Spending Is Stimulative

Last week, House Democrats released an $825 billion economic recovery package, which consists of $550 billion in government spending and $275 billion in tax cuts. Personally I hate this package, because while I believe a stimulus package is necessary, I do not believe the tax cuts should be such a large percentage of the package. Traditionally government spending results in more significant value for the dollars spent than tax cuts do. Still the provisions of the plan were put forward and have been examined and marked up by various congressional committees. The goal of House Democrats was to pass a full stimulus package sometime in mid-February.

Though Republicans at first voiced some support for the stimulus package when President Obama initially laid it out, now they are beginning to snipe and stab.

Conservatives are claiming that they are balking at seeing the size of the bill that emerged from the House. Cry baby, I mean Minority Leader John Boehner made his opposition known by simply saying "Oh. My. God."

Now conservatives are coalescing around "alternative" stimulus proposals like one crafted by the Republican Study Committee (RSC). But as usual in voicing their opposition, conservatives have started to push several lies and myths about the stimulus and its potential effect on the economy.

First and foremost the conservatives on the House Budget Committee released a report stating that the proposal "pours taxpayers' money" into projects, "many of which may be worthy in themselves, but have little to do with 'stimulating' the economy."

Harvard professor Robert Barro derided the plan as "voodoo economics," which is odd since it is actually the exact opposite of the original voodoo economics. Moon bat right-wing pundit Michelle Malkin is claiming that the stimulus will "at most be useless." Why anyone listens to that shrill harpy, I have no idea.

The truth is that an analysis by Moody’s Economy.com found that government spending results in more significant "bang for the buck." For every dollar invested in specific types of spending, the boost in real GDP is more than $1.30.

According to the analysis the most benefit comes from extending unemployment benefits ($1.64) and increasing food stamps ($1.73), but strong returns result from infrastructure investment ($1.59) and aid to state and local governments ($1.36), as well.

Furthermore, Moody's analysis also notes, "A well-timed, targeted, and temporary stimulus could in fact cost the Treasury less in the long run, since a debilitating recession would severely undermine tax revenues and prompt more government spending for longer."

Mark Zandi, chief economist at Moody's and former adviser to Sen. John McCain's presidential campaign, released his analysis of the House plan on Wednesday, and concluded that it would "provide a vital boost to the flagging economy," without which full employment would not return until 2014.

Minority Leader Boehner is also trying to come out and claim, "When it comes to slow-moving government spending programs, it's clear that it doesn't create the jobs or preserve the jobs that need to happen." Former Massachusetts governor Mitt Romney has said that "even if consumption were to bump up, it would not lead businesses to expand and to add jobs."

Former Secretary of Labor Robert Reich shoots down these talking points. Earlier this week Reich argued that, "The stimulus plan will create jobs repairing and upgrading the nation's roads, bridges, ports, levees, water and sewage system, public-transit systems, electricity grid, and schools."

It stands to reason that investing in infrastructure is going to lead to job creation, as someone needs to be hired to actually complete the various projects. By investing $100 billion in clean energy infrastructure alone, the Center for American Progress has estimated that 2 million jobs can be created in the next two years. Aid to states through bolstering Medicaid also "generates business and gets people into jobs," as a recent report by Families USA showed: "The new dollars pass from one person to another in successive rounds of spending, generating additional business activity, jobs, and wages that would not otherwise be produced."

Council of Economic Advisers Chairman Christina Romer and Vice President Biden aide Jared Bernstein, meanwhile -- by using the "1% of GDP equals 1 million jobs rule of thumb" -- estimated that a stimulus plan will create or save three million jobs. According to their calculations, "30% of the jobs created will be in construction and manufacturing," while "the other two significant sectors that are disproportionately represented in job creation are retail trade and leisure and hospitality."

Republicans and conservatives are again arguing that the answer is tax cuts. The Heritage Foundation, meanwhile, proposed an "alternative" to the House stimulus: "permanent tax reductions such as the ones Congress passed in 2003."

History shows that the tax cuts that conservatives are arguing for as a stimulus for economic growth is "weak at best." An analysis by the Center for American Progress Action Fund shows that every $10 billion spent on this kind of cut would create or save just 10,000 jobs, "versus nearly 60,000 jobs which could be created or saved by extending unemployment benefits and food stamps or investing directly in energy, transportation and education infrastructure." Furthermore, permanent measures will exacerbate the long-term debt much more than temporary measures will.

On a side note the National Republican Congressional Committee has an "issues" page on their website. This website issue page includes, as expected, a page on the "Economy." (Just so you note it's the seventh issue, behind Social Security and Border Security) Why I bring this up is that the web page tells it's readers, "Thanks to Republican economic policies, the U.S. economy is robust and job creation is strong."

Yes you read that right, it actually states that "Thanks to Republican economic policies, the U.S. economy is robust and job creation is strong."

After clicking "read more," we learn all about the NRCC's message on the economy.

According to the NRCC we have Republican economic policies to thank for the state of the economy, which actually I agree with, but they think that the U.S. economy is robust and job creation is strong. According to them the Republican tax cuts are creating jobs and continuing to strengthen the economy. The NRCC's site also explains that if we stray from Republican economic ideas, we will "set back our economy."

Republicans are in another reality.

Lets hope that Democrats wake up and realize that conservatives have no real answers and push forward with a more progressive stimulus package.

Keith Olbermann Discusses Obama's Speech

Keith Olbermann reported on President-elects economic speech yesterday, and comments made by Nancy Pelosis.

Nancy made the declaration that if the stimulus package is not passed by President's Day, there would be no President's recess. Olbermann pointed out the rank hypocrisy of John Bohner who had no trouble running up deficits during the Bush years, and is now trying to paint himself as a deficit hawk.

Olbermann interviewed Howard Fineman about the growing debate within Democratic ranks over the stimulus. Watch it here:

Visit msnbc.com for Breaking News, World News, and News about the Economy

There is definitely a debate about the needs for tax cuts, which I think is good. I don't agree with including so much in tax cuts.


Rachel Maddow then gave her take on Obama's speech. She pointed out that Obama's speech was a break, not with just the outgoing Bush administration, but with the administrations of Clinton, George H. W. Bush, and Ronald Reagan. She also reported on the confirmation hearings.

Watch her analysis and interview Robert Reich:

Visit msnbc.com for Breaking News, World News, and News about the Economy

Countdown's Take on Barack Obama's Press Conference

Keith Olbermann reported on President-elect Barack Obama's press conference, and then on comments made by President Bush on the transition. Olbermann's first guest was Countdown regular Richard Wolfe, and the two spoke about the politics of this situation. We are in very unique times, where the economic crisis has forced Barack Obama to speed up the process of putting together a cabinet and an economic team. Richard Wolfe made the bold statement that we are no longer a nation with only one President. Circumstances had forced the President-elect to act in ways that would normally be seen as out of bounds.

Keith Olbermann then spoke with Robert Reich about the New NEW DEAL, and the economics that might be a part of President-elect's stimulus plan. I am a huge fan of Robert Reich, and I like his idea's about the direction America's economy should take. In this discussion I believe Mr. Reich is correct that this nation really needs a seamless transition between President Bush and President Obama. I believe Professor Reich is correct that Obama's immediate challenge is to fill the leadership vacuum created by President Bush.

Here is Olbermann's discussion with Richard Wolfe:


Here is Olbermann's discussion with Robert Reich:

LibertyAir Blog

The Mini Depression and the Maximum-Strength Remedy

The Mini Depression and the Maximum-Strength Remedy
By Robert Reich - November 9, 2008, 2:26PM

This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression. The employment report last Friday shows job losses accelerating, along with the number of Americans working part time who'd rather be and need to be working full time. Retail sales have fallen off a cliff. Stock prices continue to drop. General Motors is on the brink of bankruptcy. The rate of home foreclosures is mounting.

When Barack Obama takes office in January, he will inherit a mess. What to do? (Because I'm an informal economic adviser, I should warn anyone who reads this that it reflects only my thoughts and therefore should not be attributed to him or to anyone else advising him.)

First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay. If they fail to do so, and creditors push them into reorganization under bankruptcy, they'll cut their payrolls, to be sure. But they're already cutting their payrolls. It's far from clear they'd cut more jobs under bankruptcy reorganization than they're already cutting under pressure to avoid bankruptcy and remain solvent.

This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.

The real problem is on the demand side of the economy.

Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.
Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.

I is investment. Absent consumer spending, businesses are not going to invest.

Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners -- as well as Americans -- put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)

That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won't work if there's inadequate demand.

So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.

The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future. (Important qualification: To do this correctly and avoid pork, the federal government will need to have a capital budget that lists infrastructure projects in order of priority of public need.)

Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.

Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run over a trillion dollars, given the amounts to be spent bailing out Wall Street and perhaps the auto industry, and providing extended unemployment insurance and other measures to help those in direct need. The hawks will argue that the nation can't afford giant deficits, especially when baby boomers are only a few years away from retiring and claiming Social Security and Medicare.

They're wrong. Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.

The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons. First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Americans pay more in payroll taxes than in income taxes. Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services, as we witnessed a few months ago when the government sent out rebate checks. Third, even when individuals purchase goods and services, those purchases tend not to generate as many American jobs as government spending on the same total scale because much of what consumers buy comes from abroad.

Fiscal hawks and conservative supply siders notwithstanding, a major stimulus is in order. Government is the spender of last resort, and the nation is coming close to its last resort.