Stimulus Plans Don't Work
The United States and the world economy have been declining for the last year, with rising unemployment rates. It is widely believed the government must "do something." Many call for a "stimulus program", and President Obama just announced a $800 billion stimulus plan. Already staring at a $1.2 trillion dollar deficit for the year, about 8% of the entire U.S. economy, the resulting deficit would be twice as large as anything we have seen since World War II.
So it begs the question, what does "stimulus" mean and what does it really do?
Economist John Maynard Keynes posited a theory that the economy can be boosted if the government borrows money and spends it, circulating it through the economy and thus stimulating it back to life.
But this theory has a conspicuous logical fallacy. It ignores the fact government can't put money into the economy without first taking money out of the economy. Because the government needs to borrow the money it uses for the stimulus plan, it follows that rather than boosting national income, it merely redistributes it. This is analogous to taking water from the deep end of a pool and putting it into the shallow end. It creates busy work and the illusion of action, but actually produces nothing while sapping the economy of resources that would otherwise be used advantageously.
Furthermore, not just theory but the evidence also shows that Keynesianism does not work. Both Hoover and FDR increased spending and ran large deficits, yet the economy did not get better for more than a decade. In fact, in May 1939, Treasury Secretary Henry Morgenthau testified:
"We are spending more money than we have ever spent before, and it does not work. ... We have never made good on our promises. ...after eight years of this administration we have just as much unemployment as when we started ... and an enormous debt, to boot."
The Gerald Ford and George W. Bush administrations also tried ratcheting up government spending, to no avail. Similar methods were also tried in Japan during the 1990s, and caused Japan's lost decade.
Economic growth occurs when there is an increase in national income, not a redistribution of it. That is why lower marginal tax rates are the best strategy to achieve growth. Ronald Reagan cut taxes by 25%, and triggered the economic success of the '80's. The Kennedy tax cuts of the '60's were highly successful. Calvin Coolidge cut tax rates from almost 70% to 25%, and it created the prosperity of the '20's.
So if our government has money to spend, it is far better to suspend all personal income tax for six months. That will cost about $700 billion, less than Obama's stimulus plan, and create an unprecedented flurry of economic activity. And people will be spending their own money, rather than government bureaucrats doing it for them. That is more appropriate as a matter of principle, and more effective as a practical matter, as the money will surely be put to better use.
Ask yourself: If spending $800 billion would jump start the economy, why not spend ten times as much, and really get the economy going? It is obvious the logic is severely challenged here.
And ponder this: if you assume that about 100 people in Washington are going to have meaningful input in the decision on how to spend this enormous stimulus of $800 billion, then on average each person is responsible for spending about $8 billion of our money. Can anyone in government spend that much money, $8,000 from every US household, more wisely than the average American would spend it? I simply do not believe that, and I also reject the morally dubious concept of taking people's money and spending it on their behalf, supposedly for their own good.
It makes sense to rely on private enterprise and not on government as the engine of growth. The US always did best when the government shrank, and worst when it grew. If big government was the way to economic prosperity, than France should have been a financial powerhouse, and Hong Kong should have been a basket case. But of course it is exactly the opposite.
Spending is the problem that caused this crisis in the first place. We cannot fix the problem using more of its root cause. Other than that, the President unfortunately cannot do much, and shouldn't work himself into an unnecessary frenzy. As Michael Gerson eloquently put it in one of his Washington Post columns, "American presidents have few levers long enough to shift a continental economy. During an economic winter, they shovel the snow -- and then take credit for the spring."
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.
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"after eight years of this administration" - Robert Morgenthau, supposedly in 1939.
I see this all over the internet.
Why would Morgenthau say this in 1939 if FDR didn't take office until 1933? Couldn't the Treasury Secretary subtract 33 from 39 and get 6?
Or is the quote a fabrication?
This is ridiculous!! If my $1000 can be used to build a transit system or improve my childs school or decrease our dependence on Iraq then I don't need it in my account. Cutting my taxes means that I either save it or pay my bills....n
This is standard republican economic nonsense. It is so ideologically blinkered it can only run on regardless.
Your analysis doesn't bother to even acknowledge unemployment and the lost productivity. The point of the spending - and stimulus- is to put people to work. I implore you to read krugman. When there is rising unemployment, every person not working is a objective negative to the economy, and furthermore it causes more layoffs and bankruptcys and consumers have less money to spend. You talk about the great depression, the reason the great depression was so bad and lasted so long was because after the laissez-faire administration of hoover allowed the banks to fail, there was 25% unemployment. An economy take severly longer to recover once you have 25% of the people not working. They still need to eat, pay pills, recieve healthcare, get unemployme
If you can get these 25% to work and do something productive through government spending, and all the stastical historical analysis proves this.
laissez-faire has failed, stopped trying to manipulate people with less economic understanding than yourself. I'm surprised you didn't try to push tax cuts for the rich...
The point of the stimulus could also be to "keep" people working rather than to put people to work. The point of govt spending in general is not to put people to work. Much of it is for defense or health care. Regarding unemployment, every person "not working" is not a negative to the economy. For example, often time too many people working is a problem for the economy as it puts pressure on inflation and decreases the mobility of labor. The reason the Great Depression last so long was not because of the laissez-faire attitude of Hoover. The depth of the Great Depression could be blamed on the federal reserve (or lack of action from) and the large international imbalances caused by WW1. Hoover was far from a laissez-faire President as he took more action than any President before him in history. The duration of the Great Depression was mostly due to lack of private investment because of the Roosevelt administrations massive attacks on capitalist. Infrastructure spending over the last three years has been at very high levels by the way, the highest relative to GDP since the 1970s. Increased govt spending in this area could be good, however, if it doesn't just simply replace private investment dollars.
You keep writing this, but you never explain how doing nothing is going to help our economy recover. Do you really think that any regular middle class family is going to spend anything they don't have to unless they feel there will be jobs?
My family still has a job, and could (realistically) afford to spend money. I haven't spent almost anything in over a year, and don't expect to do so in the future (regardless of whatever tax rebate you give me).
Only fools would spend any money they received from a tax cut. Unless there is some expectation that the govt will not only work to insure that people have jobs, but that unemploymnet, food stamps, etc., will be enough to keep your children from going hungry, why would you spend an extra dollar that you find in your paycheck? My husband's longevity pay "bonus" - in the bank. Any overtime money - in the bank.
And rich people don't care a whit about the economy that affects the rest of us. Give them a tax cut and they will simply go out and buy stocks because they are so cheap. That may increase stock prices, but no one - small business, major corporations, etc. - is going to hire anyone extra unless their products are selling. And again, regular people are not buying - products or your argument.
I was just thinking a similar thought.
With a tax cut, most folks aren't necessarily going to buy more things. Some will, yes. But I think most people would save since so many folks have gotten caught short this time around or they might repay some debt.
In both cases, it would mean the banks would get the funds that they would then borrow to buy more banks which they aren't supposed to be doing now with gov't bailout funds.
you guys are not very patriotic. You should spend money that's how we will get out of this. I have a job and I haven't even slowed down. Just doing my part to make the world a better place. As for the stimulus if no one is going spend then someone needs to boost demand if not the government then who?
I agree with you mostly but have some issues with your solution. Without government reducing spending, even tax cuts are pointless in the long run. I have the same problem with Obama's plan. He needs to raise the money before he spends it. Accumulating debt is not going to fix this problem. We are going to enter a period of hyperinflation that will be the final death knell for our economy. Obama's stimulus plan will help this unfortunate situation along. A redistribution of wealth through increasing of taxes on the rich may be the best short term solution. A better solution would be for bailed out banks to start lowering people's mortgages by 10% (Since that money never existed anyway) or corporations giving individuals 5 to 10% raises over the next few years (WIth exceptions for small businesses
How are corporations going to give large raises when their profits are deteriorating (some are taking losses) and they're cutting hours and laying off and firing workers?
quote:
A redistribution of wealth through increasing of taxes on the rich may be the best short term solution.
/quote
When you consider that money from the Treasury generally goes through the Fed, as *loans* to major banks; and when you consider that the largest industries are heavily subsidized whenever business is down -- think petroleum and agriculture -- the "redistribution" you mention is more like "restoration" of wealth to its rightful owners, those of us who created it by our productive work.
I read the article and most of the posts.
I think Krugman has the better arguements. But then, I lean progressive anyway.
I'll go out on a limb, and assume that at the hedge fund office there are devices which supply info from sources other than inside your head.
The analogy that a stimulus package takes water from the deep end of the pool to put in the shallow end is absolutely correct. And that's the basis of every dam, water or irrigation project ever created. You take the water from where it is, and move it some to where it isn't.
And guess what? It works! These projects turn deserts into farms, allow cities to grow and prosper, and floods to be controlled.
An economic stimulus takes money from the deep pockets, like hedge fund managers, and puts in places where society as a whole will actually benefit from it .
The stimulus doesn't "take" money, it borrows it. Who pays the hedge fund managers back? We do. Check a source from OUTSIDE your head.
Hedge fund managers get money from investors, just like mutual funds which they resemble. Taxpayers have no connection to funds, unless they buy entities that do get taxpayer dollars.
Check a source from someone else's head. Assuming you know someone else.
A partner in a hedge fund tells the world he knows best.
And this surprises you for what reason Neitzen?
They are always the 'smartest' people in the room,... excpet when they are not,...
Where's the fault in his logic?
He losses me when he write that Reagan's tax cut triggered economic sucess. Our federal debt almost quadrupled due to his policies. I call that 'borrow and spend'. And it gave us the insider trading scandal, the junk bond scandal, and the savings and loan scandal whose costs all fell on the taxpayer ultimately. He speaks highly of the Coolidge tax cut and sucess in the 20's, but he fails to grasp that these times led directly to the Depression.
The writer has to trim back the Hedge so he can see what's happening on the other side. I wonder how much his last office remodelling cost?
There are so many faults one doesn't know where to start.
I can live with the assertion that the stimulus does not "cure" the problem. You use of the phrase the "stimulus boosts the economy" is accurate to me, too, since it is meant to be temporary. The problem is you leave that definition behind.
The problem with your argument is that you ignore your own reasonably modest definition of Keynesian stimulus. You think (ironically like some on the Left) that adherents believe it solves all the systemic problems with the free market. Government spending at the rate proposed is a crappy solution, I will concede, save for the possible exception of everything else.
Also, why do you completely ignore the mortgage securitization and leveraging in you diagnosis of our current malaise?
You maintain that spending caused this problem...
Your historical examples are very leaky, and the France/Hong Kong example proves nothing. What I understand least is why you are so reflectively antagonistic toward the government. The bottom line is that most developed, prosperous, market-based economies in this world have strong central governments as partners, who spend money on the right things at the right times. Private enterprise will not and should not do many difficult jobs. Private enterprise is insufficiently capitalized to do many others.
This is nothing more than the same old republican mantra, which has failed so miserably!
I agree.
2009 will be the first time a stimulus is tried? FDR was a rethuglican?
Please tell me how building/repairing bridges and running more power lines is going to help anyone not already in that business? By hiring the unemployed? Are you gonna move your family to work in a dangerous industry? Sell your house and move?
You see when you put money into the system further down people tend to spend it. If you give the linemen, construction workers and steel workers more money they will spend it on things like lunch, going to a movie and auto repairs. This in turn keeps people working or even gets more people working at restaurants, Theaters or Blockbusters and repair shops. And then these people spend money also.
We have seen the rich put money away or invest only in get richer faster markets. Whereas the rest of us squirrel a little away, pay the bills and maybe treat ourselves to the occasional nicety like a move or dinner.
A little history. Taxes were cut radically in 1924 resulting in the "prosperity of the '20's" and the crash of 1929. Taxes were cut radically by Reagan, and soon thereafter we were bailing out the S&L's. Taxes were cut radically by Bush 43 and here we are today . Tax cuts, especially for the well off, result in speculative bubbles and crashes.
In the 50's and 60's, tax rates were extremely high compared to today's standards. The deficit remained stable and growth rates averaged 4.4%--a standard of growth we have not duplicated since.
Growth, as measured by GDP, dropped in the '70's due to an oil shortage and a spike in oil prices. Despite the account above, growth under Reagan was no better than during the '70's even though oil became plentiful and cheap.
George W. slashed taxes and growth during the first four years of his administration (the good four years) was an extremely anemic 2.4%.
More tax cuts anyone?
The federal income tax didn't even exist until just before WW1 and were only raised so the govt had money to fight WW1. Once the war was over the govt cut taxes because it didn't need the money. The govt had no budget deficit throughout 1920s. Tax cuts had nothing to do with causing the great depression. About Reagan's tax cuts, they had nothing to do with the S&L crisis, which was caused by interest rates. Growth rates in 1950s were decent but the best growth was during the Korean war. There were also three recessions during that decade. One big reason the economy was able to go so strongly in the 50s and 60s was because it grew from a very low base as barely any consumer goods or private investment was done during the great depression and WW2. There was also growth despite high taxes because most government spending was on defense, not entitlement programs like today which are more an economic drain . About the 70s, most growth was early in the decade. From mid 1973 to mid 1975 the economy didn't grow at all because of high inflation, not necessarily because of high oil prices. The economy also barely grew at all from early 1979 to fall 1982 because of high inflation and extremely high interest rates courtesy of Fed chairman Volker. Once inflation receded and the tax cuts went into effect the economy boomed almost without interruption from fall 1982 until late 2007.
Even where tax cuts are not directly responsible for previous recessions they are correlated to the "small government" rhetoric that is code for anything-goes financial non-regulation policies, both official and unofficial: anarchy in high finance.
When a boom is based on debt and asset bubbles, how sustainable is that? The Fed's policies can be destructive rather than "stabilizi
All booms must be followed by a bust.. The rupture in the derivatives and paper markets have caused the banks to be undercapitalized. It's all about risk, and risk was either undervalued or taken off the balance sheets to increase leverage. Since the rating was based on models of growth and asset appreciation, we are in a collapse. It is a crisis of both solvency and liquidity. Printing more money will end up being inflationary. Keynes thought that his policies would work best under the German regime in the 1933's because government control was almost total.
Meanwhile the "real economy" is dwarfed in comparison to the financial sector. The City of London was deregulated. Look at their banks there, they ar5e being nationalized.
There was also growth despite high taxes and military waste because significant government spending was on Lyndon Johnson's Great Society programs and social spending leftover from FDR, not corporate entitlement programs like TARP, petroleum tax credits and giveaways, and trade protectionism and corn ethanol subsidies, which are much more an economic drain than the minor and non-negotiable expense of maintaining a healthy workforce, who first and foremost are citizens with the unalienable rights to life, liberty and pursuit of happiness. Corporate domination is unacceptable.
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Obama is going to cut taxes.
War might stimulate a stagnant economy, especially if it is fought on somebody else's turf, as in the United States in WW2. But once an economy is developed, war spending only *diverts* funds from the core economy, harming it to a degree proportional to the magnitude of the diversion. Cutting taxes during time of war allowed the rich to fully ignore the cost of the war until now. They have postponed the inevitable, but they must now pay the piper. In the 1950s the highest marginal tax rate was 90% and the basis of our modern industrial superpower was built, so what Alan Schram has been shoveling here, that at all times in all circumstances low taxes are conducive to the general welfare, is worse than manure. It's toxic, anti-intellectual waste.
"modern industrial superpower"
-has left the building. Service superpower now.
If we do not restore fair tax rates from the 1950s, that will be true.
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We should also have symmetrical import / export tariffs with every country. If they juggle their tariffs to prevent that, we should warn them once at most, then quit trading with them. That would help a lot with the under-priced Chinese garbage made by slave labor, which is increasingly all that Americans can afford.
I think this pool analogy is completely false. The whole assumption that we all exist in one big financial
pool is a complete fallacy. The reality is our economy is a series of separate pools all supplied by one water source ( total labor&creative recourses of our nation which equals GDP). The problem is that some people (wealthy) have figured out to siphon off water from other pools ( average working person)and fill their own pool. This results in some pools that are practically over flowing, and other pools that are almost empty and are basically patches of mud.
Some peoples pools are being over filled, while other peoples are being drained. Since there is a limited water source we need to restore the original natural flow of fresh water to each pool.
I think this analogy better describes what has actually happened to our economy.
I know it's not a popular viewpoint, but the people who syphoned from everyone else, for the most part invested their money into businesses on wall street, helping create jobs for the people whos pool they had drained from, and in many cases lost most of their recent gains. Since they had larger exposure of investments they would experiance larger losses in this market climate.
That is a lie. Beneficiaries of the George Walker Bush tax cuts did not *for the most part* help create jobs for the people whose money they had drained. Job creation was the exception. Investment in real estate and speculation in commodities, and real estate-based funds, was how that windfall was used "for the most part" and that is the exact path for the evaporation of the assessed value of inflated mortgages to be so harmful to the general economy.
Bjarni,
This may partly be true, but I think it's important to keep in mind that many of the jobs created were either high paid jobs in the investment industry, or low paying service industry jobs. And maybe more importantly a lot of the money, that was siphoned off, was not used to create stable manufacturing jobs in this country, but to create jobs in low wage foreign countries. Also some of this money was simply put in offshore bank accounts. This all contributed to draining the pool of the average working person.
I think the idea that money flows thru the economy like it does thru one body of water is false. I think this type of thinking greatly contributed to this financial crisis. Money tends to collect in certain areas in the economy, much like separate pools of water. Thats why some redistribution of resources, or regulation of the financial system is necessary to make sure all areas of the economy have the recourses they need.
Good improvement on Alan's crude pool analogy. If we connect some or all pools by tubes, put one-way valves or backflow inhibitors of varying effectiveness onto those tubes, and assign "diameters" to those tubes, we'd be well on our way to a functioning model of the global economy. To make it more robust, we'd need to model the flow rate dependence on the relative levels in each connected pool pair; no law of nature or economics prohibits Pool C or any other from directly affecting the flow rates between, for example, Pool A and Pool B, so the task is tedious, but only a long sequence of simplistic tasks.
I hypothesize that one thing we'd find is that beyond a certain ratio, extreme wealth inequality is self-perpetuating, ie dominates all negative economic feedback mechanisms and is thereafter constrained only by political factors.
ObjectiveRealist-
If I understand you right I agree with you. I think that's why the deregulation and tax cuts of the last 30 years has been so destructive. Even though they may have not always worked perfectly they were developed to keep and maintain a relative balance of income within our society. I think one these protection
I think it is very telling to remember that a well-crafted plan was recently attempted (by a private businessman) to re-establish a shoe-factory in this country.
It failed.
Why? Because "in China, a shoe factory is surrounded by city-blocks of other factories that make shoe parts."
Let it be noticed: every one of those factories pays wages.
We thought that we could close-down our own productive capacity, and just "print money" and export it. We also thought that, since "war" makes so gush-darned much money, we really should be spending our time making, say, "brain-wave binoculars
Right now, I see a nation of 305 million people, with a well-developed transportation network and thousands of well-placed factories ... factories that need upgrades, sure, but otherwise "that are merely closed." I see opportunities everywhere I look, to bring productivity back into this country so that, when the US trades with other nations in the future, it will do so properly ... as their economic equal.
Instead of "one swimming pool," a neighborhood full of them.
Instead of an exploitative and one-sided arrangement masquerading as "trade," and empty currency masquerading as "money" ... the REAL thing.
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