Monday, February 9, 2009

Stimulating Thoughts

With all the unhappiness about the size and content of the stimulus, how is it that centrists have managed to force changes that address none of the complaints, valid or not, about the stimulus?

First a quick recap of the types of complaints:

Paul Krugman’s complaints are twofold. First, he thinks the stimulus bill is too small. This complaint is driven by a belief that the economy is going to face a $2.9 trillion output gap. Even if  all $800 billion or so were immediate spending, it wouldn’t be large enough to plug that gap.

Secondly, he rightly points out that large parts of the “stimulus” will not lead to immediate spending. Particularly, tax cuts are currently ineffective since consumers will probably just pocket most of the money and not spend it right now. Other critics singled out parts of the spending provisions, which they thought were not effective at stimulating the economy. The CBO estimates that only $525 billion in tax cuts and spending would happen over the next two years, with the rest falling later in the coming decade.

The Republicans complained initially that the plan was too large and could not be afforded, before going on to propose their own $3 trillion plan composed entirely of tax cuts.

With the massive current demand for US Treasury bills, thanks to the perception that they are the safest investment available, it seems difficult to claim we can’t afford stimulus of this magnitude; however, Willem Buiter offers a reasonable argument. The problem, in his view is not that the proposed deficit could not be financed, but that Congress cannot credibly claim that the increase in spending is temporary or that it will raise taxes to compensate. This will erode confidence in US ability to repay its debts, and without that confidence, the two factors that make such a deficit relatively painless to finance at the present time: the status of the US dollar as a reserve currency and the ability of the US government to borrow abroad in its own currency would disappear.

Now, with the aforementioned complaints in mind, would you:

a)      Throw in more spending to make the bill bigger

b)      Cut down the cost of the bill

c)      Make sure that the money is spent quickly and creates as many jobs as possible 

d)     Some mix of the first three

e)     Cut out the most stimulating parts like help to states, unemployment benefits, etc. and offer relatively rich people tax credits for flipping houses

Now, if you’re wondering why option e) is there and what it has to do with any of the aforementioned problems with the stimulus bill, it’s there because that’s what the Senate moderates actually opted to do.

1 comment:

  1. Option e) was probably the only way the republicans would vote for anything. One has to wonder whether America is too much in the pockets of the super rich to really ever change. And then the arguments about what kind of change. History will of course offer the truthful view of this stimulus, whether it worked or not. In the meantime our politicians will spin it every which way.
    To be fair though - there seem to be economists with opinions that fit every popluar opinion too. How can an average person figure out what really makes sense when even the 'experts' dont really seem to know.