Let's Call It What It Is: Social Engineering

[Chicopee John]

The Stimulus Time Machine

by David Obey Monday, January 26, 2009 provided by Wall Street Journal

 

The stimulus bill currently steaming through Congress looks like a legislative freight train, but given last week's analysis by the Congressional Budget Office, it is more accurate to think of it as a time machine. That may be the only way to explain how spending on public works in 2011 and beyond will help the economy today.

 

According to Congressional Budget Office estimates, a mere $26 billion of the House stimulus bill's $355 billion in new spending would actually be spent in the current fiscal year, and just $110 billion would be spent by the end of 2010. This is highly embarrassing given that Congress's justification for passing this bill so urgently is to help the economy right now, if not sooner.

 

And the red Congressional faces must be very red indeed, because CBO's analysis has since vanished into thin air after having been posted early last week on the Appropriations Committee Web site. Officially, the committee says this is because the estimates have been superseded as the legislation has moved through committee. No doubt.

 

In addition to suppressing the CBO analysis, Democrats have derided it. Appropriations Chairman David Obey (D., Wis.) called it "off the wall," never mind that CBO is now run by Democrats. Mr. Obey also suggested that it would be a mistake to debate the stimulus "until the cows come home." We'd settle for a month or two, so at least the voters can inspect the various Congressional cattle they're buying with that $355 billion.

 

The stimulus bill is also a time machine in the sense that it's based on an old, and largely discredited, economic theory. As Harvard economist Robert Barro pointed out on these pages last Thursday, the "stimulus" claim is based on something called the Keynesian "multiplier," which is that each $1 of spending the government "injects" into the economy yields 1.5 times that in greater output. There's little evidence to support this theory, but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we'd all live in paradise.

The problem is that the money for this spending boom has to come from somewhere, which means it is removed from the private sector as higher taxes or borrowing. For every $1 the government "injects," it must take $1 away from someone else -- either in taxes or by issuing a bond. In either case this leaves $1 less available for private investment or consumption. Mr. Barro wrote about this way back in 1974 in his classic article, "Are Government Bonds Net Wealth?", in the Journal of Political Economy. Larry Summers and Paul Krugman must have missed it.

 

The government spending will be a net stimulus only if its $1 goes to more productive purposes than those to which private investors would have put that same $1. There are some ways we may want the government to spend money -- on national defense, say -- but that doesn't mean it's a stimulus.

A similar analysis applies to the tax cuts that are part of President Obama's proposal. In contrast to the spending, at least the tax cuts will take effect immediately. But the problem is that Mr. Obama wants them to be temporary, which means taxpayers realize they will see no permanent increase in their after-tax incomes. Not being fools, Americans may either save or spend the money but they aren't likely to change their behavior in ways that will spur growth. For Exhibit A, consider the failure of last February's tax rebate stimulus, which was a bipartisan production of George W. Bush and Mr. Summers, who is now advising Mr. Obama.

 

To be genuinely stimulating, tax cuts need to be immediate, permanent and on the "margin," meaning that they apply to the next dollar of income that an individual or business earns. This was the principle behind the Kennedy tax cuts of 1964, as well as the Reagan tax cuts of 1981, which finally took full effect on January 1, 1983.

 

If the Obama Democrats can't abide this because it's a "tax cut for the rich," as an alternative they could slash the corporate tax to spur business incentives. The revenue cost of eliminating the corporate tax wouldn't be any more than their proposed $355 billion in new spending, and we guarantee its "multiplier" effects on growth would be far greater. Research by Mr. Obama's own White House chief economist, Christina Romer, has shown that every $1 in tax cuts can increase output by as much as $3.

 

As for all of that new spending, CBO will release an updated analysis this week. And we anticipate that the budget analysts will in the interim have discovered that much more of that $355 billion will somehow find its way to "shovel-ready" projects that the Obama Administration can start building before the crocuses bloom. But in the real world, the CBO's first estimate is likely to prove closer to the truth.

 

The spending portion of the stimulus, in short, isn't really about the economy. It's about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The "stimulus" is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.

 

Apart from the inevitable waste, the Democrats are taking a big political gamble here. Congress and Mr. Obama are promoting this stimulus as the key to economic revival. Americans who know nothing about multipliers or neo-Keynesians expect it to work. The Federal Reserve is pushing trillions of dollars of monetary stimulus into the economy, and perhaps that along with a better bank rescue strategy will make the difference. But if spring and then summer arrive, and the economy is still in recession, Americans are going to start asking what they bought for that $355 billion.

 

[Mr. T]

Does this make you want to go out and buy some Government Bonds?

 

Not really.

 

I dont feel that it will pass as it is currently, the class envy painting dems always want someone to have to pay.

 

If there is going to be any relief from the Government it will take a permanent reduction in taxes and relax some regulations on business so they wont have to move any factories out of the country to be competitive.

[Chicopee John]

Does this make you want to go out and buy some Government Bonds?

 

Not really.

 

I dont feel that it will pass as it is currently, the class envy painting dems always want someone to have to pay.

 

If there is going to be any relief from the Government it will take a permanent reduction in taxes and relax some regulations on business so they wont have to move any factories out of the country to be competitive.

 

 

And why is no mainstream media running with Reich - the Munchkin - statement about the money not necessarily going to highly skilled WHITE construction workers.

 

Who wants to drive over a bridge that was repaired by an unskilled worker?

 

 

Arguably $1 of government spending puts $1.5 into the economy (as the article said) but $1 of permanent tax cuts - especially for business - puts $6 into the economy.

 

What am I missing here? (Not a darn thing, I'm afraid).

 

[Mr. T]

And why is no mainstream media running with Reich - the Munchkin - statement about the money not necessarily going to highly skilled WHITE construction workers.

 

Who wants to drive over a bridge that was repaired by an unskilled worker?

 

 

Arguably $1 of government spending puts $1.5 into the economy (as the article said) but $1 of permanent tax cuts - especially for business - puts $6 into the economy.

 

What am I missing here? (Not a darn thing, I'm afraid).

 

You have to love a politicians calculator.

 

I thought the Munchkin got a new job at disney world. He was one of Snow White's dwarfs.

[Mr. T]

Keynesian Economics Is Wrong: Bigger Gov't Is Not Stimulus

an explanation

[Mr. T]

And today is the big showdown!

 

Stimulis 2

 

And if anyone thinks this is the way to fix the economy they need to go back to school. What congress is doing is dangling a carrot out there to the American public saying here's your check.

 

While they want to pass this massive spending bill and they are allready working on another one for the Banks and yet another bailout for Automotive.

 

Cutting taxes and adjusting regulations (roll back) to make it easier on industry will be the only way you can get the economy going.

 

 

[Guest Aloysius]

Keynesian Economics Is Wrong: Bigger Gov't Is Not Stimulus

an explanation

lol - I too am one YouTube clip away from disproving mainstream economics.

[Mr. T]

lol - I too am one YouTube clip away from disproving mainstream economics.

 

Maybe you should just hold your hand out and say, check please.

 

We faced similar economic turmoil in the 80's and thank God we had a leader like Ronald Reagan as president. Some are not old enough to remember Reaganomics but here is a little clip to wet the appetite. After all it did work and was footprint that lead us to great success throughout the past 2 decades.

 

 

"Reaganomics" was the most serious attempt to change the course of U.S. economic policy of any administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy." Reagan's 1981 Program for Economic Recovery had four major policy objectives: (1) reduce the growth of government spending, (2) reduce the marginal tax rates on income from both labor and capital, (3) reduce regulation, and (4) reduce inflation by controlling the growth of the money supply. These major policy changes, in turn, were expected to increase saving and investment, increase economic growth, balance the budget, restore healthy financial markets, and reduce inflation and interest rates.

http://www.econlib.org/library/Enc1/Reaganomics.html