Reich's Reasons for a New Fiscal Stimulus Bill

I believe that another fiscal stimulus bill is going to be passed by Congress and signed into law by either President Bush or President Obama (obviously after his inauguration). Fiscal stimulus is the most likely way that the government will be able to stop the rapid decline of the economy caused by the hoarding of cash by banks and consumers. When the private sector hoards cash, monetary stimulus stops working and the government needs to step in with fiscal stimulus to spur demand and help stop hoarding.

Last Sunday Robert Reich published an interesting blog article about why fiscal stimulus is necessary and how it will spur demand. While I often disagree with Mr. Reich, his article on Sunday was right on point. Below are some excerpts from Mr. Reich’s article. If you would like to read the entire article just hit this link to be redirected to Mr. Reich’s blog.

…The real problem [with the economy] is on the demand side of the economy…

….Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation’s economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.

I is investment. Absent consumer spending, businesses are not going to invest.

Exports won’t help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners — as well as Americans — put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)

That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won’t work if there’s inadequate demand.

So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is “a lot.” Given the magnitude of the mess and the amount of underutilized capacity in the economy– people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled — government may have to spend $600 or $700 billion next year to reverse the downward cycle we’re in…”

Comments

[jepittman:]

Good article. Takes me back to my old undergraduate economics classes. He is correct of course. However to pick nits monetary policy will work but it would just take more time. A large fiscal stimulus package will make the recession both shorter and shallower than it otherwise would be.

2008 Nov 14 01:06 PM

[Jolly_Rancher:]

Government spending alone won't do the trick. And it doesn't have to be government spending at all. Ask yourself what it is that needs to be done? We need to become more efficient. Efficiency brings prosperity. Government can cause efficiency with infrastructure projects that facilitate the movement of goods and people. Government can streamline regulatory processes so things like nuclear power plants and refineries can be built with reasonable costs. Government can streamline the legal process, so corporations do not have to fear being dragged into court by thousands of people for things like hot coffee. One of the best ways the government could help make America more efficient is to build out our wired and wireless network. Bringing fiber to the home and wireless to every city would be a huge boost for businesses and consumers.

A stimulus check is a waste of money. In past recessions it might have bought some time to help weather the recession (aka growing pain), but this recession is not a growing pain. It's old age hitting. Just giving money to people to spend on Chinese goods is pretty loony.

2008 Nov 14 02:23 PM

[Winston Smi...:]

Congress borrowing $300 billion from one group and giving it to another group while telling us we are all wealthier because of it is a farce. There is no such thing as a short-term stimulus that will fix this. Time heals all wounds. We need to focus on productivity and make Americans smarter.

2008 Nov 14 02:33 PM

[alajac:]

China didn't think it was that "loony" to give us money to spend on Chinese goods.

Anyway, the "jobs model" of economic resource distribution is dead. Get over it. We go down until that fact gets recognized and dealt with.

It's going to take $1000 PER MONTH (from now on) to every legal resident (and proportional amounts likewise in other countries) to get this crash turned around. See my other comments for details.

FYI, I called the crash 6-3-08 and tops on gold and oil 7-14-08. Published and available.

2008 Nov 14 02:35 PM

[Smarty_Pants:]

To sum up Mr. Reich's argument:

1) "Consumers are cutting back on everything other than necessities."
2) Factories and businesses outside these lines are cutting back to levels which support the demand consumers perceive as 'necessary'.
3) Only Gub'mint can be counted on to spend money to keep the less needed businesses operating (whether the consumer wants them or not).

We have to ignore our current $10.6 Trillion debt and borrow another several Trillions to produce things that people don't really need? What are we going to do with all that stuff when nobody buys it?

How exactly does that help in the long run?

Hint: Keynesian theories about consumer driven economies are in the process of being proven wrong. Going into debt to get ahead via consumptive spending is a long term losing proposition. Doing more of what we've done over the last 40 years won't change the eventual outcome.

2008 Nov 14 03:20 PM

[Robert Nabloid:]

Excellent Smart_Pants, Winston and Jolly!

We don't need government stimulus. Things will turn around, they always do. The problem is we, as consumers, are too leveraged and have too much debt at the moment. We've spent money we have not yet earned - and now we are beginning to realize we've taken on too much debt, and we are going to spend less until we have paid for what we already spent!!! Debt hid our problems during the "good" times (where we were taking on more of it!) and will make the bad times look worse (while we pay down some of it). Ultimately, things will turn around, but it will take time (perhaps a decade - as that is about how long it took us to get into this mess) and it won't be painless.

This debt burden that we now have at one time helped mask the true problem: America is no longer economically competitive. The taking on more and more debt was unsustainable. America is no longer competitive nor was this debt accumulation sustainable. Now we have to face reality and get back to competing and using our brains instead of other people's money. How is burdening the Federal Government (and every citizen) with more debt going to help the sustainability and competitiveness of this economy??

2008 Nov 14 04:58 PM

[Tony Petroski:]

Robert Reich promoting "demand side" fiscal stimulus also-known-as payoffs to big-city politcians for making sure that every metropolis in the nation continues to be completely and solidly blue--that's "Change we can believe in?"

2008 Nov 14 09:15 PM

[Perception:]

I always grind my teeth at the mention of "stimulus." The average american thinks "check" when they stimuls. AHA...free monies!

But wait...OH NOES! I have to pay it back, plus the 30 years worth of interest on the bonds sold to finance it. ANY stimulus package at this point merely digs the hole deeper, whether consumer or infrastructure, corporate bailout, pick your flavor. The net result is a ballooning debt that is unsustainable. Does anyone belive we can continue this insanity?

At some point, we lose our AAA rating as a country. When no one will buy the bonds we must sell to finance our government's follies, what then? Even better, the states are doing this crap too. I'd like to see a compilation of the 50 states' debt, combined with the federal gubmint debt. Bet that one's an eye popper.

Welcome to grim reality. The swan song of the republic. And the combination of a democratic president and congress busily spending away will do wonders to accelerate the decline. Wait for it kiddies, US treasuries getting junk ratings? It's more likely than you think.

All the hand-waving in the world about financial stimulus and fiscal stimulus can not change the fact that the government, like the average consumer, will eventually run out of credit. And when that happens? Best of luck to all of us.

Perhaps a return to a less flashy, superficial lifestyle (that the world despises us for), and a resurgence in the American spirit of industriousness, honesty, and humility. We weren't always a country characterized by greed and shallowness...

2008 Nov 14 10:35 PM

[moonbat1775:]

"We have to ignore our current $10.6 Trillion debt and borrow another several Trillions to produce things that people don't really need? What are we going to do with all that stuff when nobody buys it? " Smarty

Alexander the Great in your bloodline?


"What are we going to do with all that stuff when nobody buys it? " Smarty

With debt forgiveness/amnesty or a citizen's led massive, simultaneous default and abolishment of FRB this country would enter a golden age marked by true savings. Initially, interest rates would probably be high but as savings grew over time, people would have more money to lend out and interest rates would naturally fall. No more boom/bust cycles, just steady overall economic growth that would astound.

The US is a nation of debt slaves. Those chains were fashioned out-of-thin-air. Repayment of fractional reserve loans is not morally required because the money was not borrowed from lenders but stolen from the general public via inflation. Repayment of those loans compensates the thieves not the victims.

2008 Nov 15 07:49 AM

[jepittman:]

Folks the objective here is to keep a sharp recession from morphing into a depression. Productivity is a wonderful thing but it is not going to decrease unemployment in the short run. A long deep recession is not a political option if it can be avoided. The Fed has done its part. Money supply growth is off the charts and the yield curve is offering powerful incentives to lend money. All that is missing right now to significantly shorten this downcycle is fiscal stimulus. The democrats will not miss this opportunity to cast the republicans as the villans and themselves as the enlightened saviors of the economy and jobs. Its coming. And because of it the recession will not be as deep or as long as it might have been.

2008 Nov 15 10:11 AM

[Steve Russell:]

Fine, call it "stimulus."

But we have a terrible case of infrastructure rot that does not befit a world class economy.

The biggest immediate problem is that the electrical grid is not "smart" enough to deal efficiently with renewable electricity sources and, of course, the transmission lines do not go to the right places.

It's the job of government to fix the grid, the highways, and the bridges. Those responsibilities are as fundamental as defense.

If those fixes happen to put a bunch of people to work and those people suddenly have money to spend, it would not break my heart.

2008 Nov 15 11:04 AM

[1RuleNoRules:]

To the point, Government does not need to provide stimulus, it needs to not interfere with economic incentives. Taxes interfere with incentives. Ronald Reagan guided this country (against the will of the left, the fears of the center and the better judgment of the near right) through economic calamity by cutting taxes. Through bracket creep Americans, business and individuals, get their taxes raised every year. Those that believe that government is the answer think this is a good thing. During the presidential campaign I hear that our corporate taxes are among the highest in the world. How about instead of bailing out brokerage houses then insurance companies, then banks, then autos, then whatever else, cut taxes on business, all business, retroactively, across the board, and massively(after proof reading I think I'm quoting Kudlow here). And if we are lucky, like under Ronald Reagan, revenue will go up next year, not down(like everyone would expect). This of course would have to be done against the will of the left, the fears of the center and the better judgment of the near right. The equation, C+I+G+exports, doesn't mention T. T is left out because of an underlying lefty bias, conservative call elitism, it taints everything Americans and the world thinks about government and it is destroying this nation. If President Obama, does like President Clinton, and listen to his advisor's and abandons the left by cut corporate taxes this problem will be over. If done under President Bush it will be over nearly before it started, and save the bush legacy, although undeservingly so.

2008 Nov 15 11:32 AM

[johnnybigsp...:]

I agree with several commenters that sending a check directly to Consumers in order to increase C is a useless idea... more of the same thing that got us here in the first place. That is basically the same thing as the government becoming a Consumer when they should be Investors. (Its sad to think that the government doesn't even realize the value of 'investing' in tomorrow vs. 'spending' today.)

What if, as a result of Government Spending, we as a country emerged as a more efficient, higher productivity, more environmentally friendly country? This is possible. If the government was to substantially increase spending/investment in infrastructure such as GREEN technologies (solar, wind, nuclear, water purification, mass transportation, cleaning up environmentally impacted areas, modernization / retrofitting of older brown technologies ect ect) we could emerge with an infrastructure that will supply businesses with lower cost power, better transportation and a lower cost structure over all.

This would supply people with JOBS today. This would increase C. This would rebuild America's competitive advantage. This would create a greener world and a better tomorrow.


And I'm not even a tree hugger... I think this makes sense from $ and cents perspective.

2008 Nov 15 12:11 PM

[xsuddensam:]

Bailouts, stimulus bills......

Our national debt is accruing interest at a rate of $32,000/sec. Think about it; that's 86,400 sec/day. Do the math and convince yourself that this madness should continue.

2008 Nov 15 08:39 PM

[Smarty_Pants:]

"Alexander the Great in your bloodline? " - moonbat

Little ol' me?

No need for an army when you can spread the truth.

2008 Nov 16 11:03 AM

[moonbat1775:]

I wasn't thinking of his army but his knot solving ability. But I quibble.
Yes, you are a fine truth dispenser.

2008 Nov 16 12:49 PM

[1RuleNoRules:]

It's the taxes rates on corporations. Bracket creep is crushing them. This is the same as under Carter. Reagan cut taxes on individuals, the economy came back and revenues went up. We need huge rates cuts on corporations. The law of diminishing returns is in full effect, a tax hike will reduce revenue and a tax cut will increase revenue just like in the 80's. Only huge retroactive tax cute on corporations will save jobs stimulate spending and fix this economy.

2008 Nov 16 02:31 PM

[VintonCounty:]

Money spent by government ("demand") is first taken from me at gunpoint, and it is that much less that I spend. If the government instead gives the money to citizen B to spend, the effect is still only to substitute another person's spending decisions for mine. In both cases I am a victim of armed robbery, and the economic effect is null at best.

2008 Nov 16 08:41 PM

[Jolly_Rancher:]

I agree with you completely. First, it's double taxation on corporations and then on the owners. Second, I do not believe that a corporation should be treated as a person for the purposes of taxation. As long as owners keep the money (a.k.a. savings) in the corporation (a.k.a. in their investment), that money should not be taxable. Exxon pays more tax than all of the citizens of the U.S. combined. And Obama wants to tax Exxon even more?? I like Obama, but that's why I didn't vote for him. We should put Exxon to work drilling in California, Florida and the Northeast now -- put Exxon et al's billions of investment dollars to work building jobs here in America and reducing our trade deficit.

Have a great evening!
Jolly Rancher


On Nov 16 02:31 PM !RuleNoRules wrote:

> It's the taxes rates on corporations. Bracket creep is crushing them.
> This is the same as under Carter. Reagan cut taxes on individuals,
> the economy came back and revenues went up. We need huge rates cuts
> on corporations. The law of diminishing returns is in full effect,
> a tax hike will reduce revenue and a tax cut will increase revenue
> just like in the 80's. Only huge retroactive tax cute on corporations
> will save jobs stimulate spending and fix this economy.

2008 Nov 16 10:17 PM

[moonbat1775:]

"If President Obama, does like President Clinton, and listen to his advisor's and abandons the left by cut corporate taxes this problem will be over." !RuleNoRules

Yes, tax cuts are definitely part of the solution. It will enable the economy to more quickly adjust to the problems caused by artificially low interest rates.

Things NOT to do in a Recession according to Rothbard:

1. Prevent or delay liquidation.
2. Inflate further.
3. Keep wage rates up.
4. Keep prices up.
5. Stimulate consumption and discourage saving.
6. Subsidize unemployment.

Exactly the opposite of what government usually does.

2008 Nov 17 09:33 AM

[Vox Rationalis:]

"Reagan cut taxes on individuals, the economy came back and revenues went up."

And Clinton raised taxes on individuals, the economy came back and revenues went up MORE. So?

2008 Nov 25 03:18 PM