Bush : PATRIOT Act :: Obama : Stimulus Bill
I'm becoming more and more convinced that external circumstances allowed both men to pass measures reflective of the more extreme side of their ideology under blankets of fear and urgency, bills that would have had no chance of passing in more normal times.
I'm not saying everyone's gonna be with me on this one, but I've decided that's my view.
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This is an interesting thought, but do you really think that the stimulus bill is as idealogically extreme as the Patriot Act?
ReplyDeleteNo - to be fair, certainly not.
ReplyDeleteBut I do feel that the bill (I haven't looked at this morning's revised edition) is largely ideological and that the tactic employed is just as political and manipulative.
For example there's $16B in there for Pell Grants. I like the idea of Pell Grants, but the purpose of the bill is short-term economic stimulus, and I don't see how this supplies that. And remember that despite the huge numbers thrown around, $16 billion is a lot of money.
Basically, this is largely a "spending bill" and not a "stimulus bill."
And PS - My opinion is that Obama is committing a minor political suicide with his stimulus "campaign." It's popularity is sinking like the Titanic and going on a tour and having a primetime press conference (8PM ET tonight?) just reinforces the fact that he knows he hasn't closed the sale yet.
Note: I have not re-read this since starting it. I hope it is intelligible. Good luck.
ReplyDeleteI agree with Chris and am upset that Obama tried to jam a bunch of programs and projects into this stimulus bill that are not going to stimulate anything for at least a few years. This really hurts his credibility, especially as the Republicans continue to hammer the bill in the press. Flipping Snowe, Collins, and Specter helps, but with the vast majority of Republicans spending a large portion of their time badmouthing the bill the benefits of having those three are easily overwhelmed.
I think Obama should have been more honest with the country and split the ideas into two bills: 1. A less-controversial stimulus package that actually focuses on immediate stimulus- this should have included the payroll tax cuts (to stem the Republican publicity campaign a bit), the Medicaid and COBRA subsidy, the extension of unemployment benefits, and any of the other programs that can be used to create jobs and spending right away; and, 2. A long-term investment and development bill that included all of the non-immediate projects in the original stimulus bill- this includes the education reforms, health care reforms and modernization (e.g. digital records), the physical infrastructure upgrades (e.g. roads and bridges), transit investments, etc.
Not only does cramming these two bills together lower his credibility because of the dishonesty of the presentation, it also lowers public esteem for the overall quality of legislation he supports. Basically I see the two bills described above as balancing speed of spending and per-dollar efficiency in different ways. The first bill is all about speed, its overall goal being to increase spending as soon as possible. Though this rapid spending will lead to a lot of waste, this is seen as acceptable because of the urgency of the needs the bill is designed to address. The second bill, on the other hand, is expected to take longer to implement, but this extra time should be used to plan how the money will be spent. This planning (which should focus on determining the most effective uses of the money) should lead to a situation in which each planned dollar of spending creates a greater net benefit than each unplanned dollar of spending.
Basically each dollar spent in the short term will likely generate less benefit as compared to each dollar spent in the long-term plan, an intuitive result because of the preparations that can be made for the long-term spending.
I expect Barack Obama anticipated some backlash against the un-stimulating stimulus bill, but was banking on his (now falling) popularity rankings putting the bill over the top. Unfortunately he is exhausting a lot of political capital to save a sinking ship that never should have been built in the first place. I can only hope that this failed attempt at a partisan sleight of hand will help Obama realize that while he may be a God he is not infallible.
Ooh ... Talk about stimulus - how about the beefing up of the Titanic metaphor!
ReplyDeleteWhen it comes to long-term stimulus (and this really is a question and not a statement of opinion) is this something we should be doing?
We just took out a second mortgage on the American economy. With the huge debt implications of this bill, is any non-emergency spending worth it?
I could have sworn I said this before but I couldn't find it anywhere. So I'll say it now: of all his mistakes, I think Bush's legacy will be tied to his management of the budget. If Clinton's budget practices had been continued through the next eight years, all this stimulus discussion would be a lot easier to handle, not to mention SS and Medicare.
Great points guys. I agree with the way you structured it, Bart, but I would just ditch the second part entirely (as Chris indicated). I am under the impression that fiscal policy is generally not effective, and believe historical information confirms this pretty strongly, but at the same time I am not an extremist about it and, therefore, believe part one is a good idea. I would, however, focus more on clearing balance sheets of toxic assets. This was Paulson's original plan, and I believe it was a good one. It would make banks more comfortable about lending and that would free up credit markets, then much would follow. They abandoned the idea because they were having trouble pricing them, which is an obstacle that could have been over come. I also believe preventing foreclosures would be good because it would increase consumer confidence and, therefore, spending. I have no idea execute this though. This stuff is more in the arena of the treasury department and the Fed, but the effort should be coordinated.
ReplyDeleteInfrastructure should wait. It’s costly and would focus on repairs more than expansion, so would most likely not expand production capacity. It should be done but at a time when the governments balance sheet and the economy are healthier.
I also believe legislative changes are important. The community reinvestment act should be taken off the books to start. They Fed in the future should pursue more conservative monetary policy. And although, I believe our financial regulation needs over hauling, we must be careful not to suppress innovation. Surban Oxly makes doubtful that this will happen.
I am also worried about too much debt.
Sorry, if that was rambling. Hope there is something of value in there.
Warren I always enjoy your input on this stuff. I feel like you've got the best macro understanding of all of us; it's certainly better than mine.
ReplyDeleteSo you're not a fan of using fiscal policy? (For the non-economics majors, fiscal policy is stuff like tax cuts and government spending (think Congress) and monetary policy has to do with the supply of money (think The Fed).) I certainly agree that freeing up the credit markets should be a top priority, but do you think this alone can boost spending?
What are your thoughts with all of this regarding inflation? Are the inflationary aspects of all this even anything to worry about? Should we be engaged in actively avoiding staglation/deflation?
In short, I guess, what would Secretary/President/Dictator Kotzas's economic policy look like?
Q: I certainly agree that freeing up the credit markets should be a top priority, but do you think this alone can boost spending?
ReplyDeleteA: No I don't think it alone will cause spending to revert to previous levels, but it is preventing spending from recovering at all. To use a metaphor, we have to remove the road block and begin driving before we should worry about what the car's top speed is. As far as stimulating increased spending I agree with Bart on part one of his plan. "A less-controversial stimulus package that actually focuses on immediate stimulus- this should have included the payroll tax cuts (to stem the Republican publicity campaign a bit), the Medicaid and COBRA subsidy, the extension of unemployment benefits, and any of the other programs that can be used to create jobs and spending right away".
It should be stressed though that there is not a lot of data supporting that programs to create jobs has a particularly high level of efficacy, but I think that is at least partly due to bad execution of this in the past. For example during the great depression FDR changed policies so frequently that in the end it almost didn’t matter what he did because the unpredictability of is actions created sufficient uncertainty to cause businesses to feel like there was no way to plan for the future and therefore take no action. So whatever we should do, we should do then stop so we don’t fuck up the good markets can do on their own. Despite the uncertainty involved, I believe job creation is worth a try because the theory behind it is pretty good and you can’t ignore the benefit of the psychological effect, because whether or not it does, people believe that it works. Green energy (including a smart energy grid, which would help the construction industry) might be a good place to try, because even if it fails to help the economy it will strengthen our geopolitical strategic position while also making sure the earth remains habitable. I am also all about an overhaul of the education system, but that’s whole other debate (one I would love to see this blog tackle), although it does fit in here because it would create jobs. In general, however I think there is a void of clever ideas on this front, and would be very open to hearing a debate that explores this issue in greater detail.
As far as taxes go we should focus on the middle and lower classes, including fixing the alternative minimum tax, because they have a higher propensity to spend and the freeing of the credit market will take care of opening the wallets of the wealthy, because those with capital and market savvy are salivating at the chance to buy up distressed assets, but the lack of financing is causing them to wait for a further decline in values to invest. This is because a higher return is necessary to justify an all cash deal.
Beefed up unemployment benefits is a good thing.
All and all though, I think stimulating spending is about creating an environment conducive to making people want to, rather than having the government do it directly. Doing this is very contextual to the situation at hand and my answer to this questing is already too long. (and it is a much harder question to answer, so I’m just dodging it.)
Q: What are your thoughts with all of this regarding inflation? Are the inflationary aspects of all this even anything to worry about? Should we be engaged in actively avoiding staglation/deflation?
A: Inflation scares me, but deflation terrifies me (see deflationary spiral). In the short-term (next year or so) I believe deflation is our bigger concern. The data is already showing that we currently have moderate deflation. This has been true, however, for only a couple of months and is largely driven by declines in commodity prices, especially oil, and retailers trying to get rid of inventory, so I don’t think we’re in a deflationary spiral yet, but we certainly don’t need to worry about inflation for now. To answer your question directly, I don’t think that we can or should do anything more to counter act deflation because current policies are already hugely inflationary in nature. It follows that inflation is mostly likely going to be a problem because of, primarily, the aftermath of current Fed actions, but then fueled by an increased debt load and a larger deficit due to the stimulus plan. This is all unavoidable though because of Greenspan’s policy during the last years of his tenure at the Fed. It is possibly for the inflationary side effects to be avoided, by unlikely given how precisely it would need to be handled and the Feds track record of achieving that level of preciseness. Once we’re clear of this mess though, I feel like we should pursue more conservative monetary policy (aggressive monetary policy being one of the root causes of this mess) similar to the way the European Central Bank handles it, i.e. greater emphasis on controlling inflation and less of stimulating the growth. I have more detailed ideas about monetary policy, but all of my additional ideas have obvious unresolved issues and go beyond the scope of the topic at hand.
Q: In short, I guess, what would Secretary/President/Dictator Kotzas's economic policy look like?
A: A constant and low debt to GDP ratio. This is a similar, but in my opinion more reasonable, idea to a balanced budget, i.e. the government could run a deficit, but one no larger than the amount that would cause government debt to grow at the same rate at the economy. A federal government 2/3’s the size it is, which would mean lower taxes distributed evenly across the board maybe leaning toward being more progressive. As previously mentioned, conservative monetary policy. Smarter regulation of the financial, energy and medical industries. Less to no regulation of all other industries. No subsidies of private industry, especially farmers. No tariffs or embargos, with the exception as a political tool in some very specific cases (maybe Iran and North Korea?). More money for scientific research. A much simplified tax system (still thinking about how to do that, maybe a modified flat tax , end triple taxation of corporate profits, ie tax the company, then tax capital gains, then tax inheritance (that’s the same fucking money every time), maybe individuals having a say over how their individual piece of taxes is spent). More checks on wasteful spending (no idea how to pull that off). Instead of minimum wage, direct pay check supplements. In general help people without fucking up the price mechanism. I would also structure social programs with greatest net effect in mind rather than saddest story gets money thrown at it. That’s pretty much the rough idea. Thanks for listening if you managed to drudge yourself through this much of my pontifications.
Sorry my link to the deflation page of wikipedia didn't work.
ReplyDeleteHa, Chicago ST. I win.
ReplyDeleteWarren: great post. I want to think on it a bit before responding, though.
ReplyDeleteRelated to this thread of discussion is Jeffrey Sachs' proposal for cleaning up the banks and their toxic debt. His basic plan is to have the government swap government bonds for toxic debt, but then he adds a twist: rather than just swapping $X of government bonds for toxic debt that, although the banks have it listed as having a value of $X, is actually worth much less (let's say $Z), the government also receives warrants (future payments) of an undetermined value. (Basically this gives the bank a market capital of $X-$Z that gives it some breathing room)
The government then agrees to hold these assets (and, obviously, the warrants) until markets stabilize and credit loosens. Once that occurs the government sells the toxic assets for $Y. At this point the government takes the warrants back to the bank and, depending on the price the government was paid by the market, says, "We paid $X in bonds and received $Y in repayment. You either: 1. Owe the taxpayers the difference in the form of stock (i.e. Y is less than X so for the taxpayers to break even the bank has to give them an ownership stake equal to X-Y); 2. We are even (i.e. Y=X so the taxpayers have been fully repaid by the market alone and thus require no stock to break even); or, 3. We made a profit and your bank is still functioning (i.e. Y is greater than X and taxpayers gained from the deal, with the profits being paid for the risk associated with the lending. This will not happen, but why not list it anyway?). I think I got everything right in there.