In my last commentary I focused on the impact of the recession on ordinary Americans. I reserved making my comments on the what transpired to bring about our calamitous economic collapse and what is happening now re: objections to the current proposed stimulus package, H.R. 1 American Recovery and Reinvestment Act of 2009. No sooner did I begin to gather my thoughts and compose my message on this subject than did Paul Krugman published his article on the same: Bad Faith Economics, NYT 1/25/09 as did Bob Herbert: The Same Old Song, NYT 1/26/08. And why not? They are professionals who do this for a living. I am merely a hobbyist.
Dr. Krugman argues from the point of view that the Republicans are being disingenuous in their objections to the proposed plan. They have blown out of proportion the implications of some provisions of the plan and have just misrepresented the implications of some other provisions.
According to Krugman the motivation for doing so is:
In an earlier commentary, The Economy and Other Tragedies, I discussed what I considered the ill advised attempt to assuage the potential objections of the Republicans to the plan by including some tax cuts in the initial proposal. I argued that doing so only would change the position of the Republicans to start at that point and then ask for even more tax cuts. That is what has happened and as they argue for it they do so accusing the Democrats of not being bipartisan. Thus it turns out to be a lose-lose proposition for the Democrats.
The Republicans are not attacking Obama when they attack the plan. In fact they go out of their way to praise Obama for his bipartisanship and willingness to listen and include them in his considerations. No, it would be political suicide for the Republicans to attack Obama. And Obama is doing everything he can to follow through on his pledge of bipartisanship. His one slip was in an exchange with Rep. Eric Cantor (R-Va.) about the proposal. The president shot back: “I won,” according to aides briefed on the meeting. I guess even the coolest of cats can get testy when confronted by unremitting stubbornness. Working out of a mediation model of cooperation rather than negotiation requires both parties acceptance of the model.
The Republican strategy is to attack the Democratic congress. That is much safer than attacking Obama and they can still fake bipartisanship.
Tax cuts, even for the middle class, have less impact in reviving the economy than does government spending. The monthly decrease in withholding just will not spur the type of spending necessary to make much of a difference in the short term. They also argue that cutting taxes will yield an actual increase in tax revenues. If this were so, then the budget deficit would not have climbed so rapidly during the Reagen and G.W. Bush administrations. Further, during the Clinton administration, sandwiched between Reagen and Bush, taxes were substantially increased and an economic boom occurred with the budget realizing its first significant surplus since the Eisenhower administration (1957). (A slight budget surplus was reported in 1969 when Lyndon Johnson first integrated the Social Security surplus as part of the US general fund.)
Providing tax cuts to small business would make some sense to stimulate business spending if there was any demand to be satisfied. The major problem now is that there is no demand. The supply siders are spitting in the ocean if they think business will spend money if they can claim a tax break while they are losing money, laying people off, closing outlets, shutting down production lines, etc. etc. Also, where will this money come from with the banks unwilling to lend money?
Some analysts say that $1.00 in government spending yields more than $1.50 in GDP growth. With a marginal tax rate of say 33%, the return in taxes on that same $1.00 would be $0.50 and thus the true deficit from the $1.00 is actually $0.50. Then the equation for the calculating the yield in GDP for each dollar increase of government spending is actually a multiplier of 1.5/0.5 or 3 to 1. Moreover, spending on rebuilding infrastructure, developing alternate sources of energy, and etc. will provide future benefits for economic growth and national well being.
Don't get too excited about this. There are economists who argue that this return on government spending is false. They argue reductio ad absurdum that should the government increase spending by $10 trillion it would raise our GDP by $15 trillion at the true cost to the government of only $5 trillion. This argument is ridiculous on its face because spending hundreds of billions of dollars over the short term and then slowly returning to a policy of fiscal responsibility is just not the same as spending $10 trillion dollars.
That doesn't mean that spending money at the rate necessary to get the nation's economy restarted is not a problem. The question is what will happen if we do not spend the money? The thinking of most economists, both conservative and liberal, is that if we do nothing the economy is likely to slip further faster.
Rebates for the middle class, like the 2008 rebate program, are likely to have a mixed effect on the GDP, less than government spending will have. Analysis of the 2008 tax rebate program showed that most of the rebate money was not spent. Rather it was either saved or used to reduce current consumer debt. That which was spent was spent by those on the low end of the economic spectrum; low income and/or low (or no) net worth. The increased spending occurred in the first two months after the rebates were issued and then returned to pre-rebate levels. Aside from this, much of the increased spending probably was on foreign made goods which means that it mostly supported retail outlets like Walmart while it increased our trade deficit.
These are the items for which money should be spent by the the new stimulus package that I believe would be the best for an economic recovery and to help those hurt the most by the economic downturn.
Postscript:
This inadequate stimulus plan just passed the House of Representatives (242-189) without a single Republican voting for it. First they worked to eliminate some of their pet peeves such as money for contraceptives and money to upgrade the National Mall in DC. Then they unanimously reject the plan. This is of course the height of hypocrisy, claiming to want to be bipartisan and then acting in a strictly partisan way.
But that is OK. What will now happen is the Senate will take up the measure and hopefully there it will be fixed to be more in line with what is truly needed. However I do not think it will come anywhere close to what is actually needed. Don't let the good be the victim of the best. Better this than nothing.
Dr. Krugman argues from the point of view that the Republicans are being disingenuous in their objections to the proposed plan. They have blown out of proportion the implications of some provisions of the plan and have just misrepresented the implications of some other provisions.
According to Krugman the motivation for doing so is:
"Conservatives really, really don’t want to see a second New Deal, and they certainly don’t want to see government activism vindicated. So they are reaching for any stick they can find with which to beat proposals for increased government spending."Bob Herbert argues that the Republicans have no ground to stand on when they ask for more tax cuts and less government spending.
"Have they no sense that their policies have sent the country hurtling down the road to ruin? Are they so divorced from reality that in their delusionary state they honestly believe we need more of their tax cuts for the rich and their other forms of plutocratic irresponsibility, the very things that got us to this deplorable state?"
. . .
"When the G.O.P. talks, nobody should listen. Republicans have argued, with the collaboration of much of the media, that they could radically cut taxes while simultaneously balancing the federal budget, when, in fact, big income-tax cuts inevitably lead to big budget deficits. We listened to the G.O.P. and what do we have now? A trillion-dollar-plus deficit and an economy in shambles."There is much to criticize about this plan. It does not focus enough on the type of spending that will have the greatest and most immediate impact. Considering the size of the US economy and the size of the problem, it just is not big enough. It appears that the Democrats see a perhaps one time opportunity to get through congress a redress of the Bush programs. As the Republicans pushed through much of their agenda by attaching it to legislation, like the defense budget, that the Democrats could not vote against, here are the Democrats doing the same thing.
In an earlier commentary, The Economy and Other Tragedies, I discussed what I considered the ill advised attempt to assuage the potential objections of the Republicans to the plan by including some tax cuts in the initial proposal. I argued that doing so only would change the position of the Republicans to start at that point and then ask for even more tax cuts. That is what has happened and as they argue for it they do so accusing the Democrats of not being bipartisan. Thus it turns out to be a lose-lose proposition for the Democrats.
The Republicans are not attacking Obama when they attack the plan. In fact they go out of their way to praise Obama for his bipartisanship and willingness to listen and include them in his considerations. No, it would be political suicide for the Republicans to attack Obama. And Obama is doing everything he can to follow through on his pledge of bipartisanship. His one slip was in an exchange with Rep. Eric Cantor (R-Va.) about the proposal. The president shot back: “I won,” according to aides briefed on the meeting. I guess even the coolest of cats can get testy when confronted by unremitting stubbornness. Working out of a mediation model of cooperation rather than negotiation requires both parties acceptance of the model.
The Republican strategy is to attack the Democratic congress. That is much safer than attacking Obama and they can still fake bipartisanship.
Tax cuts, even for the middle class, have less impact in reviving the economy than does government spending. The monthly decrease in withholding just will not spur the type of spending necessary to make much of a difference in the short term. They also argue that cutting taxes will yield an actual increase in tax revenues. If this were so, then the budget deficit would not have climbed so rapidly during the Reagen and G.W. Bush administrations. Further, during the Clinton administration, sandwiched between Reagen and Bush, taxes were substantially increased and an economic boom occurred with the budget realizing its first significant surplus since the Eisenhower administration (1957). (A slight budget surplus was reported in 1969 when Lyndon Johnson first integrated the Social Security surplus as part of the US general fund.)
Providing tax cuts to small business would make some sense to stimulate business spending if there was any demand to be satisfied. The major problem now is that there is no demand. The supply siders are spitting in the ocean if they think business will spend money if they can claim a tax break while they are losing money, laying people off, closing outlets, shutting down production lines, etc. etc. Also, where will this money come from with the banks unwilling to lend money?
Some analysts say that $1.00 in government spending yields more than $1.50 in GDP growth. With a marginal tax rate of say 33%, the return in taxes on that same $1.00 would be $0.50 and thus the true deficit from the $1.00 is actually $0.50. Then the equation for the calculating the yield in GDP for each dollar increase of government spending is actually a multiplier of 1.5/0.5 or 3 to 1. Moreover, spending on rebuilding infrastructure, developing alternate sources of energy, and etc. will provide future benefits for economic growth and national well being.
Don't get too excited about this. There are economists who argue that this return on government spending is false. They argue reductio ad absurdum that should the government increase spending by $10 trillion it would raise our GDP by $15 trillion at the true cost to the government of only $5 trillion. This argument is ridiculous on its face because spending hundreds of billions of dollars over the short term and then slowly returning to a policy of fiscal responsibility is just not the same as spending $10 trillion dollars.
That doesn't mean that spending money at the rate necessary to get the nation's economy restarted is not a problem. The question is what will happen if we do not spend the money? The thinking of most economists, both conservative and liberal, is that if we do nothing the economy is likely to slip further faster.
Rebates for the middle class, like the 2008 rebate program, are likely to have a mixed effect on the GDP, less than government spending will have. Analysis of the 2008 tax rebate program showed that most of the rebate money was not spent. Rather it was either saved or used to reduce current consumer debt. That which was spent was spent by those on the low end of the economic spectrum; low income and/or low (or no) net worth. The increased spending occurred in the first two months after the rebates were issued and then returned to pre-rebate levels. Aside from this, much of the increased spending probably was on foreign made goods which means that it mostly supported retail outlets like Walmart while it increased our trade deficit.
These are the items for which money should be spent by the the new stimulus package that I believe would be the best for an economic recovery and to help those hurt the most by the economic downturn.
- The bulk of the money should go to investment in infrastructure. That will provide jobs and produce a valuable end product. The acquisition of the materials, supplies, and equipment necessary for infrastructure will provide a multiplier to the money so spent. These projects should be funded even if the expenditure stretches out for 2 or 3 years. However, the bulk of the money should be spent as soon as possible for the needed immediate economic stimulus.
- Investment in development be it alternative energy or other scientific advancement that can yield future economic benefits.
- Investment in education, primary and secondary, so that we have a future workforce capable of doing scientific development and handling the work requirements of the future.
- Subsidies to the states whose incomes have fallen to a level where they are going to be forced to lay off thousands of employees including those performing necessary services. The loss of these jobs would have a serious negative impact on economic recovery.
- Extension and increase of unemployment benefits to help those hurt by the economic downturn. These benefits should also be provided to those who during the past 2 years used up their benefits and are still unemployed.
- Provision of replacement medical coverage for those who lost theirs as a result of losing their job and can't afford the costs of COBRA (Consolidated Omnibus Budget Reconciliation Act - the extension of their coverage for 18 months as an individual without the corporate payment of the premium.)
- Extension and increase of the earned income tax benefits to those on the lowest end of the economic spectrum. These people will be most likely to spend the money rather than save it. Besides, it is a matter of compassion to take care of the least fortunate. (Definitely a liberal viewpoint.)
Postscript:
This inadequate stimulus plan just passed the House of Representatives (242-189) without a single Republican voting for it. First they worked to eliminate some of their pet peeves such as money for contraceptives and money to upgrade the National Mall in DC. Then they unanimously reject the plan. This is of course the height of hypocrisy, claiming to want to be bipartisan and then acting in a strictly partisan way.
But that is OK. What will now happen is the Senate will take up the measure and hopefully there it will be fixed to be more in line with what is truly needed. However I do not think it will come anywhere close to what is actually needed. Don't let the good be the victim of the best. Better this than nothing.
posted by Michael | 9:13 PM
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