Stimulating
We’re going to need some kind of fiscal stimulus — ideally a coordinated, global fiscal stimulus, to get us out of the hole into which the economy is rapidly sinking. Serious discussion of this will probably have to wait until after the election, but I hope people will keep in mind these Moody’s bang for the buck calculations:
Even though the tax cuts here don’t perform so well, many of them perform well enough and for political purposes it’ll probably be necessary to throw some tax side stuff on here. Payroll tax holiday seems like the best idea, since it not only gets a lot of bang for the buck but should have beneficial labor market effects. One big worry here is that there’ll be too much timidity. I suspect that we’re going to need to go very big. The new president and the new congress are going to need to brush off the forces of neo-Hooverism in the media and in the Blue Dog caucus and take some bold strokes.
27 Responses to “Stimulating”
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October 11th, 2008 at 9:29 am
I know Moody’s is a big company and Moody’s Economy might be separate from other parts of the company, but when we get information from them, we should never forget that they are one of the big culprits in the whole mess in the first place. Their absurd ratings of subprime-riddled CDOs were one of the reasons financial institutions felt comfortable buying what turned out to be toxic waste (that the U.S. may soon own $700B of). Moody’s was either dishonest or incompetent or some special combination of the two.
That makes me reluctant to listen to any advice they may have ever again.
October 11th, 2008 at 9:32 am
How about a massive new infrastrucure package coupled with earmark reform, or as a replacement for infrastructure spending allocations?
Fiber optic to all houses in 5 years. 4G wireless speeds everywhere would be a start. btw, this is what we should have done with surplus that GWB started with.
October 11th, 2008 at 9:49 am
If real boldness ( i.e. REALLY big checks with lots of zeroes) is truly called for, I hope the new congress and President Obama get agressive on UHC. Healthcare security is only going to help Americans rebuild their economy. I mean, why not take advantage of this crisis to achieve some substantive LONG TERM reforms?
October 11th, 2008 at 10:44 am
Can anyone explain why an increase in food stamps has such a large impact? Only a small minority of people in this country get foodstamps. And food, even with the current runup in price, remains a small part of the budget. I’m not saying we should not do this but I am skeptical that something which only benefits a slice of the population would have such a large effect.
October 11th, 2008 at 11:35 am
Because people on food stamps spend all of it, save nothing.
October 11th, 2008 at 12:07 pm
I think there is something left out here because of our unique situation: home devaluation. The tax base for local governments and school districts will take a huge hit as anyone who is paying attention will contest their property tax assessments based upon last year’s numbers.
The US govt will need to direct more assistance to state and local government simply to keep the country running.
But would a payroll tax holiday affect the SS trust pass-through? Do we drop FUTA taxes and deplete the unemployment fund?
One thing which might help is to make sure that you don’t need to be poor and without resources to qualify for some basic assistance.
October 11th, 2008 at 12:10 pm
mickslam has the right answer, but the number given is the return on the dollar spent. Your point is why Matt didn’t suggest massive increases in food stamps – the multiplier effect is great but there aren’t that many dollars we can use for food stamps because, as you point out, there aren’t that many people who can get them.
The one point mickslam didn’t mention is that people who get food stamps live in poor neighborhoods and so not only do they spend 100% of them, the businesses that take them are often marginal and most of the money those businesses spend has pretty rapid turnover as well.
October 11th, 2008 at 12:54 pm
Because people on food stamps spend all of it, save nothing.
Right, and what we obviously need now is more consumption and less savings. Savings could not possibly help the economy. Spending every cent we have is the way to stimulus.
Do you want to try the same approach toward the environment? You know, conservation hurts the environment, and extractinga s much oil, coal, and minerals as we possilby can will stimulate the environment and make it better.
October 11th, 2008 at 1:15 pm
What no one seems to be asking is where the money will come from.
The whole idea of Keynesian fiscal stimulus, flawed as it may be, is at least baased on the concept that during the boom part of the cycle government has saved up money.
It is no longer an issue of fiscal austerity and a balanced budget with recession vs. economic stimulus and large deficits with a recovery.
The choice is between fiscal austerity and large deficits occurring anyway, with a recession vs. attempted stimulus and super-large deficits leading to hyperinflation, currecny collapse, and depression.
What we need now is to accept the recession, save as much as we can, let the bad investments liquidate, and then re-capitalize, as the Austrian theory says.
If you want the government to do something to promote this, well, the best thing we can do right now is to cut spending. I think that there are a few ratholes in the Middle East where we can stop throwing money.
October 11th, 2008 at 1:28 pm
I’m not saying we should not do this but I am skeptical that something which only benefits a slice of the population would have such a large effect.
This may be apropos of nothing, but I don’t see why, in addition to increasing the value of food stamps received by the program’s recipients, you couldn’t also loosen the eligibility requirements to enable more Americans to receive them.
Right, and what we obviously need now is more consumption and less savings…
Short term, that’s true. One way to define the word “recession” is: a period of time when the savings rate increases. A good bit of this is inevitable, it seems to me, but, especially in the short term, you don’t want to savings rate rebounding too sharply or strongly.
Do you want to try the same approach toward the environment?
Um, saving the financial system from obliteration and saving the environment aren’t the same thing. In fact, I’d bet my life that a world that emerges poorer from this current mess is a world less well-equipped to deal with climate change and other environmental challenges.
The choice is between fiscal austerity and large deficits occurring anyway, with a recession vs. attempted stimulus and super-large deficits leading to hyperinflation, currecny collapse, and depression.
The choice is between recession (perhaps but not necessarily a fairly severe one) and depression. Hoover was very concerned with deficits and inflation. To the detriment of millions of Americans.
October 11th, 2008 at 1:29 pm
Short term, that’s true.
I should have written long term. I think few would dispute the notion that Americans need to save more money. But again, right now we need all the stimulus we can get our hands on.
October 11th, 2008 at 5:06 pm
Glaivester, let the market work itself out is what made the world markets lose about half of their value. I’m so glad your side is losing this election.
An increase in savings needs to be snuck in slowly.
What’s more, absolutely nobody is in the black here. There’s nothing to save, because everybody owes more than they’re worth. That’s the problem.
October 11th, 2008 at 6:33 pm
The recent rebate checks have been in large part a PR exercise for the Bush administration. It would be far more efficient to provide that rebate through either a payroll tax holiday or through an adjustment to the withholding rate.
October 11th, 2008 at 8:08 pm
Big short-term stimulus measures are important and will help. The plan for long-term economic stimulus which can help the U.S. economy recovery should start with health care reform. If you can extend coverage to everyone while reducing overall health care spending by 20% (pick from several thoroughly outlined proposals, including the Jacob Hacker-related ones), then that moves $500 billion from non-disposable to disposable income (and spreads the benefit very widely over the whole population to boot). This is the equivalent of having the holiday shopping season occur twice each year instead of just once.
October 12th, 2008 at 5:04 am
Glaivester, let the market work itself out is what made the world markets lose about half of their value. I’m so glad your side is losing this election.
Don’t insult me by associating me with McCain. (Unless by “my side losing” you were referring to the fact that I am supporting a “not a snowball’s chance in Hell” third party candidate (Chuck Baldwin)).
And no, what made the world markets supposedly lose about half of their value was the fact that the value was inflated by fractional reserve banking.
Hoover was very concerned with deficits and inflation. To the detriment of millions of Americans.
Yes, we’d have been much better off had we followed Hungary’s example.
The point is, we are going to have a large deficit even without Keynesian stimulus. I don’t see where the money to finance an even larger deficit s going to come from, other than from printing it and devaluing the currency.
What’s more, absolutely nobody is in the black here. There’s nothing to save, because everybody owes more than they’re worth. That’s the problem.
Retiring debt is essentially the same as savings.
October 12th, 2008 at 5:09 am
In fact, I’d bet my life that a world that emerges poorer from this current mess is a world less well-equipped to deal with climate change and other environmental challenges.
Uh – I don’t see what that has to do with my point.
My point was that the root cause of any economic malaise is a lack of production, not a lack of consumption. Production requires savings for investment, which first requires the retirement or repudiation of debts (the former is preferable than the latter, but if a business is goingto fail it is better to repudiate its debts through bankruptcy than to throw good money after bad trying to kep it afloat).
To argue that we need to stimulate consumption to get the economy going (essentially because extra consumption increases the incentives to produce) makes as much sense as saying that we improve the environment by polluting more, because it gives us more incentive to find ways to clean the pollution.
October 13th, 2008 at 6:47 am
Re: there aren’t that many dollars we can use for food stamps because, as you point out, there aren’t that many people who can get them.
And there’s only so much food you can buy. I’d rather see stimulus money that is completely fungible so people can buy whatever they need/want. Extended unemployment, for example. Though I think something broad-based is worthwhile too.
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