February 22, 2010
On the anniversary of the stimulus law (a/k/a the American Recovery and Reinvestment Act of 2009 — Public Law 111-5) there has been quite a bit of debate concerning the number of jobs actually created by the stimulus as opposed to the claims made by Democratic politicians. For their part, the Democrats take pride in the fact that John Makin of the conservative think-tank, the American Enterprise Institute, recently published this statement at the AEI website:
Absent temporary fiscal stimulus and inventory rebuilding, which taken together added about 4 percentage points to U.S.growth, the economy would have contracted at about a 1 percent annual rate during the second half of 2009.
A few months ago, I had a discussion with an old friend and the subject of the stimulus came up. My beefs about the stimulus were that it did not offer the necessary degree of immediate relief and that a good chunk of it should have gone directly into the hands of the taxpayers.
I recently read a blog posting by Keith Hennessey, the former director of the National Economic Council under President George W. Bush, which expressed some opinions similar to my own on what the stimulus should have offered. Although Mr. Hennessey preferred the traditional panacea of tax cuts as the primary means for economic stimulus, he made a number of other important points. With so much fear being expressed about the possibility of a “double-dip” recession, our government could find itself in the uncomfortable position of considering another stimulus bill. If that day comes, we have all the more reason to look back at what was right and what was wrong with the 2009 stimulus.
Keith Hennessy began with this statement:
Unlike many critics of the stimulus law, I think that fiscal policy can increase short-term economic growth, especially when the economy is in a deep recession. In other words, I think that fiscal stimulus is a valid concept. This does not mean that I think that every increase in government spending, or every tax cut, (a) increases short-term economic growth or (b) is good policy.
At the end of his second paragraph, he got to the part that was music to my ears:
If the Administration had instead put $862 B directly into people’s hands, you would have seen more immediate spending and economic growth than we did, even if people had saved most of it.
In contrast, government spending is powerful but painfully slow. If the government spends $1 on building a road, eventually that entire $1 will enter the economy and increase GDP growth. Your bang-for-the-deficit-buck is extremely high. The problem is that bang-for-the-buck doesn’t help us if that bang occurs two or three or four years from now.
* * *
I would instead prefer that people be allowed to spend and save the money how they best see fit. My preferred path also has less waste and bureaucracy.
A bit later in the piece, Hennessey said some things that probably caused a good number of the CPAC conventioneers reach for the Tums:
I agree with the Administration that last year’s stimulus law increased economic growth above what it otherwise would have been. I agree that employment is higher than it would have been without a stimulus.
Of course, Hennessey complained that “The law was poorly designed and inefficient” — in part because the money was funneled through federal and state bureaucracies — another valid point. Then, he got to the important issue:
Given a decision last year to do a big fiscal stimulus, I would have preferred, in this order:
1. putting all the money into a permanent reduction in income and capital taxes;
2. putting all the money into a temporary reduction in income and capital taxes;
3. putting all the money into transfer payments;
4. what Congress and the President did.
Given the policy preferences of the President, his team’s big policy mistake last year was to let Congress turn a reasonable macroeconomic fiscal policy goal into a Congressional spending toga party. Given his policy preferences, the President should have insisted that Congress put all the money into (2) and (3) above. He would have had a bigger macro stimulus bang earlier.
In case you’re wondering what “transfer payments” are — you need to think in terms of “wealth transfer”. In this case, it concerns situations where the government gives away money to people who aren’t rich. A good example of this was the stimulus program that took place under President Bush. Individuals with incomes of less than $75,000 received a $300 “stimulus check” and households with joint incomes under $150,000 got $600.
My own stimulus idea would involve a “tax rebate” program, wherein the taxpayers receive a number of $50 vouchers based on the amount of income tax they paid the previous year. The recipients would then be instructed to go out and buy stuff with the vouchers. So what if they spent it on imported merchandise? The American retailers and shipping companies would still make money, finding it necessary to hire people. The vouchers would display the person’s name and address. In order to use the vouchers, identification would be needed, so as to prevent resale. The maximum amount of cash change one could get back from a voucher-funded purchase would be $10.
Hopefully, we won’t need another stimulus program. However, if we do, I suggest that the government simply give us vouchers and send us shopping.
Three New Books For March
February 24, 2010
The month of March brings us three new books about the financial crisis. The authors are not out to make apologies for anyone. To the contrary, they point directly at the villains and expose the systemic flaws that were exploited by those who still may yet destroy the world economy. All three of these books are available at the Amazon widget on the sidebar at the left side of this page.
Regular fans of the Naked Capitalism blog have been following the progress of Yves Smith on her new book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. It will be released on March 2. Here is some information about the book from the product description at the Amazon website:
Michael Lewis is the author of the wildly-popular book, Liar’s Poker, based on his experience as a bond trader for Solomon Brothers in the mid-80s. His new book, The BigShort: Inside the Doomsday Machine, will be released on March 15. Here is some of what Amazon’s product description says about it:
Our third author, Simon Johnson, recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle” which explains how “we have let a ‘doomsday cycle’ infiltrate our economic system”. The essay contains a number of proposals for correcting this problem. Here is one of them:
Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management. From 2007-2008, he was chief economist at the International Monetary Fund. With James Kwak, he is the co-publisher of The Baseline Scenario website. Johnson and Kwak have written a new book entitled, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Although this book won’t be released until March 30, the Amazon website has already quoted from reviews by the following people: Bill Bradley, Robert Reich, Arianna Huffington, Bill Moyers, Alan Grayson, Brad Miller, Elizabeth Warren and others. Professor Warren must be a Democrat, based on the affiliation of nearly everyone else who reviewed the book.
Here is some of what can be found in Amazon’s product description:
As these authors make the talk show circuit to promote their books during the coming weeks, the American public will hearing repeated pleas to demand that our elected officials take action to stop the mercenary financial behemoths from destroying the world. Perhaps the message will finally hit home.
If you are interested in any of these three books, they’re available on the right side of this page.