We're From the Government and We're Here to Help

The folly of fiscal stimulus packages

Steve Chapman | January 17, 2008

In the best of times, most members of Congress are to fiscal irresponsibility what alcoholics are to the bottle—unable to resist even though they know they should. So imagine how our leaders will behave once they are told that budgetary indiscipline is no longer a vice but a virtue.

That's the counsel now from some economists and all three major Democratic presidential candidates. With a possible recession looming, they insist the federal government needs to provide a stimulus to the economy by spending or rebating money it doesn't have. That will put more cash in the pockets of consumers, who will then spend it, boosting the fortunes of companies and their employees and staving off a downturn. Or so the thinking goes.

Hillary Clinton has proposed a package that includes money to help homeowners pay mortgages they should not have taken out, as well as funds for "alternative energy investments" that might fail the cost-benefit test on their strict merits, and possibly direct rebates, too. Barack Obama wants to provide immediate tax cuts of $250 per person, while encouraging jobless workers to remain jobless by extending the time they can collect unemployment benefits. John Edwards' plan includes many of the same elements.

But skepticism is in order. Any money that the government lays out, after all, will not drop miraculously from the sky. Since the federal budget is already running a deficit, those funds will have to be obtained the old-fashioned way—by borrowing. More money would be spent by those who get the help, but less would be spent by those who provide it. So the whole transaction may add up to not much more than zero.

Giving money to people, as Obama urges, is the most direct type of stimulus. Oddly, though, there are only paltry grounds to prove it actually works. In 2001, the Treasury mailed rebates of $300 to $600 to taxpaying households, something the Bush administration later credited for invigorating the economy. In reality, later studies found, people generally declined to go out and spend, preferring to save the money or pay down debt. The booster rocket never left the launch pad.

Back in 1993, by contrast, President Clinton said a fiscal stimulus was essential to revive economic growth. But Congress refused, and the productive sector somehow managed to grope its way, unstimulated, into the longest peacetime expansion in history.

In their more sober moments, economists offer numerous reasons to treat fiscal stimulus as a wasteful charade. William Gale and Samara Potter of the center-left Brookings Institution noted in a 2002 study that tax changes of the sort being contemplated today have "a weak record in stimulating short-term economic activity."

Another problem is that to succeed, a transfusion of federal cash has to be timed just right. That is not easy given that a) the legislative process often moves at the speed of continental drift and b) the president and Congress can't agree on whether the ocean is salty.

Peter Orszag, director of the Congressional Budget Office, told The Wall Street Journal, "Most of the stimulus options under consideration would be difficult to actually get out the door in the first half of 2008." By the time a program spreads its healing balm, we may find the recession has died a natural death—or was never born.

So we don't know that these efforts to stimulate the economy will have the helpful impact that has been promised. We do know, however, that they will have one regrettable consequence: putting the government—and thus the taxpaying public—deeper in debt.

We may never reap the benefits of a fiscal stimulus, if it comes to pass. But rest assured, we'll be paying the price for years to come.

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|1.17.08 @ 1:32PM|#

Even if you believe a fiscal stimulus can work, it's unrealistic to think these plans would do the trick. Clinton and Obama envision packages worth $70 billion and $75 billion, respectively. But that amounts to just one-half of 1 percent of our annual output. It's like giving you a dollar every time you spend $200.

True, but at the same time, the national debt is currently $9,194,165,780,462.91. $75 billion (less than 1%) isn't going to make much difference there either. Not that I'm saying economic stimulus packages are a good thing, but let's not overestimate their negative effects, either.

Helping people pay mortgages they can't afford amounts to "sealing in" the home prices of the recent boom. Since the boom was driven largely by speculation (as opposed to genuine need for housing), the market is artificially high. That's no problem if the market can correct itself. If these stimulus packages go through, that market will be propped up, and efficient price signals will not be sent to consumers.

anon|1.17.08 @ 1:35PM|#

Why can't they just stick to "hope" and "change"? They cost less and have the same effect.

Elemenope|1.17.08 @ 1:39PM|#

|1.17.08 @ 1:40PM|#

seriously, how dumb are we?

Housing:
Supply goes up
Prices go up

Something here is wrong, no? If there are all kinds of houses where there didn't used to be, you'd think that the housing supply should be large enough to work against any natural rise in prices.

So then why, pray-tell, if you previously didn't own a home would you buy one under these conditions, since it's only natural for the house values to go down again after the supply has sufficiently increased in any given market?

|1.17.08 @ 1:47PM|#

Believe it or not, I'm agin' stimulus packages as such. Business cycle goes up, business cycle goes down, business cycle goes up. The best the government can do is help people weather the storm. The storm itself is going to end when it ends.

But what we're looking at here isn't a business-cycle recession. In fact, the business cycle was, finally, regaining its strength after the recession of the early 00s. There were some mighty impressive numbers put up in 2006 and 2007. This recession is driven by something being broken in how the economy worked.

What to do? I dunno, but a Keyensian-style simulus package is certainly the wrong tool for the job.

Zathras|1.17.08 @ 1:51PM|#

What to do? I dunno, but a Keyensian-style simulus package is certainly the wrong tool for the job.

Mmm. Wrong tool.

|1.17.08 @ 1:52PM|#

But, but, but, ... People are hurting! We've got to do SOMETHING.

Governor Le Petomane - "We've gotta protect our phoney-baloney jobs, gentlemen, we must do something about this immediately!"

|1.17.08 @ 1:58PM|#

Looks like that 70s word "stagflation" is about to make a comeback.

LarryA|1.17.08 @ 2:00PM|#

Since the federal budget is already running a deficit, those funds will have to be obtained the old-fashioned way-by borrowing.

I thought the old-fashioned way was by printing more dollars, which would really mess things up.

"NEWSFLASH: You're fucking homeless!" Yeah, that's an efficient market signal. It's also someone's life getting flushed.

There are lots of homes with shaky mortgages. The lenders know if they simply foreclose everything they'll be up the housing market creek without a paddle.

Absent government meddling lenders will bend over backwards to offer clients high on the margin deals, deferring principal, etc. Those they do foreclose on will have their pick of houses added to the rental market because they aren't selling. The price of houses on the selling market will drop, offering deals to those who are looking to buy with a better loan. And the lenders will learn a valuable lesson.

|1.17.08 @ 2:02PM|#

Aresen,

At least this time, Jimmy Carter has nothing to do with it. It's not like he's involved in building houses or anything.

Oh, wait.

|1.17.08 @ 2:03PM|#

Like the climate, the economy is a difficult thing to model...anyone claiming to be able to take a definitive action that will avoid recession is misguided at best...pandering at worst.

I think it is important to segregate actions that would help people hurt by the business cycle (e.g., unemployment benefits) versus those that try to 'fix' the economy.

Elemenope|1.17.08 @ 2:10PM|#

There are lots of homes with shaky mortgages. The lenders know if they simply foreclose everything they'll be up the housing market creek without a paddle.

True, but I don't think the lenders are much better off holding chronically, probably permanently delinquent mortgage loans that they can't even re-sell. It's six and one half dozen.

gaijin makes a damn good point; there is a world of difference between providing material help to those who are suffering through a downturn, and helicopter money.

Kolohe|1.17.08 @ 2:14PM|#

NEWSFLASH:, [etc]

If own a home, it should not matter whether the value goes up to a gazillion dollars or down to $1 after you bought it; you would be paying the same per month on your mortgage either way. If you bought under the assumption that you could always re-fi later, then you took a risk; I do not have sympathy for you if this risk didn't work out.

If you lost your job, that is another matter.

|1.17.08 @ 2:16PM|#

The housing prices got completly out of whack with reality. There has to be a correction there. Right now, even with the tax breaks it is cheaper to rent than it is to buy. The real estate industry and the banks created an ungodly housing bubble in the last 10 years. I work with a woman who bought her house 10 years ago for 300K and it is now worth over a million. That is almost a 400% return in 10 years. There is no sound reason why real estate should produce that kind of return. It is all just over inflated value propped up speculation and bullshit. The country and the banks can either take the pain now and right the bad loans off the books and let home prices fall to a rational level or the country can try some kind of bailout and put off the pain only making it last longer and be worse in the future.

robc|1.17.08 @ 2:17PM|#

Yeah, that's an efficient market signal. It's also someone's life getting flushed. Let's try to keep a slight bit of perspective on the human cost of a "market correction" in housing, shall we?

Sometimes it takes really extreme negative signals to keep people from doing stupid shit.

|1.17.08 @ 2:20PM|#

There life isn't being flushed. That is bullshit. If you have no equity in a home and can't make the payments, how exactly do you "own the home" in any real sense of the word? They don't. They are effective renters and need to move on to somewhere they can afford. It is not the end of the world. We don't owe people the right to live in a house they can't afford. Further, if we would let the forclosures go and the market work itself out, housing prices will fall and these people then might be able to buy a house they can actually afford the payments on and build up equity.

jackanapestarian|1.17.08 @ 2:23PM|#

Lost your house? Get a check!
Lost your job? Get a check!
Have a job? Write a check!

robc|1.17.08 @ 2:25PM|#

THIS

|1.17.08 @ 2:25PM|#

I'm am keenly aware of the "human cost" of a correction. Mostly, the correction helps lower income folks buy a home. A bailout helps banks and developers. Sure, a bailout helps a small number of people who are in slightly over their their heads. I suspect its just a balm to make us feel better about throwing cash at banks who made crappy loans.

Bingo|1.17.08 @ 2:26PM|#

Wow, guys wake up this is the 21st century. People have a right to free healthcare, free college, and free housing. Are you just going to take Grandma and little Jimmy and throw them on the street?? You don't know what its like to be a member of the downtrodden middle class.

It's not like your "market" ever does anything for anyone, we need a true leader with vision to change our country!

|1.17.08 @ 2:31PM|#

Don't be so sure that a stimulus package won't work. The psychological effects of having an extra $300 (plus the belief that the government actually has its hand on the tiller) may help avoid over-retrenchment and consumer panic.

You can be as logical as you want about economics, but the fact is, a lot of consumer activity is based on emotion. It's sort of like promising to bail out a bank in order to prevent a run on the bank. With luck, the government will never have to bail out the bank.

So what Bernanke is doing is attempting to put together a stimulus package with the best bang for the buck, based on its psychological as well as financial effects.

Saying as a flat maxium "Stimulus packages don't work" shows why the libertarian position, in the end, is not considered seriously by most Americans.

Elemenope | January 17, 2008, 2:10pm | #
True, but I don't think the lenders are much better off holding chronically, probably permanently delinquent mortgage loans that they can't even re-sell. It's six and one half dozen.

Did you even read the second half of LarryA's post?

Absent government meddling lenders will bend over backwards to offer clients high on the margin deals, deferring principal, etc.
...
The price of houses on the selling market will drop, offering deals to those who are looking to buy with a better loan.

In other words, they will act like used car salesmen looking to off-load a surplus. They will slash the prices and offer fantastic rates so they don't continue holding deeds. Empty houses don't make money.

"NEWSFLASH: You're fucking homeless!"

I am homeless!! Well, I don't own a home and would really like to. I am one of those "lower income" people who has been waiting for the market to collapse so that housing becomes affordable again and this could very well screw up what should have been an inevitable market correction.

Christopher Monnier|1.17.08 @ 2:32PM|#

> "NEWSFLASH: You're fucking homeless!"

Yeah, that's an efficient market signal. It's also someone's life getting flushed. Let's try to keep a slight bit of perspective on the human cost of a "market correction" in housing, shall we?

That's a bit of an exaggeration, though, isn't it? It's not like you go straight from a $300,000 house to a homeless shelter. If people could afford a $1,300/month mortgage before the promotional period ended, they can afford to rent a house/apartment for $1,300/month. Going from a house to an apartment can't be easy (especially if there are kids involved), but it's not the end of the world.

|1.17.08 @ 2:37PM|#

How does one get a Newsflash if one is homeless? Periodic trips to Circuit City for Newsflashes and a sink shower?

|1.17.08 @ 2:39PM|#

Of all of the things to be afraid of in this world, housing prices not coming down over the next year should probably not be on page one of your list, regardless of what the government does.

Grumpy "realist" -
$300 isn't going to do a whole lot of good when people have $3,000+ in credit card debt, a car loan, a mortgage (for those who bought a house at a reasonable price under reasonable terms), and all kinds of other expenses that they bestow upon themselves. In the event that they actually spend the $300 on something, it can in theory help them, but it's going to take a lot more than that to fix things. Say like... prices coming down.

|1.17.08 @ 2:40PM|#

If you have no equity in a home and can't make the payments, how exactly do you "own the home" in any real sense of the word?

What are you, kidding me? It's an effing bond certificate, it's somebody's home!

Everything's Rational Economic Man to some people.

|1.17.08 @ 2:42PM|#

er, it's NOT an effing bond certificate

The equity eating monster|1.17.08 @ 2:44PM|#

Real estate is so overvalued these days that people with a stake in the game want nothing to do with seeing what actual post bubble values are. Because it's bank fortunes on the line, the dream plan is to inflate the supply (and devalue the worth) of the currency until, thanks to inflation, the current price of real estate is closer to the same dollar amount as the old bubble price...all the while assuring everyone it was done to spare the nuevo-homeless from the horrors of apartment dwelling within their means.

|1.17.08 @ 2:46PM|#

So what Bernanke is doing is attempting to put together a stimulus package with the best bang for the buck, based on its psychological as well as financial effects.

The federal reserve's tools are largely limited to interest rates and money supply aren't they (an honest question)?

Does anyone here have an opinion on Paul VOlker's actions to counter stagflation in the very early 80's?

|1.17.08 @ 2:52PM|#

"housing prices not coming down over the next year should probably not be on page one of your list"

I have to disagree. A house is usually the biggest investment a person will make. The barriers to making that investment should be up there along with career choices and eating. Artificially propping up a sleazy banking industry shouldn't be on the top of your list.

|1.17.08 @ 2:53PM|#

I'd love to see some big fish in the mortgage indusrty go belly up on this. If we bail out the buyers of homes they can't afford, we bail out the lenders who foolishly granted the loans or bought the packages. This ain't about not caring for the IRRESPONSIBLE mortgage taker, it's about not caring about the IRRESPONSIBLE mortgage holder.

Dress it up as help for the little guy all you want, but I still recognize the corporate welfare pig underneath the gown and lipstick.

"What are you, kidding me? It's an effing bond certificate, it's somebody's home!"

So is the house I rent Joe. We love that house. It is our home. BUt if I stopped paying my rent they would kick my ass out. My beautiful home!! Why does having a mortgage versus a lease make things any different? Further, like I said above, if we would let the foreclosures happen and get these houses on the market a lower prices, gee maybe the people being forclosed on could afford to buy back into the market.

|1.17.08 @ 2:54PM|#

"NEWSFLASH: You're fucking homeless!"

Yeah, that's an efficient market signal. It's also someone's life getting flushed. Let's try to keep a slight bit of perspective on the human cost of a "market correction" in housing, shall we?

Why does rationality fly out the window if someone is hurting? I bought about 3.5 years ago. I very easily could have got an ARM or an interest only loan and got a much bigger/nicer/cooler/newer house than what I got. But I looked at the ARM schedule, what the housing market/interest rates might look like in 5 years, what my potential for increased income was and made damn sure that I could afford the payments on a fixed at 5.5%. But they guy who didn't plan, didn't think forward and went in way over his head is now 'hurting' (nevermind the bail out is going to mostly help the lenders holding bad loans). So now you're going to lock the guy with no foresight into his nice spiffy house and I'm stuck in my crappy affordable house (not really; it's quite nice and I'm very happy with it :). Is that the kind of behavior you want to create incentives for? Because that's exactly what your doing. I mean I'd still do the smart thing and live within my means, but there'd certainly be a twinge in the back of my head that I should increase my risk exposure because I won't have bear the consequences.
-K

PS. BTW, as already mentioned, the guys life is not getting flushed. If he can afford the payment prior to the adjustment, there's no shortage of rental properties (both apartments and homes) that can be had.

|1.17.08 @ 2:56PM|#

Didn't these people who would otherwise be homeless used to live somewhere else? Like an apartment?
Perhaps the people who are really suffering from this are the ones who sold the house that they COULD afford and refinanced to get an even BIGGER house. If they were kicked out... yeah, they'd have to move to an apartment and would lose and awful lot. Sucks, yup yup.

|1.17.08 @ 2:59PM|#

*lose an awful lot

|1.17.08 @ 3:08PM|#

Before we go crazy blaming the individuals who got these crazy mortgages and such, lets send a shout-out to the banking and financial system which is the ultimate moral hazard in this economy...the house always wins and the gov't will always be there to bail out their losses.

|1.17.08 @ 3:14PM|#

Lamar,

I meant, housing prices are going to come down over the next year, regardless of what the government does.

John, I'm guessing you've never owned. What's the difference between an owner and a renter? On an psychological level, a whole hell of a lot.

While we're at it, James, let's give a big shout out the genius who came up with the idea of aggregating junk mortgages to sell as bonds, so that lenders could be insulated from the consequences of risk.

|1.17.08 @ 3:16PM|#

Anyways, does all of this "too bad, you can rent" talk mean I'm no longer going to have to put with croccodile tears about mortgage lending standards denying the American Dream to poor people?

|1.17.08 @ 3:17PM|#

What's the difference between an owner and a renter? On an psychological level, a whole hell of a lot.

I do not understand the point of this statement. Are you proposing that we bail out people's psychological perception of their lives?

|1.17.08 @ 3:18PM|#

It seems to be getting more and more difficult to tell when real substantive growth is taking place in the economy and not simply massive deficit spending, personal credit expansion, and more and more exotic investment instruments...am I missing something?

I was asked a specific question, and I answered it.

I didn't see a proposal in there.

|1.17.08 @ 3:26PM|#

"I meant, housing prices are going to come down over the next year, regardless of what the government does."

The question is how much of the artificially high prices will remain and how much will fall off. Much of that has to do with who can get credit. A government bailout will free up more credit, allowing more people to buy houses with less risk and sealing in all or most of the artificial gains from the last 5 years. That's bad for regular folks, fan-fuggin-tastic for banks.

|1.17.08 @ 3:34PM|#

A few people get nailed on foreclosure, but a generation of people get affordable housing. Let the sucker crash. Let those in over their heads rent or buy something cheaper. Let speculators burn, burn, burn.

|1.17.08 @ 3:37PM|#

I'll be satisfied with this market 'correction' when I see stock brokers and bankers waving at me through the window on their way down...

dhex|1.17.08 @ 3:39PM|#

Dress it up as help for the little guy all you want, but I still recognize the corporate welfare pig underneath the gown and lipstick.

word the fuck up.

|1.17.08 @ 3:41PM|#

James -
Did you miss all the bank and investment firm layoffs?

|1.17.08 @ 3:54PM|#

The question is how much of the artificially high prices will remain and how much will fall off. Much of that has to do with who can get credit. A government bailout will free up more credit, allowing more people to buy houses with less risk and sealing in all or most of the artificial gains from the last 5 years. That's bad for regular folks, fan-fuggin-tastic for banks.

Even the biggest of the proposed "bailouts" are but a drop in the bucket of this mortgage disaster. Basically, the government is powerless to halt the deflation of this bubble market, and I consider that a good thing.

This is a big asset bubble, but certainly not the first nor the last.

Oh, and joe, until you pay off the mortgage, the house is effectively "owned" by the bank, regardless of whether you live in a lien-theory or title-theory jurisdiction. And since the bozos who "bought" in recent years using interest-only or option-ARM loans have acquired exactly zero equity, they are even more truly renting from the bank.

Lamar,

The question is how much of the artificially high prices will remain and how much will fall off. That's a good question. In the Eastern Massachusetts market, prices are already down (guesstimate) 10% from their peak.

Anyway, my point is that it is beyond the realm of possibility that the government would take any action large enough to keep the supply of credit from shrinking. It's just a question of how much it would shrink.

thoreau|1.17.08 @ 3:55PM|#

I'm not seeing enough snark in a thread about a big package.

Kudos to joe, though, for comparing the big package to the wrong tool. It's more like a drill.

|1.17.08 @ 3:56PM|#

ChrisO,

Do you think I don't understand that, or do you think that my comment about "It's somebody's home" maybe referred to something other than the techinical aspects of a home's title?

|1.17.08 @ 3:58PM|#

The sort of interesting catch-22 involved here is the continuing diminution of the dollar, if interest rates continue to drop(which it seems like they might) liquidity will only increase and the dollar will continue to fall, you can't save both the financial system and the dollar it seems.

|1.17.08 @ 4:00PM|#

Does anyone else remember when GWB was actually talking about intentionally deflating the dollar's value?
You know, back when SC was having textile issues, we actually cared about whether or not China floated its currency, and he was trying to save manufacturing jobs by making exports cheaper?

Do you think I don't understand that, or do you think that my comment about "It's somebody's home" maybe referred to something other than the techinical aspects of a home's title?

Oh, I'm sure you got that. I was just being literal, I guess. However, anything other than the technical aspects is basically emotionalist horseshit that is the purview of real estate industry shills and statist politicians. But then, you're a Democrat, so I guess the emotionalist stuff is more comfortable for you. ;)

|1.17.08 @ 4:02PM|#

If the difference between homeownership and renting is emotionalism, you wouldn't know it from the graffitti, upkeep, investment, crime rates...

Does anyone else remember when GWB was actually talking about intentionally deflating the dollar's value?

I don't remember that, but it's exactly the kind of dumbshit thing he would propose. Ask an Argentine about currency devaluation.

|1.17.08 @ 4:07PM|#

If the difference between homeownership and renting is emotionalism, you wouldn't know it from the graffitti, upkeep, investment, crime rates...

All good reasons for being a renter, at least at the moment. I'm fully aware of the practical reasons for buying a home. However, none of those reasons have been very persuasive since 2002 (or even earlier) in the bubbliest markets.

Bottom line in a stable market: if you intend to live in a house for more than five years, it makes financial sense to buy, even with all the headaches involved. If not, then not. Personal dwellings are not an investment, and actual real estate investments (apartment buildings) are more akin to a job than a true investment.

If the difference between homeownership and renting is emotionalism, you wouldn't know it from the graffitti, upkeep, investment, crime rates...

Maybe they can take a portion of the budget from the local police department in an individual city and give it to the people who would otherwise lose their homes and have to rent, so as to keep down crime and vandalism and all that.

Bingo|1.17.08 @ 4:08PM|#

The Feds are creating the perfect storm of retarded fiscal policies, its kinda neat.

|1.17.08 @ 4:10PM|#

There is a lot of human psychology involved in these market bubbles. As the market soars for some reason regulation becomes more and more lax, scrutiny decreases, and this sort of casino double-down, let it ride mentality takes over.

TOOLMAN BOB JAKE BILLYBOB|1.17.08 @ 4:20PM|#

IT'S A WRENCH!!!!!!!!

|1.17.08 @ 4:23PM|#

joe:

In a post thoreau @ 3:55pm world, I'm not comfortable talking about shrinkage. My point is really just that the market went up 75 to 80% over a couple of years (more in many places). Talk of a 10% decline doesn't impress me. But it's a start. We'll see if it continues to correct itself, or if the market is manipulated to give bankers a break.

|1.17.08 @ 4:32PM|#

But, but, but, ... People are hurting! We've got to do SOMETHING.

"We'll dig our way out!" -HOmer Simpson

I have to go with John on this. People who have zero or negative equity in their home don't really "own" the home or even a small piece of it. They are simply renting it from the bank. Go rent something cheaper!

|1.17.08 @ 4:54PM|#

I'm not seeing enough snark in a thread about a big package.

Ok, Thoreau, well, everyone knows by now that it's not the size of the package, it's how stimulating it is.

joe|1.17.08 @ 5:07PM|#

Reinmoose,

I guess with enough cops cracking enough skulls you can keep the peace, but it would be better to actually have the stable communities and involved stakeholders that make such actions unnecessary.

joe|1.17.08 @ 5:11PM|#

Anyway, I think most of you understand perfectly well the difference between homeownership and renting, and what it means at the individual, block, neighborhood, city, and societal level.

This unconvincing pose of confusion certainly didn't come from good-faith reasoning, so don't look to me to try in good faith to reason you out of it.

|1.17.08 @ 5:12PM|#

joe -
did you read what I wrote?

here it is again, with emphasis added:
Maybe they can take a portion of the budget from the local police department in an individual city and give it to the people who would otherwise lose their homes and have to rent, so as to keep down crime and vandalism and all that.

You know. If you want to say that it would keep down crime if people got to keep their owned houses instead of renting, go ahead and give some of the crime budget in a locality to the people so they can afford their ghastly mortgages.

|1.17.08 @ 5:17PM|#

maybe you were... how do you say... arguing with the Reinmoose in your head?

Bingo|1.17.08 @ 5:22PM|#

joe, is this your argument?

If people are forced to move from an overvalued home that they can't afford into a rental house or an apartment they can afford then they will be emotionally distraught.

So what? We're not talking about losing a job here and living on the street, we're talking about someone living outside of their means and having to tighten the buckle and cut back. It might mean putting off living the `Merican Dream of having a big house and a shitload of debt, but those things happen in this place called reality.

|1.17.08 @ 5:27PM|#

joe,

I have an emotional connection to the money being siphoned from my paycheck to finance this stuff. I cry into my pillow every night at the thought of more federal spending! And you don't care about MY pain?!

Steve Verdon|1.17.08 @ 5:28PM|#

But skepticism is in order. Any money that the government lays out, after all, will not drop miraculously from the sky.

Right here is the problem with all of these stimulus packages. The money must come from somewhere. If you tax it, then you are taking money away from some and giving it back to others. Basically redistributing the money. To the extent that taxation and transfers entail inefficiencies (e.g. deadweight loss) you'd expect little or no gain in terms of the "mulitplier effect" that many students learn about in their introductory macroeconomics course. Same thing for printing more money. Cutting taxes are a little different in that they may actually reduce some of the inefficiencies noted above, but again this is money that is already in the economy.

IIRC, many of the basic macro economic models that are used to show a multiplier effect assume the money comes into the economy from outside. Since in reality this is just not going to happen via the government, such multiplier effects should be viewed with great suspicion...and any candidate peddling such a plan should also be viewed with suspicion.

|1.17.08 @ 5:28PM|#

I thought the amount that they were batting around as stimulus package size was in the $100 billion range--some was to go out as direct payments, some was supposed to be in the form of tax breaks for business.

And please keep the fact that we have two messes here: the downturn in the economy, and the mess in the whole housing/subprime/whatever area. They're linked, but they're not the same.

The subprime/housing mess will shake itself out sooner or later--a lot of groups who invested in CDOs etc. will lose money, quite a few companies will go bust, and there will be an attempt to shoehorn a bit more regulation in to control for the fact that all the players in the game are making their money off of commissions rather than the actual return on the mortgages (which would have made them much more strict about finding out whether the lendees could actually *pay* the mortgages....) No one cared--they got their money, they were happy. Any surprise that no one was minding the store?

R C Dean|1.17.08 @ 5:32PM|#

I'd love to see some big fish in the mortgage indusrty go belly up on this.

Mission Accomplished! The biggest mortgage banker in the country no longer exists.

Unfertilized Egg Comedian|1.17.08 @ 5:34PM|#

"The biggest mortgage banker in the country no longer exists."

And American taxpayers are subsidizing the acquisition to the tune of $100 million/year.

|1.17.08 @ 5:37PM|#

I can't even pull off a joke in an unrelated thread without screwing something up. 5:34pm was me.

alisa|1.17.08 @ 5:45PM|#

Steve --
how 'bout the familiar Keynesian rule of "spend more, tax less" in a recession? Run up a deficit, keep tax hikes to a minimum, and you'll increase aggregate demand. I've seen some people mention that it won't work in this case, but I don't understand why.

If we're doing a stimulus package, direct payments seem a better choice than in-kind things like heat bills.

joe|1.17.08 @ 5:46PM|#

Yes I did read what you wrote, Reinmoose

I just read it wrong. My bad.

Bingo,

No, it is not.

Which pretty much renders crimethink's comment moot, too.

Bingo|1.17.08 @ 6:07PM|#

Well joe, I really want to know what is so terrible about moving from a house to an apartment and tighting the household budged that it requires the government to intervene.

Bingo|1.17.08 @ 6:09PM|#

tightening, budget, whjatever its the end of the day!

Steve Verdon|1.17.08 @ 6:20PM|#

Alisa,

how 'bout the familiar Keynesian rule of "spend more, tax less" in a recession?

That is exactly what I'm talking about. The increase in demand never really lives up to expectations in terms of output/ending the recession. Why? Because you are taking money out of the economy to...put money in the economy.

Geotpf|1.17.08 @ 7:06PM|#

There's lots of proof that large amounts of governmental spending helps the economy on a short to medium term basis. I always thought one should increase spending and cut taxes during bad economic times (deficit spend) and increase taxes back up during good times. Increased governmental spending during World War II is what finally ended the Great Depression.

But I guess I'm a Keynesian and not an Austrian, so meh.

Now, whether or not the specific policy platforms the Democratic candidates for president are the correct ones or not is another argument. But increasing government spending makes sense, IMHO.

Anonymoose.|1.17.08 @ 7:09PM|#

Since Ron Paul isn't accepting government matching of campaign funds, we should encourage everyone to take that $300 government bailout check and sign it over to Ron Paul.

That's how you fix the economy.

SIV|1.17.08 @ 7:09PM|#

This is going to buy a whole lot of free lunches.

Don't spend it all in one place.

joe|1.17.08 @ 7:13PM|#

Cripes, helicopter money. Great.

In a 6% inflation environment, no less.

alisa|1.17.08 @ 7:17PM|#

I'm not trying to argue as much as I'm trying to learn.
So, you're saying that an increase in government spending diverts money away from private investment? Do the rate cuts we've been seeing lately offset that effect at all?

Phillip J Fry|1.17.08 @ 7:18PM|#

If you gave me $300, I'd buy one hundred cups of coffee. Just like I did the week before I had my first heart attack.

Anonymoose.|1.17.08 @ 7:20PM|#

Increased governmental spending during World War II is what finally ended the Great Depression.

Increased government spending combined with a decreased work force.

Rakune|1.17.08 @ 7:41PM|#

The trade deficit (the USA consumes more than it produces) indicates that lack of demand isn't the problem. Therefore stimulating demand isn't the solution. Demand destruction by way of recession is the painful shortcut to recovery.

|1.17.08 @ 7:43PM|#

I thought the Keynesian idea used in the Great Depression was gov't work projects to kick-start the economy again since there was a collapse of everything.

Right now, we're going into what looks like an extended case of a) falling dollar, b) contraction of economy, c) people tightening their belts (due to expected stormy weather on the horizon) meaning less spending, d) fallout of the whole mortage/real estate mess, and e) inflation due to increased cost of oil working its way through the system.

Problem is--even the US government doesn't have too much power over the whole mess, at least in the short run. We're in a global economy now, and China/India's demand for energy is just going to continue to increase. In the long run what we really need to do is find a way to bring energy and shipping costs down.

Kolohe|1.17.08 @ 7:46PM|#

Increased governmental spending during World War II is what finally ended the Great Depression.
Increased government spending combined with a decreased work force.

And the death of up to 70 million people (but less than 1/2 million of americans)

SIV|1.17.08 @ 8:03PM|#

Cripes, helicopter money. Great.

Helicopter? Maybe a nice used kayak.

I wonder if the ink will be dry before the whirly-bird drops it.

|1.17.08 @ 8:56PM|#

So, stimulus packages don't work? Hitler implemented phenomenal stimulus packages that turned devastated Germany into such a force that it nearly took over the world.

And FDR ameliorated the depression with stimulus packages. Yes, it took that ultimate stimulus package (AKA WWII) to "ultimately" break the depression, but that's essentially what war is.

You need to do more research, though I suspect truth is secondary to you. The proposition that stimulus packages don't work is the other side of the propaganda that says only tax cuts for rich people stimulate the economy. Sadly, people who want to continue that propaganda control the media. So you will probably win the debate.

Thus continues the path that this USA is on, towards it's demise. The rich will survive, they always do, but the nation in all it's greatness will not.

|1.17.08 @ 9:21PM|#

Here, Mark, take a look at this chart.

http://krugman.blogs.nytimes.com/2008/01/15/stimulus-never-mind/

You see the the arrow labeled "First Bush Tax Cut?" That's the one that included the "rebate" checks (Yay free money!) and a nice, Republican-style start-at-the-top tax cut, for stimulus. Do you see what the line does after that?

Clinton tax increase. First Bush tax cut. Second Bush tax cut. The economy is going to do what the economy is going to do, and the people running around in circles over OMG a tax increase of OMG we need stimulus or OMG we need to cut taxes don't know what they're talking about.

|1.17.08 @ 9:24PM|#

I should mention, Mark, that right at the same time as the first Bush tax cut, we started to run those gigantic deficits because of the combination of tax cuts and out-of-control spending under the Delay regime. Exactly what the stimulus people say we should do.

And the line just keeps dribbling down, until enough time passes that it starts to go up.

crw|1.17.08 @ 9:30PM|#

And yet, my employer just beat earnings estimates and turned in record revenue. Clearly this downturn isn't being felt everywhere, and that's the main reason generalized stimulus wont work and may well make inflation worse.

The main threat right now is a lot of the money that went into mortgage backed securities was money being reinvested by pension and 401k funds who were mislead by the completely bogus AAA ratings these investment vehicles were given. If that money is just allowed to go poof (actually, it was converted into housing stock and builder profit and middlemen commissions) that could spark a panic and capital flight. That's the main thing the feds need to do now - prevent the herd from going over the cliff so they can gracefully recover as much money as possible. How to do so? That's the multi-billion dollar question. I don't think classic Keynesianism is it, though.

|1.17.08 @ 9:31PM|#

I think one main difference is that the out-of-control spending has been going mainly for that lil ol' adventure in Iraq. So rather than "stimulus package", it's been more like "burn cash in the desert".

We've been doing great for Halliburton and similar stock, not so much elsewhere....

At least out of the previous stimulus packages we got some good infrastructure and the Hoover Dam.

Kolohe|1.17.08 @ 9:48PM|#

And Mark, the reason why those things "worked" is that:

1) in the US case, when the bill came due, we were able to pay it because we were virtually untouched, and much of our competition was either figuratively or literally dead.

2) in the German case, the bill never came due; or rather due due rather abruptly and catastrophically

|1.17.08 @ 10:01PM|#

At least out of the previous stimulus packages we got some good infrastructure and the Hoover Dam.

Yeah, there are still WPA badges in the sidewalks near my house. 1930s concrete rulez!

And people got to put food on their tables building those things, when they wouldn't have otherwise. Which was nice, and important, but didn't get us out the Depression.

Steve Verdon|1.18.08 @ 1:58AM|#

There's lots of proof that large amounts of governmental spending helps the economy on a short to medium term basis.

Really, and what proof would that be? Bush cut taxes and if anything increased spending and while the recession was short lived, the resulting economic expansion was nothing other than what we'd expect when a recession ends.

I always thought one should increase spending and cut taxes during bad economic times (deficit spend) and increase taxes back up during good times.

Yes, standard Keynesian counter cyclical policy. The problem is that, as I've already noted, all this does is re-arrange the deck chairs...or more accurately rearranges who spends the money. Another problem is that when times are good taxes generally don't increase, at least not to the point where we run surpluses that offset the deficits from the recession.

Increased governmental spending during World War II is what finally ended the Great Depression.

Not really. During the period of 1929 to 1939 there were two recessions. One from 1929 to 1933 (lasted 43 months) and the second from 1937 to 1938. And the overall impact of the policies of FDR were likely minimal at best.

Now, whether or not the specific policy platforms the Democratic candidates for president are the correct ones or not is another argument. But increasing government spending makes sense, IMHO.

Right which is why with relatively stable government spending during WWII the economy has been stagnant...oh wait...that doesn't work doe it. But, what the Hell, lets not facts stand in the way! Lets have the government confiscate everything in the economy and then spend it...why we'd be insanely rich...or just insane.

I thought the Keynesian idea used in the Great Depression was gov't work projects to kick-start the economy again since there was a collapse of everything.

While things were bad, they weren't that bad initially. And the reason they got really bad was governments world wide did amazingly dumb ass shit like jacking up interest rates and curtailing credit. Why? To protect their gold reserves of course. In the U.S. the Federal Reserve didn't act as the lender of last resort to many banks during runs, so that lead to more panic, and more bank runs. People were cutting back on spending since installment purchase agreements allowed the lender to repossess the goods if only one payment was missed. Curtailing spending in other areas to ensure that they didn't lose large ticket items. This lead to falling prices. Falling prices and lower sales lead to firms not being able to pay their bills leading to new rounds of problems with investment, lending, and eventually job cuts.

Roosevelt's programs accomplished very little. This where the idea of paying landowners not to grow crops started. The result: sharecroppers evicted from the land they were working. Families now with no income, no home, and no food. Those good ol' Democrats and their fine government programs. Pigs were slaughtered, crops destroyed, etc. to try and push up prices of these goods. There was this idea of stopping "destructive competition", so firms were allowed to set prices and wages throughout an industry. Imagine what joe would do if Bush tried to exercise the same kind of policy...why his head would probably explode (hmmm...the silver lining of such a horrible policy I guess...still not worth it though). Basically, the idea was to get more production by having less production.

Problem is--even the US government doesn't have too much power over the whole mess, at least in the short run.

Nor does the government have much power in the long run either. Seriously, if the government can do things in the medium to long run, why did the Republicans screw it up. They could have enacted policies in the last 7 or so years to ensure a Republican Hegemony for decades if your thesis is true. So, pardon me if I don't accept this notion that governments are any good at controlling the economy.

We're in a global economy now, and China/India's demand for energy is just going to continue to increase.

We've always been in a global economy...since at least the turn of the last century.

I should mention, Mark, that right at the same time as the first Bush tax cut, we started to run those gigantic deficits because of the combination of tax cuts and out-of-control spending under the Delay regime. Exactly what the stimulus people say we should do.

Yeah, lets ignore that recession that started at the start of 2000 as well. Oh...wait, I get it you'll blame that on Bush too.

There go the last shreds of joe's intellectual honesty.

And regarding your Coult...err Krugman reference. Yeah, that is really honest presentation there. Let me see, the economy Clinton inherited had been growing for a year before he got into the Oval Office. We can see why Krugman has become the Coulter of the Left.

I think one main difference is that the out-of-control spending has been going mainly for that lil ol' adventure in Iraq. So rather than "stimulus package", it's been more like "burn cash in the desert".

Wait, you can't have it both ways. The money spent by FDR during WWII was burnt in the Pacific, Europe, and Africa. A little consistency please.

At least out of the previous stimulus packages we got some good infrastructure and the Hoover Dam.

Yeah, never mind that planning for it started in 1922, the bill approving the construction was passed and signed in 1928, and the construction was done by private companies, not the WPA.

|1.18.08 @ 3:08AM|#

You want to be in the same position as the government: waaaay over your head in debt, because the government will simply print more money in its garage (the Fed) to 'pay' its tens of trillions in debts. The resulting inflation will make your debts shrink, too -- along with your savings. So don't be a putz and try to 'save' your 'money'.

ps - Yes, I know the gov't doesn't actually print more currency to create money, it's got a sophisticated issue-bonds-and-use-them-as-collateral-for-loans-by-the-Fed system to avoid having to actually make the whole process easy to understand.

alisa|1.18.08 @ 7:34AM|#

Thanks Steve --
that's a very clear explanation. Any advice on a book that goes through fiscal & monetary policy rigorously? (I'm in an odd position: I know the math to understand the technical stuff, but not all the economic language, so I'd probably need something introductory.)

|1.18.08 @ 11:52AM|#

Sigh. I have to correct people ever single effing time.

Stever Verdon, did you even look at the chart I linked to? It clearly shows the recession starting BEFORE the first Bush tax cut. And what I wrote about was how that cut/spending DIDN'T END the recession. I never wrote a word about it CAUSING it. How about little less kneejerk partisanship, and a little more literacy?

Oh, and Steve?
Take a look at this chart:

http://krugman.blogs.nytimes.com/2008/01/17/great-depression-blogging/

You see that blue line? The blue line is the money suppoly, Stevie. Oopsie.

Your statement that the government tightened the money supply and limited credit during the Depression is deluded ideological horse shit. The government expanded the money supply.

Don't lecture me about intellectual honesty, you fraud. You neither know what you're talking about, nor are capable of adressing what I actually write.

Steve Verdon|1.18.08 @ 11:53AM|#

McCafferty had a pretty decent text I used in my first year of graduate school. Some math, but nothing somebody who understands contrained optimization and matrix algebra shouldn't be able to handle.

Monetary economics, the current name for macroeconomics, is a very...ahhh...diverse field in that it is unlike mircoeconomics: it has no dominant model. Micro theory is generally crafted around general equilibrium models, and that is pretty well understood. Macro models tend to be the same way these days, general equilibrium, the thing is that everybody has different views on how money works in such a model. Hence the focus on monetary policy vs. fiscal policy. Moving money around and having different people spend it isn't going to do a whole heck of alot.

One person you might look at in particular, although this is getting a bit advanced, is Robert Barro's work. He came up with the Ricardian Equivalence Hypothesis which, holds that under certain conditions bond financed government spending does precisely nothing in terms of a stimulus. The idea is that rational forward looking agents who also exhibit intergenerational altruism (you care about your kids, grandkids, etc.) then you curtail current consumption realizing that the current bonds will be paid for in with future taxes. A reduction in current consumption is saved to pay for those taxes. Thus, the government is merely displacing current private consumption with public consumption and you have no net change in output. Barro's paper was very controversial and has spawned huge amounts of further research.

My view is that generally, he is partly right. This is why fiscal policy just doesn't do much in the way of helping the economy out. Further, taxation comes with a deadweight loss. That is the taxes prohibit certain transactions form taking place and the consumer and producer surpluses are lost to the economy. The literature on optimal taxation focuses on minimizing such efficiency losses. But it points to another reason to be wary of fiscal stimulus. Implementing taxes will impose a loss for the economy even if the government spends it in ways that result in just as much economic gain as if private citizens spent it the deadweight loss means society is worse off.

Then there is the whole issue of time inconsistency and government policies. This really undercuts the legs behind any argument in favor discretionary policies (at the very least for monetary policy, but probably for taxes, spending and deficits too) that so many, but that is getting a bit advanced.

|1.18.08 @ 11:56AM|#

This is why fiscal policy just doesn't do much in the way of helping the economy out.

Yes, like the MASSIVE EXPANSION OF THE MONEY SUPPLY DURING THE GREAT DEPRESSION that all of your reading seems to have skipped over.

But what do I know? I'm just an intellectually dishonest guy who can read a line chart.

...and English.

Steve Verdon|1.18.08 @ 12:31PM|#

Joe,

Yes, I saw your chart, and yes I knew how to interpret it. Do others? Do others know that employment is a lagging indicator and that if anything that chart indicates the recession started when Clinton was still President (no, I'm not saying Clinton caused it, I don't think Presidents have that precise a handle on teh economy at all). I still find that you didn't include the recession, perhaps initially one of the big reasons for deficits if not the biggest, in your list rather dishonest.

As for the chart and post by Krugman, it really does underscore my view that the government does a bad job with discretionary policy. I'm not so anti-government that I think we should go back to the gold standard and disband the Federal Reserve. Perhaps you are arguing with the Steve in your head. My view is that since people are generally lazy, ignornant and dishonest to varying degrees and that politicians and bureaucrats are people government should make little use of discretionary policy--i.e. rules vs. discretion.

Krugman's post supports, IMO, that position. Trusting to discretion back in 1929/1930 turned a recession into a protracted depression. Due to ignorance the Fed pursued the wrong monetary policy. Would the Fed do the same thing today? Probably not, but the next crisis might be quite different, and what assurances do we have that the right discretionary policy would be chosen? None, really.

As for Krugman's rhetoric on cuasing the depression, he is playing semantics, IMO. Sure the Fed didn't cuase the recession, but it did make a recession into a very bad recession--i.e. a depression.

Yes, like the MASSIVE EXPANSION OF THE MONEY SUPPLY DURING THE GREAT DEPRESSION that all of your reading seems to have skipped over.

Joe, you are aware that there is a time lag between writing a post and when reading the ones that come next. That is why I wait a couple of hours before becoming a complete fucking asshole about what people have written.

Oh, and where did I say the Fed shrank the money supply? I said the following,

"And the reason they got really bad was governments world wide did amazingly dumb ass shit like jacking up interest rates and curtailing credit."

Notice I referred to central banks worldwide and was talking about interest rates and credit. Yet, you tell me to work on my literacy? And, the M2 is a measure of the money supply. There is M0, M1, M2 and M3. While M1 went up, as more and more people wanted to hold cash, M2 went down...which makes sense based on the definitions of M1 and M2. M1 = M0 + cash in banks (checking/vault cahs). So if M0 goes up, then M1 goes up. But M2 = M1 + savings, money market accounts + small denomination timed deposits. So savings had to drop quite a bit for M2 to go down while M1 goes up. Given that there were runs on banks we can be fairly confident the increase in M1 was due to the increase in M0. And in the banking crisis the Fed is the lender of last resort for banks, it didn't do that during the early stages of the Depression thus exacerbating the situation. Their incompetence did cause the Depression.

And Krugman's analogy is Bravo Sierra. If FEMA acted perfectly it couldn't have stopped Katrina. If the Fed acted perfectly the economy wouldn't have sunk into depression, or such an event would have become much less likely.

Oh and in case you didn't get it. Krugman agrees that the Fed let the money supply shrink which is why the recession in 1929 became a depression. He just wants to play word games...depends on the what the meaning of is is.

alisa|1.18.08 @ 12:31PM|#

Thanks for the tips.

Joe, from a quick look at the graph, it only shows data up to 1933, the year Roosevelt was first elected. If this discussion is about New Deal policies then 1927-1933 numbers don't tell us much. (I'd also like some context before determining whether a 15% increase in the money base is "massive.")

Steve Verdon|1.18.08 @ 12:42PM|#

By the way Joe, there really wasn't all that massive of fiscal stimulus when you factor in the tax increases. FDR thought that deficits were actually part of the problem with regards to the depression so he raised taxes...by quite a bit.

Steve Verdon|1.18.08 @ 12:52PM|#

Here you go Joe an article about how Roosevelt was "aroused" by growing deficit. So much the idea tha FDR like fiscal stimulus--i.e. deficit spending.

I know the modern catechism is that FDR used deficit spending to bring us out of the Depression, save the U.S. and eventually the world by leadign the U.S. inot WWII and against Facism, but the first part of the story is pretty much revisionist BS. Roosevelt campaigned against Hoovers excessive deficits, wanted to raise taxes (as did Hoover).

alisa|1.18.08 @ 1:49PM|#

um... that article (the "here you go Joe") was published in 1908. That was Theodore Roosevelt, not Franklin.

Steve Verdon|1.18.08 @ 5:08PM|#

Woops, missed the date. Still, it is fairly well known (to those who've looked at this topic) that FDR campaigned against deficits, that higher taxes were needed, and that it was the "American" thing to do to have those with higher incomes to pay these taxes. Kind of like some of the rhetoric we here so many complaining about today in regards to Bush, the Republicans, etc. FDR had other unusual ideas as well such as purchasing gold from private individuals. The idea was that if the price of gold would just get to a certain price then things would start to get better. Of course, this was an inflationary policy in that you replaced gold with dollars, and if you were offering prices over what people could get elsewhere then you were putting more money into the economy. Not a bad policy, but for the wrong reasons...like much of the New Deal.

economist|1.18.08 @ 5:48PM|#

"but most decided to save it or use it to pay down debt". Uh, what's wrong with saving and investing, or paying off debts. I personally think those should come before unnecessary consumption.

|1.18.08 @ 5:55PM|#

S.V.

I don't know what others know. I know you yapped at me completely unfairly, accusing me of making a causal statment I never made. Bad Steve! Bad!

As for not including the recession, I guess I should have expressed myself more clearly. I was trying to make the point that we DID the Keyensian thing - cut the taxes, upped the spending, ran the deficits - and it didn't do anything. I wasn't actually trying to blame the entirety of the deficit on the tax cuts and spending. That was poorly phrased. Bad joe! Bad!

As for the Fed's fiscal policy, you write: Their incompetence did cause the Depression. Maybe, but if this so, it is not because they tightened the spigots, as you asserted, but because they loosened them but not enough, as the dramatic rise the money supply (during a Depression, no less!) demonstrates.

Krugman agrees that the Fed let the money supply shrink which is why the recession in 1929 became a depression. No, he doesn't. He says that the Fed grew the money supply - mocks the people who say the opposite, and puts up a chart that proves them wrong - but didn't do so vigorously enough. You are the one playing word games.

Clinton and Obama envision packages worth $70 billion and $75 billion, respectively. But that amounts to just one-half of 1 percent of our annual output. It's like giving you a dollar every time you spend $200.

This does not take into account the Keynesian multiplier. The theory goes that the money is continuously respent. So the less that is saved the more the package works. IF the savings rate is 10% that $7fB equates to a $750B increase in GDP.
My opinion is that stimulus needs to be a last resort, but it has proven effective in changing peoples behavior and confidence. Unfortunately it has been overused and is now an expected outcome, thereby enabling bad behavior.

|1.18.08 @ 6:01PM|#

Oh, and one more thing.

HA HA HA HA HA HA HA HA HA! about that devestating link you provided.

BTW, I like this little juxtoposition:

I know the modern catechism is... followed, when your mistake is pointed out to you, with Still, it is fairly well known (to those who've looked at this topic)...

Nice. And in case you were worried, nobody noticed that you abandoned the indefensible claim that FDR didn't run deficits, and tried to swtich to his campaign rhetoric without anybody noticing. Totally.

Which, btw, was a complete diversion, because I didn't write anything about FDR and deficit spending.

|1.18.08 @ 6:55PM|#

Uh, what's wrong with saving and investing, or paying off debts. I personally think those should come before unnecessary consumption.

I think the point was that the money didn't have the stimulatory effect the tax-cutters wanted, because people didn't spend most of it on new purchases as they assumed.

|1.18.08 @ 7:09PM|#

I like Ron Paul's "fiscal stimulus" package -- just let everyone keep the money they earn.

Cutting government spending by 40-50% or more, balancing the budget, and repealing the individual income tax would usher in the greatest era of prosperity in human history.

No wonder he's received more votes than Giuliani and Thompson so far.

|1.19.08 @ 10:27PM|#

I do not understand why more American's do not realize the truth behind these "stimulus packages." This is the internet age, anyone with a PC can Google a search on the economy or taxes and find their way to many articles and websites such as this one. Why are we so ignorant? It's so frustrating.

Steve Verdon|1.20.08 @ 3:45AM|#

As for the Fed's fiscal policy, you write: Their incompetence did cause the Depression. Maybe, but if this so, it is not because they tightened the spigots, as you asserted, but because they loosened them but not enough, as the dramatic rise the money supply (during a Depression, no less!) demonstrates.

I never asserted they tightened the "spigot"--i.e. money supply, that is something you have made up completely. I said they raised interest rates and restricted credit. They did this to prevent an outflow of gold since the country still adhered to the gold standard.

"Krugman agrees that the Fed let the money supply shrink which is why the recession in 1929 became a depression."

No, he doesn't. He says that the Fed grew the money supply - mocks the people who say the opposite, and puts up a chart that proves them wrong - but didn't do so vigorously enough. You are the one playing word games.

Yes he does. He wrote,

As you can see, M2 plunged in the Depression- and the Fed should have tried to prevent that.

Seems pretty obvious to me. The Fed let M2 shrink and they shouldn't have. They also didn't lend money to banks and instead let them fail leading to banking panics.

I know the modern catechism is... followed, when your mistake is pointed out to you, with Still, it is fairly well known (to those who've looked at this topic)...

Look, it is a fact. When FDR and Hoover were president the top marginal rates went up. In 1932 the top marginal tax rate went from 25% to 63%, and in 1936 it went up to 79%. In 1936 there was also a tax on undistributed profits. Then there was the payroll tax of 1937 (Social Security). And 1938 unemployment went up to 19% (and please keep in that minuscule brain of yours that unemployment is a lagging indicator). The median jobless rate during FDR's presidency (up to WWII) was 17.2%. Gee, waht a great job he did! Funnily enough GDP starts growing in 1934...the year after the U.S. goes off the gold standard. With the abandonment of the gold standard the Fed could then pursue inflationary policies. And unemployment didn't really drop out of the high teens until the unemployed were coerced into government service (i.e. the draft of WWII).

Nice. And in case you were worried, nobody noticed that you abandoned the indefensible claim that FDR didn't run deficits, and tried to swtich to his campaign rhetoric without anybody noticing. Totally.

Well, joe, I suggest a course in remedial reading. I never claimed FDR didn't run deficits, just that much of the supposed stimulus benefits weren't there, in part due to the increased tax burdens from Hoover, as well as Roosevelt.

By the way, did you know that Roosevelt cut benefits to veterans? He backed down when this lead to protests and the passage of a bill that where his veto was over-ridden.

I do not understand why more American's do not realize the truth behind these "stimulus packages."

We had such a stimulus package under Bush. He cut taxes, increased spending, and what did we get? A mere return to trend...which most likely would have happened without the "stimulus package".

Don LeBaron|1.21.08 @ 10:03AM|#

It all boils down to the moral foundation of property and rights. Government is theft. It started with small things then grew. Now it is not imaginable a society without government theft, corporate theft, an all join the party. "Every man is entitled to the fruits of his own labor". Social forms are various but theft is intolerable, at least should be.

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