Today, international markets voted on Bush and Bernanke's stimulus package. Apparently, they don't like it. Markets from Taiwan to Frankfurt dropped by 5% to nearly 8% - in a single day. This represents trillions of dollars in wealth that disappeared into the same place as yesterday's temperatures. This is sad news for investors who've already lost about 10% of their portfolios in just the first few weeks of this year - a reversal of all of last year's gain.
Why would investors across the globe be so unimpressed by the plan? Well, to put his stimulus plan in perspective, Bush is spending $100 billion a year in Iraq - a country whose economy is about $90 billion. He wants to pump about $150 billion into the US, where annual GDP is about $13 trillion. His annual "stimulus" in Iraq is more than 100%. To avert a recession, he wants a stimulus of about 1% for the US. If this sounds inadequate to you, don't feel alone. It failed to impress thousands of investors.
Showing posts with label Bernanke. Show all posts
Showing posts with label Bernanke. Show all posts
21 January 2008
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.
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.
08 November 2007
Bush vs. Clinton - Income Growth by Percentile
The amount of joy you get from a scoop of ice cream depends on lots of things. One big determinant of how much joy you get from it is how much you already have. If you already have 1,000 gallons of ice cream, your enjoyment isn't going to go up much if you get another. If you have only one scoop of ice cream, your joy will go up more. As you get more, your marginal utility (fancy economist speak for your additional joy from the next unit) falls. It is as true of money as it is for ice cream and clothes. A person with only $100 will get far more excited about another $10,000 than a person with $1 million. To be a Bush supporter is to deny this very simple and hard to refute claim.
CSPAN posted some charts today in conjunction with Bernanke's hearing, one of which I've recreated here. For me, this graph seems to capture what is indefensible about Bush's policies. (And note that even the median income in 2006 was probably much lower than what most people think - about $35,000.)
Income growth was higher for everyone during the 1990s. For those in the top ten percent, incomes grew twice as much. More important, though, is what happened to those at or below the median. The difference for those in the bottom 10 percent could hardly be more dramatic - during the 1990s, their income went up 11% and so far this decade, their incomes have dropped 3%.It is not just that the incomes are growing more slowly. The increase in marginal utility under Bush's tenure has been negligible. Is it any wonder his approval ratings have been abysmal?
CSPAN posted some charts today in conjunction with Bernanke's hearing, one of which I've recreated here. For me, this graph seems to capture what is indefensible about Bush's policies. (And note that even the median income in 2006 was probably much lower than what most people think - about $35,000.)
Income growth was higher for everyone during the 1990s. For those in the top ten percent, incomes grew twice as much. More important, though, is what happened to those at or below the median. The difference for those in the bottom 10 percent could hardly be more dramatic - during the 1990s, their income went up 11% and so far this decade, their incomes have dropped 3%.It is not just that the incomes are growing more slowly. The increase in marginal utility under Bush's tenure has been negligible. Is it any wonder his approval ratings have been abysmal?

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