I had planned another post for today but I just can’t ignore the news. As I write, the DJ Average is down more than 200 points. But this post isn’t really about the stock market. What I am writing about is three news items today. First, in a special session that prevented our nation’s leaders from their August recess (doesn’t the word recess remind you of what first graders do at 10 in the morning?) added another $26 billion to government spending. Second, the Fed formally announced its decision to downgrade their forecasts of coming US economic growth. They agreed to a small amount of further monetary stimulus (called QE or quantitative easing) and implied that more might be needed. Third, Laurence Kotlikoff wrote that the US is financially bankrupt. He puts up some scary numbers about what it would take to close the federal government fiscal gap. Clearly he is arguing against further fiscal stimulus. http://noir.bloomberg.com/apps/news?pid=20601010&sid=aiFjnanrDWVk
Take the first two items. They are evidence that the dominant policy opinion is the seemingly humane one – more stimulus. Public Enemy #1 is slow growth that is too weak to provide significantly higher employment. It appears we are in a vicious cycle – low employment means low spending which means low employment. Monetary or fiscal stimulus aims to increase spending. But is this really humane? On the surface of it – it looks as if it is. Putting school teachers back to work not only improves the education process but it means one more family will be adding spending to the economy.
But is this really humane? What if most workers see the stimulus for what it really is – a drastic and panicky attempt to revive an economy with multiple fundamental problems, none of which is too little government spending or money growth. What if school teachers or whoever gets assisted by the latest package – and everyone else – see these actions as a sure sign that things are going to get worse before they get better? My guess is that most of them will save as much as they can of their newfound incomes – many will pay off their horrible credit card debts – many will abandon house payments. Hmmm – this does not sound so humane to me. It INSURES THAT THE DOWNSPIN will continue. We know this exactly because most experts agree that the lack of spending right now is a result of negative expectations and uncertainty. These last ditch fire hoses do nothing but enflame the uncertainty. Shame on you Fed. Shame on you Congress! Humane indeed!
My Keynesian friend says there is plenty of evidence of past stimulus policies working. And I would agree that there have been times and places when some stimulus was necessary and did work. A couple of years ago some stimulus was useful – but even then I argued that too much stimulus would send the wrong message – it sent a message of severe alarm. The Sky is Falling is what I heard. And that’s the problem today. Piling up even more stimulus sends the wrong message today. It is scaring the crap out of everyone. Furthermore, if Kotlikoff is right, it sends a Grecian message as well. If more people believe that solving the US financial gap will take Herculean increases in taxes and reductions in spending – they will translate this into even more pessimism. Are we giving a teacher a job today only to take it back tomorrow?
Clearly I don’t know the answer. But it seems to me rather than play the populist game of more stimulus, it is possible to spend more time on a plan to attack the real structural problems. We don’t have to actually start the policies today – but we could agree on and enact a proper set of real changes with an agreed schedule that make sense and would give people a little confidence in the future. Why wait until after the fall elections?
It is frustrating to me that the solution is right in front of our faces, yet we dodge it only to flail around with policies that only worsen the situation. The right policies will show that we are smart enough to recognize the true source of our economic problems and tough enough to enact the right policies. Being smart and tough is what we need to install the confidence and optimism necessary to get firms to want to produce more and to hire more workers to do so.
I agree with your view Larry but don't think anyone at the White House will get smart and tough until after the fall elections. This administration hast taken too much criticism already and another tough measure (implemented or not) at this point would put their plans for next polls at risk.
ReplyDeleteThanks for the comment. It would put the present administration at risk only if people continue to believe in the Fairy Tale that more stimulus will succeed. If more people begin to think like Kotlikoff, then the current administration would do better by biting the bullet now rather than later. Of course, our politicians on both sides may not see the merits either before or after the election. They seem stuck in old ways.
ReplyDeleteWhile there is logic to your post it is possible to come up with a different analysis. While $US26 billion may sound like lots of money there are two facts which help put it perspective. First the original stimulus bill was sold as ~$US876 billion (the jury is still out on the real cost but clearly it is a lot bigger than $US26 billion). Second only $US10 billion goes to hire peeps, the other $US16 goes to Medicaid. It should also be noted that Obama wanted closer to $US50 billion; so maybe we got by on the cheap.
ReplyDeleteSome of the talking heads on TV are saying this was not a "stimulus bill"; rather it was a political pay off to the teachers unions. What ever the true motivations the small amount, relative to a real stimulus bill, and the amount of money going to Medicaid suggest to me a real economist would not describe this as the best use for tax dollars aimed at stimulated the economy.
YMMV
Tom,
ReplyDeleteI get your drift but notice that you call it a small stimulus and you say it might not be the best use of tax dollars. We agree on that. But those ideas just show how much influence the spenders/borrowers have had on us. It's like -- geez I owe so much money now -- a little more wouldn't really hurt. I think even a little more will hurt since it sends the wrong signal. If you go to AA, you don't get cheers by telling people you just had one more drink today.
Dear LSD. I read both your blog and Kotlikoff’s article, and no offense intended, but not much was new. The administration and its congressional supporters continue to spend and not cut. I recall few legislators – Paul Ryan (R-WI), Eric Cantor (R-VA) and possibly Michelle Bachmann (R-MN) – all Rs, BTW, recently expressing concern about impending train wreck involving S.S., Medicare/Medicaid although they’re like the elephants in the room – hard to miss. Ds are now coming ‘round saying maybe we should not let the Bush tax cuts expire in light of the “less-than-stellar” performance of the recovery (er . . I meant to say the stimmilus fiasco) and the upcoming Nov. elections (hint, hint . . . ). I’ve said before . . . say again . . . two things are needed. (1) Pursue policies that will get capital off the sidelines and create private sector jobs and (2) cut spending. Neither will occur with the current clowns; November is the first chance for corrective action. And, while neither will solve the bankruptcy Kotlikoff alleges (I don’t disagree), they would at least move the economy and deficit in the right direction. Hey, do you think OB and his clown brigade ever read stuff like Kotlikoff?
ReplyDeleteBTW, the current Bloomberg/Business Week has an interview by Charlie Rose of Wilbur Ross, a turnaround investor involving steel, coal, telecommunications, foreign investment, and textiles – a guess a pretty bright guy. He advocates an industrial and energy policy to catch up to other country’s similar policies – using China’s involvement in its wind energy industry as an example. Although that would significantly depart from the U.S. free-enterprise policy, maybe having govomit participate in that regard would be better than continuing with high corporate tax rates and other costs of compliance that suffocate job creation.
Charlie,
ReplyDeleteYou sound a bit conflicted to me. First you want government to spend less and then you want them to be more actively involved in industrial policy. I can't wait to have our steel companies run by Pelosi. If Charlie Rose, the guy you quote, likes China's industrial policies maybe he should go live there. Then he will see a real industrial policy. I hope he remembers not to say anything negative about his bosses. And you mention America's free enterprise policy -- doesn't Obama now own a lot of GM and several other key companies? I don't think we have had a free enterprise policy for a long time. If you can't trust our leaders to spend appropriately I don't know why you want to let them run our companies...
Yes, it sounds conflicting to advocate smaller govomit aside its involvement in industry (BTW, ‘twas not Charlie Rose’s comment but rather Wilbur Ross’). I think Ross’ comment that the U.S. needs an industrial and energy policy was tantamount to the likes of DARPA, which specializes in developing advances technologies for DOD. As an econo type you can better articulate the subtle differences between giving stimmuls funds (on whatever basis/criteria the great OB has done) to stimmlate jobs in “green” technologies, etc. and having the private sector inject $$$ into green technologies to pick winners/losers. In either case, green technologies get funds. However, OB’s capital infusion derives from public funds, which by definition can never be spent judiciously. If the likes of DARPA got involved to expedite the development of green energy solutions, then maybe we’d get green faster, better, cheaper. Similarly, a U.S. govomit industrial policy could focus on developing technologies that strategically fit with our comparative advantage(s), conform to market demand rather than trying to create it, and compliment existing public policy initiatives – like energy, transportation, climate, (defense already is covered by existing DARPA mission), etc. Seems like the U.S. is getting its ass kicked by countries that are investing in (subsidizing) their strategic industries. Seems like there could be a balance betixt the likes of DARPA and outright subsidizing.
ReplyDeleteCharlie,
ReplyDeleteIt sounds good on paper but it is always the unintended consequences that worry the investor -- in this case the tax payer. Keep in mind that there are always well intended and seemingly beneficial ways to spend other people's money. I can empathize with the need to improve the nation's ability to compete but I am not convinced that the unintended consequences will not swamp the hoped for benefits. I am not even convinced that our arses are being kicked by other countries. Globalization means that the US can no longer be THE leader in everything. As time goes on and more countries develop, we will have to take our rightful place. Our 300 million people can survive and compete without being half of the world's economy. So in all I am skeptical that we need to or can possibly advantage the US by having government target industrial winners or technologies and use tax payers money to gain competitive advantage. Finally, there might be better ways to enhance competitiveness. We already spend a lot of money through the NSF and other agencies to subsidize research. Perhaps we should make that process work better. Our security processes make it impossible for good scientists to migrate to America. Maybe we should work on that. Public Education is a joke -- we can barely graduate kids much less produce world class scientists. Can we not do something about that?
Can we not do something about that? Apparently not; since we're crazy in that we continually spend more $$/student with diminishing results. The conventional solution to the problem of decreasing high school grad rates is that more $$ is needed. At what point do U.S. and state legislators realize that doing the same thing repeatedly and expecting a different outcome is crazy? Changing that dynamic would go a lot to improve U.S. competitiveness.
ReplyDeleteRE: arses not being kicked by other countries. E.g. having not run a trade surplus in some time. No longer being the top filer of patents. Yes, our 300 million folks can survive and compete, but it appears accompanied by a diminishing standard of living . . . but still better than most, granted. Point was not to use public funds to gain competitive advantage, but rather to exploit our comparative advantage(s), whatever they be. Seems more focus is needed for solutions to shore up the middle class, once built on manufacturing, by creating jobs that pay more than flipp’n burgers and working in tele-call centers. Our arses have been kicked because we’ve lost focus/not found a counterpoint to lost manufacturing jobs. Companies invest less in R&D; maybe ‘cause of the tax code and it’s easier to ship yobs overseas.
Yes, probably is a better way to enhance competitiveness; but we haven’t had an industrial policy since Eisenhower. Maybe it’s time to revisit.
I think the marketplace should figure out our comparative advantages. Of course, that won't restore the kind of manufacturing we used to have and it won't magically solve our education and training deficiencies...and therefore won't help the middle class much. I am guessing that in 10 years we will look back and see all kinds of industrial transformations we could have taken advantage of but didn't because people are sitting around wishing the government would do the work for them. Charlie -- wake up and smell the roses. When we were kids we were out doing stuff -- now our grandkids are in the malls or watching TV talking on their cell phones while they eat McDonalds burgers and talk about absolutely nothing or send sexual texts for hours on end. These kids can't even sit through a one hour class without wondering what their friends are doing -- which is exactly what they are doing -- nothing. If you can figure out a way to turn them into scientists and innovators then you will get what you want -- a return of the US to its former glory. If Industrial Policy can do that then I will vote for it.
ReplyDeleteWhat about the humanity of leaving future generations burdened with an oppressive tax regime, deflation, and general feeling of helplessness over the erosion of their chances to continue pushing the American Dream forward?
ReplyDeleteThe short-sightedness of our political class is going to leave us all poorer (if we're not lucky enough to die first).
Stu, the roses I am experiencing don’t smell or look as good as they did when we were growing up. People sitting around wishing the govomit would do the work for them? . . . . There are three kinds of people . . . those not knowing what to do, those wunnering what happened, and those making things happen . . . and you’ve added a fourth; those wishing something would happen. Yes, probably U.S. manufacturing will not regain its prominence in building/sustaining a middle class. Someone . . . and would certainly be Republican . . . with clout . . . either should be Prez or be mucho influential in that Administration . . . to spearhead . . . . something on the order of an industrial (or economic – whatever) policy that encompasses not only manufacturing, but trade, education, R&D, agriculture, IT, etc. It should be a joint venture, initiated by the new Admin. and attended by “captains of finance/industry” – not bureaucrats/politicians – whose track record to date is abysmal. The goal would be to plug the hole left by the middle class as manufacturing went offshore and identify the comparative advantage(s) the U.S. has and can exploit. That would provide the foundation for future generations to shake off the burdens John presented. Yes, I can anticipate your thoughts . . . "oh, there goes idealistic Chas again . . . . too much Boones Farm."
ReplyDeleteOh, there goes idealistic Chas again! :-)
ReplyDeleteBut I seen nothing wrong with Boone's Farm. Cheers