Sunday, February 08, 2009
In my December 5, 2008 post, I predicted the recession will end in June. I was wrong. It won't end quite that quickly. I didn't realize that the banks were as horribly terribly badly off as they are. Don't get me wrong, I obviously knew that big banks were in huge trouble. I just didn't realize that it would be this bad.
Later this week there will be an anticlimactic announcement on how the Obama Treasury Department will spend the $350 billion remaining from the big Congressionally passed $700 billion bailout for the financial industry. I say anticlimactic because $350 billion is fairly small in comparison to the amount of money which will in the end likely be necessary to pump into the banks and other financial institutions going forward, taking no notice of the huge amount of money which has already been pumped in.
So with the banks still in terrible shape, and likely months away from being cleaned up, I simply have no idea when the recession will end. I'll let you know when I know.
Tuesday, February 03, 2009
The Stimulus package: Flawed but well worth doing
As it passed the House, its badly flawed. Still worth doing if push came to shove, but it could be seriously improved. The Senate is in the process of improving it, fortunately.
As you all likely know, the House recently approved the $820 billion + stimulus package. Sadly, it did so without a single Republican vote. The Senate vote is expected to be somewhat more bipartisan, but clearly, this is a democratic affair.
The house vote was 244-188. All but 11 democrats voted for it.
Here are some of the highlights of the package as passed by the house:
$145 billion goes to Obama's signature "Making Work Pay" tax cut, which he campaigned on. Individuals receive up to $500 and families up to $1,000 through a cut in payroll taxes, by reducing social security withholding. This will be around $15/week for most American workers.
This sort of tax cut is not very stimulative, to say the least. Most economists say that people will spend around 30-40% of it, and save the rest. Now savings is generally a good and wonderful thing, but not in the very short term. Right now consumer spending is hugely depressed, and we need to do everything imaginable, and much not imaginable to increase it over the next 2 years. And a tax cut which will be saved is not very stimulative at all. The lower down the economic ladder a tax cut is, the more of it will be spent.
Unemployment checks will have an extra $25/week in them, and people will be eligible for unemployment for a longer period of time. This sort of spending is highly stimulative. Most people on unemployment are spending 100% of their checks, and will quickly spend the additional money.
$37 billion for high tech items, like expanding broadband access and converting medical records to electronic form. This spending is in fact somewhat stimulative, in that people will have to be hired and companies paid money to do the work.
$40 billion to allow people on unemployment to qualify for Medicaid. This entitlement is regardless of income and assets. This spending is less stimulative than other spending. It may improve people's health, and I support the idea in general, but let's not pretend its the kind of spending that multiplies itself, like building a bridge. If you build a bridge, you have to hire construction workers, who buy more boots and tvs and what have you. And the company, very possibly struggling, will make more profits/less losses, which gives the owners of the company more money. Cement has to be sold. Stores near the construction site make more.
$150 billion in additional spending on Universities, schools and child care centers. Not the most stimulative spending I can envision!! May be a good idea, may not, but the GOP is right that the primary purpose of this spending is not short term economic stimulus.
$87 billion to states to increase the federal contribution for Medicaid. This is a reasonably good idea, because it will save states from crippling layoffs, which will make the downturn worse. On the other hand, it rewards the states for highly imprudent budgeting. Given that all states (except one, I believe it is Vermont) have state constitutional provisions requiring a balanced budget, the states have been wildly imprudent in their budgeting process and rainy day funds. I hate the fact that there will be Republican governors who can say, "see, I balanced the state budget without raising taxes, and I'll do the same thing in Washington" when it will have been federal money that allowed the balanced budgets. The country desperately needs to be taught the lesson that there is no such thing as a free lunch. To balance a budget you must raise taxes, cut spending, or some combination of the two. Magic, will and GOP principles will not do it.
$79 billion for a state fiscal stabilization fund, disbursing half the money in late 2009, and half in late 2010. Most of that money would apparently be spent next year.
$30 billion in highway construction funds, and "tens of billions more" for other transportation projects, water projects, park renovation, military construction, local housing and more. This is the spending I most favor, as this is the most stimulative kind of spending, with what economists call the biggest multiplier effect. And, as an added big bonus, America's infrastructure is woefully inadequate, and surely most of this infrastructure really needs to be built anyway.
$63 billion on additional money for food stamps and on increased and extended unemployment benefits.
The initial proposal by Obama had godawful business tax cuts, designed not to stimulate the economy a jot, but to win GOP support. Fortunately those seem to have gone by the wayside. Sad to say, but in order to win GOP support these days, you need badly designed tax cuts which don't much stimulate the economy, and aren't good for the Republic. Needless to say, the GOP is out to lunch.
Speaking for the Republican party, Jim Demint, Senator from South Carolina said the following on a Sunday morning talk show:
1) We all support the need to do something. But "the way to move our economy forward and to protect jobs is to infuse more money so that consumers have more to spend and businesses have more to invest. . . ." Two ways to do this: (a) Government spending through 'political manipulation.' The other way is tax cuts. "That is the American way."
So government spending is un-American. Typical GOP horsecrap.
The Senator continued, "This plan is a spending plan, not a stimulus plan . . . its wasteful and a lot of the spending will be permanent." We have to decide if we want to be a "free market economy or government controlled economy.
"This is a government managed economy which doesn't work."
Um, Jim, it was the REGULATION which didn't work. If you want to blame (GOP) government, fine. But to imply that too heavy a regulatory burden is what has us in the state we are in is truly rich.
HEY JIM: The point is that right now people are terrified of losing their job, health care, etc. They are (wisely) saving rather than spending. They saved the great majority of the last tax cut, in 2008. Economists believe they will save most of any 2009 tax cut. Spending is much more effective in stimulating a moribund economy. Much more. The Good Senator's statement is a simple regurgitation of ideology, rather than one involving a shred of thought.
Barney Frank, key Congressman from Massachusetts, Chairman of the House Financial Services Committee gave off the democratic talking points. He also, as is his wont, went far beyond these talking points, explaining in some detail why he was saying what he was saying. He may not be an intellectual GIANT, but he's a smart serious guy that clearly wants the right thing for his district and the country.
Anyway, this isn't the very best stimulus package I could imagine. Not by a long long shot. Too much of its spending is too slow in coming, and there isn't anywhere near enough spending. Still, it looks like the Senate will add spending, including especially infrastructure spending. Roads, bridges, etc. Incredibly, some GOP Senators have called for increased tax cuts on the lowest paid and middle class workers, which tax cuts would in many cases be spent. I'm as surprised as you are.
In summary, pay attention to to what the Senate does. The final bill will probably look a lot more like what passes the Senate than what passed the House.
The House went a little hog wild throwing spending in that wasn't real stimulative. Understandable, but not ideal.