Friday, February 6, 2009

The truth about fiscal stimulus

A guest post from an Economist in the financial industry: The truth about fiscal stimulus

Job losses, production losses, income losses and spending cutbacks are feeding on themselves, pulling the entire private sector down at a pace that shows no sign of slowing. The public sector, two-thirds of which is made up by state and local governments, is being dragged down too, though here the pain is yet to come – governors and school boards are talking about budget cuts and layoffs, but they haven’t hit yet.

The only remedy is massive fiscal stimulus from the Federal Government, which needs to be big, bold and quick. It turns out that it’s hard to spend money very fast, so we need to be creative about how to push out money into the economy in ways that will have a real impact soon. Here are the best ideas:
  1. Direct aid to state & local governments: this is critical to avert a huge round of layoffs, spending cuts, and tax increases. It needs to be big, and details need to be announced immediately (weeks not months). School principals are already cutting their budgets and planning layoffs, because they don’t know whether they will really get any money, or when it might come, or with what kind of restrictions. And unlike the Feds, they can’t spend money they don’t have. This is about teachers: employment in local government education is about 8 million, four times the entire federal government.
  2. Increases in existing federal spending programs: any place where there is already a system in place to distribute funds, the limits can be raised. Examples include Pell grants, student loans, research grants (NIH, NSF), National Parks, NEA grants, and probably hundreds of smaller programs that would add up to real money. Whatever their current budget limits, these programs can be doubled, preferably with a use-it-or-lose-it rule that guarantees the money will be spent this year. Next year it’s back to normal unless we decide we need another stimulus.
  3. Tax cuts for individuals: regular checks in the mail, or a tax holiday from payroll taxes, or a series of lump-sum payments. These aren’t as effective as government spending since people won’t spend it all, but they do have the merit of going out the door immediately. It’s likely that many more people are cash-constrained than was the case a year ago, so the percentage that’s spent should be correspondingly higher this time.
  4. Longer-term infrastructure spending: probably a good idea to relieve bottlenecks and make urgent repairs, as well as to put a down payment on new public initiatives. It’s unfortunate that not much of this will happen in 2009, but if predictions of higher consumer saving rates are correct we will need fiscal stimulus for several years. Some ideas, like upgrading energy-efficiency in federal buildings and converting to electronic medical records, might actually reduce federal spending down the road.

Politically, this reverses the Republican approach to the economy over the last generation, which constrained domestic spending on infrastructure or poorer people, and provided upper-income tax cuts. Opposition to the current package is driven by the fear that it might work, and that Americans might approve of the new direction. Republican counter-proposals are designed to fail:

  • limit the size, at a moment when every day brings tens of thousands of job losses, with pleas for fiscal responsibility that are breathtakingly cynical in the light of the trillions of public debt accumulated by Republican administrations since 1981;
  • limit the aid to state & local governments – probably the most effective component of the whole effort – despite the urgent needs articulated by governors of both parties;
  • add tax breaks for businesses, which are completely irrelevant in the near term, and unlikely to help much in the longer term compared to policies that might raise demand or improve the overall infrastructure of the economy.

The Opinionator


  1. Direct aid to state & local governments: this is critical to avert a huge round of layoffs, spending cuts, and tax increases.

    That assumes, wrongly IMO, that state & local government is actually producing more than just entropy.

    Here in Denmark we have the same lame game: Schools, Hospitals, Day care e.t.c.gets the cuts yet employee count and expenses rises always because the crap service justifies more public expenditure.

    I.M.O. Public services need to sack everyone between department heads and governor and throw out maybe 80% of the legislation to focus on the people-related activities what they were put there to do (but don't).

  2. Oh Rebecca, The Opinionator reveals himself to be as clueless as Krugman, Bernanke, Geithner, and the many others who don't get money and the relationship of money to economics.

    The Opinionator says:

    "The only remedy is massive fiscal stimulus from the Federal Government, which needs to be big, bold and quick."

    Exactly why is this the only?

    Also, who says this is the right remedy?

    Right off the bat, you can see how clueless the Opinionator is when he or she writes,

    "Direct aid to state & local governments ... is critical to avert a huge round of layoffs, spending cuts, and tax increases. It needs to be big, and ... announced immediately..."

    The Opinionator fails to see that government grew too big along with the rest of the Debt Bubble phony, Ponzi Economy.

    Because no one can pay debt service, bets everyone laid down on future needed production have proven to be false.

    Because too many overspent for production equipment to make and sell stuff that no one can now buy, fewer sales shall happen going forward.

    With fewer sales, fewer taxes shall get collected. With fewer collected taxes, there's less cash to pay for a government grown to big for a future that now shall not materialize.

    The right fix is to cut government, increase the size of classrooms to a manageable 30 children for each class, cut all progressive-thinking marginal meddling, do-gooder dreams that fail to deliver general welfare for all citizens.

    Americans must awaken to truth. The biggest Debt Bubble in history, built by Bush-Clinton-Bush and their handmaiden Bernanke have wrecked the inherent design of the economy.

    Increasing debt and spending is not going to get anyone out of a problem caused by excessive debt-based spending.

  3. the debtists think that the cure for debt is more debt...

    the boomists think that only more boom will halt the debt...

    the depressionists think that debt is finite and must be reduced...

  4. The Republicans are rightly criticized for their part in creating the massive debt of the past 30 years. But it didn't happen because they were behaving as fiscal conservatives, but because they time and again gave in to the impulse to spend more.

    Giving Democrats control of the purse strings is like saying the parent in the family has been irresponsible, spending too much and running up a big credit card debt, so let's give control of the family finances to the irresponsible teenager who's been hungering for new clothes, shoes, CDs, an iPhone, a new laptop, and their own car for the last X years and feeling abused and denied because they weren't given it.

    And the great economic reasoning here is that the cure to people being forced to actually tighten their belts and develop some spending prudence is to rob their future earnings so even more can be spent now. That people who got a college degree can actually believe that is sad. I would say that the only way we're going to learn is for these Keynesians to get their way, blow our money, and see that it does nothing to address the cause of the problem - but my faith in people actually learning from past mistakes has been shaken by the fact that in 1991 the Soviet Union collapsed but we still have legions of leftists who think that THEIR version of socialism is going to turn out differently than it did there. Scary.

  5. Of particular interest - SUVs, Dodge Durango specifically, are in short supply again. Since gas prices went down, purchasing of SUVs have gone up. Now, doesn't that indicate that some people don't get the picture???
    We are going to be in a world of hurt if the stimulus package is full of non-stimulus stuff. The Fed. gov't is back buying SUVs.

  6. There's not a comprehensive solution. And there must certainly be many programs that might have a positive impact on this recession/depression.

    But deficit spending has lost it's validity as a means to rescue the economy. And there is litte room for the FED to counteract the current economic contraction.

    I didn't understand this fiasco, nor foresee this disaster. Even so, I did sell stocks on 9/2/07.

    But there is a way to increase the supply of loan funds (available savings), and lower long-interest rates (i.e., mortgage rates -inorder to help with the refinancing and purchasing of homes at lower rates, as well as help reduce the Treasury's financing requirements).

    Even during this mess, it is possible to "increase the efficiency" (i.e., the competition between U.S. commercial banks, and the Euro-dollar market - which is unencumbered by regulatory restrictions). Note the e-d market is the FED's gold standard (no regulatory restrictions).

    I.e., Congress can minimize the costs, and raise the profits, of the U.S. money creating depository institutions.

    How is this possible? Interest rate ceilings should be imposed on commercial banks and lowered gradually.

    I.e., it was a gigantic mistake to remove interest rate ceilings for an institution which, every time a it grants loans to, or purchases securities from, the non-bank public, it acquires title to earning assets by initially, the creation of an equal volume of new money- (transaction deposits) -- somewhere in the banking system.

    I.e., commercial bank deposits are the result of lending, not the other way around. The CBs could continue to lend even if the public ceased to save altogether. The last period of disintermediation for the commercial banks was in the Great Depression.

    Or money flowing to the financial intermediaries (the non-banks are not competitors) never leaves the commercial banking system.

    As an example, during the savings and loan crisis during 1966 (when the S&Ls experienced distintemediation), ceilings on commercial bank deposits were reduced, which increased the flow of savings through the S&L's. Thus the S&L's began growing, S&L mortgage loans resumed growing, and the CB's profits increased.

    The CBs growth rate was uneffected during this entire period when their time deposits fell c. 8% relative to demand deposits.

    Note also: there is unanimous agreement among monitarists that CBs pay for something they already own.

  7. Rebecca - it's all so simple & I'm afraid your guest so-called economist just doesn't get it at all. Americans(and Brits and whoever else you can think of) have got used to a lifestyle that has been unearned for at least a decade. The politicians can/will NEVER tell the people that IT'S OVER! Therefore they will assuredly screw EVERYONE in an assinine attempt to bail-out those who abused the system and who cannot, will not face reality.