CBO: "Stimulus" harmful to economy over the long term

The Congressional Budget Office has come out with a report that makes clear what seems obvious to me; Obama's so called "stimulus" package will do more harm than good.

 

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They're assuming W's Reaganomic tax setup, and other odd things.

Tax the rich to pay down the debt, as Keynes recommends, and the effects change.

The Washington Times is among the least reliable of economic news sources, btw. They don't, for example, say what they mean by the "long run". IIRC it's 2019 - ten years away - that the stimulus package starts to hurt. By then, fo course, if it works, the economy will be fine and an extra point or two to pay off the debt incurred in dodging a major depression would be money well spent.

 

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Um, they explicitly mention the 10 year and 2019 figures in the article and they say by that point, x amount of hurting will have occurred. They don't say that it won't hurt till 2019 and were very clear about some growth in 2009 and 2010. And I don't see why the tax setup has anything to do with it. It talks about private dollars versus the public dollars going into debt for the stimulus, and the complaint being that there would be less private investment in the economy. Increasing taxes on the rich would only intensify the complaint.

 

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That's what I pointed out - I vaguely recall something I can't find now that said it wouldn't hurt until 2019, and the Times article is a bit misleading in its implications.

Not necessarily. Increasing taxes on the rich can drive or fix money into wages and investments, by discouraging profit taking. Simultaneously, you remove government debt competition from the investment market. So you get more of what you want, although "the economy" overall is reduced.

 

I don't have any doubt that they are right that, in broad strokes, eventually our deficits will come bite us in the ass. That said, the alternative to deficits is "wait and see," and no one seems to have a rosy outlook on when the current crisis will end under a purely wait and see approach. I know a few professional economists who say not in '09 or '10, whether we have the stimulus or not (but "even longer" without it).

There is no guarantee that we will *ever* recover back to pre-collapse levels. Look at teh economic powerhouses from history, and most of them suffered some shock from which they never recovered. The Florentines and Venetians were once the bankers to Europe. The Dutch rivaled the British in economic power for a long time.

Still, "optimism" may not be a prescription for recovery either.

The big concern, of course, is that '10 will end, we still will not have recovered and then what? Additional stimulus might not work at that point because of the deficit/national debt, and we won't be in a position to do anything about it because of the slump and the size of the deficit at the time.

The problem with Keynesianism seems to be that so many nations were already running deficits in good times. Now that it's bad times, we do not have the access to problem-free credit he seems to have expected. Keynesianism would work better had we kept our debt low in good times.

 

That's not a problem with Keynes's theory, in which large deficits are not recommended for good times.

 

I think that is a little misleading as the CBO does not speculate on the economic impact of the bill. I think it best if we let readers decide for themselves rather than listening to those more interested in spinning the document.

http://www.cbo.gov/ftpdocs/99xx/doc9977/hr1senate.pdf

 

Where to find the CBO's reports:

http://www.cbo.gov/
http://cboblog.cbo.gov/?p=205

 

I agree, and that was my point...the problem with Keynesism is that it requires legislatures and executives to be long term thinkers, not in it for short-term political gain. No deficits in good economic times faces a collective action problem, it is a great theory if government were run by angels, not so good with mankind.

Obviously that means the problem is not that the theory is wrong, just that it does not offer good advice to us given our system and proclivities for wanting more little pork projects in our personal neighborhoods and communities. (Too bad the Republican balanced budget amendment never passed...though that, if anything was too lenient on profligate spending.)

The problem with most econ, imo, is that it assumes humans are rational utility maximizers, and largely ignores demonstrable problems with that assumption. Hopefully the Boston Fed's attempt to institutionalize behavioral economics into their policy making with take and be effective, as that may help to correct the flaw (though "behavioral macroeconomics" is not a robust field, at present).

 

If it had, we'd be totally fucked now - unless you are counting on the requirement for a balanced budget preventing things like the Iraq War.

Balanced budgets don't exclude options like printing money, after all, or rigging things so the banking system can create it. I'd rather it were borrowed.

It ran OK up to about Reagan, stumbled a bit, and then crashed with W.

You don't have to assume angels - just ordinary competence like the 75 years after WWII. And if you require a system that will work under the Reagans and Ws of this world, you may as well just throw in the towel and figure on perennial disaster as a norm.

 

If you count in state and local governments you will see that they too were lured in by deficit spending during teh boom (and we haven't yet hit the problem of bailing them out, but it's coming). In the 75 years after WWII, people just hadn't hit their stride in abusing the budget, now they pandora has opened the box, good luck getting the fiscal evils contained.

I do agree that the balanced budget amendment was too weak. It was a fig leaf of fiscal restraint, but I'd rather have a fig leaf nothing at all, which seems to be the norm since 1981. The fig leaf at least allows you to apply a marginally greater moral pressure.

Using the banking system to create money would not have worked. The banking system does create money, but teh federal government can't spend that money, it sits in private banks for use by borrowers. The government might be able to tax it (if they changed the tax code, but there would be a lag).

They could create money by simply establishing an account and, by fiat, saying there is money in it, and then spending it, but right now they only tend to do that in connection with open market operations, and the money is spent only buying back government debt. It would be a bit of a change to spend it on the regular budget.

 

There was competent government, there can be again.

There is no system, setup, or procedure that is proof against incompetent government.

 

But it is worse than just blaming incompetence. There is a "tragedy of the commons" issue in the budget. Putting in pork projects and running a deficit imparts costs on the system that are not directly born by one's constituents, let alone by the politician himself, that "external" coast is therefore not considered by the lawmaker. The way it was contained in the past was through the imposition of comity and social pressures amongst members of the legislature, and I don't see that coming back any time soon. Worse, even if it does come back sometimes comity gets to be too tight and people excuse the foibles of their fellow legislatures in exchange for similar consideration (as happens often in local government budgets).

I think the "low deficit" solution can only come back if legislatures once again adopt a very strong ethic of fiscal responsibility, even when fiscal responsibility runs contrary to an individual's chances at re-election or hurts one's party's chances. Human nature being what it is, I think any such solution will be inherently unstable.

 

Then we're screwed.

That's incompetence, to overlook the very external costs one was employed to consider. But there is no way to protect oneself against that - elect dingbats and wingnuts, be governed accordingly.

 

Since we are pretty mush assured to get at gang raping from reality for years to come not matter what is done. Very good betting on the republicans part: now they can claim its the democrats fault when things get inevitably worse.

 

Welll I find it ironic that the Republicans now screaming bloody murder over a trllion dollar fix to the problem they created over the last year including doubling the national debt (adding an additional 5 trillion dollars to the national debt) and going from a budget surplus to a two trillion dollar annual deficit.

Now they want to be fiscal conservatives. Where were they a year ago?

 

sucking their own cocks? I don't know.

 

A year ago? If by that, you are wondering why so many voted for the first bank bailout last september, but are now almost unanimously opposed to this "stimulus" plan? Because they're Republicans? Red versus Blue?

Or are you talking about other things, in addition to that bailout? Like the debt incurred from the horribly wasteful and totally pre-planned war against (oh, I forgot... for

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) Iraq?

Where did that figure come from? Really, I am not aware of the timeline of the national debt, though I know that it's astronomical (over 10 trillion)! Would you care to enlighten me on the five trillion you refer to?

 

The party is power holds the purse-strings. When the Democrats were on the outside, they were the do-nothing party. Now it is the Republicans' turn. God forbid something good happen to the country and your enemy take credit for it!

Here's the sick thing: If there was a button you could press that would guarantee a terrorist attack on US soil, I don't think many Republicans could stave off the temptation to press it. I think they would be clawing over one another to do harm to our country if it meant more power for them.

It is the same as the unmasked glee on the face of every Democrat as they gave Iraq-War death tolls. The same joy they experience when more jobs are lost and homes are foreclosed, which buttresses their opinion of Bush being a moron.

The partisan people in our country don't give a shit about anything other than their party and being "right". It is nauseating.

 

Best to view US debt wrt US's GDP. Here that is (Graph below from http://zfacts.com/p/318.html):

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or from wiki:

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Note where curve is red; yet Republican's contol press (directly & via ad dollars) so it is the Democrates who are the "big spenders" !
The recent dip is Clinton. Note top right graph is NOT nominal but constant dollars. Here is zFact's text telling how GWB doubled* the Federal debt:

Bush did three things to skyrocket the debt from $5.7 trillion to $10 trillion:
1. He lowered taxes on the rich (by far the biggest item).
2. He invaded Iraq instead of winning in Afghan-Pakistan (another $600 B).
3. He deregulated Wall Street speculators. That bailout has now "invested" $1T

Note also that future obligations are NOT included (mainly Social Security and Medicare).

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* The cost of servicing the yet to be realized Iraq war cost and fact graphs do not extend thru end of GWB's term (TARP not included, etc.) will make true the statement that GWB doubled the nomimal debt, or almost even when compared to GDP, which was dropping In GWB's last months. In nominal terms GWB spent (or obligated future costs)** more than ALL prior presidents combined. Is it any wonder US is headed for depression, when China will not buy more Treasury bonds?

**Mainly GWB's great expansion of Medicare in an election promiss. It is estimated to be 32 Trillion in unfunded future claims, as I recall.