Stimulus Update
Word is the Senate has agreed on an economic stimulus package worth around $150 billion that is essentially the House plan with low-income seniors thrown in. The House and the White House are supposedly on board, meaning the bill is likely to pass quickly.
It's both good news and a missed opportunity to craft a much more effective package.
On the plus side, those who said the political system was too clogged with partisanship to get this out the door quickly are proved wrong. The package is also much improved from the White House's first pass, which excluded low-income families and about 20 million elderly persons.
On the negative side, they could have crafted a package that would have had a lot more bang-for-the-buck.
My earlier analysis of the House bill was that, given its emphasis on tax rebates and business deductions, we'd be lucky if it provided a one-for-one boost to GDP. That is, if the stimulus package amounts to about 1% of GDP, and it looks like this one does, you want it to boost GDP by at least that much. Some economists score the rebates as about one-for-one, or even higher, but I'm skeptical. So many people are so indebted right now that they're likely to save the rebate or use it to pay off debt, neither of which directly boosts growth.
And the business tax cuts...oy. Economy.com looked at 13 different stimulus ideas and scored this one the lowest, right behind making the Bush tax cuts permanent. For every revenue dollar we sacrifice, we expect to get back a measly 27 cents.
By leaving out extended unemployment benefits and other more directly stimulative measures, like helping revenue-strapped states invest in infrastructure (roads, school repairs), the Congress and the White House missed the chance to get a significantly bigger return on our investment.
Clearly, the politics of rebates--giving money to people--was to tempting to ignore, and business interests got their slice too. In other words, while I'm busy thinking about economic multipliers, they're thinking political multipliers.
That said, and I know there's a fair bit of skepticism on this point, this package will surely help. It won't stave off recession, but it will mitigate the pain for many. If the bill really goes through, then politics worked pretty well today.
Well, politics may have worked pretty well for the stimulus package, but things are not going so well for the FISA bill they are debating right now. There are only a handful of Senators in the Senate that really try to represent the American people. 66% of the American people do NOT WANT immunity for telecoms, but the majority (including some Democratic senators) of the Senate are going to vote for the Judiciary Committee bill which includes immunity. The Republicans didn't even bother to debate the amendments offered by Senator Feingold (to better protect Americans from privacy violations), they just turned the discussions over to Democratic Senator Rockefeller and he "strongly opposed" every amendment offered by the Democrats. BUT, he is co-sponsoring a bill with Kit Bond, Republican a**wipe from Missouri, which has the "approval of General Hayden and DNI McConnell". I guess with friends and colleagues like Senator Rockefeller, we really don't need the Republicans to do the dirty work!
February 7, 2008 6:41 PM | Reply | Permalink
While I am not the largest fan of this money giveaway I believe it would have made much better since to give out vouchers for the same amount to be used only for thing produced in the U.S. After all wasn't this to protect American jobs? Failing this they should set aside some money to broadcast on TV asking people to spend as much of this money as possible on U.S. goods. Every little bit helps.
February 7, 2008 8:36 PM | Reply | Permalink
Good news is that we came within one vote, even with the "let's let government grind to a halt, become ineffective, and then let us blame it" party. Think about 2008: can we pick up that ground?
February 7, 2008 9:33 PM | Reply | Permalink
Maybe so, jhaber. Note that McCain failed to show up for the vote, even though he was apparently in town. Why would he miss such an important vote? What was he thinking?
(Updated: I was unclear here: I mean the Wed vote, when the Senate rejected, by one vote, an agruably better--ie, more stimulative--package. Mc supported the package that passed yesterday.)
February 7, 2008 9:41 PM | Reply | Permalink
Band-aid on gangrene.
February 8, 2008 6:59 AM | Reply | Permalink
Hi, Jared.
I am even more skeptical than you about the net effect of this package. I don't think it will make much difference at all. Helicopter Ben (Bernanke) got what he wanted, but it seems too little too late.
I think we're going into a long period of recession, what might even be called a soft depression. The parallels with Japan a decade (and a half) ago are pretty striking. Aren't these sorts of half-measures just the kind of thing to help drag out the misery even longer?
That's what happened in Japan. Their government kept propping up banks and injecting more and more "stimulus" money into their economy. Yet nothing could overcome the demographics and the inevitable deflation of their huge bubble.
We face the same problem here. And, really, our bubble began deflating with the stock crash of ~2001*. The Fed stepped in with big interest rate cuts, inflating a housing bubble. And we started a war, injecting huge amounts of government money -- "stimulus" inefficiently trickling down into the economy.
This helped delay the inevitable, but it also makes the situation much worse now.
Seems to me that this "stimulus" package, and the Fed's recent extreme interest rate cuts now are doing the same thing. They are fingers in the dike, desparate measures to hold off the inevitable decline to come.
Maybe they can kick the can down the road another 8 or 10 months.
So they can blame the crash on the Democrats.
That seems to be their game. (And, once again, the Democrats in Congress have gone along with the plan.)
[Didn't I see you on CNBC this week? You alone among a panel of 3 or 4 harsh conservative blowhards?! I had to turn it off. How can you listen to that Krudlow guy for more than 2 minutes without exploding? I was yelling at my TV at 6 in the morning!]
-- ARG
* In case anybody doubts this, take a look at a chart of stocks vs. gold since 2001. Viewed in terms of gold, instead of dollars, the stock market has continued steadily downward ever since.
February 8, 2008 7:48 AM | Reply | Permalink
ARG:
Krugman has similar worries this AM in the NYT, and I take your points too.
However, we're more on top of this than Japan was. As I recall, and I should really look this up, their bubbles were bigger and worse than ours and their reactions were all over the map. There was, as you say, wasteful stimulus, but it came late in the game, when deflation meant consumers were unlikely to start spending. Relatedly, the huge problem for them was the liquidity trap--near zero nominal interest rates--so they were unable to apply that type of stimulus either.
I hear your worries about precisely these problems here--over-leveraged consumers who will save and deleverage rather than spend, and interest rates that are pushing on a string, if not in a trap. I share those worries on alternate Wednesdays.
And yes, that was yours truly, trying to speak truth to power on CNBC, where I'm a regular contributor. It can be a strange setting, but I'm glad they ask me to come on.
February 8, 2008 8:52 AM | Reply | Permalink
In Japan, government officials not only tolerated the house-price bubble, economists say, they actively encouraged it . . . . Japanese officials were too conservative and too protective of failing banks . . . when a bank got in trouble it was often quietly bailed out temporarily with loans or investments from other members of the corporate group (keiretsu). Japanese bank regulators, economists note, tended to be friendly and permissive. www.nytimes.com/2008/02/09
Substitute Alan Greenspan for "government officials"; Ben Bernanke for "officials too protective of failing banks"; and sovereign funds for Japanese keiretsu and there's not a dime's worth of difference between the two governments' responses to a down turn in consumer demand following the bursting of a banker produced Ponzi bubble.
February 8, 2008 9:00 PM | Reply | Permalink
Which is not to say that the analogy between the two economies, Japan's and ours, is particularly close.
Unlike ours Japan's government financed social safety net is modest (result: a very high savings rate) and its society is, and was during the '90s, rapidly aging (result: a very low consumption rate).
Will Boomers get religion in their pre-Golden Years? Let's hope not.
February 8, 2008 9:22 PM | Reply | Permalink