If you go to RealClearPolitics (www.realclearpolitics.com) you will find various points of view about politics. Included among these is a piece from the NYT which is 100% pure administration talking point read-back. It is about the ill-fated stimulus. As noted by the author, even the administration does not refer to its own stimulus any more. Here's why.
In a recession there are precious few things a government can do. There is very nice experimental and theoretical evidence that NOTHING a government does fundamentally changes business cycles. But ignoring that, there is still little that can be done.
-The government can reduce taxes and suspend regulations to make it easier for businesses and individuals to thrive. This is essentially the 'hands off' model used prior to 1933. Individuals have more money in their pockets and businesses have fewer hoops to go through to operate.
-Government can increase spending using surplus money and/or taxes. The government spending trickles through the economy, employing workers and using businesses for work important to the state. This version of stimulus assumes the government has money to spend.
-Government can borrow money, spending on a deficit, to increase economic activity. This is the classic Keynes maneuver. In a time of crisis, when money turnover decreases, governmental spending can make a crucial difference. In a crisis, it is permissible for the government to borrow against future prosperity to increase economic activity now. This is the method used in 1933, and turned to by Keynesians ever since.
-Government can buy back its own debt to reduce interest rates. This is politely called 'quantitative easing' by economists today. The concept is that government uses its cash reserves to buy back debt, reducing interest rates and making it easier for everyone to borrow money and buy things.
Obama's stimulus package was a mixture of tax cuts and governmental spending totaling 700 billion dollars. There is a modestly complex calculation for the impact of spending within an economy which is used to create the notorious '2.5 million jobs' figure. In essence, by injecting 700 billion dollars of increased money into the economy 2.5 million jobs are calculated to be created, or saved, in a period of job losses.
No calculation is perfect of course. Without wasting too much time, the one example that comes to mind is runs created in baseball. There is a simple and remarkably accurate formula regarding runs scored and allowed that predicts a team's record in baseball. That formula, however, goes wrong when a team is especially efficient at using the runs it creates, or the opponent is wasteful. Thus the 1960 World Series, where the runs formula would predict an overwhelming Yankees victory, when in fact the Pirates won in 7 games. They lost 15-3, 13-1, and won 2-0, 3-1, etc. The result was the Yankees scored far more runs in 7 games and lost.
We don't really know whether 2.5 million jobs were 'saved' by the stimulus. Some, such as Paul Krugman, wanted a 1+trillion dollar stimulus. But there is a problem. Keynesian debt based stimulus is only warranted when there is no 'structura; deficit' to use Keynes' words. In other words, a government that is chronically spending more than it earns can not end a recession by spending yet more than it earns. Remind you of anyone? Right. Us.
The problem of deficit spending to stimulate an economy when the government is already running a deficit is that such spending drives interest rates higher. This makes borrowing harder and consumer and business spending is dampened, the exact opposite of the desired effect. Hence the recommendations to lower taxes (actually done by BHO) rather than spend. This advice in turn depends on the value of the economic multiplier. Generally one dollar spent privately is said to produce three dollars of economic activity. In contrast, one dollar of tax money spent produces only 0.80 dollars of economic activity. It is thus much better to stimulate private spending through lowered taxes than to stimulate by governmental spending. Others vehemently disagree, saying that the governmental spending multiplier is higher.
Again without wasting too much time on a peripheral issue, there is no way the governmental multiplier is higher. It CAN'T be. Government gets money from the private world by taxation. Thus one dollar is already taken out of the private sector for every dollar of governmental spending. Assuming the private multiplier is 3, the best the governmental one can be is 2. But government comes with administrative costs before any spending is created. Thus one dollar of tax money does not create one dollar of spending. One may argue that borrowed money has a better multiplier than tax money, and that would be at least partly true. The problem comes in increased governmental interest costs and higher interest rates. This takes tax money to pay and places a drag on the economy generally.
And so governmental spending, especially deficit spending is a dead end for stimulus. We truly are better served by lowering tax rates and creating low interest, low paperwork loans. One significant drag on the economy is the high cost and down payment requirements for business loans.
However, the real point fo this wandering exercise is this. We have already lowered interest rates artificially. They can not go lower than 0-1%. There is just nowhere to go. The Fed is giving banks FREE MONEY and we can't get more economic activity. Despite wails at BHO, he has lowered a fair number of taxes. And this has not worked either. The Fed therefore decided to try quantitative easing. Now proposed is a third round of QE, or QE3. Now, where is the problem?
The obvious problem is the Fed has no money. There is no cash with which to buy back Federal debt! So how is it being bought By printing money, you silly! The Fed prints the money and uses it to buy back the debt, at least theoretically lowering costs. But I am one who joins a host of economists in saying this is pointless and dangerous. We can not lower borrowing costs any further anyway. And printing money is an invitation to hyper-inflation, a risk as our total debt approaches or exceeds 100% of GDP.
The plain version of all of this is- the government has no more interventions. This recession must run its course. It is being made worse by horrific borrowing regulations for people and businesses put in place by people angry at the banks for being bailed out. But unlike individuals, 80% of whom defaulted on renegotiated loans, the bank bailout preserved the financial system for all and the money has been repaid back with interest. The Fed MADE MONEY by bailing out the banks, and lost money bailing out consumers.
My take- keep taxes low at this time
relax borrowing and lending requirements
allow foreclosed homes to be sold off, getting the market to its bottom
When housing is seen again as a safe investment and money can be borrowed without having to set yourself on fire to prove your worth then I think our economy will improve. Until then we are at risk for inflation, and our stock market is spectacularly overvalued.
And my point about media? One part of the media continues to cheer for a concept that simply does not apply. They are either ignorant, malicious or deluded. Other voices in the media make plain the problem, but few people read or hear them. The people who will suffer from this media dichotomy are not the wealthy, who read the smart media and are not herd followers. The ones who will suffer are unions with invested, underfunded pensions and individuals.
High time to wake up and realize there is nothing more the Fed can do, we are in significant danger, and the stock market is an illusion.
Ted
In a recession there are precious few things a government can do. There is very nice experimental and theoretical evidence that NOTHING a government does fundamentally changes business cycles. But ignoring that, there is still little that can be done.
-The government can reduce taxes and suspend regulations to make it easier for businesses and individuals to thrive. This is essentially the 'hands off' model used prior to 1933. Individuals have more money in their pockets and businesses have fewer hoops to go through to operate.
-Government can increase spending using surplus money and/or taxes. The government spending trickles through the economy, employing workers and using businesses for work important to the state. This version of stimulus assumes the government has money to spend.
-Government can borrow money, spending on a deficit, to increase economic activity. This is the classic Keynes maneuver. In a time of crisis, when money turnover decreases, governmental spending can make a crucial difference. In a crisis, it is permissible for the government to borrow against future prosperity to increase economic activity now. This is the method used in 1933, and turned to by Keynesians ever since.
-Government can buy back its own debt to reduce interest rates. This is politely called 'quantitative easing' by economists today. The concept is that government uses its cash reserves to buy back debt, reducing interest rates and making it easier for everyone to borrow money and buy things.
Obama's stimulus package was a mixture of tax cuts and governmental spending totaling 700 billion dollars. There is a modestly complex calculation for the impact of spending within an economy which is used to create the notorious '2.5 million jobs' figure. In essence, by injecting 700 billion dollars of increased money into the economy 2.5 million jobs are calculated to be created, or saved, in a period of job losses.
No calculation is perfect of course. Without wasting too much time, the one example that comes to mind is runs created in baseball. There is a simple and remarkably accurate formula regarding runs scored and allowed that predicts a team's record in baseball. That formula, however, goes wrong when a team is especially efficient at using the runs it creates, or the opponent is wasteful. Thus the 1960 World Series, where the runs formula would predict an overwhelming Yankees victory, when in fact the Pirates won in 7 games. They lost 15-3, 13-1, and won 2-0, 3-1, etc. The result was the Yankees scored far more runs in 7 games and lost.
We don't really know whether 2.5 million jobs were 'saved' by the stimulus. Some, such as Paul Krugman, wanted a 1+trillion dollar stimulus. But there is a problem. Keynesian debt based stimulus is only warranted when there is no 'structura; deficit' to use Keynes' words. In other words, a government that is chronically spending more than it earns can not end a recession by spending yet more than it earns. Remind you of anyone? Right. Us.
The problem of deficit spending to stimulate an economy when the government is already running a deficit is that such spending drives interest rates higher. This makes borrowing harder and consumer and business spending is dampened, the exact opposite of the desired effect. Hence the recommendations to lower taxes (actually done by BHO) rather than spend. This advice in turn depends on the value of the economic multiplier. Generally one dollar spent privately is said to produce three dollars of economic activity. In contrast, one dollar of tax money spent produces only 0.80 dollars of economic activity. It is thus much better to stimulate private spending through lowered taxes than to stimulate by governmental spending. Others vehemently disagree, saying that the governmental spending multiplier is higher.
Again without wasting too much time on a peripheral issue, there is no way the governmental multiplier is higher. It CAN'T be. Government gets money from the private world by taxation. Thus one dollar is already taken out of the private sector for every dollar of governmental spending. Assuming the private multiplier is 3, the best the governmental one can be is 2. But government comes with administrative costs before any spending is created. Thus one dollar of tax money does not create one dollar of spending. One may argue that borrowed money has a better multiplier than tax money, and that would be at least partly true. The problem comes in increased governmental interest costs and higher interest rates. This takes tax money to pay and places a drag on the economy generally.
And so governmental spending, especially deficit spending is a dead end for stimulus. We truly are better served by lowering tax rates and creating low interest, low paperwork loans. One significant drag on the economy is the high cost and down payment requirements for business loans.
However, the real point fo this wandering exercise is this. We have already lowered interest rates artificially. They can not go lower than 0-1%. There is just nowhere to go. The Fed is giving banks FREE MONEY and we can't get more economic activity. Despite wails at BHO, he has lowered a fair number of taxes. And this has not worked either. The Fed therefore decided to try quantitative easing. Now proposed is a third round of QE, or QE3. Now, where is the problem?
The obvious problem is the Fed has no money. There is no cash with which to buy back Federal debt! So how is it being bought By printing money, you silly! The Fed prints the money and uses it to buy back the debt, at least theoretically lowering costs. But I am one who joins a host of economists in saying this is pointless and dangerous. We can not lower borrowing costs any further anyway. And printing money is an invitation to hyper-inflation, a risk as our total debt approaches or exceeds 100% of GDP.
The plain version of all of this is- the government has no more interventions. This recession must run its course. It is being made worse by horrific borrowing regulations for people and businesses put in place by people angry at the banks for being bailed out. But unlike individuals, 80% of whom defaulted on renegotiated loans, the bank bailout preserved the financial system for all and the money has been repaid back with interest. The Fed MADE MONEY by bailing out the banks, and lost money bailing out consumers.
My take- keep taxes low at this time
relax borrowing and lending requirements
allow foreclosed homes to be sold off, getting the market to its bottom
When housing is seen again as a safe investment and money can be borrowed without having to set yourself on fire to prove your worth then I think our economy will improve. Until then we are at risk for inflation, and our stock market is spectacularly overvalued.
And my point about media? One part of the media continues to cheer for a concept that simply does not apply. They are either ignorant, malicious or deluded. Other voices in the media make plain the problem, but few people read or hear them. The people who will suffer from this media dichotomy are not the wealthy, who read the smart media and are not herd followers. The ones who will suffer are unions with invested, underfunded pensions and individuals.
High time to wake up and realize there is nothing more the Fed can do, we are in significant danger, and the stock market is an illusion.
Ted
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