News Can the market alone fix the economy?

[mgb_phys]

A GDP of >$30,000/capita puts you into first world position.
The US population is 300M, so if you are allowed to count government deficit spending as GDP, then now there is a deficit of >$9T everybody can stop working.
If we can only double the deficit we will double GDP!

 

[russ_watters]

A GDP of >$30,000/capita puts you into first world position.
The US population is 300M, so if you are allowed to count government deficit spending as GDP, then now there is a deficit of >$9T everybody can stop working.
If we can only double the deficit we will double GDP!

Obviously, that is not a steady state condition. GDP works just fine as a measure of economic health as long as there aren't any momentary aberrations...of course, you could say the exact same thing about many measurements in many scientific fields.

 

[Astronuc]

With regard to Coburn's list -

Aren't there already funds for this stuff? Aren't such things covered in the normal appropriations bill?

I keep wondering - so what about next year? Another stimulus package?



Obama needs to listen to republicans' concerns about those various items. We don't need busy work, but sustainable jobs.


Obama needs to sit down (behind closed doors) with the leaders of those bailed out financial institutions and figure out the best strategy to move forward. Ostensibly they want to make good loans so they can make money. I'd like to know what Warren Buffett and other executives think about the stimulus.

 

[Gokul43201]

Obama needs to listen to republicans' concerns about those various items. We don't need busy work, but sustainable jobs.

Is there anything much that Obama can do at this point? This ball is in Congress' court right? Can Obama do anything more than apply some gentle pressure on Dems in the Senate?

 

[Astronuc]

I hope Obama is firm with the Pelosi and Reid.

Looking a the last item on Coburn's list as cited - State Medicaid Bailout: $87.7 billion Through 3 different mechanisms, the bill would provide additional federal funds to state Medicaid programs over the next 3 years. This is nearly $70 billion more than the governors asked President Obama for in December, and should be a loan to be repaid by the states - that's 10% of the proposed bill.

Obama just signed the SCHIP (State Children's Health Insurance Program) Bill for ~$33 billion to extend health care to 4 million children.

Obama signs bill extending kids' health insurance
http://news.yahoo.com/s/ap/20090205/ap_on_go_pr_wh/children_s_health

http://www.cms.hhs.gov/home/schip.asp

 

[WhoWee]

I think Ms. Pelosi is over-reaching...and a little confused?

http://www.nypost.com/seven/02042009/news/politics/pelosis_500_million_person_slip_153530.htm

 

[Gokul43201]

I just don't get Coburn's list. How can he claim that the things on that list provide no stimulus? Looks to me like most of them would, indeed, provide stimulus.

To quote Mark Zandi again:

The mix of tax cuts and spending increases in the stimulus package is designed to provide both quick relief and a substantial boost to the struggling economy. The tax cuts will not pack a big economic punch, as some of the money will be saved and some used to repay debt, but they can be implemented quickly. Aid to state and local governments will not lift the economy, but it will forestall cuts in programs and payrolls that many governments would be forced to make to meet their states' constitutional obligations to balance their budgets. Infrastructure spending will not help the economy quickly, as it will take time to get even "shovel-ready" projects going, but it will provide a significant economic boost.

http://www.economy.com/mark-zandi/default.asp?src=economy_homepage

Clearly, like most economic advisers, Zandi supports the three-pronged approach, and Coburn doesn't seem to care much for two of them.

This more recent analysis by Moody's will probably have Coburn throwing a fit:

The industry research firm Moody's Economy.com tracked the potential impact of each stimulus dollar, looking at tax rebates, tax incentives for business, food stamps and expanding unemployment benefits.
...
In findings echoed by other economists and studies, he said the study shows the fastest way to infuse money into the economy is through expanding the food-stamp program. For every dollar spent on that program $1.73 is generated throughout the economy, he said.
...
The report pointed to expanding unemployment benefits as the program that gets the next biggest bang for the buck. That's because, although the unemployed are already getting checks, they need to spend the money. For every dollar spent here, the economy would see a return of $1.64, Zandi said.
...
Finally, Moody's report says business incentives such as tax breaks for buying new equipment - so-called accelerated depreciation - would give the least bang for the buck and potentially provide the slowest infusion of money. A dollar spent there would generate only 33 cents in the economy because, Zandi said, it takes longer for businesses to implement any benefit received.

http://money.cnn.com/2008/01/29/news/economy/stimulus_analysis/index.htm

 

[Astronuc]

Home-buyers tax cut raises cost of stimulus bill
http://biz.yahoo.com/ap/090205/congress_stimulus.html
Thursday February 5, 6:21 am ET
By David Espo, AP Special Correspondent
Home-buyers tax cut raises cost of stimulus bill that Senate Dems hope to finish by Friday

WASHINGTON (AP) -- Historically huge to begin with, economic stimulus legislation is growing larger by the day in the Senate, where the addition of a new tax break for homebuyers sent the price tag well past $900 billion.

"It is time to fix housing first," Sen. Johnny Isakson, R-Ga., said Wednesday night as the Senate agreed without controversy to add the new tax break to the stimulus measure, at an estimated cost of nearly $19 billion.

The tax break was the most notable attempt to date to add help for the crippled housing industry and gave Republicans a victory as they work to remake the legislation more to their liking.

Democratic leaders hope for Senate passage of the legislation by Friday at the latest, although prospects appear to hinge on crafting a series of spending reductions that would make the bill more palatable to centrists in both parties.

Three swing-vote senators met with President Barack Obama at the White House on Wednesday to discuss possible cutbacks, but they declined to discuss details of their talks. Obama has made the legislation a cornerstone of his recovery plan.

For their part, Senate Republicans signaled they would persist in their efforts to reduce spending in the measure, to add tax cuts and reduce the cost of mortgages for millions of homeowners.

Officials figures were unavailable, but it appeared that the measure carried a price tag of more than $920 billion, making it bigger than the financial industry bailout that passed last year and as large as any measure in memory.

. . . .

I wonder if the subsequent appropriations bills for FY2010 will be cut back. Given current practices I somehow doubt it. The process reminds me of those TV commercials that claim "we will save you money" - if you spend it.

For 2009 - http://www.gpoaccess.gov/usbudget/fy09/browse.html

 

[WhoWee]

I just don't get Coburn's list. How can he claim that the things on that list provide no stimulus? Looks to me like most of them would, indeed, provide stimulus.

To quote Mark Zandi again:

http://www.economy.com/mark-zandi/default.asp?src=economy_homepage

Clearly, like most economic advisers, Zandi supports the three-pronged approach, and Coburn doesn't seem to care much for two of them.

This more recent analysis by Moody's will probably have Coburn throwing a fit:

http://money.cnn.com/2008/01/29/news/economy/stimulus_analysis/index.htm

Perhaps the most effective combination would be to focus on (recently) unemployed people...provide food stamps along with unemployment benefits...and then NOT tax the benefits.

 

[mheslep]

A GDP of >$30,000/capita puts you into first world position.
The US population is 300M, so if you are allowed to count government deficit spending as GDP, then now there is a deficit of >$9T everybody can stop working.
If we can only double the deficit we will double GDP!

There's no free lunch. The government sooner or later crowds out the private economy when it spends extravagantly.
http://en.wikipedia.org/wiki/Crowding_out_(economics )

 

[mheslep]

Is there anything much that Obama can do at this point? This ball is in Congress' court right? Can Obama do anything more than apply some gentle pressure on Dems in the Senate?

Every politician is sensitive to some degree to running counter to the will of a popular new elected President. If the President were to say 'these long term projects and projects that otherwise have nothing to do with getting the economy going don't belong in this fast track stimulus bill' Reed would have to listen. The President is putting pressure of that kind on the Republicans right now with his public rejection of 'the notion that tax cuts alone will solve all our problems' (though no major Republican is saying anything like that).

 

[mheslep]

I just don't get Coburn's list. How can he claim that the things on that list provide no stimulus? Looks to me like most of them would, indeed, provide stimulus.

To quote Mark Zandi again:

http://www.economy.com/mark-zandi/default.asp?src=economy_homepage

Clearly, like most economic advisers, Zandi supports the three-pronged approach, and Coburn doesn't seem to care much for two of them.

It is not clear to me what Coburn considers ok, he doesn't single out every dime of spending. However, if we agree that Zandi's description is indeed an economically correct one, the current bill still falls short of that mark with 'smoking cessation' fluff and the like - that's not infrastructure, not job aid to state governments.

 

[Gokul43201]

I agree there's fluff. That's why I said "most" of them.

Heard in the news today that they've nearly knocked out $100B worth of porky projects from the House bill, and that's probably as close as it will get to a maximum consensus number.

 

[Astronuc]

Wanted: Personal Economic Trainers. Apply at Capitol.
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/05/AR2009020503413.html
By Steven Pearlstein

As long as we're about to spend gazillions to stimulate the economy, I'd like to suggest we throw in another $53.5 million for a cause dear to all business journalists: economic literacy. And what better place to start than right here in Washington.

My modest proposal is that lawmakers be authorized to hire personal economic trainers over the coming year to sit by their sides as they fashion the government's response to the economic crisis and prevent them from uttering the kind of nonsense that has characterized the debate over the stimulus bill during the last two weeks.

. . . .

 

[Astronuc]

Obama seems to have a good team of advisors on the economy, particular the CEOs of Caterpillar and GE.
http://news.yahoo.com/s/ap/20090206/ap_on_go_pr_wh/obama_economy

. . . .
Obama had already tapped Paul Volcker, a former Federal Reserve chairman and a top Obama adviser, as the leader of the Economic Recovery Advisory Board. Members will include former Securities and Exchange Commission Chairman William Donaldson, TIAA-CREF President-CEO Roger Ferguson and Harvard University professor Martin Feldstein, who wrote a Wall Street Journal op-ed piece last year titled "John McCain Has a Tax Plan To Create Jobs."

Obama friend and campaign finance chairwoman Penny Pritzker also is on the board, as is Caterpillar Inc. Chairman-CEO Jim Owens and General Electric Co. CEO Jeffrey R. Immelt. Two labor officials — Anna Burger of Change to Win and Richard Trumka of the AFL-CIO — also were named to the 15-member board designed to offer Obama advice as he seeks a way to weather the crisis and rebuild the economy.

The new council is intended to be an economic sounding board for Obama — an outside-the-Beltway group that will report to the president directly. It will meet regularly with Obama, perhaps once a month. Its mission will include responding to requests from Obama — such as delving into a particular subject — without competing with the National Economic Council or day-to-day decision-making at the White House.

. . . .

Presumably, he's getting sound advice.

 

[russ_watters]

Heard in the news today that they've nearly knocked out $100B worth of porky projects from the House bill, and that's probably as close as it will get to a maximum consensus number.

Here's an obvious question: since the bill is composed entirely of unnecessary projects that are being funded to stimulate the economy, how does one differentiate what is "pork" and what is not?

 

[Gokul43201]

Here's an obvious question: since the bill is composed entirely of unnecessary projects that are being funded to stimulate the economy, how does one differentiate what is "pork" and what is not?

You think they are all unnecessary. From what I've read so far, few others do. No one else on this forum, for instance has expressed such an opinion.

But the way I differentiate pork from non-pork in just this specific spending bill, is based as much on its short term merit in terms of job creation and GDP growth as on its potential for generating longer term improvements in efficiency (the first requirement would not feature in my definition of non-pork for any general allocation, only for rare situations such as this one).

So even if an allocation falls under what I might otherwise consider pork, I will likely not cringe if it serves little long-term purpose but has a large multiplicative effect in the short term. For instance, I would support a temporary (i.e., expiring within the next couple years) but sweeping expansion of food stamps or unemployment benefits, something that I wouldn't normally support in a healthier economy.

I imagine that some weighting of short-term stimulative effect and long-term value must go into most people's valuation of whether a particular allocation is justified.

 

[russ_watters]

You think they are all unnecessary. From what I've read so far, few others do. No one else on this forum, for instance has expressed such an opinion.

No, it's a matter of the reality of what Congress thinks and does, plus a little bit of logic, not *our* opinions. I think building 500 new nuclear plants is "necessary", but that's not what I'm talking about - if Congress thought it was necessary, they'd have done it already. If these public works projects were truly deemed "necessary" by Congress (the people for whom "necessary" actually gets bills passed), they would be done regardless of whether we were in a dire economic situation or not. For example, there was a recent report in the press about our crumbing infrastructure, yet before the stimulus, Congress did not consider it necessary to put such massive funding into our infrastructure - otherwies, they would have done it!

But the way I differentiate pork from non-pork in just this specific spending bill, is based as much on its short term merit in terms of job creation and GDP growth as on its potential for generating longer term improvements in efficiency (the first requirement would not feature in my definition of non-pork for any general allocation, only for rare situations such as this one).

But "pork" is exactly that. Pork is when Timbuktu, Alaska (made-up town) decides it needs a new $10 million visitors' center and the congresspeople for them get a line-item put into a bill to fund it. With a population of 10,000 people, such a construction project does immediate wonders for the local economy (or at least the construction part of it).

And I can assure you the Congresspeople from Alaska think that that project is "necessary" whereas most others, if pressed, would say they don't.

 

[Gokul43201]

You can't really say that Obama never deemed any of these projects necessary, can you? He promised during his campaign to invest in education and infrastructure and cleaner energy. And Congress may have just been waiting for the changing of the guard before pushing for projects that they may have expected the old guard to veto. And until a month ago, the Dems didn't have a strong enough majority in Congress to do very much. Moreover, the need for some specific projects may have arisen only recently (or else, one could just as well use your argument that all the spending in this bill is unnecessary because Congress never chose to spend it before now, to every single spending bill ever passed).

 

[WheelsRCool]

IMO, this bill is going to be a long-term disaster; it is a big pork bill and likely will not work. It is just throwing money at people. And historically, government spending has not once ever stimulated any economy. The Japanese had the same type of crises we are in when their real-estate bubble burst, and they tried multiple times to stimulate their economy through borrowing. They also have yet to recover, and experienced an at least ten year recession (they have a 200% debt to GDP ratio!). IMO, what is needed is to let the economy self-recover and for the government to provide the proper social safety nets they can (like unemployment) and maybe infrastructure work to ease the pain. Otherwise, usually whenever government tries to "stimulate" the economy, they in fact mess things up and slow it down.

Economies go into recession. Yes, if the financial system is going to collapse, that is like a utility and must be saved, but otherwise, economies have to occassionally go through a recession.

There are economists both in agreement and against the stimulus plan (http://www.cbsnews.com/stories/2009/01/28/politics/otherpeoplesmoney/main4759532.shtml). Some economists who are skeptical, or critical of this plan, are:

Robert Barro: here is an article he wrote in The Wall Street Journal that caused a stir: http://online.wsj.com/article/SB123258618204604599.html
Greg Mankiw
Gary Becker
Thomas Sowell
Stephen Moore
Robert Lucas
Eugene Fama
Kevin Hassett

Some economists who support the bill are:

Paul Krugman
Robert Reich
Joseph Stiglitz
Matt Yglesias
Brad DeLong

And on a sidenote, with deciding to spend this kind of money, I think it is very wrong for President Obama to have signed SCHIP. That is not going to cost any $35 billion as planned. Very rarely do government healthcare programs cost as planned, because the cost estimates are always off.

The Medicare prescription drug benefit signed in 2003 by President Bush has cost less than expected, but that is because it has triggered competition among drug companies.

Obama friend and campaign finance chairwoman Penny Pritzker also is on the board, as is Caterpillar Inc. Chairman-CEO Jim Owens and General Electric Co. CEO Jeffrey R. Immelt.

Immelt I get a bit antsy about. This is the guy who was doing business with Iran, who has had GE's stock decline by 60% under his watch, who lobbies for global warming legislation so that they will buy GE's windmills, etc...(not that I'm against doing anything against global warming if it will work, but windmills are not yet viable).

 

[Ivan Seeking]

No, it's a matter of the reality of what Congress thinks and does, plus a little bit of logic, not *our* opinions. I think building 500 new nuclear plants is "necessary", but that's not what I'm talking about - if Congress thought it was necessary, they'd have done it already. If these public works projects were truly deemed "necessary" by Congress (the people for whom "necessary" actually gets bills passed), they would be done regardless of whether we were in a dire economic situation or not. For example, there was a recent report in the press about our crumbing infrastructure, yet before the stimulus, Congress did not consider it necessary to put such massive funding into our infrastructure - otherwies, they would have done it!

You have got to be kidding! We've been fighting a $trillion war, remember? Also, the Republicans controlled the government - the party that brings prosperity to the country.

Just be glad the Democrats are now running the show so that we can do some nationbuilding at home.

 

[Gokul43201]

The Medicare prescription drug benefit signed in 2003 by President Bush has cost less than expected, but that is because it has triggered competition among drug companies.

Less than which estimate of the cost? All of them?

Bush first announced it would cost $400B (over 10 yrs)...

One month later, the ten-year cost estimate was boosted to $534 billion, up more than $100 billion over the figure presented by the Bush administration during Congressional debate. The inaccurate figure helped secure support from fiscally conservative Republicans who had promised to vote against the bill if it cost more than $400 billion. It was reported that an administration official, Thomas A. Scully, had concealed the higher estimate and threatened to fire Medicare Chief Actuary Richard Foster if he revealed it.[2] By early 2005, the White House Budget had increased the 10-year estimate to $1.2 trillion.[3]

So, is there a newer estimate that is lower than the original $400 billion? Should we make David Walker eat his words?

Former US Comptroller General David M. Walker has called this "...probably the most fiscally irresponsible piece of legislation since the 1960s... because we promise way more than we can afford to keep." [4]

LINKS:

Here's the wiki:
http://en.wikipedia.org/wiki/Medica...ement,_and_Modernization_Act#Changes_to_plans

More on the cost numbers and related issues:
http://www.washingtonpost.com/wp-dyn/articles/A9328-2005Feb8.html

And for some fun, how the GOP tried to bribe their way into passing the bill:
http://www.usatoday.com/news/washington/2003-12-04-dem-inquiry-bribe_x.htm

 

[Astronuc]

The Medicare prescription drug benefit signed in 2003 by President Bush has cost less than expected, but that is because it has triggered competition among drug companies.

AFAIK, if the Medicare prescription program cost less, not because the drugs cost less, but because the government is covering less, e.g. reduced remimbursements, and in some cases, simply not paying for prescriptions, or paying for less expensive 'generic' equivalents, which are less effective.

Immelt I get a bit antsy about. This is the guy who was doing business with Iran, who has had GE's stock decline by 60% under his watch, who lobbies for global warming legislation so that they will buy GE's windmills, etc...(not that I'm against doing anything against global warming if it will work, but windmills are not yet viable).

GE took a big hit because of GE financial, which is a big chunk of GE's profit. Compare 60% to 90% for other financial institutions. GE stock is a bargain right now, with a yield over 10% if the dividend holds.

GE sells aircraft (jet) engines, but that business is down along with aircraft orders. GE is also interested in selling nuclear plants, yet orders are slow to take off - utilities are waiting for approval, then need to line up the financing. Apparently the 'stimulus' package may have some funding for new nuclear plants.

New nuclear plants won't happen right away since there is only one shop in the world that is qualified to fabricate nuclear-grade pressure vessels. There is one shop in the US that could be qualified - IF there was a market. Even then we might only see about 1 or 2 pressure vessels per month.

 

[mheslep]

You can't really say that Obama never deemed any of these projects necessary, can you? He promised during his campaign to invest in education and infrastructure and cleaner energy.

Yes he did promise those, but this bill and the emergency path its taken are about the recession and immediate job creation, or so we are told in the bill's title. If the issue at hand is just education, infrastructure and clean energy it can go through the normal legislative process, otherwise its a fraud.

 

[mheslep]

You have got to be kidding! We've been fighting a $trillion war, remember? Also, the Republicans controlled the government - the party that brings prosperity to the country.

Spkr Pelosi and Sen. Reed have been in leadership seats now since Jan 4, 2007, and 'I Can't Drive' Daschle was the head of the Dem. Senate Majority '01-'02. That 'Republicans controlled the government' yarn is getting a little long in the tooth.

 

[DrClapeyron]

The US government must spend money. Large banks love to sell their mortgage-backed securities to Fannie and Freddie, same with other federal credit banks which essentially purchase loans that banks make (who says the government cannot change/control the money supply?). There was a serious case of overlending in US by the FED. If you trade a certain volume of debt notes (US Treasuries, mortgages, etc) too quickly the exchange rate of the debt note quickly becomes larger than the return rate of that debt notes.

Both sides are guilty of overlending, but were we not supposed to have the SEC to watch these sorts of things? *cough*Madoff*cough* But don't worry, the US can solve the problem by printing more money to cover the debt. Finance debt with more debt, brilliant! And what happens when the baby boomers retire? Our largest income earners (GDP) are going to retire within the next 15 years. Dare I say it...print money for entitlements?

 

[mheslep]

...Just be glad the Democrats are now running the show so
that we can do some nationbuilding at home.

Does this qualify for nation building at home:

Mr. Obama is preparing to increase the number of American troops in Afghanistan over the next two years, perhaps to more than 60,000 from about 34,000 now.

http://www.nytimes.com/2009/01/28/us/politics/28policy.html?ref=worldspecial

How about this in the House ARRA:

DIGITAL-TO-ANALOG CONVERTER BOX PROGRAM
Notwithstanding any other provision of law, and in
addition to amounts otherwise provided in any other Act,
for costs associated with the Digital-to-Analog Converter
Box Program, $650,000,000,...

http://www.rules.house.gov/111/LegText/111_hr1_text.pdf

 

[mheslep]

The Medicare prescription drug benefit signed in 2003 by President Bush has cost less than expected, but that is because it has triggered competition among drug companies.
...

Less than which estimate of the cost? All of them?

Bush first announced it would cost $400B (over 10 yrs)...

So, is there a newer estimate that is lower than the original $400 billion? Should we make David Walker eat his words?

LINKS:

Here's the wiki:
http://en.wikipedia.org/wiki/Medica...ement,_and_Modernization_Act#Changes_to_plans

More on the cost numbers and related issues:
http://www.washingtonpost.com/wp-dyn/articles/A9328-2005Feb8.html

And for some fun, how the GOP tried to bribe their way into passing the bill:
http://www.usatoday.com/news/washington/2003-12-04-dem-inquiry-bribe_x.htm

Prescription Drug Benefit is another entitlement disaster:

from table 1.:
http://www.cbo.gov/ftpdocs/56xx/doc5668/07-21-Medicare.pdf

 

[mheslep]

...So what is the best way to create jobs?

What is best way to stimulate the economy?...

Here's something that passes my filters on what won't work, for what that's worth:

...I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift...

and for the state governments, who are in danger of major layoffs:

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. This provision would essentially be giving governors the temporary authority to impose a payroll tax on his or her citizens, collected via the federal tax system. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters. It is called federalism.

http://gregmankiw.blogspot.com/2009/02/my-preferred-fiscal-stimulus.html

Why not spending stimulus? Per J.M. Keynes late in life, well after the General Theory:

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

http://thinkmarkets.wordpress.com/2009/01/25/keynes-as-public-works-skeptic/
M. Friedman said once that if Keynes had lived another year, he likely would have seriously curtailed the big government policies derivative of his work.

 

[Gokul43201]

Yes he did promise those, but this bill and the emergency path its taken are about the recession and immediate job creation, or so we are told in the bill's title. If the issue at hand is just education, infrastructure and clean energy it can go through the normal legislative process, otherwise its a fraud.

The issue at hand is not just education or infrastructure. The point I was making though, in response to Russ, was that some people involved in this bill had seen the need for certain measures before this emergency arose (as opposed to the assertion that everything in this bill is unnecessary since no-one involved in the drafting saw them as necessary before now).

And just because something falls under education or infrastructure, that doesn't disqualify it from this bill. There are a large number of infrastructure projects, for instance, with high stimulative potential in the fairly short term.