Problem with stimulus is it always runs out

But barely relevant articles and blogs never run out.

He makes good points while slamming Krugman and Obama while plugging for cuts in taxes and government spending.

You can't kick the can down the road forever. We spent two trillion on stimulus money and got nothing. How much more demand can you guy from the future and at what rate. The money comes from somewhere and the taxes have to be raised a some point.

Meanwhile, I continue to believe that both Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials - to precisely the worst stewards of capital in society - is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first.

A few additional notes. We are likely to observe a substantial increase in U.S. government debt in the next couple of years, not only because of stimulus spending and possible further bailouts, but also due to tax shortfalls and aid to states and municipalities. The key question to ask is the extent to which the increase in debt is matched by an increase in productive capital or urgently needed social benefit. Remember also that the crucial consideration is how the money is first spent - how productively the money is used. Once the funds are spent, there will be government liabilities as evidence of that spending, but it is important to recognize that those liabilities are simply IOUs.

In short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security). What appears to be "sideline cash" is simply the evidence of past spending. Again, the crucial consideration is how the government spent the funds in the first place. Rapidly mounting evidence suggests that the answer is "not very well."

Over the long-term, massive increases in government liabilities do have inflationary impact. This imposes a real burden, not simply a paper one. If the holder of government currency can command a certain stock of real goods and services, and then the government debases that currency so that it can command a lesser stock of real output, then it is undeniable that the difference in real value has been implicitly transferred to the government to finance its spending.

http://www.hussmanfunds.com/wmc/wmc100706.htm

http://www.ritholtz.com/blog/wp-content/uploads/2010/07/perfectly-good-econ-theory.png

Funny that you republicans didn't peep about debt when your policies decimated the Clinton surplus and ran up historic debts while destroying our economy. Do you guys think that you know how to fix the economy because you were the ones who ruined it

Clinton inherited an economy that benefited from eight years of Reagan and the fall of the Soviet Union. Both of which he takes no credit for. What Clinton did accomplish was accelerate the pace at which Americans tapped into their homes to finance consumption that which their income levels could not support.

Funny how we're always back to the argument that because in the past we ran an irresponsible deficit that we should continue the failed policy.

Actually it was the republicans and Bush who pushed Americans to spend away their home equity not Clinton. What Clinton did was create an economy that actually created equity in homes. bush and the republicans created a structure that allowed wall street to pilfer that equity and Bush urged America to take that equity and spend it on crap so we could defeat terrorists.

reagan was horrible with financial policy, created massive debt, and handed Clinton a sack of shit that he turned around. bit you can continue to look at the world through your partisan lies

Clinton came into office with a growing economy and left office in a recession.
petrfitz- you are usually clueless, but stop being a liar too. You know that the Clinton administration forced FNMA and FHLMC to expand loans to borrowers with bad credit.
Clinton's policies didn't grow the economy- he just rode the wave.

"If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed."

Banks, of course, don't do that.

"Clinton inherited an economy that benefited from eight years of Reagan."

Right - the 4 years of George I mean nothing. (Nor does the fact that Regan also left a huge budget deficit, and raised taxes.)

"You know that the Clinton administration forced FNMA and FHLMC to expand loans to borrowers with bad credit."

Right. And that's what caused all of this. Deregulation - undoing everything that had worked so beautifully since FDR - had nothing to do with it.

Please.

1)Banks, of course, don't do that.

Of course banks can mis-allocate capital. And the result is supposed to be failure. Currently that does not apply to the large too-big to fail banks.

2)Right - the 4 years of George I mean nothing. (Nor does the fact that Regan also left a huge budget deficit, and raised taxes.)

Again we should have deficit spending now because the other guys did it and we need to fund our pork barrels and reward our patrons.

Why do republicans take credit for the good things that happen while democrats are in power and blame democrats for the bad things that happen while the republicans are in power ?

I guess Reagan started the Internet years under Clinton....

No that was Nobel prize winner Al Gore. He also invented global warming.

http://ginacobb.typepad.com/.a/6a00d8341c2c6053ef013480036634970c-popup

http://www.washingtonexaminer.com/politics/Obama-economy-sends-Americans-to-their-mattresses-98134404.html

Home mortgage interest rates are the lowest in history, but house sales are plunging. Banks can make money easily because of the Federal Reserve's low interest rates, but they're not making many loans. Major corporations are sitting on something like $2 trillion in cash, but they're not investing.

Unemployment is running at 10 percent, rounded off, for the 11th straight month, but few employers are hiring and a million people have stopped looking for work in the last year. Small-business hiring is at a nine-month low and retail sales are tailing off.

Government policies designed to stimulate the economy seem to be having the opposite effect. Consumers aren't buying, businesses aren't hiring and those fortunate enough to have some cash on hand don't seem to be investing.

I call it the mattress economy.

People seem to be following this investment strategy. Step one: Go to Mattress Discounters and buy the biggest mattress you can find. Step two: Take it home and stuff all your money in it. Step three: Lie down and get some rest.

This hurts the economy, but it's a rational response to the Obama Democrats' public policies. And that's not just the view of their political opponents.

Consider the plaint of Verizon CEO Ivan Seidenberg, head of the Business Roundtable, which has been playing footsie with the Obama administration for most of the last 18 months. "By reaching into virtually every sector of economic life," Seidenberg recently wrote, "government is injecting uncertainty into the marketplace and making it harder to raise new capital and create new businesses."

Or take a look at Obama backer Nate Silver's fivethirtyeight.com Web site. "Why aren't businesses hiring?" asks tax lawyer Hale "Bonddad" Stewart. "Uncertainty: there has been a tremendous amount of change over the last 12 months. Businesses are still trying to figure out what this means for their bottom line. Until there are firm answers, they will freeze hiring."

In other words, the Obama Democrats' vast expansion of the size and scope of government -- and the threat that they may pass even more such legislation in a lame-duck session of Congress after the November election -- has chilled the animal spirits that John Maynard Keynes said were the driving force for economic growth.

Instead of stimulating the economy, the Obama Democrats' policies have shocked it into immobility. People are lying on their mattresses, waiting for the next shock. At least one is definitely coming: The Bush tax cuts expire at the end of the year, which means that high earners can be sure they will very soon keep less of what they make.

Politicians up for re-election are taking notice. Congressional Democratic leaders can't round up the votes for another stimulus package and have not dared to ask their members to vote for a budget resolution.

New York Times columnist Paul Krugman keeps beating the drum for even more increases in federal spending. But congressional Democrats are refusing to dance.

Democrats can plausibly claim that their 2009 stimulus package, passed less than a month after Barack Obama was sworn in, prevented a 1932-style downward spiral. But it didn't hold unemployment below 8 percent as they promised it would.

They can argue that Treasury Secretary Timothy Geithner's stress tests prevented a meltdown of the big banks. The problem is that it didn't get them back into the lending business.

And Democrats can claim that the General Motors and Chrysler bailouts are working out better than some of us doomsayers predicted. Unfortunately the transfer of assets from secured creditors to the United Auto Workers -- which I dubbed "gangster government" last year -- has undoubtedly deterred investment in similar enterprises.

But the brute fact remains that even enormous government spending can't revive an economy when government threatens to take away anything you earn.

America has seen this kind of thing before. In the late 1930s, when Franklin Roosevelt raised taxes on high earners, encouraged lawless sit-in strikes by labor unions and took over utility businesses, the response was a "capital strike."

Instead of creating jobs, businesses and investors put their money in mattresses. The result was a stagnant economy and double-digit unemployment-and a 75-seat Republican gain in the 1938 off-year elections.

Back then, the economy eventually perked up thanks to mobilization for World War II. No such mobilization appears on the horizon today. You may need to get a bigger mattress.

Michael Barone, The Examiner's senior political analyst, can be contacted at mbarone@washingtonexaminer.com. His columns appear Wednesday and Sunday, and his stories and blog posts appear on ExaminerPolitics.com.

Read more at the Washington Examiner: http://www.washingtonexaminer.com/politics/Obama-economy-sends-Americans-to-their-mattresses-98134404.html#ixzz0tNwIkEiM

Bill Clinton, quite famously, came into office with the behind-the-scenes motto "It's the Economy, Stupid", so LICcomm's suggestion that the economy was strong at that time is clearly an outright falsehood, extraordinary disingenuousness that typifies LICcomm's posts.

And what he left at the end of his eight years was an exceptionally thriving economy, such that it's widely acknowledged that Al Gore would've been a shoe-in for the Presidency, had he not distanced himself from Clinton (not wanting to be associated with Clinton's kissing an incredibly tacky intern, who was probably from Long Island City).

This has been argued before. George H Bush was the victim of bad timing. When he was voted out the economy was about to recover. If the election were held six months later.....

Whatever. This happens with every election.

"Of course banks can mis-allocate capital. And the result is supposed to be failure."

You really don't know what you're talking about. Lehman wasn't enough, you REALLY DO want to go back to the 1800's.

Banks CAN'T be allowed to fail. The entire economy collapses. That's why the FDIC was created.

"Again we should have deficit spending now because the other guys did it"

Absolutely not. We need deficit spending now because there isn't enough private spending to go around. We DIDN'T need deficit spending before - we should have paid down the debt when the economy was strong.

I find it nearly impossible to believe that so many people actually do believe in economic policies that defy all accepted economic theory, logic, history, and proof.

Allow banks to fail. HAHAHAHAHA.

Banks CAN'T be allowed to fail. The entire economy collapses. That's why the FDIC was created

ok we're back to traders and bankers getting all the upside and tax payers getting the downside. Is that what you want?

Absolutely not. We need deficit spending now because there isn't enough private spending to go around. We DIDN'T need deficit spending before - we should have paid down the debt when the economy was strong.

Deficit spending works until it doesn't work...Greece
And do you care what the government deficit spends on? Or is it all the same?

"Clinton inherited an economy that benefited from eight years of Reagan and the fall of the Soviet Union."

Excuse me? The last time I checked, there was a president in between Reagan and Clinton. Who was that guy? Oh yes, Bush 41. And during Bush 41, the economy stunk. Do you really think we are that stupud where you can erase the 4 disasterous years of Bush 41 from history?

Bush Sr. left right before the economy turned up. William Jefferson got credit for an upturn he did not fully deserve.

steve still follows disproven economic theories that have been debunked since the 1970s. He thinks you can tax and spend the country out of a recession. A fool's theory.

alan- seldom right and wrong again. I see you don't tire of being factually incorrect all the time. The economic recovery started at the end of Bush I's term, but too late to affect the elections. The economy also started its recession before Clinton left office. Clinton benefited from a growing economy, a tech boom, and a (too much) reduction in military spending to have a surplus. Other than signing welfare reform, which I'll grant was an huge benefit to the economy and was also pushed by the Republicans, what else did Clinton do for the economy?

http://www.marketoracle.co.uk/images/2008/clipboarda2.jpg

"we're back to traders and bankers getting all the upside and tax payers getting the downside"

No. that happened during the time of what LICC calls the "disproven economic theories that have been debunked since the 1970s." The 1970's "debunked" nothing. Just wait.

And no, RS: before the repeal of Glass-Steagall, bankers and traders couldn't be said in the breath.

And no, not "tax and spend": just spend.

We don't need to wait steve, the policies you support have failed. See Japan, Greece, etc.

How do you pay back the massive debt incurred for your government spending? You either tax or inflate, either of which is a major negative for the economy.

Reduced government spending which allows for reduced taxation, along with smart regulation, will promote strong economic growth. Unfortunately the current administration believes in nothing but huge government in both size and control.

A 3-minute course in Keynesian Theory

OK, a few quick equations. Stick with me - there's a lot of insight for the effort. Let's start with the standard definition for GDP (ignore imports and exports for simplicity)

Output (Y) = Consumption (C) + Investment (I) + Government (G)

Move a few things around, and you'll notice that by definition, I = Y - C - G, which basically says that total real investment (factories, equipment, inventories, etc) can only be created by whatever output is not absorbed by consumers or government (i.e. savings). So real savings and real investment are always equal, even if the investment represents unwanted "inventory investment." This isn't a theory, it's an accounting identity.

Next, we introduce basic Keynesian theory in two lines:

C = cY : consumption is proportional to income

I = I_fixed : real investment is fixed

That gives you

Y = cY + I_fixed + G

so

Y = ( I_fixed + G ) / (1 - c)

Example: G = 100, I = 20, c = .75, so (1-c) = .25, and Y = (20 + 100) / .25 = 480. Every dollar of G or I conveniently has a "multiplier" effect of 1/.25 = 4.

Since Keynes assumes real investment I to be fixed during a recession, the best way for the Keynesian economy to produce more output is to increase government spending. It doesn't matter how. Go ahead and fill old bottles with banknotes and bury them at suitable depths. Worse, notice that if people try to reduce the proportion of income "c" they consume, that is, as they try to save more, (1-c) gets larger, and cruel Keynesian algebra says that output (Y) will fall. Again, the solution is to increase G.

Now, one might wonder why we should be so quick to assume that real investment is fixed. Keynes did it because he assumed that the only incentive to invest was a reduction in interest rates, and he assumed that interest rates were caught in a "liquidity trap" during recessions. Productivity, incentives, innovation, profit motives, and other factors weren't really on Keynes' radar. Once we assume that investment is fixed (which means that total saving is fixed), then every effort to save more becomes mathematically counterproductive because the economy contracts enough to prevent it. This is why saving is so hated by Keynesians. There is no purpose for it because Keynes assumed that purpose away.

One might also wonder why we don't consider the dynamics of output over time, which would also force us to ask how productive different sorts of spending might be. Surely, the allocation of resources is crucial, because every form of spending has a different effect on the cumulative amount of future output created. The true debate in economics is not between Keynesians and Monetarists, but between economists who care about the productivity of resource allocation and those who only pay lip service.

Crafting a Package

Once we begin to ask these additional questions, we immediately open up important policy options to that might reasonably be included in an (inevitable) stimulus package. While this may seem incomprehensible given the low political tolerance for deficits at the moment, we have yet to see a case where fiscal responsibility trumps perceived crisis. Fresh economic weakness is unlikely to be kind to the housing market, the credit market, or the employment market. The weak underpinnings in the private economy may not absorb new pressures well.

If individuals are attempting to increase saving, and Keynesians view this as undesirable, an obvious but underutilized response is to promote productive investment through tax incentives, R&D credits, and other means. Private sector investments are often well-beyond the planning stages, and may provide a quick road to immediate economic activity in response to incentives that move their timing forward. We should not overlook productive forms of government-funded non-profit research. Among those avenues, one might consider restoring funding to the National Institutes of Health and the National Science Foundation, both which have historically been successful in advancing innovation and producing major discoveries in public health and technology.

We might also consider investments that cannot be easily made privately due to coordination failure. Various forms of public infrastructure, particularly those that increase the efficiency of large numbers of individuals (roadways, telecommunications) have been shown to have a good payoff over time in terms of output, relative to the cost of those investments. In contrast, one might view "rural broadband" as somewhat questionable, precisely because of the relatively high cost per beneficiary. In a challenging downturn such as this one, where the duration of economic difficulty may be extended, some amount of infrastructure expense makes sense. In contrast, during most post-war recessions, these have been difficult to coordinate on a timely basis.

In any case, numerous moderate investment-like projects - including infrastructure, research, alternative energy projects, and so forth - are more likely to be effective than massive "pick the winner" approaches, not only because technology is usually too dynamic to pick a winner correctly, but also because the marginal returns from massive expenditure tend to diminish quickly. If the Keynesian problem is increased saving, the natural response should include incentives to initiate real, physical investment and research (not simply tax cuts on investment income). Moreover, projects having the capacity to spread their effects over a large number of beneficiaries should be heavily preferred to projects having a high cost per beneficiary. This should be obvious, but concentrated pork and bridges to nowhere are strikingly common.

Finally, in an economy likely to push 12% unemployment, a compassionate society ought to consider extended - if tapering - unemployment compensation as a necessary "counter-cyclical" element of fiscal policy, at least in my opinion.

In any event, we should be thinking not in terms of brute "stimulus" here, but rather should be thinking in a more nuanced way about incentives, productivity, and resource allocation. Government spending is not one monolithic "G" but is instead comprised of countless projects with very different productivities and long-term consequences. If we abandon all of that subtlety and simply call for government to spend, we can be certain that the spending will benefit those who are best connected to the policy makers doing the spending.

Avoiding a Reprise

Meanwhile, I continue to believe that both Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials - to precisely the worst stewards of capital in society - is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first.

By all appearances, Ben Bernanke has a four-second tape in his head that says "We let the banks fail during the Depression, and look what happened." Then the tape repeats. There is no subtlety that says, "yes, but we let the banks fail in the most disruptive and disorganized way possible, forcing them into piecemeal liquidation as Lehman had to do. Today, the FDIC is fully capable of preserving and transferring the operating entity while properly cutting away the failing bondholder and stockholder liabilities so that depositors and customers are not affected." This understanding would prove useful in the event we observe further credit strains.

Basic ethical principle dictates that policy makers should not burden ordinary Americans to pay the losses that well-informed bondholders voluntarily took when they lent money to failing institutions. From my perspective, it is urgent to recognize that Fannie Mae and Freddie Mac obligations are not legally obligations of the U.S. government, that its backing was always at best implicit, and that even the Treasury's distressingly generous 3-year promise to bail out Fannie and Freddie only takes those obligations through 2012. Longer-term GSE securities held by the Fed and by investors represent debt obligations of insolvent institutions, yet are still treated by investors as if they are default free. Congress should quickly clarify that FHA obligations are explicit government commitments and GSE debt is not. Traditionally, the Fed's open market operations have been almost exclusively using Treasuries. Any other securities were purchased on a repo basis only, which meant that the Fed would get its money back predictably, regardless of the quality of the security. Without these, the Fed can unconstitutionally engage in fiscal policy, and has recently done so by purchasing Fannie and Freddie debt outright. Congress should limit the Fed to purchasing sovereign debt of the U.S., with a limited role for sovereign debt of major, fiscally intact trading partners, or it should bless GSE debt explicitly so Americans understand that the U.S. dollar will ultimately become the Reichsmark.

A few additional notes. We are likely to observe a substantial increase in U.S. government debt in the next couple of years, not only because of stimulus spending and possible further bailouts, but also due to tax shortfalls and aid to states and municipalities. The key question to ask is the extent to which the increase in debt is matched by an increase in productive capital or urgently needed social benefit. Remember also that the crucial consideration is how the money is first spent - how productively the money is used. Once the funds are spent, there will be government liabilities as evidence of that spending, but it is important to recognize that those liabilities are simply IOUs.

Interestingly, some observers lament that corporations and some individuals are h olding their assets in "cash" rather than spending and investing those balances, apparently believing that this money is being "held back" from the economy. What is preposterous about this is that the "cash" that companies and individuals are observed to be holding is primarily in the form of government securities and base money created over the past couple of years, which somebody has to hold at every point in time until those liabilities are retired. This is not money that is waiting to be spent. It is a stack of IOUs representing resources that have already been squandered, and now somebody has to hold these pieces of paper until they are retired.

In short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security). What appears to be "sideline cash" is simply the evidence of past spending. Again, the crucial consideration is how the government spent the funds in the first place. Rapidly mounting evidence suggests that the answer is "not very well."

http://www.hussmanfunds.com/wmc/wmc100706.htm

http://www.ft.com/cms/s/0/270e1a6c-9334-11df-96d5-00144feab49a.html

It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians. They cannot and never will forget the policy errors made in the US in the 1930s. But they appear to have learned nothing from all that has happened in economic theory since the publication of their bible, John Maynard Keynes’s The General Theory of Employment, Interest and Money, in 1936.

In 1981 the US economist Thomas Sargent wrote a seminal paper on “The Ends of Four Big Inflations”. It was in many ways the epitaph for the Keynesian era. Western governments (not least the British) had discovered the hard way that deficits could not save them. With double-digit inflation and rising unemployment, drastic remedies were called for. Looking back to central Europe in the 1920s – another era of war-induced debt explosions – Professor Sargent demonstrated that only a quite decisive policy “regime-change” would bring stabilisation, because only that would suffice to alter inflationary expectations.

Those economists, like New York Times columnist Paul Krugman, who liken confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key.

The ones following Krugman and other Keynesians are those making power grabs for huge government.

Well the advantage in raising taxes and spending government money is the power that comes with deciding who gets the money and how tax deductions are given out.

Sure. The motivations have nothing to do with saving jobs, advancing new industries, preventing the collapse of the banking system or preventing great depression 2.0.

Stop looking through the lens of the fictional individual solely interested in profit-maximization and you might begin to understand other people's motivations a bit better. Doesn't mean they are right but if you stop demonizing and start thinking you might learn something.

In any event we will get to see soon enough whether austerity is the prescription for what ails us because that is where we are headed. Goldman for one is not optimistic:

"By our estimates, (federal) fiscal policy has contributed +2½ percentage points (annualized) to real GDP growth from early 2009 to mid-2010. From mid-2010 to mid-2011, we estimate an impact of about -¼ percentage point—i.e. 2¾ percentage points less than before—even under our baseline assumptions of extended unemployment benefits, more aid to state governments, and at least a temporary extension of the bulk of the 2001-2003 tax cuts. We need a lot of improvement in private sector activity to offset this swing, and at the moment it unfortunately doesn’t look like we’re getting it." (via Krugman)