what is "stimulus"?

Xposted from another thread because it turned out longer than I thought it would and I figured that meant “new thread time”.

Well, we have to go back to our basic Keynes here.

Problem : bad bad economic mojo goes down. In this case, a bunch of mindless greedy assholes lied billions of dollars into existence and then one day, the spell wears off, and that money disappears, making the money supply drop like a felled steer and scaring the bejaysus out of everyone.

This is easily bad enough by itself. However, it leads to something even worse:

Everyone hears about the bad economic news. Jobs vanish because banks aren’t lending. Businesses disappear, same reason. Anyone who still has money has no idea what they should do with it, but they know one thing :

They sure as hell aren’t spending it!

So economic activity nosedives, and brothers and sisters, that is BAD. Spending is the blood of capitalism. A healthy capitalism moves lots of money around all the time. When the blood stops flowing, THINGS START TO DIE.

But you can’t very well expect people to spend money they really shouldn’t, quite likely sacrificing their own economic futures, just to keep things flowing.

What you really need is some massively rich guy who has tons of money to suddenly start spending it. But gee, who is rich enough?

Nobody, that’s who. Not Warren Buffet, not Bill Gates, not the rich couple from Gilligan’s Island, nobody.

Capitalism is, at this point, helpless to save itself.

The only thing that can save the patient is a massive blood transfusion.

And the only doctor who can do that is the government. Only a government is big enough and can borrow enough to get that blood flowing again. They essentially have to do whatever they can to be the heart and lung machine of the economy until the patient can live and breathe on its own again.

That is stimulus.

That does mean that, technically, all spending is stimulus. However. there’s a few factors to consider :

  1. If you’re going to be spending a hell of a lot of money that you’re borrowing from the future (better than letting the patient die and having the whole world turn into Iceland), you might as well spend it on things that need doing anyhow, and that have just been waiting around for someone to have the political will to do.
  2. Not all spending is equally good for the patient. Construction, for example, is great because it provides a huge economic stimulus while it’s going on. Labour, materials, planning, legal issues, the whole shebang. On the other hand, once it’s done, it’s done, and whether or not it will generate a significant amount of economic activity afterwards tends to be highly debatable.

This is where all that “shovel ready” ballyhoo comes in.

So sorry, conservatives. Stimulus is real and it really really needs to happen and government is the only entity that can do it.

Feel free to argue about what, exactly, should be stimulated, though.

The first step to enlightenment is to stop blaming everything on ‘greedy assholes’. This problem is systemic, and there’s lots of blame to go around. And it’s not a problem of a few individuals. A system built up over time that under-valued risk and over-valued real estate holdings. Government was as guilty as anyone - The Bush Administration spent like drunken sailors. The Federal Reserve kept interest rates artificially low for a long time, pushing capital to find different outlets where returns would be better. The Congress played the game by passing al kinds of regulations and programs to help stimulate home ownership. Good and honest businesspeople and bankers had to deal with a system where you had to play by the new rules or be pushed aside.

The next step to enlightenment is to ask yourself why. Is it just ‘fear’? Not at all. Banks aren’t lending because they don’t know what the securities they are holding are worth. There is a market failure due to informational asymmetry. That’s the ‘toxic debt’ everyone’s talking about. People aren’t borrowing because 14 trillion dollars in paper wealth went up in smoke when real estate collapsed, and Americans were heavily leveraged against it. Now they are behaving rationally by saving their money.

Or, you can look at it another way - we were over-invested in real estate, and over-leveraged. We’ve been living beyond our means for years, and that can’t continue. Now that the bubble has burst, we find that we HAVE To contract. Some things SHOULD die. If you run your credit cards up to the max, the only way to get back on a sound footing is to live a little more frugally for a while until that debt is paid down.

The home construction industry is too big. Those jobs don’t need to be protected, they need to be ended. Demand for new home construction will be down for a long time to come. For the health of the economy, those workers need to move into other industries. That’s just one example, but when any economic bubble pops, pain ensues, and has to be endured.

Let me ask you - do you think the government should have bailed out all the Dot-Coms when they crashed? Pets.com lost billions. Huge numbers of IT workers lost their jobs. Why didn’t we have a stimulus to stop that recession?

Here is where your analogy completely breaks down. By equating the Federal Government with a ‘rich guy’ is insane. The Federal Government doesn’t have assets of its own. All it can do is borrow them on our behalf. If you want to continue the familial analogy, the Federal Government is more like your big brother saying, “Don’t worry about losing your job, bro. I got Mom to take out a second mortgage on our house to give you an economic stimulus. Go buy yourself a Playstation.”

The government will have to borrow the stimulus money. This runs the risk of the feds crowding out private investment. And the government can raise the money three different ways: It can tax you for it, defeating the purpose. Or, it can negotiate with other countries to lend the money, which runs the risk of driving up interest rates, or it can monetize the debt through the Fed, which would likely result in the debt being paid for through inflation, which in this case will be a hidden form of tax of the most inefficient kind.

Make no mistake - a fiscal stimulus is, at best, paid for by borrowing against future economic growth. The question is not whether the stimulus might do anything positive, it’s whether or not the cost of it is worth the benefit.

By ignoring the cost side of the equation, you can convince yourself that any government program is fan-damn-tastic.

Capitalism can save itself just fine. The only question is whether it can do so in a fashion that is less painful overall than having government attempt to manage the economy.

I guarantee you that Capitalism will adapt. It will be painful, but eventually there will simply be too many opportunities left unmet, and prices will be too low to ignore, and the economy will start moving upwards again. There have been many recessions, and government has either not attempted or has utterly failed to stop them. It has always been market forces themselves that have acted to recover on their own. There is no evidence of a government fiscal stimulus that really did much of anything. They usually come in too slowly to make a difference, or they are so mismanaged that they do more harm than good even in the short term.

The open question among serious economists is which path will lead to the least painful recovery, and is that worth the cost in future productivity. This talk of disasters is Obama fear-mongering to push a vote through. The Congressional Budget Office doesn’t agree with him. Most economists are talking about recoveries starting within the next 18 months, and perhaps as early as the fall.

My personal opinion is that it’s going to get significantly worse. But I’m also afraid that government is going to contribute mightily to making it worse. They’ve done it before. Many, many times around the world.

Your argument rests on the proposition that to do nothing will result in the complete collapse of commercial and financial ruin. There’s just no reason to be that hyperbolic about that at this point.

[/quote]
That does mean that, technically, all spending is stimulus.
[/quote]

No, it does not. Spending that results only in a transfer of wealth from one party to another does not stimulate a thing. Spending that simply moves debt from the states to the federal government does not stimulate anything, but does result in greater federal control of the country.

Spending that crowds out private investment, or which cause uncertainty which causes private investors to save their money, does not stimulate a thing. Right now, there are state projects which were being worked on, which are now halted while the state waits to see how much green the feds will cough up. That’s contributing to the problem.

Do you know how many states are currently dusting off projects they didn’t want to pay for themselves, but are now going to be built anyway? Hell, the Alaskan Bridge to Nowhere was almost shovel-ready. Should you build that?

There are several problems with construction as a stimulus. It takes too long (even ‘shovel ready’ projects won’t start for months), it has the best chance of crowding out private activity, and it’s distortionary. By subsidizing the construction industry to allow it to remain at its current size - which is probably not the size it should be. The increase in demand for raw materials drives up the price for everyone else. At some point, the stimulus has to stop, and then you’re going to be laying off people anyway.

Ultimately, the long-term wealth of your country is measured by its productive capacity to make the things or offer the services the world wants to buy. Any stimulus which splatters money all over the economy through the process of political favors and horse-trading is bound to be less efficient than one directed by the laws of supply and demand. That’s a long-term price you are going to pay.

As for whether the infrastructure is needed, you might want to check out what [url=http://online.wsj.com/article/SB123396676711659061.html]Milwaukee gets[/url:

Building another school in an area where 15 are already vacant is not far from paying someone to dig a hole and another to fill it in. This would not just be a waste of money now, but an ongoing maintenance expense for that city for the indefinite future.

This stimulus bill is absolutely overflowing with garbage ‘investments’ like that. You’d be better off just dropping the money from helicopters.

The sad fact is that fiscal policy has a miserable track record. Just awful. It has either failed utterly (the last three bailout attempts, for example. TARP I, for another example. The Bush ‘stimulus’ in 2001 came in just as the recession was ending, and contributed to the current bubble and increased the debt. Fiscal stimulus in Japan completely failed and has left them with too much under-utilized infrastructure which is now an economic drag on the country. Their debt is 180% of GDP. They spent 5 trillion dollars on their attempts at a stimulus, despite having an economy 1/3 the size. It didn’t work.

What this will do, however, is increase the power of the federal government, pay off Democratic constituencies like labor unions and government employees, and give them a huge slush fund from which they can buy votes and sell influence. It will make vast swaths of the country more attached to the federal government teat, and that much more likely to vote Democratic next time around. It’s very smart politics, but terrible governance.

True enlightenment only comes after acknowledging one’s own errors and deficiencies.

After eight years of the Bush economy, the proof is in the pudding. Furthermore, we’ve given two signficant trials to the Republicans present favored economic policies, with notably damning outcomes both times. How many times does one have to be flat wrong before reality creeps in?

If anyone, particularly those here on this board, spent the last year predicting rosy outcomes from the Bush administrations’ economic policies, they ought to go and sit in the corner. The last thing they should be doing is giving tedious lectures about enlightenment. Republican economics have “enlightened” too many people right out of work to be given a shred of credence at this point.

Something involving a miniaturized cattle prod and your prostate gland. Try it! You’ll be amazed! :slight_smile:

No thanks, I’m too easily shocked. :stuck_out_tongue:

Somehow there always is after a Republican administration, but…

Fascinating how problems involving Democrats are always so direct and clear.

Unemployment does that to a person, yes. What is your plan for getting people back to work so they can be off the teat, so to speak? Ah yes, tax cuts. Because someone earning no income will definitely have their spirits lifted by paying a smaller percentage of zero. No wait, it was people having the burden of taxation lifted would invest in more capital. Except that banks aren’t lending. So, wait… It’s actually that there is no plan, we just have to buckle down and realize that we overspent ourselves, and swallow one massive bitter pill instead of crushing it up with some orange juice and taking it over time.

I like that plan. It sounds so… moral. Righteous. And when you sound righteous, there’s little need to be right.

Tax cuts ain’t gonna help.

I disagree with your basic reasoning. You’re making statements, but on what authority? You’re saying “that is BAD”. Bad by whose standards? “THINGS START TO DIE”. Is there any reason why massive corporations should live if they can’t survive independently? “They essentially have to do whatever they can…” Who says they have to? “It really really needs to happen”. Again, by what authority?

Let’s look where we are right now. Unemployment is at 7.6%. Or, from another perspective, employment is at 92.4%. The economy is shrinking at a 2% annual rate. Or, from another perspective, 98% of it will still be here in a year. Housing prices sank 14% last year. Or, from another perspective, 86% of their value is still there.

So who’s to say that we’ve reached the point where a massive government intervention is necessary? By what fixed, objective standard is that true? Are the American people suffering badly? Hardly. Even after the last few months, this nation is still amazingly wealthy. Almost any person, anywhere on earth, at any time in history, would be delighted to have what we have right now.

If we pass a stimulus bill now, we are indeed borrowing from the future. It provides benefits for us right now, and increased costs in the future. Who has the authority to say that it’s “better” to swap current benefits for future pain? Isn’t it rather unfairly convenient that we’re grabbing money for ourselves, while much of the bill will be paid by those who can’t vote, or who aren’t even born?

10,000 foreclosures a month. 600,000 added to unemployment rolls per month. Strangely these add up. 50 million without health care. Oh but there are millions with health care ,so all is well. Nothing to see .Move on.

Not quite. The unemployment rate only includes those fully unemployed and actively looking for work. When this rate was under 7%, the underemployment rate, consisting of those in jobs below their proper level (engineer working in McDonalds) and those who have given up looking for work, was well over 12%. I don’t know what it is now. Anyhow, even in the Great Depression 75% of people have jobs. Is that acceptable?

Not if you owe 90% of its former value.

The voters in the last election, that’s who. It’s our money, and we voted in someone who was clearly going to intervene. If we wanted McCain’s magic tax cuts, we could have voted for him and Republican candidates for congress.

Really? People in Europe, who even when laid off get reasonable benefits and who don’t have to worry about affording medical care probably aren’t too envious. You think the people who are losing their homes aren’t suffering? Those laid off with no job in sight? Those cutting spending to the bone? How about the larger number of homeless? Or do only Somali refugees suffer in your book?

The American people,. that’s who. Who had the authority to borrow from the future to pay for World War II? The national debt after that was 2 X GDP, much worse than it will be now. But we taxed the prosperity of the '50s and we paid it off.

What an interesting standard.

They’ll be richer than me anyway.

I would think that stimulus is going to be money injected into the economy that results in a money multiplier greater than one for those funds.

Some people are losing their jobs or homes or both. Most are not. At any given time, some people are losing their jobs or homes or both. At the current time, the numbers are higher than usual. Does that automatically justify a rush to spend almost a trillion dollars? If so, why? Is there any fixed, principled stance on what economic conditions must occur before a stimulus “really really needs to happen”? If not, then what makes this particular piece of legislation less opportunistic than any other?

I’m not opposed to government spending. I’d be perfectly content with increased spending in some areas, if it was managed well. I just don’t see why there’s this rush to spend money on anything and everything and do it fast fast fast, based only on the fact that economists say we must do so. Remember that a year ago economists said that early 2009 would be economic good times, with the banking and housing sectors doing particularly well. They were wrong. If they were wrong then, why are we so fast to trust them now?

The difference is that traditional monetary policy has failed. The Fed can no longer decrease the interest rate. It’s gone as low as it can go.

But modern macroeconomics teaches us that there is an alternative, even when the central bank has used up its normal bag of tricks. Fiscal stimulus is that alternative.

Due to the complexities of modern financial instruments, the true depth of the financial crisis and the resulting recession could not be so easily predicted. But now that these symptoms are fully visible, many economists have changed their minds in the face of this changing evidence, because that’s what reasonable people do. Just because a doctor can’t perfectly predict illness does not mean that there is no prescription available when the patient finally gets sick.

C’mon folks! If any government spending is stimulus we would not even have this problem. How much did the feds spend last year? Did federal spending dip and did this cause a recession?!? Government spending increases every year and we think that increasing this spending by 30% (by borrowing the money) is going to solve anything?

Good post Sam. You aren’t telling em what they want to hear, so it’s sort of a pile on of course. But just so you know…that was a very good summation of things IMHO, FWIW.

I really don’t have anything to add, just wanted to chime in. These threads never seem to do much or get anywhere though so I think my 2009 resolution is to never dip more than a toe into them.

And now back to your regularly scheduled <Its all Bush and the evil Republicans and Big Businesses fault!> thread. Have at it boys! Kumbaya!

-XT

WW2 was an example of governmental stimulus. The goods produced were wasted in economic terms. They could have been burned in an incinerator ,because they were shot up and destroyed. But ,the stimulus to the economy was real. This time we are supposed to do real work. rebuilding roads, bridges ,and in rebuilding the grid. These are worthwhile projects in some countries, just not this one. We do not plan ahead well and only fix things when they break.
ITR ,there are many economists who warned of this disaster. You can not collectively state economists did not see it coming.