17 January 2008

Stimulating our Over-Stimulated Economy

Bernanke and Bush agree that our economy needs a stimulus. (Pelosi, Clinton, and Obama have also called for stimulus.) Basically, the proposal is to add about $100 billion in spending to our roughly $13 trillion economy (an infusion of less than 1%).

One, as long as they're doing this, why do it through banks? Why not send out vans and just pass out money to the homeless? Seriously. They'd spend money if they had it. Instead of a trickle down, we could have a surge up.

Two, is a stimulus really what's needed? Unemployment is higher but, at 5%, it is not that high. Meanwhile, a big part of the bump we're feeling is from home prices settling a bit. I'm not sure that's so bad. Here in San Diego, median home prices topped $500,000 for a while. If they kept rising at 5% to 15% a year, about .001% of households could afford homes, eventually. I'm not sure who benefits from that. If dropping home prices hurts the economy some, I don't know how that's to be avoided. Stimulating the economy so that home prices stay out of reach might help speculators, but it's not obvious how it helps normal people who just want a place to raise kids.

Three, our problem may be less a matter of stagnating consumption than over-stimulation. We already spend plenty. Many countries have savings rates of 20 to 30% (China's is close to 50%) but our savings rate is not far from zero. (Last year, briefly, our savings rate was negative.) It may be that stimulating the economy now is like offering an exhausted, crying baby a rattle.

Instead of more macroeconomic stimulus, how about a better safety net for this age of globalization? Why not offer longer periods of unemployment coverage, more aggressively fund training, and adopt policies that make housing affordable rather than expensive? A stimulus package seems like such an expensive and vague way to address real and specific problems.

And besides, it's not as though no one in Washington has already thought to cut taxes and increase spending in the last 7 years. If that is really what we needed, it's hard to explain how we got here.


Anonymous said...

I have doubts whether those simulus packages really make a difference. I bet if you did absolutely nothing the economy would still rise and fall in pretty much the same way.

Ron Davison said...

ah, Thomas,
You're talking to a guy who thinks that Keynes was one of the great minds of the 20th century. Stimulus works - but like anything, it doesn't work in every situation.

LSD said...

Along a similar line, Reason Magazine has this:


Ron Davison said...

My post was like a Reason article? Oh no! I've become a contrarian.

Lifehiker said...

What has happened to us?

We've become a service economy, primarily, not creating much of lasting value. Health care is great, but it's real value in keeping children and workers healthy, not extending the lives of many who are neither productive or much interested in living beyond that it's maybe better than the alternative. Yet that's where the great bulk of our spending goes.

We've become a financial economy, with people making and losing money as they pass it from one person to another. Again, little permanent value is created. The house that's now $350K instead of $500K is the same house.

We've become a dependent economy, with incredible sums leaving our borders for goods and energy. We need to find ways to not spend this money or spend it here. Our education and research engines should be focused on solving this problem.

A stimulus is a short term bandaid that deals with none of these core issues.

But, what do I know? I'm probably full of baloney.

Ron Davison said...

I think you're hitting on a crucial piece of it. In addition to monetary and fiscal policy, we need focus on structural policy - the creation of jobs and wealth rather than just the stimulus of activity or the dampening of inflation. But then, as you say, what do I know?

cce said...

There's no doubt that a sort of down turn may actually have lasting and positive effect (or is it affect) on the way American's spend their money in the future. Those that lived through the Depression spent a lifetime being frugal, saving and eschewing senseless spending on luxury items that we, those of us who have only enjoyed economic prosperity, have come to see as our entitlement, the symbol of our self-worth. I can't help but think a little pinch is what we all need to revise our goals, to gather global perspective. It's going to hurt, badly, but it may be, in this instance, "No Pain, No Gain."

Lifehiker said...

Unfortunately, we're in a box now. If the pump is not primed, more and more businesses will have to cut employees or close due to lack of adequate business. A viscious cycle will begin. That's what the Fed and politicians are worried about.

Yet, to prime the pump the government is basically going to print money - pay for the pump-priming with debt. That lowers the value of the dollar and makes all imports (oil, computers, steel) more expensive. So we pay for the short term stimulus over the long term.

There is no free lunch.

LSD said...

What do you mean "Oh No"?

Becoming a contrarian is something to aspire to! It's a hard-fought priviledge of growing older. And not many people attain the mantle of curmudgeon by forty seven.

Embrace your destiny!

Since I am still only forty four, I agree with a lot of what you all have said. I am not so concerned about a little downturn, or the globalization of the American economy, except for this; I am concerned about the preeminance of non-productive and non-creative activity in our economy, especially as it melds with other, potentially leaner economies. I think legal reform would help on a lot of fronts.

LSD said...

...Either that or the establishment of a monarch by means of a farcical aquatic ceremony.

Ron Davison said...

this is non-trivial, this matter of expected behavior, the catch-22 of policy. We need to bail people (and banks) out but if we do, they may well come to rely on it, which puts the whole system in jeopardy.

The only good thing about more money is that it'll devalue the dollar more which will make it harder for us to buy (imports) and easier to sell (exports).

"farcical aquatic ceremony."
What? Were you spying on me yesterday when I was trying to swim laps?

Lifehiker said...

Yes, a falling dollar will help us increase our exports. Too bad we don't have any oil to export!

The U.S. balance of payments deficit is so astonishingly huge that even a 10-20% increase in exports wouldn't make that much difference, I suspect.

Meanwhile, the cost of imports will go up. Perhaps that means we will buy less of them,and improve the balance of payments by lowering our consumption. Make China angry, that would, says Yoda!

Interesting chat on this topic. But the stimulus will happen for many reasons, not the least of which is that Bush would prefer not to leave office with the economy in tatters largely to his administration's "free market" (don't need no regulation) approach to real estate lending.