03 02 09 Are You Stimulated Yet?
We left the below comment on another blog in response to a post on the stimulation our government plans for us:Well if they count everything we will be approaching a 4, yes FOUR, trillion dollar federal budget. The first $1T budget was in 1987. $2T came in 2002. $3T came in, your choice 2006,07,08 as much of the war spending was not 'on budget'. Tack on $900 B and we are at $4T. Note that 30 years ago, in 1979 the budget was about $500B.
This year federal spending will be close to 28% of GDP. The prior, non-WWII peak was 23.5% in 1983. And to put these in perspective, in 1930, Federal spending was 3.4% of GDP, in 1950 15.6%. Is the problem really that the government is now spending too little?
There are two problems at the moment. Unsustainable spending on entitlements and the prevailing need "to do something". We all know about the first. The second though is left in the dustbowl of history - FDR (and Hoover before him). Contrary to popular belief, the massive post 1929 crash / depression time spending did little to change the picture. They were also suffering from the 'we have to do something' problem. While there was an initial rebound in the economy in 1934-36, things tanked again in 37 and 38 with unemployment going back to 1934 levels. Spending however increased 6% in 1930, 8% in 31, 20% in 32, 42% in 34 and 28% in 1936. There is no clear link between the massive increases in spending and resultant changes in gdp and employment.
[UPDATE 2/4/09:From the wires this morning, the Treasury Dept. said it will need to borrow $493 billion during the current January-March quarter, a record amount for this period, following actual borrowing of $569 billion in the October-December period, the all-time record.]
A bit rough and dirty, but the basic points are there. Very large spending programs by the government in dire economic times have historically not had the effect their proponents claim they would have. At best the New Deal spending is a mixed bag and some might argue the 1937 tank was in part a result of knock on effects from the massive stimuli. The current economy has already seen a huge stimulus - a few hundred billion directly to taxpayers under Bush and about $500B in aid to the financial industry. Interest rates are near 0, though that may apply more to the return investors are getting rather than the rate borrowers pay, assuming they are able to secure the financing they desire. We have long maintained that the ZIR policy followed by Japan in the 1990s through today has hurt and prolonged their economic slowdown and we feel the same will be true of the Fed version. We also believe that the end effects of the government running the printing presses at full speed will be inflation (not deflation) and eventually new bubbles. Are there any doctors in high places in our government? Primum non nocere!
We do not, however, summarily dismiss all government spending nor all the new spending proposed by the new Administration. Our highways require significant maintenance as do our many state controlled roadways and bridges. If well monitored, spending in this area will be worthwhile, but is not likely to provide any short term stimulation to the economy. Increased funding to our national labs, in particular to the physical sciences and technologies, will ultimately pay significant dividends both to the economy and our knowledge... just down the road a bit. But these are things which should be addressed in normal, continuing resolutions and not emergency spending bills. These are investments, not stimulus.
Our current spending is unsustainable. At some point our creditors will pull the plug and/or our currency will devalue significantly. The government is on track to become an ever larger percentage of the economy and we all know that the government does very little well. The entitlement bogey man must be addressed, the sooner the better. However, if our politicians feel they absolutely must, must do something now! we recommend significant tax credits for the formation of new (not realigned) businesses. Giving people an incentive to start a business and hire employees is a far better way to go.
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I am the “other blogger” at cosmicvariance.com…
http://www.economy.com/mark-zandi/docume..
Read the above, folks. It’s worth it.
John () (URL) - 04 02 09 - 18:47
Zandi is just one of many economists who have spoken on this subject and as others have noted, his group has put out some debatable stats about the effects of different spending/tax changes. In particular, if money is fungible, why would a person treat increased unemployment benefits differently than a tax rebate check? He claims the tax check would be put towards paying down debt and yet claims that people will spend any income support they get very quickly. Its difficult to have this both ways unless the income support is greatly in excess of the tax credit.
Here are a few conflicting views:
http://online.wsj.com/article/SB12325861..
http://www.politico.com/news/stories/010..
And for a lengthy list of those economists who disagree (publicly):
http://www.cato.org/special/stimulus09/c..
Hyperion () (URL) - 04 02 09 - 20:44