No One Would Argue That the Stimulus Has Done Nothing", and he was McCain's economic adviser.
No One Would Argue That the Stimulus Has Done Nothing", and he was McCain's economic adviser.
Averting the Worst - PAUL KRUGMAN
Joseph Stiglitz writes in Stimulus or bust for the Guardian that we need another stimulus right now, interestingly:J
Published: August 9, 2009
So it seems that we arenít going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.
ust to be clear: the economic situation remains terrible, indeed worse than almost anyone thought possible not long ago. The nation has lost 6.7 million jobs since the recession began. Once you take into account the need to find employment for a growing working-age population, weíre probably around nine million jobs short of where we should be.
And the job market still hasnít turned around ó that slight dip in the measured unemployment rate last month was probably a statistical fluke. We havenít yet reached the point at which things are actually improving; for now, all we have to celebrate are indications that things are getting worse more slowly.
For all that, however, the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss.
A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late 2008 was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators ó world trade, world industrial production, even stock prices ó were falling as fast as or faster than they did in 1929-30.
But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year.
So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government.
Probably the most important aspect of the governmentís role in this crisis isnít what it has done, but what it hasnít done: unlike the private sector, the federal government hasnít slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.
All of this has helped support the economy in its time of need, in a way that didnít happen back in 1930, when federal spending was a much smaller percentage of G.D.P. And yes, this means that budget deficits ó which are a bad thing in normal times ó are actually a good thing right now.
In addition to having this ďautomaticĒ stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet itís possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.
The point is that this time, unlike in the 1930s, the government didnít take a hands-off attitude while much of the banking system collapsed. And thatís another reason weíre not living through Great Depression II.
Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan ó a number that will grow over time ó and that the stimulus has played a significant role in pulling the economy out of its free fall.
All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.
And arenít you glad that right now the government is being run by people who donít hate government?
We donít know what the economic policies of a McCain-Palin administration would have been. We do know, however, what Republicans in opposition have been saying ó and it boils down to demanding that the government stop standing in the way of a possible depression.
Iím not just talking about opposition to the stimulus. Leading Republicans want to do away with automatic stabilizers, too. Back in March, John Boehner, the House minority leader, declared that since families were suffering, "itís time for government to tighten their belts and show the American people that we Ďgetí it." Fortunately, his advice was ignored.
Iím still very worried about the economy. Thereís still, I fear, a substantial chance that unemployment will remain high for a very long time. But we appear to have averted the worst: utter catastrophe no longer seems likely.
And Big Government, run by people who understand its virtues, is the reason why.
At the same time, almost one-third of the stimulus was devoted to tax cuts, which Keynesian economics correctly predicted would be relatively ineffective. Households, burdened with debt while their retirement savings wither and job prospects remain dim, have spent only a fraction of the tax cuts.
The conservatives will never admit that we are coming out of the recession. Even when we are sitting high on the hog, if this happens this year after the stimulus did it's job, conservatives will still cry about it. HAHA. No matter what Obama or the Dem Congress do, it will never be right for the right.
It's time for a revolution in our country. Not a revolution forged with guns and bombs but a revolution forged of compassion and altruism. A revolution that extends a hand to those who don't have and who cannot. A revolution that makes Health Care available to all those in the US.
With respect to the President's fiscal stimulus, I believe it has also helped contribute to the recent stabilization and possible imminent recovery. A fiscal stimulus increases aggregate demand. Risks associated with the stimulus e.g., timing of withdrawal, are farther ahead.
Today, Bloomberg.com quotes a number of economists or trade group representatives who give some credit to the stimulus. One such person is Kenneth Goldstein, an economist at the Conference Board stated, ďWeíve averted the worst, and there are clear signs the stimulus is working.Ē
As so often happens in political battles, the reasonable case that could have been made against a stimulus (increased debt burden, poor track record of reversing the stimulus later, etc.) is discarded for apocalyptic rhetoric e.g., the economy will not revive, or superficial fallacies e.g., each dollar spent by the government is taken from the private sector and that amounts to a wash or worse (as the private sector is more efficient than the government). Of course, the fallacy is just that. When the private sector is hoarding cash out of fear, the hoarded cash is not contributing to economic growth. So, when the government borrows from the private sector, and then spends the money, that translates into an increase in growth. In addition, the federal government borrows from abroad.
In the long-term, if the deficits are not reduced, the stimulus is not adequately withdrawn, and the additional debt incurred from the stimulus is not paid off, that situation will make an adverse contribution to the economy e.g., in the form of higher long-term interest rates than might otherwise be the case. However, that's another issue that is beyond the scope of whether the President's fiscal stimulus played a role in stabilizing the economy.
The Stimulus Plan: The Tax Cuts - ProPublica
The largest credit, the ironically named "Making work pay" credit, is a tax credit for 2009 and 2010 that people get through a recalculation of withholding rates, or by claiming the credit on their tax returns. The value of this credit is calculated at $116 Billion. If the government-must-spend theory is valid, then this credit, which increases for 2009 and 2010 disposable income to individuals, should have little stimulative effect, because the individuals should be hoarding that cash rather than spending it. Additionally, because the tax credit is calculated against current income, that $116 Billion has not been fully received by individuals (as it is applied to current income), reducing its actual stimulative impact to date. Further, with unemployment rising, a tax credit applied to income is the least likely to be spent, because a rising fear of job and income loss will reduce discretionary spending; the hidden "gotcha" in the tax credit is that if you lose income, you lose the tax credit (or a portion thereof).
Consumer spending rises in June, incomes fall | U.S. | Reuters
While consumer spending has risen (0.4% in June and a revised 0.1% in May) recently, personal income continues to decline (real disposable incomes declined 1.8% in June). The increase in spending is largely from non-durable goods (1.7% increase in June); durable goods purchases actually fell 0.2%. As recovery goes, this is anemic at best, and may not herald recovery at all (consumer spending rose in the first quarter by 0.6% and the economy still contracted).
The tax credit, then, is not showing up at the cash register.
Report: Economists Say Recession Over, Want Bernanke to Stay - Political News - FOXNews.com
The running presumption is that productivity spurs employment, and that rising productivity now will lead to job creation in the third and fourth quarter. However, if sales are not expected to rise (and they are not), companies are not going to hire. Hiring by employers is their expression of confidence in the future. With durable goods purchases continuing to decline, new jobs are not yet in the offing.Obama said last week that the "worst may be behind us," and the Labor Department on Tuesday seemed to bolster that notion, reporting that productivity surged in the spring by the largest amount in almost six years while labor costs plunged at the fastest pace in nine years.
Productivity is a key ingredient for rising living standards because it means that companies can pay their workers more with the wage increases financed by rising output.
However, in the current recession, companies have been using the productivity gains to bolster their bottom lines in the face of declining sales. Many companies have been reporting second-quarter earnings results that have beaten expectations despite falling sales, due largely to their aggressive cost cutting.
A tax credit that people spend on groceries is not a stimulative tax credit.
The other flaw in crediting the stimulus plan with any recent economic growth is the support it has given to real estate prices--and the pending fallout that will result. Ginnie Mae, the mortgage arm of FHA, is doing a land office business, while at the same time FHA is not holding adequate reserves, something for which the agency was roundly excoriated by an Inspector General report in June:
The stimulus plan's housing tax credits are contributing to this mini-housing bubble--and bubble it is, because what the government is doing is propping up housing prices when they need to fall another 10%-20% to return to the historical norms in real estate.On June 18, HUDís Inspector General issued a scathing report on the FHAís lax insurance practices. It found that the FHAís default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHAís reserve fund was found to have fallen in half, to 3% from 6.4% in 2007ómeaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a ďCongressional appropriation intervention to make up the shortfall.Ē
The stage is not set for recovery, but for a "W" shaped double dip recession, as further housing declines will squelch any economic growth in the 3rd and 4th quarter. Worse, that decline will likely trigger a government bailout of a 3rd GSE, pushing the deficits further into the stratosphere. The impact of the stimulus plan in this has been neutral to bad.
We should remember that economists are better historians than prophets. These same economists who proclaim the recession "over" are the same economists who failed to recognize the recession until it was close to bottoming out.
I used to work as an economist! But I don't anymore. The recession is certainly coming to an end, but all is not well. The recovery will be weak and slow. This was not a typical recession, this one was near total meltdown. And you don't go from near meltdown to birds singing and people dancing through meadows quickly and without pain. Should Bernanke stay on? I can't say I care. He's done a good enough job. Not perfect, but perfect is not easy in his job. There is something to be said for continuity right now. I agree with that. We've mapped a course and changing it now might not be the best idea.
Wow. Am I awesome or what?
I think Bernake should indeed stay. He has weathered quite a storm and such experience is priceless. Many may think that the money given by Bush and Obama to attempt stabilization of the market, has been fruitless, but I will say that I think it has had some good impacts. For one, think of how many jobs were saved by keeping GM afloat. Not only were jobs preserved at GM directly, but many other related industry jobs as well.