Spend, Spend, Spend - But Who Pays?

Paul Krugman in his New York Times column yesterday chastises the Obama administration for not pushing for a sufficiently large enough stimulus package to juice the economy.

"Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade?" he asks. "Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger."

Given this morning's news that the economy shed nearly 600,000 nonfarm jobs last month--the biggest monthly loss since 1974--the case for government stimulus never looked stronger. All the more so if deflation threatens, which it clearly does.

But no one ever said that spending vast sums of money--the current stimulus plan circulating in Congress now tops $1 trillion--insures a quick fix for the economy, or any fix. That doesn't mean that government stimulus should be off the table, but no one should expect that spending such astronomical amounts of money comes without risks.

Benn Steil, director of international economics at the Council on Foreign Relations, wonders where the financing for the stimulus will come from. As he writes in today's FT,

Nobel Prize-winner Paul Krugman, who calls today “The Keynesian Moment”, justifies such a trillion dollar investment programme on precisely the Keynesian foundations that Rueff demolished – the claim that money “would otherwise be sitting idle”. When Mr Krugman buys his stimulus bonds, I am curious where the “idle” money will come from. Will he sell stocks? Bonds? Withdraw funds from the banking system? If it is not to come from a cash box, it is not idle, and Mr Krugman can only fall back on the hope that the government will use his funds more productively than businesses can.

Comments

[skopros:]

when the carry trade finally unwinds and china maybe starts selling treasury debt at discount, i fear it's bye bye US dollar, esp. if the combined bailout and stimulus packages fly. and aren't those pesky CDSs still lurking back there, behind a lot of other ticking bombs?

does anyone have a constructive recommendation about what to do with dollar-denominated assets other than buying the metals? all advice gratefully picked over....

Feb 06 05:17 PM

[PastTense:]

"Who Pays?"

There is a bipartisan consensus to mortgage the next generation.

Feb 06 09:32 PM

[Tradememe:]

Excellent post. It is irresponsible for professionals to darken the economic picture in order to advance their ideological views on how to end this global recession.

Feb 06 11:29 PM

[James H. Wang:]

Those not born yet have poor voting turnout.

It looks like someone else has also thought the same thing.

Feb 07 02:51 AM

[Steven Hansen:]

my son-in-law believes fluoridation of the water causes the american electorate to be passive like sheep. the masses need to demonstrate on the street to stop stimulus spending.

stimulating an exhausted economy is the same as beating a dead horse.

Feb 07 05:13 AM

[allan skye:]

On the subject of stimulus.Unless Ive got this wrong the purpose of it is to increase the velocity of money to get growth going again.If this is the case it will be most effective(and therefore require less electronically created new money) if it is given to those who will spend it quickly and less effective(requiring more electronically created new money) if it is given to failed institutions who will hoard it.Extra new money causes inflation once velocity picks up and the more new money the more inflation,therefore there is a double benefit to giving stimulus to those who will spend it and a double punishment for giving it to those who wont.In my opinion it is also a matter of natural justice.Since we are all going to pay the price of the stimulus package in the form of inflation further down the line we should all get to spend some of the money before it is devalued.So I say distribute the extra money equally among the population and it will be spent faster requiring less new money and therefore less inflation further down the line.

Feb 07 08:45 AM

[y3115y:]

You pay, we pay, we all pay when inflation coming. Inflation is tax, It devaluate your dollar, and reducing your purchase power.

You can buy a quart of mile with one dolalr fifty cents now, but it will jump to two dollars. In China in 1949, people paid one million yuan to buy one quart of milk.

Politicians want you have some benefit now, so you'll vote for them, and you have to pay it when they were gone. They were the winners - Reagon, Bush and Obam is doing the same now..

Feb 07 08:51 AM

[sieraromero:]

The american public has been led to believe for generations that borrowing is the way to go to live a comfortable lifestyle. It's rings really true when they also become accustomed to someone else picking up the bill. They feel they deserve it and do not worry how it will affect future generations. They got their's and screw them. We have become greedy just like wall street. We spend with reckless abandon. We are lost and we deserve everything we areabout to recieve.....as long as someone else pays for it.... Good Luck to you all. Don't worry everything is going as planned!---LOL

Feb 07 08:56 AM

[shootpar2001:]

The $$ may be more resilent than many think; I still see numerous rate cuts coming from around the world. The $ is fungible just about anywhere in the world (can't say that about most currencies). It is needed to buy oil and other $ pegged commodities, and lastly for this short discussion is the currency of the richest and most stable nation.

Yes, with the plans for spending nothing we have ever seen, there will be down drafts; collapse I think not.
Therefore, playing the movements in the $ dollar may be your best bet to make some money.



On Feb 06 05:17 PM skopros wrote:

> when the carry trade finally unwinds and china maybe starts selling
> treasury debt at discount, i fear it's bye bye US dollar, esp. if
> the combined bailout and stimulus packages fly. and aren't those
> pesky CDSs still lurking back there, behind a lot of other ticking
> bombs?
>
> does anyone have a constructive recommendation about what to do with
> dollar-denominated assets other than buying the metals? all advice
> gratefully picked over....

Feb 07 11:02 AM

[donzelion:]

"...Mr Krugman can only fall back on the hope that the government will use his funds more productively than businesses can."

Business operates on the idea that they use their resources effectively to generate profit. Government operates on the idea that through careful use of means of compulsion not otherwise available, resources that otherwise were unavailable can be produced or accessed.

If business can use resources other than those which they can borrow, create, or otherwise obtain through permissible means - then business will become government.

Feb 07 11:04 AM

[axelrod608:]

Keynes is dead. Unfortunately his zombie economic theory lives on, devouring the naive and unsuspecting.

Feb 07 11:30 AM

[Dirk McCoy:]

When 3 billion people are living on less than $2.50 a day, and excess capacity is pandemic, it is clear that more economic production and distribution is required.

When a Chinese engineer works 3 years for the same car a US engineer works one year for, it is clear that there needs to be a change in exchange rates.

When a majority of the electorate suspects that free trade, lower marginal tax rates, and less government interference in business has caused a drop in living standards- when living standards have increased globally by a factor of 2-3 since 1980, it is clear that allowing that expansion to have been killed off by 18 straight Fed rate hikes between 2004 and 2007 was a huge mistake, and needs to be reversed ASAP.

And when it's clear we need to offset this mass deflation, yet people can't seem to differentiate between monetary and fiscal policy, it is clear that Ben Bernanke better come through with the monetary stimulus he's always promised before this country finds itself like 1920s Soviets, attributing advancement (less starvation) brought by the Industrial Revolution to Communism.

It will be terrible indeed if our children grow up dreaming of moving up a socialist bureacracy instead of inventing and spreading technology and trade to where it's sorely needed, and where returns can be greatest.

Feb 07 01:11 PM

[unclej0:]

I think BARBARA BOXER had it right when she pointed out that employed people pay taxes while the unemployed must be subsidized. Therefore, when calculating the cost of the recovery package, that fact should be taken into account.

I don't have an economic model that will produce the quantitative result, but best estimates should be provided by those who do. My present, admittedly poorly informed, guess is that the recovery package is a much better deal, even with consequent inflation, than doing nothing - and that a pure tax cut is probably the worst plan because it increases the debt without improving infrastructure, education, or the development of alternative energy sources. Longer term, that is a no-brainer.

"Leaving the money with those who earned it because they know how to spend it better than the government" is so simplistic that I would classify it as demagogery. Some money must be spent for the common good.

Are luxury imports more important than recovery?

Is wasteful use of gasoline more important than recovery?

Is dead money better than recovery?

I really have no dog in this fight. I am retired, so deflation is good for me - and my time horizon is short. My chief complaint is that, while I have life and breath, stupidity, hypocrisy, and political bullcrap offend me.

Feb 07 06:05 PM

[FWallace:]

To: Unclejo

Thanks for your post of logic and reasoning... I was beginning to worry that everyone thinks the plan is not a good one and should not pass, but it's nice to read few folks with some good sense are standing strong...

Feb 07 09:37 PM