Balanced Budget Stimulus

"The essential idea, again, would be to raise taxes and raise expenditures, simply for the duration necessary to push us out of our current bad equilibrium. For plenty of policymakers, the phrase “tax-and-spend” has become a four-letter word, but it might just offer the optimal solution to our present crisis."


TNR
There are two facts about our current economic situation that can no longer be denied: Our economy is in desperate need of government stimulus, and our political system won’t abide any increase in our national deficit.

Taken together, the two points seem to bode poorly for the United States. But we shouldn’t be too quick to assume a contradiction. Just because stimulus has traditionally been understood as a function of deficit-spending doesn’t mean that’s how it has to work.

We first have to come to grips with the fact that we need stimulus because we’re facing a problem of inadequate aggregate demand, a concept that we owe to the work of John Maynard Keynes. Keynes pointed out that a national economy can get stuck in a bad equilibrium—as it had in the Great Depression in 1930—where unemployed people really wish to supply their labor to some employer, but employers won’t hire them because they don’t think that the extra product they would make could be sold. Why not? Because of all the unemployed people trying unsuccessfully to supply their labor who can’t afford to buy anything. And why aren’t they working? Because no one will hire them.

That sounds circular, but that was exactly Keynes’ point. The whole depression situation is just an absurd circularity that we get stuck in from time to time, and can stay stuck in for a very long time. The core idea of Keynes’ theory is that there’s no fundamental reason to be in such a weak economy except the fact that we’re in it.

The problem is essentially one of communication: Somehow the unemployed have to communicate—not just in words but in the marketplace—their desire both to supply their labor and also to buy the excess of goods they would produce with the income from that labor. Part of Keynes’ idea, not always explained in the subsequent discussions of the theory, is that what has to be communicated is not any objective facts or information, but an intuition—a sense of confidence, a sense that the worst is over, a sense that the people’s animal spirits are back. If we think confidence is returning, then confidence will return.

The medium through which that communication largely needs to occur is collective action. We need to assert as a nation our will to get out of the bad equilibrium and get moving. And the way to do that is through government stimulus: We need to increase government expenditure for as long as it takes to break out of our rut. And there’s no use denying that those government expenditures will need to increase substantially in order to reduce the unemployment rate measurably.

That brings us to a critical fallacy that has crept into our thinking: We have become habituated to the idea that Keynesian fiscal stimulus has to take the form of deficit spending. After a credit downgrade by S&P, there’s a strong argument to make that the U.S. government is in no position to make a massive further increase in the national debt—but that's not an argument against stimulus as such. The fallacy is to think that stimulus necessarily needs to run up the national debt.

In reality, stimulus can easily take a balanced budget form: The government can simply raise taxes and raise expenditures by the same amount. The idea that balanced budget increases could save an economy stuck in a bad equilibrium goes back to the work of economists Walter Salant and Paul Samuelson in the 1940s, and it’s been taught in introductory economics courses ever since, though somehow it has been absent from public discussion of the current economic situation. Salant and Samuelson argued that in a very weak economy the balanced budget expenditure increases would translate into a one-for-one increase in national income.

In fact, the returns on a balanced budget stimulus are likely to be even greater than that. If the government raises taxes to hire the unemployed, then the unemployed who now get jobs will likely quickly spend all the money they earn on new consumption, since they have been strapped and now have jobs. The currently employed, who will see their taxes go up, will likely not cut their expenditures as much because they are habituated to their current level of consumption. And it is unlikely that a balanced budget stimulus would “crowd out” private expenditures on goods and services by pushing up interest rates. The Fed has already committed itself to keeping interest rates at zero until 2013.

The big problem with balanced budget stimulus is political, namely that there is a huge opposition to tax increases right now, primarily among Republicans. But their resistance might be softened if they were made aware that a balanced-budget stimulus would not lower average after-tax income: Every dollar of increased taxes could go toward giving someone extra income. (Though it's true that the people who would see their taxes increased the most are not likely to be the same people who would see their income increased.) Moreover, any public concerns about the high national debt should easily be allayed by the balanced budget stimulus, as it would probably lower the debt to GDP ratio by raising the denominator (GDP) without increasing the numerator (debt).

The balanced budget stimulus could also be designed in such a way as to avoid substantially increasing the size of the government. People often seem to think that government expenditures on stimulus means hiring people to sit at a desk at a government agency, or to clean up trash in the local national park. But that is not at all the way it has to be.

In enacting the stimulus, we could take as our model the National Science Foundation, through which the federal government sponsors scientific research. The government does not hire scientists directly through the NSF. Instead, it makes grants to individual scientists in universities and research facilities. The choice of who gets what grants are largely made by panels of non-government scientists who are called in to help the NSF evaluate the grant proposals. Those procedures could easily be extended beyond scientific research to other industrial areas.

Ultimately, if we did enact a balanced budget stimulus, we would still face the problem of how to find suitable projects to spend government money on. Designing and vetting projects takes time: A single construction project can demand years of planning and permitting. So the first step should be to immediately get going on the planning, even before we've gotten the resolve to do any additional stimulus.

(My colleague Martin Shubik, now an emeritus professor of economics at Yale, has proposed a sustainable solution to this latter problem—namely, a Federal Employment Reserve Authority, a permanent new government agency that would continually be in the business of creating a list of public works projects that are ready to go should there ever be a steep economic downturn. It would resemble a federal agency created in 1941, the Public Work Reserve, which was created to address the risk that the U.S. economy might fall into depression again after the economic stimulus of wartime spending was over.)

The essential idea, again, would be to raise taxes and raise expenditures, simply for the duration necessary to push us out of our current bad equilibrium. For plenty of policymakers, the phrase “tax-and-spend” has become a four-letter word, but it might just offer the optimal solution to our present crisis.

Obama's Katrina and an America that can't get anything done.

The entire Empire State Building was constructed in one year and 45 days. The Empire State Building came in on time and under budget. It was work for 3300 men during the Great Depression. It cost $40,948,900.

The builders Starrett Bros. & Eken told the owner, Raskob that they could get the job done in eighteen months. When asked during the interview how much equipment they had on hand, Paul Starrett replied, "Not a not a god damned thing. Not even a pick and shovel." Starrett told Raskob: "Gentlemen, this building of yours is going to represent unusual problems. Ordinary building equipment won't be worth a damn on it. We'll buy new stuff, fitted for the job, and at the end sell it and credit you with the difference. That's what we do on every big project. It costs less than renting secondhand stuff, and it's more efficient."

They got the job.

The Empire State Building officially opened on May 1, 1931

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James Pinkerton - FOXNews.com - July 06, 2009
Obama's Katrina
Make no mistake, the economic crisis and Obama's failure to create real jobs with his stimulus package means we're looking at this president's Katrina.

The economy is shaping up to be Barack Obama's Katrina. If President George W. Bush was blamed for his slow response to Hurricane Katrina in 2005 -- there was plenty of blame to go around, of course, but the disaster was on Bush's watch--then Obama will get the blame for his slow response to the current recession. The difference, of course, is that Katrina afflicted a city and a few states, while the recession afflicts the whole country.

Unemployment is 9.5 percent and rising fast, certain to go higher than 10 percent. And what is the federal government doing about it? Not much. And so House Republican Leader John Boehner makes a good point when he asks, "Where are the jobs?"

On Sunday, Vice President Joe Biden said that the Obama administration had "misread" the economic indicators. So what are they likely to do about it? More of the same--which is to say, not much.

The problem the Democrats have--and come to think of it, the country has it, too--is that even if you want to build something, you can't do it. That is, you can't do it without plowing through years' worth of lawyers and environmental-impact-statement-writers, nor without enduring endless hearings and lawsuits where every last NIMBY gets a whack at the project. And so even before this terrible recession, America's capacity actually to build anything--build a highway, build a bullet train, build a power plant -- had been crippled.

So piling on new money does no good, because the old money hasn't been getting spent. Getting spent, that is, on bricks and mortar and technology, as opposed to lawyers and consultants. In the past, "stimulus" was a way to put blue collars and hardhats back to work. Yet now, the only people being stimulated are white-collar lobbyists and litigators.

To be sure, Obama's federal government will spend a lot of money. The feds are asking for $3.5 trillion for fiscal year 2010, and that's not counting the $787 billion "stimulus" package, as well as trillions in funny-money income transfers to big banks--including such improbable "banks" as General Electric, parent company to NBC, MSNBC, and CNBC--through shadowy organizations, such as the Federal Reserve Bank and the Federal Deposit Insurance Corporation.

But all that money is pushing the wettest of wet noodles--because governments, surrounded as they are by Greens and NIMBYs, can't do anything.

On May 27, more than three months after President Obama signed the American Recovery and Reinvestment Act of 2009 into law, USA Today reported that a grand total of $2 million of stimulus money had spent in Michigan, the hard-hit state with the nation's highest unemployment rate. That works out to 21 cents per Michigander. How much stimulus is that?

And just this morning, The Big Money reports that only $55 billion of the $400 billion in non-tax-break stimulus money has been spent. Jobless Americans might ask: What are you waiting for? Indeed, every American might ask the same question. Because all Americans would benefit from new roads, new train tracks, new windmills--anything at all.

Democrats are starting to notice that the fiscal contraption of government leaks more fuel than it burns. "We're disappointed," House Majority Leader Steny Hoyer on "FOX News Sunday." We're looking at ways to get the money out more quickly.

Well yes, that would be a good idea. And so Democrats might learn from their own past. Confronted with 25 percent unemployment in March 1933, here's the agenda that Franklin D. Roosevelt set for the country in his first inaugural address:

"Our greatest primary task is to put people to work . . . treating the task as we would treat the emergency of war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our national resources."

But of course, it's deeds, not words, that matter, and FDR and the New Deal delivered. In his 1990 book, "Our Country: The Shaping of America From Roosevelt to Reagan" Michael Barone offers one of the best overviews of five decades of recent U.S. history. Barone recounted the effectiveness of the New Deal in combatting unemployment. By January 1934, less than a year after Roosevelt took office, the Civil Works Administration employed 4.25 million people, fully eight percent of the national labor force. In fact, over the entire course of the the Depression, unemployment peaked in the month that Roosevelt came into office.

Was there waste, or fraud, or abuse in all this New Deal spending? Sure. But there was also a huge renaissance in public works around the country, from the Triborough Bridge in New York to the Golden Gate Bridge in California. And New Deal programs such as the Rural Electrification Administration and the Tennessee Valley Authority literally lit up (as well as cooled) life for tens of millions of Americans.

Conservatives were horrified, of course, but most Americans cheered. Not only was Roosevelt re-elected three times, but the Democrats kept control of both houses of Congress all during the 30s and well into the 40s. And by the way, during the 30s and 40s, America built up the industries that not only won World War II and the Cold War, but also created the consumer abundance that we enjoyed for decades thereafter.

So something must have gone right for New Deal Democrats.

By contrast, today's Democrats are not really interested in building things. They are demonstrably more interested in bailing out banks, and keeping environmentalists happy. Bankers, of course, deal in intangibles; they make money without regard to where physical goods are manufactured--although bankers know that goods are likely to be cheaper in China, so that's their preference. And the environmentalists, of course, oppose just about everything. Thus we have the "green-green alliance" -- green as in the color of money, and green as in Greenpeace. Together, these allies are working to pastoralize the United States. We can create meadows and forests, but not jobs.

And if that's the goal, so what if unemployment rises? So what if the real economy contracts? That's a small price to pay for elite Democrats, who hold those other, non-productive green objectives closer to their hearts.

Thus the "cap-and-trade" legislation, which passed two weeks ago in the House of Representatives, is a perfect exemplar of the modern Democratic mindset: The green environmentalists are happy, because carbon-based energy production is restricted, and greenback-minded Wall Streeters are happy, too, because traders will make billions trading trillions' worth of funny-money carbon contracts.

But there is a catch: People don't have jobs now, and they won't get them in the future if Obama spends money that doesn't stimulate--and then seeks to choke what remains of the productive economy through environmental regulation.

And that, surely, is that a misreading of what the American people will vote for in 2010 and 2012.

This is Obama's Katrina. You heard it here first.

It Is Fiscal Stimulus Time

Time for your medicine

$50 billion, $75 billion, and now Treasury Secretary Robert Rubin is calling for $100 billion in increased government spending or transfer payments, to stimulate the economy.

The economy is clearly slowing rapidly. The consumer seems fatigued and cautious, business will soon follow the consumer, but the government can still print money and it will. The economy is so large that it will take $75 billion in extra government spending over a period of one to two quarters to increase the economy by just 1%. Therein lies the problem.

First it is an election year. Any thoughtful deliberation will therefore be unthinkable. The Democrats will demand more money for unemployment compensation, more food stamps, and more spending or give-aways to those that will be the most likely to spend it. Given the recent congressional habit of using earmarks, any stimulus bill will be larded with superfluous spending as everyone in Congress is up for re-election and a third of the Senate is as well.

Secondly, the Republicans will be no better. The only difference will be the constituency for the giveaways. It would be far wiser to pursue public works, infrastructure and domestic energy projects that would create additional domestic jobs and have a lasting positive economic effect. (A border fence could suck up a few billion.) However this would take thought and planning and would not be half as much fun. So it will be business as usual with politicians casting caution aside and we will make another run at government trying to spend us into prosperity, and no one will be able to stop it.