'Feel-Good Economics' - About the 'Stimulus Pkg' Today from WSJ

[Paulie]

http://online.wsj.com/article/SB120070786488902199.html

Feel-Good Economics
By BRUCE BARTLETT
January 19, 2008

With remarkable speed, Congress, the White House, Republicans, Democrats and even the Federal Reserve have come to a consensus on the need for economic stimulus to moderate and perhaps forestall a recession. It seems certain that the final stimulus package will contain a tax rebate.

The underlying theory for the rebate idea traces back to the British economist John Maynard Keynes. He believed that spending was the driving force in the economy. It didn't matter whether the spending was done by businesses on capital equipment, by governments on public works, or by consumers -- spending is spending in the Keynesian model, and all of it is stimulative.

In Keynes' defense, his theory was developed during a severe, world-wide deflation. Spending of all kinds was paralyzed by a lack of liquidity, and the Federal Reserve had difficulty injecting money into the economy because so many banks had closed. Under these circumstances, deficit spending by governments made sense as a means of getting money into circulation and overcoming deflation. The problem is that, once World War II seemed to validate Keynes's theory, the idea of stimulating the economy by increasing government spending became the all-purpose cure for every economic slowdown, regardless of its underlying cause.

In the 1960s and 1970s, this usually took the form of public works spending. But in 1974, the White House was keen on the idea of cutting taxes to stimulate private spending. Since it was feared that a permanent tax cut might be inflationary, President Gerald Ford and the Democratic Congress agreed on a one-shot tax rebate. It was thought that cash-strapped consumers would take their government checks and immediately run out and spend them on food, clothing and other necessities. This would give the economy a Keynesian boost.

One dissenter was economist Milton Friedman. His research had led him to conclude that consumer spending was less a function of liquidity than something he called "permanent income." Friedman observed that when workers lost their jobs, they didn't immediately cut back on spending. They borrowed or drew down savings to maintain spending, in the expectation of finding a new job shortly. Conversely, consumers didn't immediately spend windfalls. They kept spending on an even keel until they achieved a promotion at work, or other increase in their long-term income expectations.

Thus Friedman predicted that the $100 to $200 checks disbursed by the Treasury Department in the spring of 1975 would have a minimal impact on spending, because they did not alter peoples' permanent income. Most likely, people would save the money or pay down debt, which is the same thing. Very little of the rebate would cause consumers to buy things they wouldn't otherwise have bought in the near term.

Subsequent studies by MIT economists Franco Modigliani and Charles Steindel, and Alan Blinder of Princeton, showed that Friedman's prediction was correct. The 1975 rebate had very little impact on spending and much less than a permanent tax cut -- which would change peoples' concept of their permanent income -- of similar magnitude.

In 2001 -- despite the thoroughness and general acceptance of these studies -- Congress and the White House once again chose a one-shot tax rebate to deal with an economic slowdown in 2001.

To his credit, Treasury Secretary Paul O'Neill cautioned against the rebate. "I was here when we tried that in 1975, and it just didn't work," he said. "If we want to change consumption patterns, we need to make permanent changes in peoples' tax burdens." But President George W. Bush overruled his Treasury secretary and approved the rebate idea. Checks of $300 to $600 per taxpayer were sent out in the late summer. Contemporaneous polls by Gallup, Bloomberg and the University of Michigan all found that the vast bulk of consumers expected to save the money or use it to pay bills. Subsequent studies confirmed these forecasts.

In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political -- giving politicians a way of appearing to be doing something about the nation's economic problems that is superficially plausible.

A new rebate probably won't do much harm. But anyone who thinks it will prevent a recession -- if one is actually in the pipeline, which is not at all certain -- is dreaming. It's an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicians feel good about themselves and buy re-election with the public purse.

Mr. Bartlett was deputy assistant secretary of the Treasury for economic policy during the administration of President George H.W. Bush.

 

[Meemer]

Absolutely correct, Paulitics, can't argue with one word.
We saved ours from '01. Oh, how grateful we were with the 1/2% interest on it. eusa_whistle: ) Eventually savings is spent on remodeling, landscaping, required municipal sewage system, large ticket items. But that doesn't go to the immediate problem which is endemic to our economy.

 

[Annie]

What do you know, we agree. Taking money out of one person's pocket and into another is just moving money around. More important, those that it's taken from are more likely to invest it in something that will grow wealth. Those it's given to may buy something at retail or pay off part of their bills, nothing is created. Perhaps it blips up for a couple months, that's it.

 

[ronpaul2008]

To get around the fact that people may either save the money or use it to pay down debt Peter Schiff suggests the government could give us debit cards and force us to spend the money within a certain time period.

However

The only downside to the plan is that it will completely clarify the fundamental component of any and all fiscal stimuli, namely the government creating money out of thin air and giving it away. Of course, the other negative effect would be higher consumer prices with price spikes particularly pronounced immediately following any additional government authorized spending. After all, what rational retailer would not raise prices during those times in which the new consumers were holding exploding gift cards? However, a few more adjustments to the CPI should take care of that problem lickety-split! As Richard Nixon once said, “No politician ever lost an election by creating inflation.”

http://www.financialsense.com/fsu/editorials/schiff/2008/0118.html

 

[RetiredGySgt]

However, as noted, a PERMANENT cut could have the desired effect. No way Democrats would EVER agree to that though.

 

[Toro]

However, as noted, a PERMANENT cut could have the desired effect. No way Democrats would EVER agree to that though.

A permanent tax cut would be good long-term - assuming spending is cut - but it doesn't help us now. The tax cuts don't expire for another three years. We'll be out of the recession by then.

The checks they'll send us will help us a bit but it won't be enough to get us out of the recession. What will get us out will be lower interest rates and just time to work out all the problems in the economy.

 

[Toro]

To get around the fact that people may either save the money or use it to pay down debt Peter Schiff suggests the government could give us debit cards and force us to spend the money within a certain time period.

However



http://www.financialsense.com/fsu/editorials/schiff/2008/0118.html

I'm going to Europe for a holiday. That's where I'm spending mine.

 

[Paulie]

A permanent tax cut would be good long-term - assuming spending is cut - but it doesn't help us now. The tax cuts don't expire for another three years. We'll be out of the recession by then.

The checks they'll send us will help us a bit but it won't be enough to get us out of the recession. What will get us out will be lower interest rates and just time to work out all the problems in the economy.

Spending doesn't look like it's ever going to be cut again. No one in Washington advocates cutting spending anymore. They pay LIP SERVICE to the idea, but all one needs to do is look at their recent records.

That 150 Billion they're sending out can only come from one of 2 sources, as I see it...PRINT IT, or BORROW IT.

so, either inflate the supply, or create more debt.

When will these fucking idiots realize how much they're fucking this country over?

How do you KNOW the recession will be over, even in 3 years? If spending isn't cut, and borrowing, tax cutting, and money printing keep going up, there's no WAY the markets will just work themselves out.

There's no more bubbles left to transfer things to. We need to stop all the spending, and we need to do it NOW.

 

[Toro]

There's no more bubbles left to transfer things to. We need to stop all the spending, and we need to do it NOW.

Actually, there is another one coming IMHO

 

[Paulie]

Actually, there is another one coming IMHO

You could be right. It'll be the first bubble I got involved in.

I wish I'd have grabbed some gold a couple years ago, but I'm all over it now.