January 27, 2009
House Democrats have unveiled their proposal for economic stimulus. Here's mine.
I'm sympathetic to a proposed requirement that any bill be read in its entirety on the House floor before representatives are asked to vote on it. Were I a member of that legislative body, I would be inclined to vote "no" on any proposal that I had not personally read. Such a rule makes my position on the 647-page American Recovery and Reinvestment Act of 2009 an easy call.
For what it's worth, here's my alternative stimulus bill, background motivation for which can be found here:
(a)The Secretary of the Treasury is hereby authorized and instructed to borrow a sum of $200 billion and distribute the proceeds no later than May 30, 2009 as follows. The funds shall be distributed to the 50 states proportional to population reported in the most recent available Census data, as a supplement to each state's general funds.
(b)In authorizing this Act, Congress is hereby signaling its intention to raise federal taxes by May 30, 2019 to a sufficient degree to repay all principal and interest due on the debt that is incurred by the Treasury as a result of implementing provision (a).
Maybe some more legal-minded readers will have ideas about how to fluff that up some. But I don't see how it could get longer than 2 pages.
Posted by James Hamilton at January 27, 2009 08:24 PMdigg this | reddit
Amen! to voting no on a bill you had not read & the superiority of your 'stimulus' to the House Dems'.
Posted by: Bryce at January 27, 2009 08:51 PM
My apologies, though I would want to ask, wouldn't the politics (and corruption in others) cause problems with the funds being used in the most efficient way possible?
Also, 200 billion seems like an extremely small number, even given a decent multiplier, to deal with a recession of this magnitude—not necessarily in absolute numbers, but plainly enough said in making up the spending that isn't being spent due to lack of consumer and business confidence.
Posted by: James Wang at January 27, 2009 08:51 PM
And to clarify, when I said "cause problems," I meant basically "prevent the funds from being used in the most efficient way possible."
Posted by: James Wang at January 27, 2009 08:53 PM
Some smart people have also called for a simple distribution by population. Mankiw says distribute to state government, I say let the representatives earmark the money in proportion. All this presupposes that we think the money is going out anyway.
647 pages is enough to "de-expectation" most of us from the Kenyesian "countershock".
Posted by: MattYoung at January 27, 2009 10:48 PM
Lol, legislate a future tax increase? You know that they can repeal that, right? Tho I suppose repealing a tax increase is better than creating a new tax cut.
Posted by: Anonymous at January 28, 2009 02:15 AM
Keep in mind that we won't see any positive effects for quite some time. We are beginnnig to see the effects of TARP money and as we know it has taken a while and it's not overly dramatic. I did a piece about the nuts and bolts of the stimulus. Check it out.
Posted by: elementaryfinance at January 28, 2009 03:53 AM
Why does the principle on the debt need to be repaid with tax increases? Even the WWII debt that reached 120% of GDP was NEVER repaid. The dollar amount of govt debt continued increasing. The economy grew making the ratio of the debt level fall; combined with a comfortable low level of inflation after 25 years the debt was insignificant.
As a matter of fact, every attempt to pay down principle on govt debt over our history has not been good. Seven times the debt was reduced by more than 10%, the first six were followed by depressions. It looks like we might make it 7 for 7 following the 1999-2001 budget surplus. I understand correlation does not prove causation. But I have read the work of a few economist that have a very good and logical explanation for this correlation. Unfortunately the explanation is far too long to get into on a blog. If interested, I would suggest reading the work of Abba Lerner, Randall Wray, and Warren Mosler.
Posted by: markg at January 28, 2009 05:38 AM
markg: I certainly don't recommend paying off the existing debt, only the new additional debt issued as a result of the proposal.
If you are claiming that the government can issue $200 billion in additional debt without ever having to do anything differently, then by all means let's do it. Can we also issue $300 billion, and never pay it back? $300 trillion? I don't think you want to claim that, no matter what the government borrows, it never has any consequences.
My own view is that we're already at a point where there could be quite significant consequences of the debt that is already outstanding.
Posted by: JDH at January 28, 2009 06:11 AM
If you were to adhere to a policy of voting against every bill you hadn't read, you would vote no on virtually everything, regardless of its merits. Members of Congress don't have time to read every piece of legislation they're called upon to vote on. The read summaries, they get staff briefings, etc.
Posted by: John B at January 28, 2009 08:24 AM
Yes, John B, I would most assuredly vote "no" on most proposed legislation.
Posted by: JDH at January 28, 2009 08:35 AM
I have to agree with the voting "no" on things not personally read. I am a Dem and I don't have major issue with many of the ideas proposed in the legislation as I understand it. That said, Congressional bills are excessively large to the point of discouraging general public over site or interest. What regular person with a full time job not concerned with legislation can manage to absorb what is written in any bill? If Congress would slim down these proposals (say under 100 pages) we would all benefit from the increased transparency.
Posted by: Ben at January 28, 2009 08:57 AM
What are those consequences? From my understanding of a fiat non-convertable currency, the value of that currency is all that matters. Can you explain why Japan has managed to increase its debt/gdp ratio to 170% without a collapse in the value of the Yen or higher interest rates?
Like I said, the explanation is quite long. But to sum it up best I can, govt debt represents the desired net financial savings of the private sector (treasury securities). A growing economy would require an increasing financial wealth. A trade deficit is the foriegn sectors desire to accumulate dollar wealth. To satisfy both, the govt would presently have to run a deficit of at least 6% of gdp.
Posted by: markg at January 28, 2009 09:04 AM
Does anyone have some idea of how any of the stimulus package will help the economy?
I skimmed the HR1 bill with the hope that some appendix or discussion of economic models would help me to see how the goals would be met:
1. Stop the rise in the numbers of unemployed,
2. Create new jobs for the many highly skilled people who have been laid off already,
3. Get value from the money spent, as some improved infrastructure, a shift to more paid workers versus extended unemployment benefits, and I'll throw in a tie to
4. The stimulus bill having a connect to the banking solvency bill with means for the return of occupants to their foreclosed empty houses.
Some elements of an effective bill seem easy to include: 1. help states and cities to pay their employees in 2009 to prevent these layoffs,
2. Help US manufacturing companies to stay afloat (like automakers) until consumer spending rises,
3. Get more money in motion to promote spending and avoid more business foreclosures.
Of course, these random choices can be argued for and against. My point is: Where is the economic model? What I see in the HR1 bill seems to be everyone gets a piece of the money through every government agency under the sun.
Comments sent to my Senator:
Dear Senator Vitter:
I try to understand the complex issues of:
1. The breakdown in financial markets, and
2. The falling demand for goods and the resulting rise in unemployment,
that are the elements of the world recession.
These current “big news” topics, not by accident, follow the $140/bbl crude oil price in news reports of the spring and summer of 2008.
The federal government has limited control of these phenomena through monetary policy, Senate Committee hearings (criminal prosecutions) , the regulations on lending, and the oversight of publically traded companies.
I am sure there are “state-of-the-art” macroeconomic models that claim to forecast the effects of various government policies and tinkering on the “health of the economy”.
Your current call for better accounting and scrutiny in spending, (or better said, in giving away $350B with $350B to go,) is something everyone agrees with. The question is “How do we do that?”
A show aired on PBS that is worth watching and verifying. Possibly you have seen it?
The documentary is called, “The Ascent of Money, a line borrowed from the great PBS series, "The Ascent of Man". The explanations of current events in the show are plausible. The push by American banks to lend the glut of dollars held in Chinese savings accounts to marginal home buyers in the US was a story I never had heard. As I suspected, the fall (then bailout) of many more giant corporations in 2008, and the breakdown of financial markets, had the same bogus "balance sheet" slight-of-hand. ...
So would a panel of advisors on economic issues/ approaches to moderate the recession/ agree with the "facts" presented in the “Ascent of Money”? Where do you fit into the review process?
Is there any independent review of the theories offered in the series?
I follow economic issues on Econobrowser and have worked on the impact of the oil price shock and the resulting lost spending power in the US. As I see gasoline prices rise again, I still believe that a significant tax on gasoline would keep oil prices from going back to $4/gal and offset the “federal government’s balance sheet”, which you and I see as similar to ENRON accounting.
If you can send me any Internet documents that you have access to for better oversight, better economic policies, I will review them with the shared goal of accountability and scrutiny in spending the next $350B and then injecting cash into the economy to save jobs and reduce home foreclosures at the level of the ordinary citizen.
Posted by: ben claassen at January 28, 2009 09:24 AM
Knowing how this state (MN) apportions its money, I'd vote 'no' to your proposal.
Posted by: wally at January 28, 2009 11:12 AM
"Why does the principle on the debt need to be repaid with tax increases? Even the WWII debt that reached 120% of GDP was NEVER repaid."
Government spending is fully paid for with taxes, so $200 billion of spending costs $200 billion of taxes, whether borrowing is used or not. Options:
1) The government collects $200 billion of tax right away.
2) The government borrows $200 billion then has to collect tax to service the interest cost on the borrowing. If the principal is never paid down the interest runs forever. The interest charge on $200 billion of such borrowing discounted to present value is $200 billion.
So one way the govt collects $200 billion of tax and the other way the govt collects $200 billion of tax -- only the timing is different.
As to WWII, the borrowing for that was a one-time surge in a very short period, so once it was over the debt/GDP ratio steadily declined for decades, so there was no urgent reason to repay it.
The situation is entirely different today. Even before the current problems arose, the national debt was projected to surge so high on existing law that S&P projected US Treausury bonds falling to "junk" status by 2027. To head that off by keeping revenue in line with spending, CBO projected income taxes as a portion of GDP would have to increase 50% by 2030, and then keep on rising indefintely from there.
So major tax increases are coming to deal with the growing debt, believe it. Now we are adding more trillions to the debt, so those tax increases will be going up proportionately.
Paying off the debt cost of the stimulus program up front, before the tidal wave of entitlement costs arrives later, will reduce the need for later tax increases by that much.
And considering how the deadweight cost of taxes increases by the square of the increase in the tax rate, it's a darned good idea to not put off the tax bill so it all piles up and comes due at one time at a higher rate. Spread it out by paying some down early if there's the political will to do so.
But on that count I'm not holding my breath for either Democrats or Repubicans to come though.
Of course it would be even better to cut the future deficits by reducing spending, instead of increasing taxes, and having Section(b) of the stimulus bill finance today's spending hikes with future offsetting spending reductions, instead of tax increases ... but I don't want to get silly about what our political system can do.
Just think of the mohair subsidy. Created for the "national security purpose" of making sure there was enough mohair for US army uniforms after WWII, it ran until the late 1990s, was briefly killed, then reinstated and lives on today. I suspect that elements of this new stimulus spending program will still be with us in the 22nd Century.
Posted by: Jim Glass at January 28, 2009 11:23 AM
A couple more questions on the subject. Why does a govt that issues its own non-convertable fiat currency have to borrow that currency in order to spend? Just where did the 700B TARP money come from?
I think your working knowledge of monetary operations is second to none. But I think the concept of non-convertable fiat currency is a subject that is fully understood by very few (none of which are in Washington). Unfortunately, pride idles the mind.
Posted by: markg at January 28, 2009 11:40 AM
Dispersion of substantial sums to states and localities to spend as they see fit unfortunately would largely go to pay down debt and deficits they are already incurring, so as much as I would like this proposal (though weighted by unemployment would be better though not politically possible), sadly it would not be particularly effective. Some will go to them to try to maintain near their current level of spending. Taking the favorable view of this, the size of the bill suggests it will be spent more rather than less efficiently. I would take a dim view of spending large sums on only a few programs.
Posted by: Lord at January 28, 2009 11:55 AM
The debt will be paid by:
1. increased tax rates which will probably be counter-productive
2. increased tax revenue from holding tax rates
3. inflation which will exaggerate income and increase tax revenue
What's the likely actual process.
Posted by: Bruce Hall at January 28, 2009 02:12 PM
Horray for Hamilton!
That is the first stimilus proposal that makes sense to me. I like the small amount. I like the requirement to pay for it with additional taxes.
Let the argument shift to which taxes to increse.
Posted by: ReformerRay at January 28, 2009 02:54 PM
Markg say: "Can you explain why Japan has managed to increase its debt/gdp ratio to 170% without a collapse in the value of the Yen or higher interest rates?"
I would say the efficient production system that Japan has created is admired the world over. They no longer depend primarily on a trade surplus. The have developed a relationship with China which yeilds a slight surplus with all nations but is less offensive to all. They can pay for their debts because they have an economy that is producing a large quanitiy of goods and services that they can sell around the world. Their political system is in disarray but which nation isn't? I would be happy to own some of the Japanese debt.
Posted by: ReformerRay at January 28, 2009 03:28 PM
I don't understand. You were advocating money printing to buy local assets, foreign assets, etc. Inflation targeting.
Now you are saying hold over the states and let the market anticipate repayment (using government investment to reallocate wealth to states, competing with private investment).
That doesn't sound like stimulus to me, especially in the face of an estimated 8% GDP gap.
How do you propose we fill in the GDP gap?
Posted by: Michael Krause at January 28, 2009 07:11 PM
Markg say: "Can you explain why Japan has managed to increase its debt/gdp ratio to 170% without a collapse in the value of the Yen or higher interest rates?"
Also consider giant trade surpluses finance a giant savings surpluses that sufficiently offset government shortfalls.
Posted by: Michael Krause at January 28, 2009 07:23 PM
Pardon me for potential (probable?) ignorance, but aren't the stipulations you lay out - the government WILL repay the debt - precisely those that need to be in place for Ricardian equivalency to hold?
Posted by: Jack at January 30, 2009 08:35 AM
Didn't Ricardo himself reject this equivalency theory?
Posted by: Michael Krause at January 30, 2009 08:47 AM
It seems to me that once taxes get raised to a certain tipping point, where a person can get equal benefit from the gov't for not working as from the private sector for working....then only fools will work to pay for the non-workers. So, workers will HAVE TO find ways to get out of paying taxes....through bartering or other black market type activity. Which is exactly what the non-workers will be doing to maintain their "eligibility" for the handouts. And at some point, the hottest commodity will be guns and ammunition, so that you can just "take" from those who "have" when the gov't lets you down and doesn't give you that bigger free check you had been counting on. Of course, congressmen will all be living in armed and gated compounds with protection from the public paid for by, you guessed it, the public they want protection from. Time to start this experiment all over again is on the horizon. Maybe I'll move to New Zealand. Sure it's socialist, but at least they have no natonal debt and they are diligent in restricting immigration to qualified individuals with financial means. Too bad I don't like mutton. Wool is nice, though.
Posted by: Kevin Johnson at January 30, 2009 06:55 PM
Paying to fix and modernize a delapidated road and rail system is not pork. Paying to ensure adequate health and public education facilities is not pork. This is the case when the need is really there. Attempting to revive domestic heavy industry is not pork, these industries are vital to our economy and national security. The only just way to do some of these things ia on an as needed basis. States with more road and rail milage will have to recieve more money for roads and railroads. States with more people in need of education and health care will need more money to finance their needs in these areas. The time for jealousy is over. This country is in sore disrepair and its infrastructure needs fixing
Posted by: Roodog at February 10, 2009 12:14 PM
Um, well, you are not calling the shots and you have no idea what goes on on the hill. So your comment means nothing, and I am annoyed at myself for even wasting the time to read this let alone comment on it. Damn.
PS if you dont want the stimulus money for your state. Then dont take it and shut up, seriously.
Posted by: cdub at February 18, 2009 08:53 AM
My stimulus; They gave,loaned,granted(however bernanki wants to put it)$11.6 trillion to the banks.That happens to be the amount in mortgages in the US the banks hold. The banks keep the money. cancel out the mortgages and give renters the vacent houses the banks hold to pay us back. The Gov raises taxes. That should stimulate the economy and keep the consumer/debtbased economy they are trying to hold onto to keep on goin on..for awhile longer.
Posted by: Froggy at March 1, 2009 10:10 AM