all these politician schmucks are boinking each other for votes. Its not all that helpful to raise the alarm about the wolf when he is sitting right there having tea with the neighbors.


"Are we a wealth producing nation or a net consumer?"

Thats a million dollar question. Based on the culture of Bush and Republican control, we are a net consumer. How obvious can it be? Bush says, to paraphrase: "The terrorists want to kill you, I'm the guy that can protect you", and in the next breath, "The way to beat the terrorists is to continue buying crap and show them you're not afraid".

Shallow American consumerism is a culture thats been brewing for years, maybe decades. Bush didn't start the culture, but as with many things, he has taken it to the next level. The one thing I expect Republicans to get right, they get it worse to a degree hardly seen before. Corruption, power and greed cut through Republican values like a hot ginsu through butter.

The problem with our economy, other than the big obvious things (bad investments, mortgage defaults, housing prices, etc.), is that 70% of our economy is based on consumerism and people aren't financing this spending spree with money, they're doing it with credit, just like our fearless leaders in government are doing. Creating jobs doesn't mean a thing if the jobs pay low and people live beyond their means. Giving more money to rich people (Bush's tax cuts) doesn't create jobs or even mean higher pay for average workers. Everyone likes to bash Keynes economics, but no one has mentioned the fact that supply-side economics is obviously a failure too! We're in a supply-side economy right now. The only real growth going on is in GREED. Gee, who woulda thunk it, give rich people more money and all you end up with is richer rich people. Amazing. Thats why Kling is taking another look at Keynes, its a courageous acceptance that supply-side doesn't work either. Ideology is for the doomed.

targeted windfall
"The more fortunate among them may use it to pay down debt. But even then, the money shows up as a credit on someone else's ledger"

Roy...ok, how does paying down debt generate NEW consumer spending, which is the intellectual fulcrum behind your insistence that these scams work? They are paying off OLD consumer spending plus interest! While worthy in itself, that doesn't stimulate economic growth. No pump is primed.

"And that's the kind of stimulus that keeps companies from cutting back their work force."
No, Roy. It doesn't. Businesses KNOW it is just a shot in the arm and it doesn't change the fundamentals of the bigger picture. They'll just lay off less people or push out the final decision to lay off, perhaps. But, they are still going to lay off if that is what they were planning before the 'miracle pump priming' was announced.

Now, if the government were to say, "Ok, we're going to send out rebate checks EVERY month for the next two years." THAT would work as you describe.

See, Roy. Businesses tend to react even more rationally to one-shot windfalls than individuals do.

You need to shed your precious shiboleths and join the 21st Century, Roy. Economists have studied what people do when they get windfalls like this and the vast majority DO NOT SPEND IT, contrary to how you view the world. Zip codes don't change that overwhelming fact much, either.

"The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated....If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.

And even the people who get the money often save more of it than they spend.

That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating."

From: http://www.invisibleheart.com/2008/01/the_science_of_stimulus.php#000086

Wealth elasticity
Yes, wealth elasticity for the poor is greater than it is for the rich. That is, a pauper who gets a windfall of a million dollars will tend to blow it within a year while a millionaire who gets it will not expand his consumption that much more. However, a $600 rebate check isn't going to do much for a pauper's ability to reach the full potential of his/her wealth elasticity as the aforementioned million bucks will. So, one can not compare the effects of one vs the other.

Also, the poor is such a small segment of our economy that it just won't do much. It certainly won't do much to change business plans except maybe for that quarterly results for WalMart. It won't change tax receipts whole lot, either.

Now, if the poor were given money in a special investment account that they can't touch until they retire, THAT would make a difference over time in a big way for the economy as a whole and for the individual concerned. That's because the person's behavior is forced to invest, not consume or even pay off existing debts. Draconian, yup. But the truth.

"Personally, I would prefer if...debt were not the basis for our personal finances"

On that, I believe we can all agree on. Our debt-infused culture is toxic on so many levels. But it really stems from our inability as individuals as well as the collective whole to stifle the urge to consume more than we should, not some evil plot by companies to purposely impoverish people. The companies are just there to peddle the debt crack we so crave.

Bring on the Nanny-surge
Why do we assume that the government knows better than the rest of us?

The "spending surge (TM)" about to be unleashed against the forces which seek to discomfort the pampered American worker has not been analyzed or justified as necessary let alone non-damaging to our economy.

Really, why do we need it?

In the old days (pre-Bush/Clinton) it would have been part of the business cycle. Excess is replaced by dearth is replaced by excess. We were hardy; we toughed it out!

Now we have a workforce which wants their "Mommy" to save them from every discomfort and inconvenience. And, except for maybe Romney in Michigan telling the voters that their jobs are not coming back, nobody, not even Sen. Straight Talk is being honest.

So, bring on the "Nanny-Surge (TM)" the whiners need $$$ to spend at McBigButts, 200DollarSneekerCity, WheelSpinnerWorld, Buds6x6packBarn and all the other places worth visiting.

private savings accounts like u mentioned
Yes, those accounts already exists and opperate successfully in places like Singapore, and Chile, and a bunch others they say. When people can see how it's growing, it tends to get them to think about investing, instead of the immediate gratification that most low class people engage in. I'm not sure Americans are innovative enough for such plans though since they've so far into the socialist welfare state in the past few decades.

Really, why do we need it?
We don't. The politicians need it to show that they care. Bread and Circuses for the uneducated masses.

It's understandable that Hillary right now leads in the 'undereducated' vote. What's bad is that the Republicans this year have been seeking out that vote, too.

Fred Thompson told the truth about entitlements and spending in this campaign. Over a decade ago it was Paul Tsongas. In both cases, they didn't get nominated. Nobody wants to hear the truth, they want to hear lies. Especially the uneducated.

And when I refer to 'uneducated', with regards to economics, 99.9999% of the voting public is completely uneducated. It's just slightly less as bad with regards to foreign affairs knowledge. And the politicians know it. That is, the ones who are educated themselves to know it. Many of the new breed truly are representative of their constituents and have no clue either.

It's time to bring back poll testing. Of course, anyone who advocates that gets branded a 'racist'. But in reality, the current crop of politicians who have mastered the art of pandering to the uneducated masses don't want the rules changed in favor of the smart voters.

We're well down the Road to Serfdom.

What on earth?
The whole point to a stimulus is that it be spent. Without its being spent, there's no point in giving the money away. It does no work.

Also, "the poor" in our society-- meaning the working poor-- are all in debt. How could any of them "save" money given to them, other than by retiring some of their debt. Their debt is just negative savings.

You then say "the poor is such a small segment of our economy that it just won't do much. It certainly won't do much to change business plans except maybe for that quarterly results for WalMart. It won't change tax receipts whole lot, either."

No, the poor could very well be defined as the bottom two quintiles. You're thinking of the underclass, which is only about the bottom ten percent. No one is advocating giving them anything. The thirty percent or so above them, who are working hard and never quite able to make ends meet, would spend any award given them in a heartbeat. They're a great repository of unmet needs.

And the stimulus, once again, is not intended to make Uncle Sam seen like a nice guy. It's pump priming. If you give cash to a population with unmet needs, it instantly goes into someone's cash register, stimulating profits, employment and government revenue. It does work.

The WalMart crack is a bit snobbish. Maybe you're above shopping there. But dollars earned by that company do as much good for the economy as dollars spent even at Hammacher Schlemmer, or Bergdorf Goodman.

Re the supposed toxicity of having a debt-based culture, it used to be income-based. But incomes have fallen behind, relative to costs, so the debt industry was developed to meet the shortfall between attainable income levels and required spending ability.

I'd like to find something in your comment I agreed with. But even this is off base: "if the poor were given money in a special investment account that they can't touch until they retire, THAT would make a difference over time in a big way for the economy as a whole and for the individual concerned. That's because the person's behavior is forced to invest, not consume or even pay off existing debts."

Absolutely upside down. First you have to eat. Second, live debt free. Then after that, if you have something extra, sure, save it, put it in a fund, do something to try to preserve its value. But you're talking about investments like it's THEY that are our crack cocaine, the only thing in life of any importance.

It's not the purpose of life on this earth, to invest invest invest. That would just make someone into a cheerless drudge, always squinting through his spectacles at his ledger, like Scrooge. Good lord, get out and have some fun!

Russ Roberts
The guy does make a lot of sense. $150 billion goes pretty quickly when it comes to injecting some purchasing alcohol in the national carburetor. But it could go a lot further if it were being targeted better.

If most or all the money were just allocated to the bottom earners it would more likely be spent immediately. A plan indicating that a family of four, say, making twice the poverty level or less (about 40K) would get the full amount, while those above would get nothing, would virtually ensure that all the seed money was going to be spent immediately. This target group is largely below the line where one qualifies for credit, so little would be used to spend down their nonexistent debt. They pay for their groceries with debit cards.

In the Senate of course they're talking about spreading the benefit up to those making 150K. And those people don't need the money, won't spend it and will just tuck it away in their investments. Perhaps you would see the utility in that; I don't.

But if you still see this approach as being useless, what would you suggest? Just do nothing? Wait for it to go away? What?

Do you feel nannied?
You seem to have strong feelings about the amount of nannying experienced by the American worker.

There could be two reasons for this. Either you ARE an American worker, and feel as though your job is too cushy and you're paid too well... or you're not a paycheck earner, and just talking through your ass about things of which you know nothing.

I'm curious... which is it?

The point to considering a stimulus is not to augment a meager income, but to stimulate economic activity through increased purchasing power. And such an approach only makes sense to the degree that you target low-income workers for receipt of the stimulus. They can't afford to buy all the things they want, so they'll use the money on purchases.

Maybe such an approach will work, maybe it won't. We'll certainly see. The plan is going forward, and I'm sure we'll have lots of bean counters tallying the result. I don't see it as an adequate stimulus for your outburst against people who might use the cash to buy sneakers, wheel spinners and beer. After all, those things constitute a goodly proportion of our local economy here... and if sales were slow there would be a lot of people put out of work.

So to the degree that our federal revenues are put to those purposes, jobs will in fact be saved. And the multiplier effect is that the money does double duty, allowing a lot of wage earners to continue earning (and spending) wages.

Meanwhile on the other end, is all that money just wasted? A dollar leaves the Treasury and gets spent, sending thirty cents back into the Treasury. Then it gets spent again and sends another quarter back to Washington. At that point maybe it leaves the country, but we really didn't lose a dollar. We only lost 45 cents. Check my math if you don't think so.

Poll testing
We don't have literacy tests... but we have other devices that serve as well. For instance we have two million people currently incarcerated, mostly for nonviolent crimes like drug possession or uttering bad checks. And we have an even larger population of ex-offenders, who can't vote in many states.

In a nation almost evenly divided between the Rs and the Ds, this is enough of a margin to allow the victory to be awarded to the "right" people.

But I get your drift. The poor, ignorant and ill-educated don't have the mental capacity to know, or vote, their own best interest. Democrats in SC, for instance, either voted for Hilary because she's a woman, or Obama because they think he's black. If they knew enough to vote their wallets they'd have gone for Edwards-- which they didn't. I'm sure they knew little about the man beyond the cost of his haircut. And if they did, they'd still be protected by a cynicism that keeps them from actually exploring the issues.

The road to serfdom? In South Carolina they've always been there.

Okay, but screwing up the market?
Doesn't it seem to you like the government would be rewarding bad behavior, if it were to buy out every bank that made dumb purchases on the secondary mortgage market? How on earth can this be considered either a responsible or an effective move on their part?

Akk it does is reward bad investors for their bad decisions. And, frankly put, the investor class can survive such a mini calamity. The people who get hurt in a recession are the ones who become unemployed during the business setback. An extension of unemployment benefits would seem to me to be far more practical than asking the feds to pay off banks who were gullible enough to not look beneath the surface at those bundles.

Secondly, we know through experience that the feds are miserable property managers. Remember all those boarded up HUD houses? I guess you don't, but I do. I used to manage the ones across the street from them. They attracted vandals and druggies, and no one ever lifted a finger to either fix them up or market them. They were a permanent blight on the urban landscape.

I think we can put federal money, if we resolve to spend it, into projects that give a much better bang for the buck. Here's an interesting perspective:

http://www.tpmcafe.com/blog/coffeehouse/2008/jan/07/stimulus_101

"What are the best policies for the job? [Providing a recession everting stimulus] The usual competition here is between temporary tax cuts and a shot of direct spending. When the tax cuts are appropriately targeted (like Dean’s), that’s fine—they can provide a direct form of stimulus by putting more money in consumers’ pockets, but you’ve got to be careful here. Tax breaks for rich people are unlikely to generate much stimulus because those folks are not income-constrained.

"For example, analysis of this point has found that a dollar of revenue sacrificed for a dividend or capital gains tax cut yields a measly nine cents.

"You get a much better bang-for-the-stimulative-buck from direct spending. A dollar spent shoring up Unemployment Insurance yields $1.73; a dollar spent on fiscal relief to the states yields $1.24. This last idea—ratcheting up state grants from the Feds—is particularly important right now, since many state and city coffers are coming up short due to the local revenue impacts of the housing meltdown.

"In short, especially given the ideologies of the folks in charge, we should favor direct spending stimulus ideas over tax cuts."

A dollar spent shoring up Unemployment Insurance yields $1.73? I didn't know that. From a business perspective, doesn't this seem like a good thing for a cash-strapped government to do?

Your points
"Doesn't it seem to you like the government would be rewarding bad behavior, if it were to buy out every bank that made dumb purchases on the secondary mortgage market? How on earth can this be considered either a responsible or an effective move on their part?"

Answers: First one, yes. Second one, the whole 'lender of last resort' function of the Fed and other government agencies was specifically designed to save the financial system from collapse. The logic behind that is that a financial collapse would be far more damaging than the moral hazards of bailing out some fat cats. This is the main reason why we HAVE central banks in the first place. It pisses everyone off, but the logic is pretty harshly in favor of that argument.

This happened before. Remember the S & L bailout? This happens to Florida every time a hurricane wipes it out and the Feds have to choose between 'losing a Big state' or letting folks learn their lesson. As long as we live in a democratic state, it will tend to happen more than not, too.

I submit that most of the ignorant aren't the poor
There's too many uninformed middle-class and rich people out there and they outnumber the poor.

The Road to Serfdom is the title of a book written by F.A. Hayek. I recommend it to you.

"If they knew enough to vote their wallets they'd have gone for Edwards-- which they didn't"

That's funny! I say the same thing to all the $200k+ DINK couples out here in the SF Bay Area that don't vote Republican, too.

The kind of poll testing I have in mind are just simple , mutliple-guess questions like:

The Federal government is comprised of how many branches?

(a) 1
(b) 2
(c) 3
(d) 0

If a farmer sells corn to 100 people last month, but 200 people show up to buy it from him this month, how will that effect the price of corn for this month?

(a) Prices will rise
(b) Prices will stay the same
(c) Prices will fall

I submit to you that a lot of college educated folks won't pass either of those two questions any more than a poor person would, such is the dismal state of our citizenry. We need to weed them out of the voting booth.

more retarted keynesism
"The point to considering a stimulus is not to augment a meager income, but to stimulate economic activity through increased purchasing power. And such an approach only makes sense to the degree that you target low-income workers for receipt of the stimulus. They can't afford to buy all the things they want, so they'll use the money on purchases."

That Keynesian clap-trap has long been discredited. It didn't work in 2003, it won't work now. Only sending the signal that work and risk taken from now on will be rewarded more will do anything.

You really need to at least VISIT Planet Reality, Roy
"The whole point to a stimulus is that it be spent. Without its being spent, there's no point in giving the money away. It does no work."

First, your continued Keynesian viewpoint has been long discredited. Second, the money that is invested goes to those who create more jobs and more wealth, both for the risk-takers and for the rest of society. THAT is what I meant by 'make a difference over time in a big way for the economy as a whole and for the individual concerned'.

"No, the poor could very well be defined as the bottom two quintiles. You're thinking of the underclass, which is only about the bottom ten percent."

Congrats Roy! You HAVE found the difference between our ZIP codes that is relevant to this topic. See, where I live, the working poor have all left. Not during this downturn but during the previous upturns because the cost of living skyrocketed beyond there reach. Now, we have upper income folks and the underclass (immigrants) . But still, giving money away for ANYONE to just spend never works, Roy. Never.

Oh, I do shop at WalMart. All the time. But my position on the economics of your views still stands.

"Absolutely upside down. First you have to eat. Second, live debt free. Then after that, if you have something extra, sure, save it, put it in a fund, do something to try to preserve its value. But you're talking about investments like it's THEY that are our crack cocaine, the only thing in life of any importance."

Nope. The subject here is stimulating the economy to get us out of a recession or worse, correct? That means doing things now to effect the future. Spending now does not do that. Investing does. Always. All the wealth we have is from prior investments, not 'pump priming' money through the slew, Roy.

And life is worth living in an economy that generates new wealth, because the alternative sucks big time.

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