Stimulus II: This Time It's Fiscally Responsible

Tim Cavanaugh | July 8, 2009

One of these quotes is from Chance the gardener; the other is from Sen. Majority Leader Harry Reid (D-Nevada). Which is which?

A. "The crops have been planted, the shoots are now appearing above the ground." 

B. "As long as the roots are not severed, all is well. And all will be well in the garden."

Answers here and here.

Reid is referring to the need for a second stimulus package, which he doesn't want but other Obama Administration allies support.

The issue has revealed divides among Democrats who think the second stimulus isn't necessary because the first one is working (Vice President Biden and economic advisor Austan Goolsbee); those who think we don't need a second stimulus because the first one needs to work faster (House Majority Leader Steny Hoyer, from the Old Line state of Maryland), and those who think we need a second stimulus.

This last group is eclectic. Stimulus 2 is expected to save or create the job of informal Obama economic advisor Laura Tyson, who the other day said in Singapore, "the real economy is a sicker patient," and called the first stimulus "a bit too small." But Tyson is only a size queen on stimulus, not on budget deficits; she dismisses worries that the country can't afford another package: "The concern is that the U.S. will have to inflate away its debt. I do not think that is a valid concern," Tysone says. "The Federal Reserve is not going to let the U.S. government inflate away its debt."

On this point, Tyson is correct as of this time. This week's auctions of Treasury notes have attracted ready buyers; yields on long-term Treasuries (and concerns about inflation) continue to fall. The Federal Reserve continues to buy up Treasury notes in case the rest of the market loses interest, but with few other attractive investments out there, that precaution may be unnecessary. As long as the economy stays in the crapper, the government can continue to issue debt. AOL Daily Finance writer Joseph Lazarro puts the metaphor too bluntly in his report on Tyson: "The U.S. recession has created a big hole, and it's going to take a great deal of capital from a variety of sources to fill it, most economists agree."

Also agreeing is Federal Department of Bond Fund Management Pimco, whose managing director Paul McCulley is ready to shoot himself he's so excited about a second stimulus package. Completing the circle of magical thinking and perpetual-motion economics required for stimulus support, McCulley wants Stimulus 2 to be "not just a platitude, but a plan for fiscal responsibility." As Mish Shedlock notes, this is like hoping for rain that doesn't make things wet.

The admissions by Biden, Tyson and other Obama experts that they seriously misunderestimated the recession way back in February admits several interpretations: A) their policies are making the economy worse; B) they didn't know what they were talking about five months ago and have shown no evidence that they know better now. I'm going with a combination of A and C) they were lying in February. After all, the contraindications are always clearly labeled on the stimulus bottle. Remind yourself what they are with the now-more-than-ever infomercial for Stimulis:

Comments

|7.8.09 @ 3:04PM|#

That's my favorite Peter Sellars movie.

WWJGD|7.8.09 @ 3:08PM|#

No no no, it's Stimulus II: Electric Boogaloo

|7.8.09 @ 3:11PM|#

Following the analogies, Stimulus 2 would be fertilizer?

Fluffy|7.8.09 @ 3:12PM|#

How about we pick Reid up by the collar and pull him out of Being There and drop him into the middle of The Painted Bird instead?

Fist of Etiquette|7.8.09 @ 3:14PM|#

My guess is there are a number of dems who fall into the fourth group of those who know the stimulus isn't going to work and we can't afford the first one much less a second. They just can't go so far as to admit that publicly.

But, sure, cause more indecision in the market by keeping investors thinking they should wait to see what more of that free government money will do before acting on anything.

|7.8.09 @ 3:15PM|#

The market is lobbying for more money by dropping consistenly day after day to help the pro-stimulus 2 people by giving them further ammunition on how effed up the economy still is.

|7.8.09 @ 3:24PM|#

How about we pick Reid up by the collar and pull him out of Being There and drop him into the middle of The Painted Bird instead?

How about Cube instead? As a matter of fact, I'd like to put all of Congress through that.

|7.8.09 @ 3:31PM|#

Oh, c'mon. WHAT policies are making the economy worse? They've barely done anything! The stimulus may be unwise or ineffective or even a complete boondoggle, but I cannot conceive of it having an immediate downward effect on the economy. What are we talking about here?

Art-P.O.G.|7.8.09 @ 3:33PM|#

Long-term, I presume.

|7.8.09 @ 3:45PM|#

"we don't need a second stimulus because the first one needs to work wank faster"

John|7.8.09 @ 3:51PM|#

Love this Reid line on the success of the stimulus:

And that certainly is evident based on the fact that slightly over 10% of the dollars are out among the people.

Weren't they out among the people to begin with?

ChrisO|7.8.09 @ 3:52PM|#

"We're not getting any closer to getting out of this hole, so we need to dig faster!"

A tax and spending cut would also constitute a stimulus, and it would actually benefit the productive sector, unlike throwing more money at state and local bureaucrats.

|7.8.09 @ 3:56PM|#

We're all gonna be millionaires, I tell ya!

Maybe even billionaires!

AMERICA, FUCK YEAH ! !

Tim Cavanaugh|7.8.09 @ 3:57PM|#

WHAT policies are making the economy worse?

I hope RC Dean will be along to explain better than I can, but the usual answer is market uncertainty: You won't put your own money into a project as long as there's a chance Uncle Sugar may pay for it instead. A stimulus plan composed of longstanding political pet projects can have a chilling effect even before the money is spent.

Also, before the money is spent it has to be raised, through constant auctions of Treasury debt, which draw capital that could be going to the private sector. (If the pro-stim types were really clever, though, they would say all this debt is actually keeping deflation from getting worse.)

Also, the freezing in place of banks, insurance and auto companies that have been selected for extinction is anti-stimulative because it rewards non-performers at the expense of performers -- and because, obviously, entities frozen in place are less likely to generate vigorous activity than they are to shatter when they hit bottom.

robc|7.8.09 @ 4:09PM|#

brotherben,

Really? Better than The Fiendish Plot of Dr. Fu Manchu?

|7.8.09 @ 4:09PM|#

I like to watch

|7.8.09 @ 4:11PM|#

The Federal Reserve continues to buy up Treasury notes in case the rest of the market loses interest, but with few other attractive investments out there, that precaution may be unnecessary. As long as the economy stays in the crapper, the government can continue to issue debt.

So, tell me again how having the federal government soak up the available investment capital is going to get the economy going faster?

I hope RC Dean will be along to explain better than I can, but the usual answer is market uncertainty:

Market uncertainty (as described above) is one.

Regime uncertainty is the current project killer in healthcare - because the government so dominates this sector, and its policies are so arbitrary and unpredictable, nobody is investing in new projects.

The government's massive spending imposes opportunity costs on the economy - by definition, every government project is paid for with tax money taken from someone who would have spent on a more economically productive use.

The government's massive borrowing shrinks the pool of capital available for investment in the productive/private economy.

Is that enough?

robc|7.8.09 @ 4:12PM|#

Weren't they out among the people to begin with?

Nope. They have to print them first.

|7.8.09 @ 4:14PM|#

Also, before the money is spent it has to be raised, through constant auctions of Treasury debt, which draw capital that could be going to the private sector. (If the pro-stim types were really clever, though, they would say all this debt is actually keeping deflation from getting worse.)

While the purchase of government debt by the Fed is anti-deflationary/pro-inflationary (because it is the functional equivalent of printing new money), I'm not sure that the purchase of government debt by the private sector has the same effect.

domo might be the man to go to on this one.

robc|7.8.09 @ 4:19PM|#

While the purchase of government debt by the Fed is anti-deflationary/pro-inflationary (because it is the functional equivalent of printing new money), I'm not sure that the purchase of government debt by the private sector has the same effect.


Private sector purchasing debt shouldnt change M0, but Im not sure what it would do to the higher level Ms. My initial guess would be that it would lower the velocity of money, so it would be deflationary, but that is a guess.

|7.8.09 @ 4:47PM|#

What would be really interesting is if the money from Stimulus II is spent before the money from Stimulus I. I'm not sure if it more closely resembles the difficulties of speaking about the "first" Star Wars movie or the "accident with a time machine and a contraceptive" that led to Zaphod Beeblebrox being the great grandson of Zaphod Beeblebrox IV.

|7.8.09 @ 4:58PM|#

robc, lemme rephrase that:

it's the only peter sellars movie I watched all the way through and I loved it. I will look out for "The Fiendish Plot of Dr. Fu Manchu."

Rich|7.8.09 @ 5:10PM|#

brotherben, please try again to watch "Dr. Strangelove" all the way through. It's a great portrayal of the Cold War; and it has some lessons for our current situation, albeit perhaps in a metaphorical sense.

robc|7.8.09 @ 5:41PM|#

Also, The Mouse that Roared.

Fu Manchu is not known for actually being good, its known for being his last movie. I liked it as a kid. I havent seen it in probably 25 years. If I owned it, I have a feeling it would go on the pile with Buckaroo Bonzai as "movies I wished I just had memories of".

robc|7.8.09 @ 5:49PM|#

The imdb reviews of Fu Manchu are funny...they are all the same...why is this movie considered awful...its not his best work, but still funny...I enjoyed it. etc etc.

|7.8.09 @ 6:10PM|#

Please try again to watch "Dr. Strangelove" all the way through.

Gentlemen, please! There will be no fighting in here - this is the War Room!

Tim Cavanaugh|7.8.09 @ 6:51PM|#

The imdb reviews of Fu Manchu are funny...they are all the same...why is this movie considered awful...its not his best work, but still funny...I enjoyed it. etc etc.

I like to think that somewhere in the Disney HQ there's an entry level staffer whose sole job is to add "but it has since become a cult classic" to the Wiki pages for RocketMan, Treasure Planet, Million Dollar Duck, etc.

GILMORE|7.8.09 @ 7:23PM|#

Do any of them think we need a 'second' stimulus because the first one, well, wasn't really a stimulus at all but a giant political boondoggle giveaway to fiscally distressed states and public employee unions?

I think they're all worried that either a)the economy will rebound and it will be clear that nothing that politicians did was of any use at all in aiding the recovery, or b) the economy will remain in the pooper for another year, and it will be clear that nothing that polticians did was of any use at all.

ergo the "Do Something New" idea and pray to Jebus that people will believe that it may have some positive impact.

"I love the money hole!"

Paul|7.8.09 @ 7:25PM|#

"I have difficulty coming down table pounding saying we need another stimulus package, but if you put a pistol in my ear I would say yes," McCulley said"

Oh, someone's getting pounded alright, Mr. McCulley.

Paul|7.8.09 @ 7:27PM|#

Market uncertainty (as described above) is one.

Is there any other condition? For instance, I've heard investors for years telling me the market will either go up, go down, or stay the same. I suppose that would be a market certainty.

Paul|7.8.09 @ 7:29PM|#

whose sole job is to add "but it has since become a cult classic" to the Wiki pages for RocketMan, Treasure Planet, Million Dollar Duck, etc.

If two people think it's really cool, it's a cult classic.

|7.8.09 @ 8:20PM|#

"but it has since become a cult classic"

Anything that people still know about and that you can get your hands on, but never made much money, is de facto a cult classic, Tim. The question is, however, when does Banacek get cult status?

alan|7.8.09 @ 8:53PM|#

If I owned it, I have a feeling it would go on the pile with Buckaroo Bonzai as "movies I wished I just had memories of".

I have never seen Buckaroo Bonzai because I like the ideal of the movie so much I don't want that to be spoiled and ruined by the reality of the actual movie.

Rich|7.8.09 @ 9:34PM|#

> "movies I wished I just had memories of"

Oh, then you want "Total Recall".

And about these continual stimuli: They better not be at the economy's resonance frequency or we could be in trouble.

|7.8.09 @ 11:23PM|#

I was very disappointed to get through the post without any "Electric Boogaloo" remarks. Imagine my delight at (appropriately) comment number 2.

|7.8.09 @ 11:31PM|#

But can Harry Reid walk on water?

Art-P.O.G.|7.9.09 @ 1:46AM|#

Was Peter Sellers as good a Fu Manchu as Nicholas Cage in the trailer for Werewolf Women of the S.S.?

"This is my Mecca! Ha ha ha ha ha ha!"

|7.9.09 @ 2:29AM|#

Vox Day, on his blog, makes the point that people seem to be forgetting (including the person who wrote this article): The 'stimulus' under discussion is actually the *third* one...

|7.9.09 @ 6:25AM|#

If Obama, his colleagues in Congress, and supporters wanna create an American Lost Decade, they're certainly going the right route. :/

|7.9.09 @ 6:26AM|#

And if $787 Billion in stimulus "wasn't enough", how much IS enough? $1 Trillion? 1.5? TWO TRILLION?? 5 trillion, even? Come on, lefties! Just admit Keynesianism and your entire big government agenda doesn't work! Economics has disproven its effects time and again. You guys have "misread" the economy since the 1930s!

Invisible Finger|7.9.09 @ 12:08PM|#

but with few other attractive investments out there, that precaution may be unnecessary.

So they'll keep on keepin' on until they DO make Treasuries become toxic?

Invisible Finger|7.9.09 @ 12:11PM|#

You won't put your own money into a project as long as there's a chance Uncle Sugar may pay for it instead.

Even worse. You won't put your money into a project as long as there's a chance Uncle Fucka may pay for a competing project.

The Current Account Deficit|7.9.09 @ 12:43PM|#

Do you know who my father is? I always thought it was the budget deficit, but Ben Bernanke said it was a savings glut. I'm awfully confused.