The Stimulus Seems to have failed

[drkitten]

That's interesting. Yeah, I think I get why stimulus spending should in theory stimulate the economy more than tax cuts, because tax cuts are likely to be saved rather than spent. So basically stimulus is the government forcing money to circulate, as opposed to trusting people to circulate it on their own, which is not likely in a climate of "recession." Do I have that right?

Basically, yeah. To be fair, under "normal" circumstances, even putting money in the bank will cause it to circulate if the bank lends it out.

But for the most part, that's not what banks are/were doing in this recession, because they wanted/needed to build up cash reserves against the "toxic assets" they held. When your billion-dollar mortgage portfolio looks like it may become a seven hundred million dollar loss, you need to find seven hundred million more dollars somewhere. And when that's the case, you're not likely to go giving what cash you have away to someone who wants to open a Pizza Hut, no matter how good his credit is.

And of course money spent on things like Kruggerands doesn't circulate at all.

 

[L The Detective]

That's the funny thing. 36% of the stimulus went to tax cuts. another third went to entitlement programs and the last 1/3 went to the grants and contracts which created jobs. In other words, all of the things that people talk about represent about a 1/3 of what the stimulus package offered. Some people think that the tax cuts were a waste and 2/3rds of the bill should have gone to grants/contracts. I don't know if this is true or not.

What I do know is that the stimulus bill was actually a measured rational approach to end the economic problems. The fact that it didn't work as well as intended is a shame.

Right, I had forgotten that 1/3 of the stimulus was tax cuts. I actually learned about that from watching a Jon Stewart interview on Bill O Reilly.

Though we really don't know how well the stimulus actually worked, right? We know that it didn't fit the white house's predictions, but we don't know if that's because the Stimulus didn't work as well as intended, or if it did but the predictions were just wrong. As I understand it, there's no real way to measure the overall effect that the stimulus is having on the economy, is that correct?

 

[YoPopa]

YoPopa suggests that what is really needed is "some action that would make it easier for an individual to set up in business." I'd like to submit that that's exactly what he did see, but he didn't see enough of it.

What does he actually need in order to set up in business? Customers, and startup funding. Well, he's not going to get any startup funding if the banks aren't lending -- and the whole purpose of TARP was to break the credit crunch of late 2008 and get the banks lending again instead of just sitting on cash. And that bit of the stimulus largely worked, in that banks are now lending again (at all), but they're still being very cagey with their money. Putting more money into circulation -- creating moderate inflation -- would force banks to lend out more of their money because "just sitting on it" would actually lose them money. That's an argument not for a different stimulus, just for a larger one.

Similarly, customers : you can't sell things to people who don't have money to spend. People who don't have jobs and don't have income can't spend stuff. Giving people who don't have jobs a compensatory income -- whether that be through food stamps, or through unemployment benefits -- gives them money to spend, so they can afford to be YP's customers. The more money that gets put into circulation that way, the more money YP can tap into. Again, that's an argument simply for more stimulus, not for a different one.

Rubbish. I don't need any loans to start any of several businesses that I could profit from. Your lack of imagination is sad.

The fact that you can't conceive of any way to help small business without the injection of other people's money is obvious.

 

[L The Detective]

Basically, yeah. To be fair, under "normal" circumstances, even putting money in the bank will cause it to circulate if the bank lends it out.

Okay, so how effective tax cuts are in stimulating the economy depends on a number of factors, one of which is the banks. That makes sense to me.

I think I understand Keynesian theory a lot better now than I did at the start of this thread, and I guess I have to tentatively agree with it because I really can't think of any logical counter arguments to it. Although I understand why libertarians would be against government spending to fix problems in principal, and certainly I can agree that some of the ways they spend the stimulus dollars may not be wise. I recognize though that the important part is the circulation of money, not so much how the money is being spent, as long as it's not being spent in ridiculous ways.

I still feel like there's reasonable arguments for tax cuts over stimulus spending out there... I just don't know what they are. Perhaps they don't exist. I hope that people continue to have real conversations about this, though!

 

[YoPopa]

And of course money spent on things like Kruggerands doesn't circulate at all.

If I spent some money buying gold then that money goes into a vault somewhere and can no longer circulate? That's news to me. How does one know when the money they spend will end up in that vault?

 

[L The Detective]

Rubbish. I don't need any loans to start any of several businesses that I could profit from. Your lack of imagination is sad.

The fact that you can't conceive of any way to help small business without the injection of other people's money is obvious.

I think the point he was making was that those are ways in which the stimulus helps people set up a business. Do you agree with that, but simply have a moral objection to accepting that kind of help in starting up a small business?

 

[BeAChooser]

http://biggovernment.com/publius/20...democrats-trillion-dollar-stimulus-plansince/

Stimulus Failure: 48 Out of 50 States Lost Jobs Since Democrats Trillion Dollar Stimulus Plan

 

[YoPopa]

I think the point he was making was that those are ways in which the stimulus helps people set up a business. Do you agree with that, but simply have a moral objection to accepting that kind of help in starting up a small business?

It is not a moral objection to accepting that kind of help. If you need that kind of help it would be foolish to ignore it. I have an objection to doing foolish things.

The foolish thing in this case is to think that this one tool of stimulus spending is going to solve the problems we face.

I have made the point that lack of confidence is one of the big problems. The thought of people borrowing loads of money from other people who did not consent to loan it is not very confidence inspiring.

 

[JonathanQuick]

Bill Clinton has been endlessly applauded, nay worshiped, by Democrats for NOT spending so very much. In fact, I applaud the pathological liar and serial sexual predator for signing the Welfare Reform Act, which Leftists promised us would result in bodies littering the streets.

What helped Clinton enormously was the effects of the Reagan Tax Cuts, coupled with his savage cuts to defense spending.

George Bush had to contend with rebuilding the defense savaged by the Sexual Predator in Chief, as well as the devastation of 9/11.
Democrats savaged Bush for spending too much - creating an enormous deficit. That was BAD!

Now Barack Obama is outspending Bush by enormous amounts, and spending deficits are suddenly wonderful and good, according to Democrats. Just last night, liberal extremist Alan Colmes said Obama hasn't spent enough.

Deficit spending is bad when Bush does it, and brilliant when Obama does it.

Our Founding Fathers brilliantly understood the dangers of big government, and specifically enumerated the powers of the federal government.

Their enumerated powers have been exceeded many times over, to the profound detriment of this once great nation.

Indeed I tremble for my country when I realize that God is just; that His justice cannot sleep forever. - Thomas Jefferson, a "right wing extremist" like me

 

[L The Detective]

http://biggovernment.com/publius/20...democrats-trillion-dollar-stimulus-plansince/

You keep spamming links to blogs. Why do you keep ignoring my questions from post #1230? Are you afraid to actually participate in a real discussion? Don't be intimidated of me, I'm not here to hurt you.

 

[L The Detective]

It is not a moral objection to accepting that kind of help. If you need that kind of help it would be foolish to ignore it. I have an objection to doing foolish things.

The foolish thing in this case is to think that this one tool of stimulus spending is going to solve the problems we face.

I have made the point that lack of confidence is one of the big problems. The thought of people borrowing loads of money from other people who did not consent to loan it is not very confidence inspiring.

So you're agreeing that stimulus spending might help people start businesses, but you're suggesting that the cost in "confidence" makes it not worth it? Do I have what you're saying correct? Sorry, I'm just having a little trouble understanding your point here.

 

[BeAChooser]

http://www.npr.org/templates/story/story.php?storyId=130851559

Analysis: Obama Seeks Votes Among The Unemployed

… snip …

To sign the stimulus bill 21 months ago, the president went to Denver.

"I don't want to pretend that today marks the end of our economic troubles," he said. "But today does mark the beginning of the end."

At the time he spoke, unemployment stood at 7.6 percent.

In the months since, it has risen by nearly one-third.

Sort of ironic, isn't it?

And in other news …

http://www.bloomberg.com/news/2010-...tal-goods-fall-signaling-less-investment.html

Oct 27, 2010

Bookings for capital goods fell in September, signaling a slowdown in U.S. business investment

The stimulus ... such a success.

 

[YoPopa]

So you're agreeing that stimulus spending might help people start businesses, but you're suggesting that the cost in "confidence" makes it not worth it? Do I have what you're saying correct? Sorry, I'm just having a little trouble understanding your point here.

Yes, you understood the point I was making. I was making it from a very small POV, that being my personal confidence in the recovery and how it relates to government loans and government insured loans to small business. How many other would be entrepreneurs share this POV determines how negative the impact of the stimulus is.

 

[drkitten]

Yes, you understood the point I was making. I was making it from a very small POV, that being my personal confidence in the recovery and how it relates to government loans and government insured loans to small business. How many other would be entrepreneurs share this POV determines how negative the impact of the stimulus is.

Oddly enough, the actual empirical data suggest that "confidence" is actually a negative factor in starting businesses. (Here's another source saying roughly the same thing.)

There's a very good reason for that, of course. Most, or at least many, businesses don't get started because someone wants to, but because they have to; starting a business is scary, but when you've just been laid off your comfortable salaried job, you may have little other choice. Which is why the number of startups was actually up in 2009 over 2008, and I believe is expected to continue to be up in 2010 (although obviously the numbers aren't in on that yet).

 

[lomiller]

Okay, so how effective tax cuts are in stimulating the economy depends on a number of factors, one of which is the banks. That makes sense to me.

I think I understand Keynesian theory a lot better now than I did at the start of this thread, and I guess I have to tentatively agree with it because I really can't think of any logical counter arguments to it. Although I understand why libertarians would be against government spending to fix problems in principal, and certainly I can agree that some of the ways they spend the stimulus dollars may not be wise. I recognize though that the important part is the circulation of money, not so much how the money is being spent, as long as it's not being spent in ridiculous ways.

I still feel like there's reasonable arguments for tax cuts over stimulus spending out there... I just don't know what they are. Perhaps they don't exist. I hope that people continue to have real conversations about this, though!

An often missed part of Keynesian theory is that it requires government to pay back debt when the economy is running full speed.

If an economy is left to it’s own devices both increases and decreases in demand are self re-enforcing, this creates a cycle where when times are good the economy accelerates until growth is no longer sustainable. When the growth begins to slow it’s self re-enforcing so the slowdown accelerates until it hits bottom and begins to grow again. Keynes advocated using government spending as a way to dampen the highs and lows spending more in the “down” slope and spending less in the “up” slope.

To a large extent this has been replaced with predictable levels of government spending and using monetary policy rather then fiscal policy to smooth the highs and lows. The problem is that using monetary policy this way is that interest rates can’t in practice drop below zero so if you have deflation holding onto money becomes a better investment then lending it out so you can no longer use the banking system as a way to get money circulating. In cases like this stimulus spending until there is some level of inflation is really then only way to get money moving again.

Libertarians tend to follow an oddball school of economics that insist the boom/bust cycles is all government s fault and growth would be steady if there was no government spending despite extensive historical evidence to the contrary. Essentially they are a lot like the die hard communists who insist that their economic ideas have never been truly implemented but would work wonderfully if they were despite all the recorded failure.

 

[joobz]

Thanks, but I'll own this one. The primary problem with the stimulus was indeed simply that it was too small. Even with the misdirected monies and the inefficiencies, a "bigger hammer" would still have had a larger effect, enough to pull the economy out of the deflationary slump that was the actual predicted effect of too small a stimulus.

YoPopa suggests that what is really needed is "some action that would make it easier for an individual to set up in business." I'd like to submit that that's exactly what he did see, but he didn't see enough of it.

What does he actually need in order to set up in business? Customers, and startup funding. Well, he's not going to get any startup funding if the banks aren't lending -- and the whole purpose of TARP was to break the credit crunch of late 2008 and get the banks lending again instead of just sitting on cash. And that bit of the stimulus largely worked, in that banks are now lending again (at all), but they're still being very cagey with their money. Putting more money into circulation -- creating moderate inflation -- would force banks to lend out more of their money because "just sitting on it" would actually lose them money. That's an argument not for a different stimulus, just for a larger one.

Similarly, customers : you can't sell things to people who don't have money to spend. People who don't have jobs and don't have income can't spend stuff. Giving people who don't have jobs a compensatory income -- whether that be through food stamps, or through unemployment benefits -- gives them money to spend, so they can afford to be YP's customers. The more money that gets put into circulation that way, the more money YP can tap into. Again, that's an argument simply for more stimulus, not for a different one.

And, of course, if more customers means more businesses created, it also means more jobs, and the unemployment problem fixes itself. The reverse is also true; the more people aren't working, the fewer customers existing firms have, and the more likely they are to have to continue cutting staff. Again, this is an argument simply for a larger stimulus....

Of course, we can tune the existing stimulus to make it more effective; raising the amount spent on food stamps and eliminating the tax cuts would have given a lot more bang for buck. (Rich people don't spend tax cuts, they bank them.... and banks aren't lending out much today. Poor people, by contrast, spend their food stamps.)

Out of curiosity, then, What is the limit to a stimulus package? If more would have been better, what would be the concern of one that was too big? How do we select a stimulus size that wouldn't make the deficit too large (a point I still don't understand) but would have been sufficient to bring the economy back?

is it merely the deficit concern or is there another factor that would limit the size a stimulus should be? (e.g., inflation?)

 

[drkitten]

Out of curiosity, then, What is the limit to a stimulus package? If more would have been better, what would be the concern of one that was too big?

Inflation, primarily.

How do we select a stimulus size that wouldn't make the deficit too large (a point I still don't understand) but would have been sufficient to bring the economy back?

is it merely the deficit concern or is there another factor that would limit the size a stimulus should be? (e.g., inflation?)

Well, the deficit per se is not a concern, any more than you should be concerned about the fact that your mortgage is so much bigger than your credit card debt. (In fact, if that's not the case, you could be in serious trouble.) What's a concern is that if the deficit is too large relative to government receipts, we could have trouble paying for it and would either have to default or monetize the debt via massive inflation. Or cut services to the point of causing real hardship. None of which would be good.

But there's a nice, easy to read barometer of how much people are concerned about "having trouble to pay for it," which is the interest rates people need to be paid in order to accept our bonds.

So the simplest answer would be keep increasing the stimulus size until bond yields start to rise.

 

[drkitten]

An often missed part of Keynesian theory is that it requires government to pay back debt when the economy is running full speed.

If an economy is left to it’s own devices both increases and decreases in demand are self re-enforcing, this creates a cycle where when times are good the economy accelerates until growth is no longer sustainable. When the growth begins to slow it’s self re-enforcing so the slowdown accelerates until it hits bottom and begins to grow again. Keynes advocated using government spending as a way to dampen the highs and lows spending more in the “down” slope and spending less in the “up” slope.

Exactly. In the words of former Fed Chair William Martin, the job of the Federal Reserve is "to take away the punch bowl just as the party gets going," to damp down what Greenspan called "irrational exuberance." Since most of the time, times are good, this is the primary job of the Fed.

But right now, things are a little different, and the Fed needs to spike the punch bowl and get the party hopping a little more. And if the Fed can't do it alone, Congress needs to step in and help.

 

[lomiller]

Yes, you understood the point I was making. I was making it from a very small POV, that being my personal confidence in the recovery and how it relates to government loans and government insured loans to small business. How many other would be entrepreneurs share this POV determines how negative the impact of the stimulus is.

Shrug. IMO the businesses that are most likely to be successful are not the ones judging demand by their gut feel of what effect government action will do. Rather, the businesses that are most likely to succeed are the ones that can actually measure their sales and respond to the trends that are actually happening in the marketplace.

 

[lomiller]

Out of curiosity, then, What is the limit to a stimulus package? If more would have been better, what would be the concern of one that was too big? How do we select a stimulus size that wouldn't make the deficit too large (a point I still don't understand) but would have been sufficient to bring the economy back?

is it merely the deficit concern or is there another factor that would limit the size a stimulus should be? (e.g., inflation?)

To big = high inflation (say >4%)
To small = very low inflation (say <1%)
Way to small = deflation.

What you want from a stimulus is to get inflation to the point where monetary policy starts to work effectively again.

With 0 inflation people lose nothing hording money. With negative inflation hording cash is actually a sound investment, often better then investing is a stable business since the business will decline in value even if its unit sales and margins are constant. Under these conditions any money the fed injects will likely end up get tied up in the banking system because the money gets more valuable jsut by sitting there.