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« Economist Martin Feldstein: Wait a month or two to avoid ‘stimulus’ mistake | Main | Heat is on Obama »

January 30, 2009

Comments

George

After a period of kissing up to Obama, Peggy Noonan seems to have sobered up and is back in her stride.

Frank Warner

Yes, she's on point.

If I were Obama, I'd tell the Senate I want to start from scratch and get this right. So far, he's flying over the hurricane, looking out the window.

jj mollo

There are a number of different views on the benefits of fiscal stimulus, but consider that all the other cards in the deck have already been played. The Fed has essentially lowered interest rates to zero! But few can get a loan at any rate. The monetary option has therefore already fizzled out. Maybe it's Greenspan's fault for keeping it too low for too long, but blame assignment is not going to help us here.

Another idea being touted, tax cuts, is certainly a good idea about now, but it only works for people who have an income. And the interest rate deduction for mortgages doesn't help much if you're in foreclosure.

Another alternative is to swallow our medicine and let nature take its course. If that's what we're talking about, we're talking about financial collapse and blood in the street. Sure, in the long run we'll all be better off, but as Keynes said, in the long run we'll all be dead.

The current situation has been described as a "perfect storm" for good reason. The business cycle has always been with us, but this is probably the first time, post-globalization, where all the countries are failing at the same time, on the same cycle, synched into collective hysteria and self-destruction. People in Europe, Australia, Russia, Iceland poured a lot of money into bad, bad US mortgages, all blessed by Moody's. They're going down with us. And the US cannot pull up Mexico or Argentina like we did in the past because we're in too much trouble ourselves. Japan's bubble burst in the 90's, but at least they could still rely on foreign trade. Ships today are idle.

So the first argument is that the potential for devastation is profound and we have to do something! And if we want to do something, the political realities are that we have to take whatever the sausage factory can grind out.

One of the most telling historical arguments against fiscal stimulus is that it takes too long. By the time you are up and spending, the economy has transitioned to an inflationary phase. OK. But consider this. We don't know how long this thing is going to last, and besides, we don't know that the economies of the past would have recovered at the same rate if the stimulus had not been provided. How can you tell the difference? There is a futures aspect to federal programs. If people know that the money is coming, they will plan and spend in order to be under the spigot when it turns on.

So the second argument is the "shovel ready" possibility. There are already people at work who will lose their jobs if we don't spend the money, and if we find a way to insure their continued income, it will keep flowing through the economy. That's better than shovel ready. New projects should, I don't know if they really will be, but they should be funneled to people that can start spending money immediately. Perhaps we can avoid the downstream inflationary effects if we emphasize immediacy requirement, and the Administration seems to have been doing so.

A third knock against the stimulus concept is that the government has to borrow money in order to spend it. The result is that it consequently takes money out of circulation that would have been used, itself, to stimulate the economy in the private sector, which seems pretty self-defeating.

The argument against is that a) the federal government can print money, b) the government can spend money at a more advantageous multiplier than a private individual, c) government borrowing can effectively elicit money from vast pools of savings and safe havens where it is currently hiding.

Our problem right now is mostly a liquidity issue. We are operating far below capacity because continuity capital is drying up. People want to work, their work is more productive than ever, and the people who need the jobs would spend if they had the money.

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