The Stimulus Is A Failure

[Drake Tungsten]

Did Joe Klein really not know that he was explaining why the stimulus was a failure in a post in which he calls the American people "dumb" for thinking the stimulus money was wasted? Talk about stupid...

It turns out that what people are really upset about is all that wasteful money that has gone to political public works projects...except that the overwhelming portion of that money hasn't been spent yet. Remember all those "shovel-ready" projects? Well, they didn't exist. The big jobs-creating projects like the rebuilt "smart" electric grid, major highways and fast trains will come on line during the next year.

http://swampland.blogs.time.com/2010/01/25/too-dumb-to-thrive/#ixzz0dhAXsu6P

[DanS]

WTF China?

That piece is a muddled mess of journalism. Couldn't decide whether it wanted to be an infrastructure story, a stimulus story, or an expose on a government-directed mass development gone wrong.

[Drake Tungsten]

Why can't it be all three?

[DanS]

I'd have no problem with it, if they said something meaningful about the topics. But the story was just a meandering mess.

NB: I think all of the topics would make interesting stories on their own.

[Drake Tungsten]

CBO: Stimulus $75 Bln More Expensive Than Estimated

This isn't the headline that President Obama wanted heading into his State of the Union address as he promises to rein in budget deficits and makes a last ditch effort to boost public support for his health care legislation. But today, the Congressional Budget Office estimated that his signature domestic achievement to date -- the economic stimulus package -- cost more than the $787 billion it originally estimated. On page 113 of its Budget and Economic Outlook for 2010 to 2010, CBO tells us:

Looking ahead, it appears that ARRA will have larger effects in later years than originally estimated. All told, CBO now anticipates that the law will increase deficits by $862 billion between 2009 and 2019...

http://spectator.org/blog/2010/01/26/cbo-stimulus-more-expensive-th

$75 billion more for the money hole.

[Dinner]

I imagine that is because the repaid funds from TARP have been redirected. That's not exactly new money though.

[Drake Tungsten]

Good news...

The U.S. economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter, the quickest in more than six years, as businesses made less-aggressive cuts to inventories and stepped up spending. ...

Growth was boosted a sharp slowdown in the pace of inventory liquidation, a factor that could mask the strength of the economic recovery from the longest and deepest downturn since the Great Depression.

But even stripping out inventories, the economy expanded at an annual rate of 2.2 percent, accelerating from the 1.5 percent increase in the third quarter, reflecting relatively strong performance from other segments of the economy. ...

Business inventories fell only $33.5 billion in fourth quarter after dropping $139.2 billion in the July-September period. The change in inventories alone added 3.39 percentage points to GDP in the last quarter. This was the biggest percentage contribution since the fourth quarter of 1987.

For the whole of 2009, the economy contracted 2.4 percent, the biggest decline since 1946, the first year after the end of World War II.

http://www.cnbc.com/id/35141739

I still wouldn't be surprised by a double-dip recession, but let's hope the economy continues to grow.

[DaShi]

Let the good times roll!

[Drake Tungsten]

From the BLS:

The unemployment rate fell from 10.0 to 9.7 percent in January, and nonfarm payroll employment was essentially unchanged (-20,000), the U.S. Bureau of Labor Statistics reported today. Employment fell in construction and in transportation and warehousing, while temporary help services and retail trade added jobs.

... Nonfarm payrolls decreased by 20,000 in January. The economy has lost almost 4.0 million jobs over the last year, and 8.42 million jobs since the beginning of the current employment recession. (note: job losses were 7.2 million before benchmark revision).

The unemployment rate declined to 9.7 percent. (I'll have more on that soon)

... For the current recession, employment peaked in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early '80s recession with a peak of 10.8 percent was worse).

http://www.calculatedriskblog.com/2010/02/employment-report-20k-jobs-lost-97.html

http://michaelscomments.wordpress.com/2010/02/05/january-unemployment-at-9-7-unbelievable/

I'd like to be excited about this, but the details make me wary of reading too much into this decrease in the headline unemployment number.

[Jon Miller]

I think it is a bit of noise.

JM

[Drake Tungsten]

I think it is a bit of noise.

I'm inclined to agree.

[Theben]

It is modified for seasonal job fluctuation. There was a net loss during that time.

[Theben]

Drake borke the thread.

[Straybow]

It is modified for seasonal job fluctuation that didn't happen. There were much fewer post-holiday season layoffs than normal. They adjusted the total number of jobs downward to account for fewer seasonal jobs.

Not cricket.

[Drake Tungsten]

I thought this was a good interview that corrects a lot of common misperceptions.

How Obama got Keynes wrong

NEW YORK (Fortune) -- The Obama White House likes to say that the theories of John Maynard Keynes form the foundation for its fiscal policies. Most notably, it draws upon the legendary British economist's idea of spending big to pull out of a recession.

But one economist says the administration has gotten Keynes only half right. Allan Meltzer of Carnegie Mellon is one of the most influential monetarists of the past 50 years. He has served in the Department of the Treasury under President Kennedy and on the Council of Economic Advisors during the Reagan Administration. He also authored the book, Keynes's Monetary Theory: A Different Interpretation.

While the Obama team is laying out huge sums of money, Meltzer says it's neglecting a key part of Keynes' plan: You can't run up a debt without a way to cover it.

Meltzer recently sat down with Fortune editor-at-large Shawn Tully. Below are edited excerpts from their conversation.

If Keynes were alive today, what would he think of President Obama's fiscal policies?

He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It's true that we're stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.

Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn't understand that the proper policy in a democracy recognizes that today's increase in debt must be paid in the future.

We paid down wartime deficits. Now we have continuous deficits. We used to have a rule people believed in, balanced budgets. And now that's gone.

Didn't Keynes advocate temporary deficit spending in a recession?

Keynes wanted deficits to be cyclical and temporary. He wouldn't have been in favor of efforts to raise tax rates in a recession to eliminate deficits. He viewed that as suicidal. He was opposed to the idea that governments should balance the budget during a downturn, and advocated running short-term deficits to spur the economy.

The type of stimulus he advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending, as the source of durable job creation. He also said that the deficits should be self-liquidating, so that the increased economic activity caused by the stimulus inevitably generated a combination of extra tax revenues and lower unemployment payments. With higher revenues and lower outlays, the deficit would disappear.

The Obama administration's main objective, in the name of Keynes, is boosting consumption. That sounds very different from the focus on investment that you say Keynes advocated.

Keynes didn't favor at any time that I know spending to increase consumption. He didn't want that, and in fact he believed that was taken care of by the marketplace.

Keynes wanted to increase employment by smoothing the amount of investment through the up and down parts of the business cycle. He knew that recessions cause a decline in investment, and that the fall in investment caused unemployment to rise. So he wanted the government to stabilize investment through a recession.

What specific policies did Keynes advocate for smoothing investment?

Keynes is very vague on the subject. He believed that the government should plan and direct investment, but not nationalize it. He talked about how well utilities were run under state regulation in Britain. Keynes wanted to apply that model to more of the economy. He thought government planning of investment was the best way to reduce risk for private companies and lower interest rates to spur investment.

Did Keynes champion tax cuts or government spending increases in a recession?

Again, he was extremely vague. On spending, he did say that deficits should be temporary and self-liquidating. He clearly did not advocate long-term spending in excess of revenues, since that causes structural deficits. Nor did he specifically recommend tax reductions for individuals or companies. Those types of cuts, however, are an obvious way to achieve his goal of boosting investment in a recession. And it's been used with great success by his Keynesian disciples. For example, the Kennedy Administration tax cuts were championed by Keynesian economists, and proved very successful at raising investment.

And one of the leading Keynesians, Franco Modigliani, developed a theory of consumption stating that temporary tax cuts are mainly saved or used to reduce debt. Milton Friedman, the ultimate champion of free markets, independently developed an alternative model that came to the same conclusion. The temporary reductions under Carter, George W. Bush and Obama were all failures, since people spend more only when they're confident their take home pay will rise permanently.

This is standard economic theory that the current administration ignores.

What would Keynes think of Obama's stimulus plan?

It's unbelievable that a man whose main theme was to smooth investment comes to be the proponent of redistributing income away from the people and companies who do the investing.

My advice on the stimulus plan was, don't do it. Let's look at the plan. First, a lot of the money was used to reduce the deficits of state and local governments by increasing the federal debt. It was simply money transferred from the federal government. The economic multiplier effect was zero. Second, the temporary tax cuts went to paying off credit cards and other debts, not spending that would have increased economic growth.

http://money.cnn.com/2010/02/04/news/economy/meltzer_keynes.fortune/index.htm