Flying Pink Unicorns

There is now much talk in Washington of a stimulus package to help the economy stave off recession. Fed Chairman Bernanke supports it, Clinton and Obama support it, Bush supports it, and apparently the democratic congressional leaders do as well. This is (a) a fabulously good idea; (b) reasonably timely; and (c) shocking. Why shocking? The idea that Bush would agree on a bill that is obviously good for America? Shocking.

Anyway, why do we need a stimulus package? The economy is either in recession, or very very close to one. I suspect its in one, and while I'm no economist, I'm not wholly ignorant either. You just don't have housing tank and consumer spending be weak without the economy doing poorly. It doesn't happen. In any event, whether growth in a given quarter or two is .2% or negative .2% doesn't matter a whole lot. Either growth number results in an increase in unemployment, a decrease in earnings power, and other things that FEEL just like a recession.

Let's pick a number out of thin air and assume that absent a stimulus package the economy will shrink by 1% in 2008. That's a very realistic number I think. That would be a true recession, and unemployment would rocket upward. By at least a full percentage point, which means more than 1.4 million more people out of work than are out of work now. A huge deal to a lot of people, and a medium-sized deal to the country as a whole.

The US gdp is now approximately 13 TRILLION dollars.

https://www.cia.gov/library/publications/the-world-factbook/print/us.html

There is talk now of a package in Congress to cut taxes and raise spending in order to avert a recession, or at least mitigate its effects, as I said above. This is basic Keynsian economics. John Maynard Keynes, http://en.wikipedia.org/wiki/Keynes, was a famous british economist who believed, among other things, that when there was a sudden drop in demand (people suddenly buy fewer goods and services), the government should step in and create demand. In other words, either buy goods and services itself, or cut taxes so people would. These sorts of policies were the intellectual underpinning for parts of the New Deal, including in particular the Works Progress Administration. http://en.wikipedia.org/wiki/Works_Progress_Administration

However, in order for this sort of a Keynsian boost in spending or cut of taxes to make a big difference, it would have to be huge. Again, assuming that 2008 is a -1% "growth" year, in order to turn that into a +1 % growth year year (still very slow, but avoiding a recession, and making a real difference), you would need a 2% swing in the economy. Thus you would arguably need a stimulus of 2% of $13 trillion, or $260 billion, which would be a HUGE package. Nothing anywhere near that big is being considered. Now I should add that a package of say $100 billion would presumably add more than $100 billion to the economy. If a bridge is built in 2008 as part of a stimulus package that would not have been built otherwise, a few construction jobs would likely be created (or not destroyed). Those employees go out to eat at the local diner, keeping a few more waitresses employed, perhaps. They do more work on their homes, thus buying more at home depot, etc. One bridge will not have significant knock on effects, but $20 billion worth of construction would. The same is true for a tax cut. If taxes are cut, people have more money to spend. They will save some of it (not really helping the economy in the short run very much) and will spend some of it. This is why increasing spending is a MUCH more reliable means of Keynsian stimulus than tax cuts.

EDIT INSERTED HERE-- Larry Summers, the brilliant former Treasury Secretary under Clinton, recently wrote an opinion piece

http://www.ft.com/cms/s/0/3b3bd570-bc76-11dc-bcf9-0000779fd2ac.html?nclick_check=1

advocating a $50-$75 billion stimulus package over two to three quarters, which he said would have an impact of about 1% of GDP over a year. Given that my goal was an impact of 2% (from -1% to +1%), his numbers track mine quite nicely. He proposes a much more cautious, smaller package. I imagine he is taking into account previous and future interest rate cuts, and doesn't want to overdo things. I would encourage you to take his views over mine here, not because he's an "expert," but because he really is an expert.

Back to original post--

Anyway, if a package of $100 billion were to be passed immediately, it would probably have an effect (I am guessing a bit) in 2008 in the area of $150 billion. This WOULD be enough to make a meaningful difference, and could indeed help us avert recession (together with the rate cuts the fed has already made and will continue to make). I would STRONGLY support such a package, even if, as is likely inevitable, some of the tax cuts were wasteful giveaways to the rich. The benefits of increased spending, QUICKLY, to avert recession or mitigate its effects are hugely beneficial, and I would pay a reasonably steep price to get such a package passed fast.

A smaller package, say $50 billion, would help, but not all that much, as its just not that significant in a $13 trillion economy.

Finally, any such package would add to our already serious deficit problems. That does not concern me overmuch because it would by definition be a one-time jolt to the deficit, not to be repeated until the next demand shortfall, which hopefully is not right around the corner. Of course, prudent management requires trimming some spending after the economy rebounds, in order to keep the deficit under control. Good luck on that one. And yes, there could be some minor increase in inflation as a result of a package. Anyone who is worried about inflation right about now needs their head examined in my view.