Economic stimulus package

If you have been paying attention to the news you will hear that Congress and the White House is looking to stimulate the economy, or really inoculate it against a recession.

Last Friday Treasury Secretary Henry Paulson said this in a press briefing,

SECRETARY PAULSON: Well, again, what has been put out is our broad and important principles. And a significant part of this is going to be tax relief that will go to consumers. And we’ve been talking about a package that is 1 percent of GDP, so that’s in the neighborhood of, you know, $140 to $150 billion. And we have been thinking that the biggest portion of this package should be aimed at consumers, taxpayers, and providing them relief.

Q Can you be any more specific than that?

SECRETARY PAULSON: I think I shouldn’t be more specific here. The President intentionally put out guidelines, broad principles, because we’re looking to be collaborative in working with Congress here.

Q But folks on the Hill are saying that the White House already has something in mind in the neighborhood of $800 for individuals, $1600 for families.

Now aiming this at consumers is definitely a Keynesian (demand side) policy. The idea is that it will encourage consumption which will bolster the economy. But the other side comes in in comments at the same briefing by the Chairman of the Council of Economic Advisors Ed Lazear,

CHAIRMAN LAZEAR: Excuse me, I’d just add to that. There are two major parts of the economy that we have to deal with: the consumption side, and the investment side. Consumption is important, of course, because it is the major component of GDP; it’s 70 percent of GDP. But in addition to that, investment is extremely important not only because it’s a significant part of GDP, but also because investment is the way that we create demand for labor. And demand for labor means more jobs and more wages, and that’s the reason that we have to focus on that side as well.

The focus on investment is straight out of the voodoo economic policy of Reagan. This is what you will hear from the right, they will continually hammer away at this narrative to help corporations and the investor class.

Now Joshua Holland did a nice job over at Alternet starting with quoting Kevin Hassett of the American Enterprise Institute column in the WaPo, who basically says that there are some upsides to a recession. It is a really nice long piece Holland has written, so go read it.

So I will focus on the Newshour this evening that had William Beach of the Heritage Foundation and Joseph Stiglitz talk on this issue. First some background on the two contributors. Let’s start with William Beach,

Prior to joining Heritage in 1995, Beach held a variety of posts in the public, private and academic sectors. He served as a litigation economist with two Kansas City, Mo., law firms-Campbell & Bysfield and Watson, Ess, Marshall & Enggas – where he specialized in analyzing how anti-trust legal remedies would alter product pricing and availability. Later, as an economist for Missouri’s Office of Budget and Planning, he designed and managed the state’s econometric model and advised the governor on revenue and economic issues. After a stint in the corporate headquarters of Sprint United Inc., Beach moved to the Washington, D.C., area to serve as president of the Institute for Humane Studies at George Mason University.

A graduate of Washburn University in Topeka, Kan., Beach also holds a master’s degree in history and economics from the University of Missouri-Columbia. Beach also is a visiting fellow at the University of Buckingham in Great Britain.

and Joseph Stiglitz,

He is now University Professor at Columbia University in New York and Chair of Columbia University’s Committee on Global Thought. He is also the co-founder and Executive Director of the Initiative for Policy Dialogue at Columbia. In 2001, he was awarded the Nobel Prize in economics for his analyses of markets with asymmetric information.

Stiglitz was a member of the Council of Economic Advisers from 1993-95, during the Clinton administration, and served as CEA chairman from 1995-97. He then became Chief Economist and Senior Vice-President of the World Bank from 1997-2000.

Just on a simple look at their bios, I have to say Stiglitz is more impressive. In fairness if you looked at the bio of Paul Krugman and Milton Friedman, Friedman’s would look a lot more impressive and you can guess which I prefer. Now lets get down to what they said tonight.

JOSEPH STIGLITZ, Economist, Columbia University: Well, I would begin by focusing on, what gives the biggest bang for the buck? The problem is that, over the last seven years, our deficits have increased enormously.

Now, when you’re ranking proposals by the bang for the buck, the number-one is strengthening our unemployment insurance system. When people get thrown out of work, they get money, they spend it.

Number two, giving money, tax rebate to low-income Americans. Again, when they get the money, they’ll spend it. And a tax rebate could be done in a very quick way.

Number three, giving money to states and localities that are facing real financial constraints. Tax revenues are going down. Property values are going down. And most states have a balanced budget framework.

So if the revenues go down, they have to cut their expenditures. And this will depress the economy. So dollar for dollar, this will stimulate the economy enormously.

and predictably Beach comes out with investment,

WILLIAM BEACH, Economist, Heritage Foundation: Well, let’s back up just a moment, Ray. Those are the leading ideas. There’s one that he didn’t speak about, and I’m sure that he meant to, and that is what Republicans and Democrats have done time and again when the economy has fallen on these sort of pebbly paths, and that is to incentivize investment.

Tell businesses that if they’ll take production, expansion of plant and equipment, buying equipment, out of the future and bring it to the present, and get a tax cut for doing so, that brings production to the present, creates jobs, expands incomes by making workers more productive.

RAY SUAREZ: So give us an example of what kind of spending you’re talking about.

WILLIAM BEACH: In 2003, for example, we had a program, what was called bonus depreciation. It really is giving a tax cut to businesses so that they will do things now instead of three years from now or so. And that worked very well to get production up, to get jobs growing again.

Many people listening to this program will remember how slow jobs were. That’s been tried time and again, and it usually works pretty well.

And some of the economic research which is now being done to evaluate which of these programs really work says investment incentives are a really tried and true method for changing the direction, the slope of the economy.

Now later on Beach gets into how investment increases productivity

WILLIAM BEACH: … increasing consumption, we can have a bump up in consumption, which will inevitably happen, which will stimulate the economy in the short run.

But what we’ve learned about that is that it doesn’t necessarily — and it frequently doesn’t — change the trend of the economy. What you’re hoping for in a stimulus plan is not to just increase consumption or GDP temporarily, but to change the trend from sluggish to growing.

And to do that, you need to expand productive capacity, increase the productivity per worker. And that could be done in the short run. It can be done in conjunction with the consumption side, but it should be the dominant part of the package and not the minor part of the package.

There has been talk in the past year about how productivity gains didn’t go to workers, which is what you want if you are trying to boost consumer demand. Many people have said that the productivity gains have gone to corporate profits, but not Dean Baker in a January 1 blog dissented.

In short, a careful examination of the data shows that profit shares have not risen from 1997 to 2006. So, if the money didn’t go to ordinary workers and didn’t go to profits, then where did it go? The answer is high-end workers, which include CEOs, the hedge fund boys, doctors, lawyers, and other highly educated professionals. One of the main reasons for this upward redistribution is trade policy — but the NYT likes current trade policy.

Now the ironic thing about Beach’s position is that it seems to be contradictory, at least to me, of the Heritage Foundation mission.

Founded in 1973, The Heritage Foundation is a research and educational institute – a think tank – whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.

$150 billion on economic stimulus, or 1% of GDP doesn’t sound like limited government. I am guessing that is code for limited regulation. Or maybe he is off topic and could get fired, then he will advocate for unemployment insurance that Stiglitz is talking about.

Stiglitz’s recommendations are repeat of ideas for 2002-2003 problems. As the CBPP reported on state budgets and the cuts in Feb 2003. Here was one quote in the report.

Robert M. Solow, emeritus professor of economics at MIT and winner of the 1987 Nobel Prize for Economics, has made a similar point. Solow recently wrote, “There is urgent need for substantial revenue-sharing from the federal government to the states, cities and counties. The recession and slow recovery have gutted states and local revenues. Since they operate under constitutional balanced budget constraints, governors and mayors are being forced to make drastic cuts in basic and necessary public services. This weakens the economy – states and cities spend twice as much as the federal government – and could spell disaster for many low-income people who are the main beneficiaries.”

In 2002 Congress extended the unemployment insurance as the CBO reported on.

Personally I like Stiglitz’s recommendations. I think they would do the most help.

But no matter what the package looks like, it must not exclude those who do not pay any federal income tax. They pay sales, they pay payroll taxes, and they need help as much if not more than middle and upper income folks.

-Josh

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1 Comment

  1. January 24, 2008 at 5:42 pm

    Long term, the FairTax has features ( http://snipr.com/fairtaxslate ) that minimize political manipulation, and place emphasis on visibility and attunes focus toward congressional spending. Its consumption base is more robust, and any economic disruptions would tend to be less severe. Additionally, with the massive debt facing us ( http://snipr.com/meltdowninprogress ) we may just be postponing the inevitable in addressing this present crisis.


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