Friday, January 30, 2009

Conservative drumbeat against stimulus continues



Published on on January 30, 2009

The same way Republicans beat it when Bill Clinton proposed a modest $35 billion stimulus in the teeth of the 1992-1993 recession. The GOP nitpicked each spending item and highlighted midnight basketball courts and swimming pools that were funded in the package. Clinton, for his part, didn't really care what the money was being spent on, he wanted to be sure it was spent to give the economy a boost before he cut spending and raised taxes to balance the budget. So, the president accommodated all of the pet projects of Democratic lawmakers. The resulting publicity made the package radioactive.

Republicans are ideologically opposed to spending, but they never met a tax cut they didn't like, except a payroll tax cut, which would help the vast majority of the nation's wage earners. Republicans view wage earners with contempt.

Republicans should feature each element of the package -- just as they have highlighted the contraception and global warming research -- to show it for the boondoggle that it is.

Time to engage the Hollywood and Madison Avenue imagemakers, who are the natural allies of Democrats, to counter Republican propaganda on this.

The package is losing support almost daily. According to Rasmussen, only 42% of Americans now support it. The key is for the Republicans to attack its specific line items to show how overblown it really is.

And it is terribly important to beat, or at least cut back the stimulus legislation. What we allocate in deficit spending and "refundable" tax cuts (i.e. welfare) today we will pay for in inflation tomorrow.

Not true. Inflation would only be a cause for concern if the economy is running at full capacity, where all of its resources and capital--including human capital--are being used. We are far from that. Inflation has nothing to do with the nominal level of bank reserves in the system and is not, as we often hear, a monetary phenomenon.

In the seven years between 2000 and 2007, the money supply rose from $600 billion to $800 billion. In 2008, alone, it more than doubled from $800 billion to $1.7 trillion! We cannot sustain this level of increase in the money supply without having way too much money chasing way too few goods and services, sending prices up into double digit inflation.

He seems to be confusing the monetary base (Federal Reserve notes, coins and bank reserves) with money supply (M1, M2). Bank reserves, which represent the largest component in the monetary base, are not part of the money supply. Morris doesn't understand this. Furthermore, he doesn't understand that the Fed targets interest rates and it does this by manipulating reserves. To achieve a 0% Fed funds rate, reserves have to be increased significantly and kept high for as long as the Fed wants the 0% rate.

While the economy is in shell shock, at the moment, we face deflation. But once it begins to come back and the dollars come out of hiding, we will find the resulting inflation intractable and very difficult to cure.

This is his opinion and not a fact. It also fails to realize that the sale of Treasuries will bring the level of reserves down. It's already happening. And it fails to understand that the current tax structure automatically produces rising levels of fiscal drag as the economy grows faster, just as it automatically acts as a stabilizer when the economy contracts.


googleheim said...

Please post your estimated % of debt to total revenue ? i.e. left side / right side account ledger x 100.

Why is the WallStreet Waffle show indicating that we are in far much more debt currently than in WWII ?

googleheim said...

if the government is not funded by tax money :

1. good, the republicans are wrong to think they can destroy the gov by trying to elliminate taxes.

2. good, the republicans will not be doing any harm when they do reduce taxes.

3. there is no such thing as wasteful spending since my tax money is not going to fund government expeditures. Therefore, I cannot blame the tax man for giving my money to any social program.


Mike Norman said...

Because they look at nominal levels of debt. The right way to look at it is spending as a percentage of gdp. Outlays (spending) totalled 44%, 44% and 42% of GDP in 1943, 1944 and 1945 respectively. Outlays in 2009 are expected to be 21% of GDP. Doesn't even come close to the WWII period. Same holds true when you look at debt in that context.

googleheim said...

what about the numbers from the skeptical optimist dude : he has a threaded calculator ( perhaps simple javascript ) on the upper right hand page. He also has good diagrams about the Fed's bond structurings. Bonds pay for most of this stuff and not tax payer.

looks like we are already near 1940's levels ?

what about GNP - gross national product where we include foreign monies owed to USA?

how about the fact that we have already been printing money at a rate of 15% of whatever for the past years, possibly to deal with the Iraq hole ?

we have already been printing beaucoup amounts of money during the past 8 republican years ! Why not Sum that up in a total fixed figure and show America that the hand outs and the bailouts have ALREADY been happening since Bush took office and bribed us all with the tax rebates which were merely used to deflate the surplus built up by Clintonomics and to devalue the strong dollar policy so we could start exporting oil machinery and prevent low commodities from entering USA like steel, some of the last remaining things we still make.

a recurrent item mentioned is the enlistment of young citizens into the military and their choice of joining against lack of choice to have work. I am assuming you are mentioning this with respect to the stimulus and making jobs in things OUTSIDE the military. I am also assuming that the fiscal conservatives what to pump up the military and make everyone work for the military.

I would try to clarify that because more and more youth are getting into the military - despite that a liberal view may say that is it because they only do it for money and despite that a conservative view may say that it is the ultimate in patriotism - neither view is correct - it is dangerous to have people in there who are really not prepared and are only doing it for lack of any other choice. They will cost more later after battle and they might not be effective members.

Finally, it is pretty lame that we can trace millions of events in a single run at a particle physics accelerators with computers that are not out of reach for any medium or large sized business.
However, we cannot trace the purchase and sale of mortgages. The ambiguity is not with the liar loaners but with the financial system comprised of banks, aggregators, derivative makers and sellers etc.

We can easily find all the liar loaners who foreclosed with simple recordset queries from national databases, therefore we could have fixed this if not for the overleverage.

cuOnTheOtherSide said...

-- Republicans view wage earners with contempt --

This would explain a lot.

Mike, you make a very good point about the Republicans and their actions on the stimulus bill.

The vote went against them in the recent elections because they seem to have little interest for the general public. Most of the general public would be hard pressed to see how more Corporate, capital gains and dividend tax reductions help them during these times.

The Republicans prove once again that they have lost touch with the public.

Mike Norman said...


Yes, I agree, but they are far from becoming irrelevant as some political pundits suggest. Rather, I see a danger if the president's policies fail to revive the economy (only because he is being sensitive to conservatives' concerns, I believe), you could see a rise in fiscal conservative, hard money and free market fundamentalism that we have never seen before. I would not rule out that we could even go back on a gold standard, pluging the U.S. into real depression.