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Liberal Economists Skeptical of Obama Stimulus Package
Despite the fact that President-elect Obama described his stimulus package on Thursday with only broad generalities, the proposal is already coming under criticism from economists on the left. Anxiety that the package is too small is combined with a fear that the rumored $300 billion in tax cuts for individuals and corporations will do little to jump-start the economy. They argue that Obama, in seeking a solution that Republicans on the Hill will support, has sacrificed key components that would make the package work most effectively.
Paul Krugman, Nobel Laureate and in-house economic lefty for the New York Times, wrote on his blog this week:
This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan's perceived failure, if it's spun that way, will be placed on Democrats.
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."
Dean Baker, co-director of the Center for Economic and Policy Research, appeared on Rachel Maddow's MSNBC show on Tuesday and said that investments in America's infrastructure, which will create jobs, are preferable to tax cuts. The numbers, Baker said, are on his side.
Well, this isn't a matter of ideology. There's a lot of evidence on this. People save tax cuts, particularly given the current environment. People just lost all of their savings in the stock market and their house. They have to rebuild their savings.
If we send people a check, they are likely to save much of it. That's good for them but it's bad for the economy. We need spending right now, and we now hope the government spends it in weatherizing homes, redoing infrastructure, whatever it might be, that gives a direct boost to the economy.
John Judis, writing in the New Republic, expanded on infrastructure investment's various benefits:
Most economists agree that what finally pulled the U.S. out of the Great Depression was military spending for World War II.... In 1936, unemployment was still at 16.9 percent; by 1942, after two years of war spending, it was 4.7 percent, strongly indicating that it was war spending that did it. I am not suggesting that the United States start a world war in order to solve the world's economic problem. But I am suggesting a strategy that could be called the fiscal equivalent of war.
It would consist not merely of updating or repairing the nation's infrastructure, but in undertaking massive new investments that would expand the scope of American industry, and address other urgent problems in the process: global warming, over-reliance on petroleum, and the need to revive America's domestic manufacturing capabilities—not just to provide jobs, but also to provide tradeable goods that can reduce the country's current account deficit.
James Galbraith, an economist at the Lyndon B. Johnson School of Public Affairs, who recently wrote for this magazine that Obama needs to think long-term for his stimulus package to be truly effective, recently urged massive action, drawing inspiration from Ronald Reagan:
Reagan got it right: he put everything into the first package in 1981, passed a tax cut that was grossly excessive, and then let the Congress pass tax increases taking it back in 1982 and 1984. The result, on net, was a cyclical success. A strategy that calibrates the package to a forecast which proves too optimistic will
lead to failure.
For this reason, I have favored a package that is at least twice, and even three times, the two-percent-of-GDP we are hearing about now. There is no harm in doing too much; you can take it back if the economy recovers. There is every potential for harm in doing too little.
Greg Anrig of the Century Foundation puts it all together, arguing that Obama's drive for bipartisan support is a misuse of presidential leadership:
The big corporate tax break proposals they have floated are misguided from a policy standpoint and concede too much ground politically. And even hinting at the possibility of cutting Social Security benefits, when we are clearly in a much deeper economic crisis than most voters understood even in November, is a further sign that Obama is focusing on trying to win broad support for a package that will be less likely to be effective than sufficient support for a package that will be more likely to be effective.
Now that he's actually going to be president, getting policies right and
then winning support for those strategies should be the order of operations rather than the other way around. The foremost priority has to be assembling ideas that will actually work.
Obama's first initiative as president will likely be one of the most important of his four or eight years in office, and is one that he must undertake with no presidential experience and little time to build working relationships with his economic advisers or Members of Congress. How he approaches this raises a critical issue: does his instinct for bipartisanship conflict not just with his progressive principles, but with the best interests of the country?
Photo by flickr user target="new"Obama-Biden Transition Project used under a Creative Commons license.
It's not the numbers, it's the psychology. A trillion dollar stimulus, though more effective than a $900 billion stimulus, will never pass. It's for the same reason retailers swear by pricing items at $8.99 instead of $9. That high digit makes a big difference. It means the stimulus has to be low enough that it can't reasonably be called a trillion dollar stimulus. I know the dittoheads will call it that whatever, but reasonable people can't. The best strategy is to pass a smaller stimulus now, then have another less than a trillion stimulus later, and call it something else. Call it the Infrastructure Reinvestment Act, or the Safety Net Strengthening Act. The New Deal wasn't all one chunk, so why should the stimulus be all one package? Make this first package no more than $900 billion, and make the next what ever more is needed, though it probaly needs to be a small amount.
Hummm...exactly how long can you guys print money before you need a suitcase full to buy a taco?
Excuse me, but isn't the US already involved in two wars during which there has been massive spending?
And what about recovering some of that bailout money, which was a ridiculous expenditure given the past massive profits of the banks?
You may have noticed that there is something of a trend for people to cut their consumption, given the state of global warming, and that "stimulating" spending may not be the way to go.
Surely we could recover jobs if we returned health to smaller community businesses rather than keeping the giants with no consciences afloat; you know, the ones who hold governments to ransom with their threats to cut jobs unless they get huge subsidies.
I say give that money to the poor, hungry, and sick. They need to spend it, and will.
I think if they want to help the economy, then they can start looking at some of the perennial monthly hurdles people face, rent, fuel, insurance, and so forth. Insurance companies rake it in like a mad dog, no one says, 'peep'. Further, some of the things that kept the economy 'high' like turning a blind eye to blatant usury in the area of lending and credit, well, we can have the 80 Years' Depression instead of that, thanks very much, in short, to help the economy, they need to be absolute DEATH on any kind of white-collar crime, and not take any wooden nickels come budget time. Also, bring the military home, not just from Iraq, but from a lot of different places where they've been for decades. Hundreds of billions a year expended on 'defense' when there's no congressionally declared wars is, well, fraud. 10.5 trillion is a heck of a burden for the economy, deficit spending just drives the knife a little deeper, I think. That's my view.
i'd like to express my thoughts on the issue of the size of obama's bailout package. i've been following this closely via brad delong, tpm, krugman and nate silver and mulling over what obama's strategy appears to be.
first off, nearly everyone i tend to respect agrees that the size of the bailout package is too small and that it is disproportionately tied to tax cuts. i, too, tend to think that's the case based on the reasoning behind it.
does obama know this?
i think he does.
then it's deliberate?
i think it is.
why would his opening proposal be too small?
i tend to believe it is driven largely by his desire to forge a working relationship with congress. by offering a "modest" proposal, when measured by the number obama floated of 1 trillion, he invites congress to fill in the blanks. once a congressman has filled in his blank with one of those good ideas obama was talking about, why then he becomes committed to seeing the bill pass and taking some credit.
the idea is to develop a working partnership wherein congress can contribute as many good ideas as it likes and take all of the credit so long as they continue to move in the direction obama wants. in short, obama is really trying to re-integrate congress back into its proper constitutional role, but, in a manner conducive to getting his legislation passed.
there are several pieces of the puzzle that seem to fit when viewed through this lens. obama's retention of a large number of senate staffers and former clinton insiders should increase his ability to get things through congress, think lbj. in these cases, i believe that they have been taken aboard despite ideological differences, for their technical expertise in the arcane area of legislation. here they will be putting their skills to use from the top down as obama likes to say.
obama's television appearances practically beg for input from congress. give me good ideas he says.
the framework offered by obama is thought to be a step in the right direction everyone agrees and congress has been explicitly invited to the table.
it's also consistent with that old straw about FDR listening to a plan he agreed with and then challenged the proponent to "make me do it."
going about this way also includes the additional benefits of keeping his campaign promise to lower taxes and includes a tax cut in the bill for the republicans.
but what if you're wrong?
you mean, what if congress can't get it's act together and function as a legislative body?
yes.
well, then, obama might have to resort to the stick of the public arena and use his popularity based on the reasonableness of his requests to shame congress into towing the line.
does anybody remember rick warren?
Obama's stimulus plan should also envision changing regulations & economic policies to have short-term & long-term effects on unemployment, middle-class and the market stability. Strengthening the middle lass and creating more job opportunities should be the primary objective of the package, rather than handing the blank check to the Wall Street and failed financial institutions.
Interesting.
And A.P. reports that the Congressional Budget Office predicts that little of the stimulus package will have any impact for years.
Much in Obama Stimulus Bill Won't Hit Economy Soon
By ANDREW TAYLOR
WASHINGTON (AP) It will take years before an infrastructure spending program proposed by President-elect Barack Obama will boost the economy, according to congressional economists.
The findings, released to lawmakers Sunday, call into question the effectiveness of congressional Democrats' efforts to pump up the economy through old-fashioned public works projects like roads, bridges and repairs of public housing.
Less than half of the $30 billion in highway construction funds detailed by House Democrats would be released into the economy over the next four years, concludes the analysis by the Congressional Budget Office. Less than $4 billion in highway construction money would reach the economy by September 2010.
The economy has been in recession for more than a year, but many economists believe a recovery may begin by the end of 2009. That would mean that most of the infrastructure money wouldn't hit the economy until it's already on the mend.
The CBO analysis doesn't cover tax cuts or efforts by Democrats to provide relief to cash-strapped state governments to help with their Medicaid bills. But it illustrates just how difficult it can be to use public investment to rush money into the economy. It usually takes bids and contracts to announce such developments, which invariably take time.
Overall, only $26 billion out of $274 billion in infrastructure spending would be delivered into the economy by the Sept. 30 end of the budget year, just 7 percent. Just one in seven dollars of a huge $18.5 billion investment in energy efficiency and renewable energy programs would be spent within a year and a half.
And other pieces, such as efforts to bring broadband Internet service to rural and underserved areas won't get started in earnest for years, while just one-fourth of clean drinking water projects can be completed by October of next year.
Still, other elements of Obama's $825 billion economic recovery plan, such as $275 billion worth of tax cuts to 95 percent of filers and a huge infusion of help for state governments, will be distributed into the economy more quickly. But Republicans are poised to attack the bill for spending too much.
The Obama transition has stressed that a combination of old and new federal investments will help the economy recover, as well as tax cuts and other steps. Obama economic advisers and their allies on Capitol Hill have sought to identify federal programs that can deliver dollars fast, like food stamps and a boost in unemployment benefits.
At the same time, defenders of brick-and-mortar projects such as federal building and school construction are poised to reap benefits from the big recovery package.
On the Net:
Congressional Budget Office: www.cbo.gov/
...and to think.., just a few months ago Democrats took great delight in, rightfully IMHO, criticizing Bush for being the biggest deficit spender in history. I think there's little doubt his deficit spending record is about to be blown away, and now, somehow, it's all A-OK.
Does anyone on this site care to give 2 seconds of consideration to how this proposal is going to be paid for, as-is? Let alone the much bigger spending proposals most of the posters here would seem to prefer?
Do we really think trillion dollar annual deficits can go by, and never be paid for by anyone, Ever??
Or do we think we can simply take every dime the top 5% have, and that'll cover it? Because it won't. Particularly given that we're already in debt for well over what the top 5% are worth.
I hope there is an amendment in the stimulus that the jobs created are for Americans and Legal Residents. If there is no amendment most of the jobs will just go to those workers with temporary working visas (H1b and L1) and Americans are still out of work. It would be a shame if citizens of India and China benefit more than Americans that funded the stimulus.
"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."
- John Maynard Keynes - 1942
Keynes (1883-1946) was an economist, and father of the Fiscal Interventionist, or "Government Spending as Fix for the Economy" school-of-thought.
Alex asks: Hummm...exactly how long can you guys print money before you need a suitcase full to buy a taco?
Well, we could study a tiny bit of economics and some 20th Century cases of hyper-inflation to get a clue how that works..., but I've got a feeling we're about to repeat history, rather than learn from it.
Wow...this country is so screwed! Read up on Japan's attempts to stimulate their economy by printing money like mad. Then Google on similar attempts in the US and Germany. It just doesn't work.
The pathetic thing is that so many people buy the crap that government feeds us! Are you so blind that you believe these idiots in Washington give two hoots for the little people?
We're screwed and this ridiculous "stimulus bill" is not going to stimulate anything but inflation.
Obama administration needs to realize that in several months economic crisis and soaring deficit will be solely his administration's and his party's problem, so for any previous or future mistakes he'll have to take the blame. Two-three months from now nobody will remember Bush's policies and the Democrats have to be more careful on the long-term effects of massive spending. If the new stimulus fails, just like the past one, then this will balloon into Obama's first political problem. We have to also realize, that on the long-term we won't be able to afford more bailouts and there has to be alternative solutions, since we are passing the trillion Dollar deficit boundary. Printing more money can be utilized as short-term tool, but on the long run it will devastate economy. Something needs to be done immediately, but more regulation & spending does not seem to be a logical answer, we need another alternative solution. Maybe we should take pure libertarian approach and let the free market decide who wins or loses? This will cause social unrest and chaos, so as a society we can not afford this option either. Maybe we've killed the goose that laid eggs for us?
So much for bipartisanship.
So much for bipartisanship. Seems everyone wants to play the blame game. Can't we all just get along? (Somebody please call Rodney King!)
It is a shame that a lot of
It is a shame that a lot of the wasteful spending in the stimulus package went completely unnoticed. Things like hundreds of millions of dollars in spending for new government cars, millions for re-soding the National Mall, billions for alternative energy and billions for rail systems were swept under the rug. The Obama administration and the media silenced all discussion and dissent on these topics by claiming that the stimulus was too important to let die over this additional spending. Not only were these things not perceived domestically, they were also not perceived internationally. It makes sense that they didn't perceive it because if our media didn't care enough to report on it, why would theirs?
How about now?
How about now? There are some "glimmers of hope" in the economy. The stock market has come back to life, well sort of.