Economic Stimulus: Why So Late?

Is it too little too late? The economy has been faltering for a long while now. What's brought on urgency was surprisingly weak job creation in December, the rise in the unemployment rate, and tepid Christmas sales. Now everyone is on the stimulus bandwagon -- that is, tax cuts or more government spending. And you thought Keynes was dead.

The real story here is why everyone was so late with so little -- in particular the leading Democratic candidates for president. The Edwards camp had been talking about a serious stimulus package of at least $75 billion for well more than a month, and then issued in mid-December a mere $25 billion spending proposal. At least Edwards had the foresight to jump ahead of the pack. From Obama and Clinton came nothing. Until Friday, that is, after even the Bush team acknowledged there was need for a stimulus. Clinton has a solid $100 billion plus program, mostly for spending. On Sunday, Obama issued a similar program.

But all of them should be talking more about investment in the economy, not just a short-term pump up. Edwards is closest to being on the right track.

There are three decisions to be made. First, how much stimulus. Second, tax cuts or spending. Second, if it is spending, then consumption or investment.

A reasonable rule of thumb is to spend at least one percent of GDP. That is, $125 to $150 billion. None of the candidates has gone that far as yet.

Second, we've had enough tax cuts. Government needs some wherewithal. There is too much to do. And it's simple political pandering.

Third, investment. Edwards proposed a transportation investment program, which would create jobs. He suggested another $75 billion in reserve, whose specifics are yet to be decided. Hillary Clinton has proposed immediate spending in the $100 billion range: on housing bailouts, unemployment insurance and aid to the poor. She sets side just $5 billion for energy programs. Obama is not truly tuned it.

The Republicans are only talking tax cuts. They seem lost, and very slow to react. But Republicans and Democrats alike are talking about immediate rebates... checks in the mail to taxpayers so it is spent immediately.

Here's the crux of the matter. Two points. Ignore the budget deficit. The Democrats are late in the game because they are deceived into thinking that budget balancing is the highest priority. It is an amazing turnabout, and wrong theoretically, empirically and historically. There will be a lot of deficit scare in part because in recession the deficit will rise as tax revenues fall due to receding incomes for business and individuals. Some will also talk up the threat of inflation. But that's non-existent except in the very short run. at the It will take guts to ignore the scare tactics, which will come from Republicans but also many middle-of-the-road Democrats.

Second, it is a perfect time to start investing in the long run. The Washington sages say forget about that. Let's just get stimulus. But this economy needs investment in a new healthcare plan, infrastructure, and early education. Investment serves two purposes: stimulus and long-term productivity growth.

Let's see which of the candidates are smart enough to understand that--and gutsy enough to fight the conventional wisdom in their own parties.

Comments

[realitytrumpsbull]

Um, if/when I get employed again, can I be paid in cash, a diverse basket of currencies, please, so that if any ONE currency tanks, I can still afford breakfast?

[Xander]

So the Democrats are claiming the fix for the economy is to give food stamps and aid to people who aren't working (and in many cases, don't want to/will not work).

And the Republicans are claiming the fix is to give tax breaks to business owners (the wealthy) who don't need them, as well as to give them incentives to expand their empires.

And all the while, the middle class is left completely out of the equation. Way to go, 2 party system that completely misses the boat.

The only reasonable suggestion out of that entire article was funding education programs so people could get back into the workforce. And of course, nobody wants that in Washington.

[GreedyOldPsychopaths]

Wow,

In order to solve a problem you've got to understand the root cause:

1. This mess started over twenty years ago but accelerated after 2000: Offshoring and outsourcing have displaced the middle class and stagnated personal income, especially in the high-value wage sector of manufacturing: more than 3,000,000 direct manufacturing jobs since 2000.

The FED countered high-value job losses and displacement with record low interest rates that fueled new mortgages and refinancing. The FED's monetary policy and increased US National debt was enabled by foreign investors (Banks of China and Japan) buying US securities (debt). But with an inability to produce real wealth (manufacuting based value added production), dollar devaluation, coupled with increased demand in Asian markets, resulted in higher energy and food prices. Stagnating incomes coupled with dollar devaluation (mistakenly identified as inflation) have led to a consumer credit crunch, loan defaults, and thus the failing derivatives market;

2. The Chinese peg of the Yuan (RMB) to the dollar will continue devaluation (not inflation) of the dollar. As long as the Chinese, Japanese, and OPEC banks don't tire of US debt, the race to the bottom will continue unabated. But if they have a change of heart...look out. Iran has already opted out, more fallout is likely to follow...Venezuela, Russia, Saudi Arabia and others are rumored to be weighing decisions. If there was another currency that was viable as the world's reserve currency, the dollar would have already been abandoned.

Until these two issues are dealt with and corrected, all other perspectives and proposals are simply treating the symptoms and not the actual disease. The problem is Freidman (Milton) "free market" "free trade" policies coupled with supply side economic tax policy. Both enrich the few at the expense of the many. Galbraith and Veblen were right, Freidman was wrong. Good luck to all.

[Sundialsvc4]

"Tax and spend, or spend and don't tax?"

What a lame idea in either case.

I'm glad that these people studied hard in Professor Flitwick's class at Hogwarts, but "swish! flick!" doesn't work in the world of money.

If you want "economic stimulus," you can't wave the Elder Wand to do it. You have to fundamentally change the environment of business. You have to impose a stop to the unscrupulous business practices which have stolen so many billions of dollars from the pockets of your countrymen. You also have to stop allowing every nation of the world that runs a sweat-shop to first buy your strength and now, buy your treasure.

There will be no quick fixes, only a bone-wrenching economic depression, curiously drenched in "easy money" that has no effect. It will cost a great many leaders who sit in Congress and elsewhere in government their careers, and it will land quite a few of them in jail before it's over. This depression has, in fact, already begun.

[nads2985]

Tax cuts and rebates are not the answer. Increasing the budget deficit by giving people cash now is stealing from future generations, who will have to pay off the growing national debt. It is just delaying the inevitable - we have to pay back what we've borrowed, and, at some point, this means we need to increase taxes. This is simply redistributing wealth from future generations to ourselves. This kind of borrowing, with little thought of how it will be paid back, is incredibly irresponsible and partly to blame for how we got to this point.

The only responsible deficit spending is for investments that will pay off in the future. What we need is a new New Deal.

The US has fallen behind other countries in infrastructure, in telecommunications, in transportation, in education. As this summer in New York and Minnesota ably demonstrated, our infrastructure is literally falling apart. Invest in fixing and improving it, and we can create jobs now, which will put money into the economy, as well as pay off in the future by increasing American productivity.

Fiscal stimulus should be aimed at putting money into the economy where its value will be subjected to the largest multiplier, and provide the largest dividends. This means creating jobs and improving ailing sectors of the economy, not just forking over cash on the assumption that it will be spent, and how it's paid for can be dealt with later.

Senator Edwards, and to a lesser extent, Clinton, seem to understand this and have incorporated this thinking into their proposals, but neither Obama or the Republicans seem to have gotten past the idea of cutting taxes as the answer to all economic problems.

[RossalGondamer]

Jeff you must be watching the FOX/MSNBC/ABC debates which exclude the 'other' candidates who have REAL solutions to not just the pain but the underlying problem.

[vippy]

Now don't fall for another stimulus package like the $ 600 Bush gave us in 2003 and which did not help a bit. In the meantime he got what he wanted, high oil prices, which in turn made the utilities and grocery prices rise, housing material was shipped by railroads, etc.
If Bush had any interest in our economy he would have mandated higher CAFE Standards and our big car makers would not have been driven out. There is no oil shortage. Demand shrank and we are swimming in gas inventories. Sauids won't increase their production because the market is flooded already, there is no growth expected in the US. Why don't Hillary or Obama reign in the Hedge Fund People, who trade oil on paper and on the future's market. why not go back to the old way, where the real price of oil kept the economy going.

[seawolf77]

Higher energy prices have brought on a recession, only this time energy prices won't decline because production has peaked. Serious efforts such as telecommuting and ticketing single person drivers must be implemeented now. Immediate consruction of rail and public transit. If you keep sending 1 trillion dollars to Middle East for oil every 2 years, how long before the country is broke. Not very long at all. Cars kill. They are killing our country. They are destoying our world. Combustion on this massive a scale is ecologically unsound.

[Dunnage]

The Fed and Wall Street needed to get their ducks in a row first. Who do you think takes care of whom in this setup. So everybody said that nothing was as bad as it looks. So folks don't panic -- we already have and need time.

[flatus]

Greedy freaking bankers creating unmeasureable misery.

Where are the rolling heads?

[Wulfstan]

Tax cuts are not much good to the lower paid or if you are out of a job.

Corporations need to pay their people better so they can afford to buy stuff the corporations sell otherwise they sell less.QED. Henty Ford said it years ago when he was the richest man in the world.

Printing more money just leads to more inflation and price increeases making the problem worse.

[Wiredwilly]

The only way to stop total economic collapse, depression, and War is to enforce Executive Order 11110 that was enacted by John Kennedy right before he was shot and filed away under something like , " too bad suckers " by LBJ and Treasury Secretary C. Douglas Dillon. Unfortunately, none of these buffoons even know what Ex. Order 11110 is about. . Clinton & Obama are to serious economics what Bevis & Butthead are to John Kenneth Galbraith. In descending order , Ron Paul, Kucinich, and John Edwards have some idea.

[Overd0g]

Too much stimulus is what caused this problem. More will exacerbate it.

[Camel54]

As far as Obama's plan, maybe this will help:

http://www.barackobama.com/issues/economy/

[vippy]

I agree with FROST here. Good plan. However,
politicians want to enrich themselves, keep the masses taxed and uneducated and if they are sick then that is just too bad. The government calls upon your patriotism to fight but then
time after time we have seen how they treat the vets and we don't get any smarter. As long as
we stay stupid we deserve what is coming.