The Economic Stimulus Package
I have been doing my homework reading books on what has happened to our economy and our way forward (Return of Depression Economics – Krugman, Bad Money – Phillips, Panic – Michael Lewis, The Predator State – James Galbraith, The Hanbbook of Financial Instruments – Fabozzi, and numerous articles). In the coming week or two I will try to distill what I have learned. But I will give you a preview. There are really two stories here, one of microeconomics describing what happened in the financial markets, and one of macroeconomics, looking at capitalism and world markets as they now exist and work. Yes they are interrelated, but when you look at what is and did go wrong with both, I think the causative factors are very different. Anyway, more about that later. Right now we need to stop our shrinking economy or at least slow it down and what is on the table is the Obama Economic Stimulus Package (American Recovery and Reinvestment Bill of 2009).
What is happening is that people are spending less: there is less demand for goods and services; there is less tax revenue created; and we are in a cycle of layoffs, less spending, and more layoffs. In the past, part of the problem was that much of the spending may have been propped up by borrowing. Once borrowing dried up, the spending spree was over. Actually it is a lot more complicated than that, but the conventional wisdom is that we need to reverse this shrinking trend by growing spending. Now comes the tricky stuff, which is how to stimulate the spending and reverse the economic downturn.
Conservatives think that government spending is evil and develops a dependence on that spending, and therefore they would prefer tax cuts to stimulate private spending. Progressives reject the tax cut approach as not getting much spending bang for the buck based upon the results of the last tax cut to stimulate the economy, and that private spending is not going to be enough to kick-start the economy. That is where the Obama Stimulus Package comes in and it may be a compromise to nowhere.
The package as it is currently configured breaks down kind of like this (roughly, sort of): 43% direct aid to states for social services and education, 37% in tax cuts, and 20% in infrastructure. Much of the tax cut spending came out of the infrastructure percentage. Let’s take each one and look at the pluses and minuses of the proposed spending.
Tax Cuts $306.3B, 37% – Conservatives don’t think this is enough and progressive (myself included) think this is wasted spending. Both sides want to see a quick injection of cash into the economy to spur spending. But the question you might want to ask is spending for what? Conservatives will tell you that the government should not be directing how you spend your money while progressive will point out that last time we cut taxes to stimulate the economy most of the money went for either consumer electronics (that went overseas) or went into savings. In other words, very little bang for the buck. If this is our money, shouldn’t it be spent on something that will not only put money into the economy, but invest in something that will produce returns in the future? The other issue is whether this kind of cash inflow is anywhere near sufficient to simulate the economy if you assume private spending will be enough to do just that. From my point of view this fails on both points. It is wasted money that won’t be invested in our future, and is not near enough to prime the pumps.
Aid to States/Social Programs $358.7B, 43% – Everyone agrees that as state incomes fall, and now 47 out of 50 States are showing shortfalls in their budgets, the federal government needs to help the states maintain their social programs, and help those who are losing their jobs. But the conservatives raise a valid concern in that these types of federal programs develop a life of their own and the states become dependent on this cash flow. No one believes that we should just abandon the young, old, or homeless, but this type of spending may be much better utilized if states are forced to reform their own systems as a condition for receiving this aid. Here in California there was a article in the paper that we might expect $21 billion in help. But California is the poster child for how not to run government and until government is reformed, this money will just allow the failed systems to fester.
Infrastructure $160B, 20% – The smallest part of this stimulus package is the most important part and will leave us something in the future to build upon. Conservatives argue that these types of programs take too long to get money flowing in the system to rescue us. I would also add that the other problem is that states will rush to get their share of these funds by building projects that don’t reflect our changing world (like highways instead of high speed rail). In my mind it is way too small and not properly focused.
So to make a long story short, the economic stimulus package is a throwback to old ways, doesn’t have a unifying strategic goal other than to spend as quickly as possible, and is way too small to make a major impact on what is becoming a global crisis. It will not succeed and will just set us up for Phase II of another round of spending. The real way forward is an understanding that it cannot be piece meal. Health care reform is part and parcel of the problem. The banks holding toxic investments have to be addressed and some need to go under. Home foreclosures have to be drastically reduced. And then we must pump money into our economy in a way that doesn’t just stimulate spending as an end result, but is part of a strategic plan for investing in our future. I challenge anyone to tell me what our strategic plan forward really is. I am in good company here as even conservative columnist David Brooks found no strategic plan (The First Test) and liberal economic columnist Paul Krugman found it a muddle (Stuck in the Muddle).
The conservatives have the edge here because their dogma of tax cuts requires no planning or strategic thought, and they can use the fear card of growing deficits to bolster their arguments. The problem is that it has not worked in the past and will surely fail now, but it is an easy sell for a populace who is used to not making sacrifices. The proof is in the cry, “Where is my bailout?”
Progressives have their work cut out for them because not only do they have to get an agreement on what investments will be most productive, but they must overcome the very real fear of deficits out of control. I personally feel strongly that the only way forward is the progressive way, but much like FDR when he buckled to growing worries about the deficit, shrunk the economy and threw us back into a deep recession, it is going to have to get a lot worse before people are willing to really do something different. When that happens, we will understand the strategic purpose of our spending and have agreed to a way forward. Right now we are floundering in halfway land. Progressives need to remember they won the election and not fall for the call to bipartisanship when it really means incorporating failed conservative ideas into your plan. Trust me on this, if the tables were turned, they would not compromise with us. There idea of compromise is their way or the highway. That is why we are in such a mess today.