Ten Reasons To Whack Obama's Stimulus Plan

US News' James Pethokoukis, one of the few econ/business writers to be consistently against all the financial sector and stimulus plans offered up by both Dems and Reps over the past several months, offers up 10 reasons (count 'em) not to count on President Obama's latest and greatest pitch, which is "heavy on government spending and light on tax cuts."

Among them:

6) Christina Romer, the new head of the Council of Economic Advisers, coauthored a paper in which the following was written about taxes: "Tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects." And former Bush economic adviser Lawrence Lindsey tack on this addendum: "The macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases. The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet."…

9) Massive stimulus didn't work in the Great Depression. As this Heritage Foundation study notes: "After the stock market collapse in 1929, the Hoover Administration increased federal spending by 47 percent over the following three years. As a result, federal spending increased from 3.4 percent of GDP in 1930 to 6.9 percent in 1932 and reached 9.8 percent by 1940. That same year—10 years into the Great Depression--America's unemployment rate stood at 14.6 percent." Same goes for Japan and its Great Stagnation of the 1990s.

10) Olivier Blanchard, the chief economist of the International Monetary Fund, coauthored a paper which found "that both increases in taxes and increases in government spending have a strong negative effect on private investment spending."

Pethokoukis concludes, "There is another model out there. One that worked in 2003, 1997 and 1981. But will America use it?" Read the whole thing here.

For more on what worked in 1981, watch The Washington Post's Robert J. Samuelson (no relation, genetically or ideologically, to economist Paul Samuelson), discuss his book The Great Inflation and Its Aftermath:

More links, embed code, podcast version, etc. here.

Comments

[Tulpa]

Tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects.

Those statements are not equivalent. That's like saying that if taking away half your child's candy produces very negative effects, then doubling his candy supply will produce very positive effects.

[EJM]

...The Washington Post's Robert J. Samuelson (no relation, genetically or ideologically, to economist Paul Samuelson)...

But, what about to legendary farm broadcaster Orion Samuelson?

[sage]

"that both increases in taxes and increases in government spending have a strong negative effect on private investment spending."

Haven't you heard? Private investment spending is the new ugly.

[sage]

Instead of putting my money into my 401(k) or Sharebuilder account, I'm sending it to the treasury to put on the national debt, where I know it will do some good.

[PM770]

...The Washington Post's Robert J. Samuelson (no relation, genetically or ideologically, to economist Paul Samuelson)...

What about angry former Penguins Defenseman Ulf Samuelson?

[Josh]

I say go with David Letterman's suggestion and "lotto our way out of this son of a bitch."

[damn it all]

what you don't like giving uncle Sam 30% of your income to kill innocent oil babies?

[economist]

But the Great Keynes told us that every recession could be ended by more government spending!

[JM Keynes]

Reason sux.

[Jon H]

"that both increases in taxes and increases in government spending have a strong negative effect on private investment spending"

Dead banks also have a strong negative effect on private investment spending.

Private investment spending isn't really on anyone's calendar right now, so tax cuts are just going to be sat upon.

Petho really needs to read the papers.

[Jon H]

Petho repeats this lie:

"4) An initial CBO analysis found that a mere $26 billion out of $274 billion in infrastructure spending, just 7 percent, would be delivered into the economy by next fall. An update determined that just 64 percent of the stimulus would reach the economy by 2011."

[Jon H]

Better hacks please, Nick. This one's broken.

[alan]

For more on what worked in 1981, watch The Washington Post's Robert J. Samuelson (no relation, genetically or ideologically, to economist Paul Samuelson)

Thanks for the reminder, NG. I read Robert Samuelson's column in News Week every week, and still have a copy of Paul S's text book, so there is no excuse really, but it still happens.

[economist]

Jon H,
"Dead banks also have a strong negative effect on private investment spending.

Private investment spending isn't really on anyone's calendar right now, so tax cuts are just going to be sat upon."
So, how exactly does the economy recover without private investment spending? And how does bailing out failed banks help in the long run?

[speculator]

Could Jon H be Jonathan Hanson?

[Jon H]

economist:"So, how exactly does the economy recover without private investment spending?"

That's why the government spending is needed. Somebody has to spend money while private businesses are sitting around with their thumbs in their asses, self-defensively cutting their spending to the bone, and waiting for everyone else to start spending first.

[TallDave]

But the Great Keynes told us that every recession could be ended by more government spending!

We're told Obama's team is assuming a multiplier of 1.5. By this magical argument, we should spend as much gov't money as possible, since it's bascially less than free.

[Kolohe]

Nearly all of the 10 items listed have been bouncing around the blogosphere (and on H&R) for a bit, and most are not quite as Mr. Pethokoukis presents them. (For instance that CBO report was indeed preliminary, but it also was not for the entire plan. Hence, the money calculated to be spent by next fall is likely lowballed.)

[Francisco Torres]

Those statements are not equivalent. That's like saying that if taking away half your child's candy produces very negative effects, then doubling his candy supply will produce very positive effects.

That's not a correct analogy - there is already a negative connotation regarding candy. One analogy that reflects what's been said is if you RELEASE your grip on your victim's throat, it will have positive effects on her life compared to squeezing your grip on your victim's throat.

[Francisco Torres]

Jon H,
That's why the government spending is needed. Somebody has to spend money while private businesses are sitting around with their thumbs in their asses, self-defensively cutting their spending to the bone, and waiting for everyone else to start spending first.

You totally misunderstood Economist's question. The fact of the matter is that Spending in itself is not what drives the economy, it is investment in productive endeavors.

The problem is that in order for investment to be possible, there must be savings, which already have been spent away by consumers and the government. Government itself does not generate wealth, it can only take it from someone else, i.e. other people's savings, in the form of taxes or inflation (the hidden tax). Government expenditures will actually delay the recovery very severely, not accelerate it.

This Power Point presentation explains the relationship between savings and investment, and how money thrown by the government creates malinvestment and misallocation of resources.

http://www.auburn.edu/~garriro/cbm2006.ppt

[Francisco Torres]

Jon H
Dead banks also have a strong negative effect on private investment spending.

Initially, yes, of course. But propping up badly managed banks is worse.

Private investment spending isn't really on anyone's calendar right now, so tax cuts are just going to be sat upon.

So? Besides the immorality of taxation, allowing people and businesses to keep more of their earnings help them accumulate more capital for FUTURE and more sound investments. Instead, keeping the squeeze around your victim's throat is not likely to improve her well being, would it?

[Taktix?]

Come April, I should have around 13,000 reasons to "whack" the stimulus plan...

[Paul]

This seems somewhat paradoxical, re: the comment about Capitalism ultimately failing because people become "too soft" and lose their perspective on wealth creation, especially with Samuelson's comment about institutions believing they could manage the business cycles.

Capitalism fails because it can't be managed to provide prosperity to all, forever?

Isn't the real issue that managed economies are always doomed to fail?

[Tulpa]

Paul, it's sort of like driving on icy roads. No matter how good a driver you are, you're going to skid a little bit. The problem is that the immediate reaction of people to skidding is to brake, which is the absolute worst thing you can do.

Likewise, a free market economy is going to have periods where prosperity disappears, and the immediate reaction of the people will be to demand that SOMEBODY DO SOMETHING to bring back the prosperity. And the only entity with seemingly large enough powers to do so is the govt.

[R C Dean]

Those statements are not equivalent. That's like saying that if taking away half your child's candy produces very negative effects, then doubling his candy supply will produce very positive effects.

Bad analogy. Tulpa. If increasing the relative share of national output taken by taxes burdens output, then I think its a pretty safe assumption that decreasing that relative share decreases the burden on output. Decreasing the burden on output = increased output.

Private investment spending isn't really on anyone's calendar right now, so tax cuts are just going to be sat upon.

You need to compare the delay in getting tax cuts into circulation v. the delay in getting this "stimulus" money into circulation. Much of the stimulus is delayed for years. I don't think that people are going to sit on their cash, and not spend or invest it, for years.

And the only entity with seemingly large enough powers to do so is the govt.

Which, like braking during a skid, is exactly the opposite of what should be done.