1 Boring Old Man

Liberals Push Back on Weak Stimulus Bill
By: Stirling Newberry

 Firedoglake

There’s one big problem with Obama’s stimulus bill: the numbers don’t work. Because of the excessive reliance on tax cutting up front, the bill forgoes over 200 billion dollars of GDP, and approximately 40 billion dollars of additional lost tax revenue. This means he’s accepting an estimated additional 3/4 of a point of unemployment for no other reason that he likes tax cutting. It’s bad policy by a President who obviously hasn’t been reading Martin Wolf:

^{Welcome to 2009. This is a year in which the fate of the world economy will be determined, maybe for generations. Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade. They are wrong. Our choice is only over what will replace it. It is between a better balanced world economy and disintegration. That choice cannot be postponed. It must be made this year.}

The problem is that a banking crisis produces large falls in demand, output and employment. Worse still, it has an exponential curve of effect: half of all countries facing such a crisis have real debt increase by somewhat under 150%, but many run away and see an almost endless drain. The lesson is to reach ignition of recovery quickly, or suffer a period of lurches and reverses. Wolf warns exactly what happens next:

And to get to this point the fiscal boost must be huge. A discretionary boost of $760bn (€570bn, £520bn) or 5.3 per cent of GDP is not enough. The authors argue that “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years”.
Now think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened – in the 1930s – the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past – above all, nationalism – will return. Achievements of decades may collapse almost overnight.

In short, some form of protectionism comes into vogue. We had protectionism in the last decade: houses, defense, and health care are all industries that, because of their location, are protected from competition. China can do many things, but it can’t build a house in the suburbs of Dallas, and people don’t fly to Beijing to get their tonsils checked. This protectionism was a contributing factor to the "global imbalance" of supply and demand. Americans have been spending on consumption, and on creating financial instruments. However neither are supply. China can produce supply for consumption, but it means a burden on resource supply. While oil has collapsed, the volatility of oil markets should be a warning: all it takes is a fight in Gaza to add 10% to the cost of gasoline in the space of two weeks, and long term, both supply and sink of carbon based energy sources are constrained.

What Obama seems to have missed politically, dazzled by 80% preproval numbers – that is people don’t approve of what he is doing, they approve of him being given a chance to do something – is that liberals must push back on calling another tax cut and spend bill "Keynesian stimulus" because counter-cyclical stimulus is one of the pillars of liberalism. It is one of the key conclusions that separates modern economics from classical economics – that an economy can fall below full output, and that only government has the power to be, in such cases, the buy, seller, borrow, lender, employer, and insurer of last resort. Only government has a chance of being here when the economy craters and we are all thinking about the "eating babies case."

Krugman struck back with this blog post – and admitted that he was being generous in his estimates of the efficacy of the plan as it stands. There are increasing signs of discontent from liberal supporters of Obama, precisely because this is a core asset of the liberal idea. It is one of those ideas that Republicans, such as the Heritage Foundation, constantly seek to discredit, because they would much rather have defense spending and tax cutting as the means of redistributing buying power from the future to the present, and they promote pro-cyclical policies: make the bubbles bigger, and let the busts fall on the ordinary people to pay off with regressive taxation.

Better policy would be to have fewer generic tax cuts, and a greater focus on expansion of next generation broadband, wireless umbrellas, incentives for energy efficiency, a "soot buster" program – buy back old cars in exchange for newer ones, coupons for soot filters – and money for strict enforcement of speed limits. We have a brief window where resource inflation has eased, we need to use that window to shift the global imbalance in supply and demand, or it will be much more expensive later to do it, if, as observers from the IMF on down, we get a chance to do it at all.

Stimulus, remember, must be timely, targeted, and effective. We should have had larger stimulus last spring, but we got a war spending bill and a rebate on the inflation tax. It was somewhat timely, but neither targeted, nor effective. Now we are running out of map, and the stimulus being proposed is still not well enough targeted, and is likely not to be effective enough to buy the time that we need.

It’s come up like a tsunami, this financial crisis – like out of nowhere. Well it’s not out of nowhere. It has been brewing for a long time. Some of it is the result of the deregulation of our financial markets and the wild speculation that’s gone unchecked for longer than we’d like to admit. Some of it has to do with allowing ourselves to become a nation of executives and financiers while losing sight of the fact that we don’t produce anything much, instead becoming the world’s customer. I think a big piece of it is ignoring "real government." I heavily blame the Bush Administration for what they haven’t done – govern the country. But whatever the causes, it’s come on us like a flash flood.

All of these experts – Conservatives, Liberal Economists, Financial Commentators have a definite opinion about what to do, but where were they last year when we needed them? They didn’t see the Perfect Storm either, even the ones who predicted various pieces of it didn’t see the big nasty picture. And so Barack Obama has to sit in the middle of this mess and sort through all the suggestions and contradictory dire predictions and land on a plan. What’s worse, we don’t even know if any plan is going to work, because we’re trying to prevent a coming disaster – and there’s no real precedent for succeeding at that kind of prevention. And what complicates matters even more is that it all rests on something called "Consumer Confidence"  and how in the hell does one create "Consumer Confidence" when the experts themselves have such widely divergent views, and all of them say that we need to act urgently? For all we know, we may need the Great Depression II to knock some sense into our heads about what really matters, and how our country should redefine itself.

There are several things about Obama that bode well for our future. He’s going to have to find a Stimulus Package that he can get through all the hoops and hurdles that stand before him. He’s going to have to endure criticism no matter what he does. He’s going to have to live with the disappointment and panic Americans are going to feel in the coming months as things inevitably go downhill. I think he can do that part. If he can laugh off the shameful "Barack the Magic Negro" song and ignore Rush Limbaugh’s "Operation Chaos," he can take the criticism from educated economists who are trying to help. But he’s got a couple of other things going for him. He’s not afraid to be wrong. If he’s going down one road, and it’s washed out, he finds another path. He did it over and over in the Campaign – Reverend Wright being a fine example. If his compromise Stimulus Package isn’t working, he’ll change it. He’s a pragmatist, not an ideologue. He’s honest. He’s already said something like, "I never promised you a rose garden." I think we’re hungry for honesty and that will carry him a long way. And I think we’re going to need the world’s help, and the world likes Barack Obama – a whole lot.