Fiscal Policy: Obama Administration Isn't Making Much Sense

Tim Geithner is not making sense. From Reuters (Geithner: Too soon to decide on more stimulus):

U.S. Treasury Secretary Timothy Geithner said it was too soon to decide whether the U.S. economy would need the help of a second round of government stimulus to recover from recession. "I don't think that's a judgment we need to make now, can't really make it now prudently, responsibly," Geithner said in a taped interview with CNN that will air on Sunday. According to a transcript provided by CNN, Geithner said the "biggest thrust" of the $787 billion package of spending and tax cuts signed into law earlier this year would take effect in the second half of the year...

Let's review the bidding:

Last December the Obama administration to be decided on a fiscal stimulus package which they believed would have minor effects on the economy in the first two quarters of 2009 and major effects--would push unemployment down below what it would other wise have been by more than half a percentage point--starting in the third quarter of 2009. They believed that the economy was not that weak, and that with the fiscal stimulus package taking effect unemployment would be peaking now at a rate of 7.9%.

Instead, unemployment is now probably in the 9.5-9.7% range--and without the stimulus package it would right now have turned out to be above 10%:

The financial crisis of last fall hit the economy's levels of production, spending, and employment much harder than people thought at the time. If we had known then what we know now, it would have been prudent then to propose twice as large a fiscal stimulus program as the Obama administration in fact did propose.

If Tim Geithner is not making much sense, neither is Barack Obama. Dan Balz writes (Obama Stands to Be Judged on Economic Recovery):

Obama, in Moscow yesterday, tried to modulate the impact of the vice president's words that the administration had somehow miscalculated. "No, no, no, no, no," he told NBC's Chuck Todd. "Rather than say 'misread,' we had incomplete information." To ABC's Jake Tapper, he said, "There's nothing that we would have done differently"...

And Keith Hennessy directs us to Balz's judgment (Scrambling for a macroeconomic message):

It seems hard to square an assessment that the administration underestimated the severity of the recession and the assertion that the White House wouldn’t have done anything differently had it known how bad things really were...

All in all, it looks like the unemployment rate in 2009 is going to average 1.2 percentage points above where the administration last December thought we would be. First quarter real GDP was $11.36 trillion year-2000 dollars--and second-quarter real GDP will be the same. Thus year-2009 real GDP is going to be close to $11.40 trillion--1.2% lower than the administration forecast that real GDP in the four quarters of 2009 would average $11.53 trillion.

It is interesting and important to note that the excess unemployment now forecast over 2009 relative to last December's forecast is of the same magnitude--1.2%--as the deficiency in real GDP. In earlier decades this would not have been the case. In earlier decades the economy was ruled by Okun's Law, and the rule-of-thumb was that the excess unemployment was 2/5 of the magnitude of the deficiency in production, not equal (see "labor hoarding by firms in American recessions, end of"). In earlier decades a 1.2 percentage point rise in unemployment would have meant a $420 billion shortfall in year-2009 nominal GDP, not a $170 billion shortfall.

If I were running the government, I would be trying to make up that GDP shortfall right now: I would be rushing a clean $170 billion--$500 per citizen--aid-to-states-that-maintain-effort package through the congress this week. It would seem the right and the obvious thing to do.

Comments

[Tony Petroski:]

It's good you're not running the government.

Physician: first do no harm. Try doing nothing.

The markets usually rally when Obama leaves to run around the world. What happened last week?

Jul 13 08:58 AM

[robert.b.fe...:]

Nothing about this situation is making sense. We can't see an end to rising unemployment. Meaning the figures used for calculating tax revenue is way off as those revenues have declined over 30% (unemployed people don't pay taxes). Yet we keep trying to spend more imaginary money. Mr. President and company: Step away from the check book. You are over drawn.

Jul 13 10:11 AM

[spald_fr:]

A nightmare scenario:

The US Dept of Justice is negotiating with Swiss-based UBS regarding tax evasion.

UBS releases ONE name: Turbo Tax Tim Geithner.

Jul 13 12:44 PM

[Larrysyr:]

This author (and Paul Krugman) are pushing hard on the notion that the U.S. has provided too little stimulus to the economy. Many authors and commentators are pushing hard the exact opposite notion - there's been too much.

I'll go with a different view. The administration has done what it can to keep the economy from falling totally off the cliff. We're already tapped out and need to let the over-leveraging that got us here unwind. It's going to take a while, but it has to happen. We shouldn't let anyone starve or be homeless, but we shouldn't reconstruct the bubble.

Jul 13 01:08 PM

[montanamark:]

Wake up! Obamas spending plan has little or nothing to do with "stimulus" and everything to do with payback for votes. Look @ where the $ went so far - to bankrupt blue state governments and absolute bs, wasteful, social whims. Obama is not contradicting anyone or anything - his intention was to use the $ as mentioned above. The big lie is that his spending and social engineering has something substantive to do with kick starting the economy. The main thrust has been to flood the big banks with fake money to create the illusion of saving the sytem.

Jul 13 01:19 PM

[Clive Corcoran:]

Not only do the unemployed not pay taxes but nor do banks that can carry forward losses for years, nor do multi-national corporations that can play any number of offshore shell games to avoid declaring income, nor do those with Swiss bank accounts...etc.

Not only are we looking at a jobless recovery but a tax less recovery and meanwhile the mounting debt has to be serviced. Oh dear!

Jul 13 01:20 PM

[old boat guy:]

Sorry. I think you are mistaken in your position. Even Obama and Biden can't get their stories right. More money is more trouble. If Obama and little Timmy agree then 1 + 1 = 0. In the beginning, I would have expected more from Obama. Now, I have lost my confidence.

Jul 13 01:21 PM

[American in...:]

It isn't reinflating the bubble. Asset deflation is likely to continue for years regardless of whether the government goes for a second stimulus package or not.

The truth is that long term consumption spending is likely to be lower permanently as the US savings rate rises.

Hence someone has to be pick up the slack.

The US is poor in public goods relative to Europe.

So it is obvious who has to pick up the slack ...


On Jul 13 01:08 PM Larrysyr wrote:

> This author (and Paul Krugman) are pushing hard on the notion that
> the U.S. has provided too little stimulus to the economy. Many authors
> and commentators are pushing hard the exact opposite notion - there's
> been too much.
>
> I'll go with a different view. The administration has done what
> it can to keep the economy from falling totally off the cliff. We're
> already tapped out and need to let the over-leveraging that got us
> here unwind. It's going to take a while, but it has to happen.
> We shouldn't let anyone starve or be homeless, but we shouldn't reconstruct
> the bubble.

Jul 13 02:03 PM

[American in...:]

Ah yes, we should just let the US unemployment rise to 20% and let a Great Depression set in ...

Brilliant thinking ....


On Jul 13 01:21 PM old boat guy wrote:

> Sorry. I think you are mistaken in your position. Even Obama and
> Biden can't get their stories right. More money is more trouble.
> If Obama and little Timmy agree then 1 + 1 = 0. In the beginning,
> I would have expected more from Obama. Now, I have lost my confidence.

Jul 13 02:04 PM

[Sovestor:]

At this point of the economic condition, nothing will make sense.

Jul 13 02:16 PM

[kohalakid:]

If I owned a business producing widgets, I sure wouldn't be expanding and hiring now. I'd be looking to move overseas.
Let's review. Obama wants to add the following burdens to my business:

Higher income taxes

Higher energy costs via Cap and Trade

Higher minimum wages

Higher employee costs via mandated health care


How do any of these things encourage a business to hire new workers?? Obama is a great speaker, but he doesn't know jack about what it takes to make a business or an economy grow.

Jul 13 02:16 PM

[TLassen:]

Obama is rightfully following all Industrialized countries during this recession by increased Deficit spending on Infra-structure, HealthCare, Education and Research and development, while maintaining a low interst rate to encourage economic growth. Counter-cyclical measures are exactly what is needed when there is economic contraction!! Only in the US is Keynesain basic economic principal not understood by the people.
BUT and that is a big but, this deficit spending MUST be followed by increased tax-cuts and reduced government spending once the economy goes into expansion mode.

Jul 13 02:23 PM

[Living4Divi...:]

What doesn't make sense?
1. Reckless governmental borrowing will lead to higher interest rates.
2. A future rise in payroll taxes to fund social security + Cap and Trade + recent rise in minimum wage + more mandated spending by employers on health care will lead to reduced hiring by employers. (I wrote a blog entry on this)
3. Higher unemployment leads to higher unemployment taxes - thus reducing hiring even further

what doesn't make sense ?

Jul 13 02:59 PM

[MichaelAK:]

Is this not Stimulus III being proposed? Reason since Bush did one in Sept/Oct 08 period and Obama has done one In Feb 09 that comes close to 1.2 trillion in Federal stimulus of some sort in less then a year. That has not helped any situation since Stimulus 1-2 have not been fully spent by the Fed's or State and Local Govt and what has been or will be spent is questionable at best.

We need no more Federal Viagra at this point.

Jul 13 03:12 PM

[Jason Rines...:]

In 2007 the US was a $14 T economy and now we are an $11 T economy. That is a 22% reduction and represents the 1st half of the ballgame in terms of deflation. World Bank forecasting deflation in 2010 of 3% for the globe and I forecast another 10% coming off the US economy. We will be a $10 T economy if Washington does nothing. I hope Washington does nothing, because as other commenters stated, the legislation passed and being considered is all anti-business. In an environment where Small Business was the jobs driver for the last decade and likely inflationary effects in energy +taxation, Washington could turn the US into a $8 T - $9 T economy. Obama being wrong means he spends his life already a millionaire, salary for life and SS to protect his unpopular behind. The 97% of the citizenship not already hedged faces a very nasty era of austerity, crime and government oppression.

To me Obama's goal is pretty apparent. He seems to like the way Ortega, Chavez and Castro run there countries as communists. It will be up to the voters to decide if they wish to live in a free country or communist lite country. The 'lite' part comes in because we will still be able to celebrate Brittany Spears of the world and pedophile pop starts whom pass away.

Jul 13 03:36 PM

[whpinvest.com:]

"Geithner said it was too soon to decide whether the U.S. economy would need the help of a second round of government stimulus"

No - it's not too soon to decide. At the present time, it is 100% clear that the Federal deficit is completely out of control, and that politicians could better serve the people by exercising some fiscal restraint.

Jul 13 03:58 PM

[The Geoffster:]

The economy would have corrected on its own eventually but we couldn't handle the pain so we've traded more debt against the inevitable collapse. I guess when you're going down, you may as well go out with a bang.

Jul 13 04:13 PM

[puravidavid...:]

MV still = PQ. Ideology be damned.

Jul 13 04:14 PM

[davidbdc:]

$500 more per person? Aren't we deep enough in debt?

The hard truth is that we had INFLATED GDP for several years due to allowing people to borrow money they had no hope of ever paying back!!! Why "stimulate" to keep up a facade?

How about we tighten our belts, work a little harder, let a few get rich quick dreams die and be replaced by good old fashioned sustained hard work to improve one's lot in life.

No more stimulus, no more deficits, tighten our belts, help out our communities and invest our savings - thats the solution to our problems not more stimulus or government programs.

Jul 13 04:40 PM

[claremont:]

If you are arguing that it is unfair to call the stimulus ineffective at this point because only 15 billion or so has been spent so far, doesn't the fact that the bulk of its spending has not yet been made just mean that it is unnecessary to pass even more stimulus? Less than 5% of this package has hit the economy, why do we need a second stimulus if the first hasn't run its course? If most of the first package's funds had been spent then you might have an argument.

Jul 13 05:34 PM

[Socialism c...:]

Taxless recovery? Oh believe me, there WILL be taxes! It's the recovery part that will be in question given the continued spending and the taxation that the spending will necessitate.


On Jul 13 01:20 PM Clive Corcoran wrote:

> Not only do the unemployed not pay taxes but nor do banks that can
> carry forward losses for years, nor do multi-national corporations
> that can play any number of offshore shell games to avoid declaring
> income, nor do those with Swiss bank accounts...etc.
>
> Not only are we looking at a jobless recovery but a tax less recovery
> and meanwhile the mounting debt has to be serviced. Oh dear!

Jul 13 05:53 PM

[kohalakid:]

Uh, as of June 26, $56 billion had been spent.

Boy, I'm sure glad the Stimulus bill had to be rushed through Congress in February with no time for anyone to actually READ it.
First we were told the economy was SSOOO bad we needed to get $787 billion flowing to keep the unemployment rate from going above 8.1%. Now, at 9.5% unemployment, the VP says they may have "mis-read" the situation. Ya think??

You have Moe and Larry and Curly trying to run the largest economy in the world.

I'm worried.........


On Jul 13 05:34 PM claremont wrote:

> If you are arguing that it is unfair to call the stimulus ineffective
> at this point because only 15 billion or so has been spent so far,
> doesn't the fact that the bulk of its spending has not yet been made
> just mean that it is unnecessary to pass even more stimulus? Less
> than 5% of this package has hit the economy, why do we need a second
> stimulus if the first hasn't run its course? If most of the first
> package's funds had been spent then you might have an argument.

Jul 13 05:57 PM

[dcb:]

In reality the fist step is for all american's to decide to stop paying their mortgage. then wait until the bank forecloses. based upon legal cases before the bankd has to prove they actually have the mortgage. This has been lost in about 80 of the cases so they have no legal right to foreclose.

If 20 plus million american's engagte in civil disobediance and stop paying their mortgage they can't put everyone in jail, they can't ruin everyone's credit rating (that will only hurt the banks in the long run). That is the first step.

If the government continues to bail out the banks and not main street the next step is to stop paying your taxes. If every american decides that our current government does not represent the people but special interests are they going to throw everyone in jail. The american people are not represented by the people they elected. we got rid of the british under the principle of taxation without representation. the second amendment gives us the legal right to carry arms in case tyranny should happen to take away our voice in government. It is time fr the pople to stand up for a government that has their best interest in mind, not those f special interest.

Therefore, I urge the american people to start their protest with a mortgage holiday. As MLK said "we shall overcome someday"

Jul 13 08:32 PM

[doubleguns:]

dcb take a look at GOOOH.COM and you may find something that will fix our problem in washington. I am all for a tax revolt if it gets to that point. That would leave washington no money to spend. I believe however that unless we take over our govt. the republicrates and demicans will eventually ruin us.

This is not a BS website it has potential to send a real message in 2010. Give it a serious look.

Jul 13 08:52 PM

[Big Bubbette:]

It is being reported that Obama and some of his Czar's smoked the Green Shoots.

Jul 14 01:27 AM

[mkreisel:]

That's a pretty good idea!


On Jul 13 08:32 PM dcb wrote:

> In reality the fist step is for all american's to decide to stop
> paying their mortgage. then wait until the bank forecloses. based
> upon legal cases before the bankd has to prove they actually have
> the mortgage. This has been lost in about 80 of the cases so they
> have no legal right to foreclose.
>
> If 20 plus million american's engagte in civil disobediance and stop
> paying their mortgage they can't put everyone in jail, they can't
> ruin everyone's credit rating (that will only hurt the banks in the
> long run). That is the first step.
>
> If the government continues to bail out the banks and not main street
> the next step is to stop paying your taxes. If every american decides
> that our current government does not represent the people but special
> interests are they going to throw everyone in jail. The american
> people are not represented by the people they elected. we got rid
> of the british under the principle of taxation without representation.
> the second amendment gives us the legal right to carry arms in case
> tyranny should happen to take away our voice in government. It is
> time fr the pople to stand up for a government that has their best
> interest in mind, not those f special interest.
>
> Therefore, I urge the american people to start their protest with
> a mortgage holiday. As MLK said "we shall overcome someday"

Jul 14 03:04 AM

[Arthur Hau:]

Send a $10,000 check to every retiree in America. This only costs about $500 billion.

This is cheap, direct, and effective!

Stop bailing out all the speculators and big fat corporations. They were the creators of the bubble. After receiving their bailout money, they will divest in the U.S. and use the money to invest in third world countries to increase jobs elsewhere, not in the U.S. They will import more commodities into the U.S. and worsen the trade deficit further.

I need someone to bail me out too (just kidding). At least I am less harmful and more conscientious than those biggies!

Jul 14 06:01 AM

[Igneous:]

I agree it's small business that needs the break to stimulate employment.
Also, I used to think he was a great speaker, but I'm beginning to wonder. Have you seen the video comparisons of effectiveness with and without the Teleprompter? Shouldn't great Statesmen be writing their own speeches and not reading someone elses words? ...At least for minor speeches.


On Jul 13 02:16 PM kohalakid wrote:

> If I owned a business producing widgets, I sure wouldn't be expanding
> and hiring now. I'd be looking to move overseas.
> Let's review. Obama wants to add the following burdens to my business:
>
>
> Higher income taxes
>
> Higher energy costs via Cap and Trade
>
> Higher minimum wages
>
> Higher employee costs via mandated health care
>
>
> How do any of these things encourage a business to hire new workers??
> Obama is a great speaker, but he doesn't know jack about what it
> takes to make a business or an economy grow.

Jul 14 10:08 AM

[kohalakid:]

Agreed!!
There is a huge difference between Obama's teleprompter skills and his impromptu abilities.


On Jul 14 10:08 AM Igneous wrote:

> I agree it's small business that needs the break to stimulate employment.
>
> Also, I used to think he was a great speaker, but I'm beginning to
> wonder. Have you seen the video comparisons of effectiveness with
> and without the Teleprompter? Shouldn't great Statesmen be writing
> their own speeches and not reading someone elses words? ...At least
> for minor speeches.

Jul 14 11:27 AM

[Old Rick:]

On Jul 13 01:19 PM montanamark wrote:
> Wake up! Obamas spending plan has little or nothing to do with "stimulus"

In the first place, the stimulus was NOT Obama's stimulus. It was Nancy Pelosi's stimulus (or porkulus). Obama has a well earned disregard for policy detail, and turned the detail writing over to the Nancy and Harry show. It emerged as not a stimulus, but a litany of Democrat pork-barrel stuff including aid to schools (teacher unions) and blue states. The package included provisions that stimulus money spent for real job related projects had to be at "prevailing wage" (ie Union scale). You've got to go with the lowest bidder except for labor where you must go with the highest bidder. A true stimulus (TTT) would have gotten $$ out the door in 6-9 months vice the out year spending (more in 2011-2015 than in 2010) on the Dem priorities. BHO is proving pretty quickly that he talks a good game ("as I have always said (starting this morning).....) but can't close the deal.

Jul 14 11:50 AM

[awake09:]

So, we should be following industrialized nations' example? That will gain us what, exactly? Since many of them have socialized health care, then that means we need it too? If it wasn't for US strength around the world, with huge expenditures in defense systems that keep them safe, they wouldn't be able to afford their health care.

So, unfortunately, we are the world's protector, letting many others enjoy the luxuries they find in socialism. If we follow in kind, then the whole picture changes.

Jul 14 01:17 PM

[awake09:]

Forward thinking! Now find or create a political party who can attract powerful speakers and candidates who will push this as the Second American Revolution. It won't come from R's, and certainly not D's. The door is open to you, DCB.


On Jul 13 08:32 PM dcb wrote:

> In reality the fist step is for all american's to decide to stop
> paying their mortgage. then wait until the bank forecloses. based
> upon legal cases before the bankd has to prove they actually have
> the mortgage. This has been lost in about 80 of the cases so they
> have no legal right to foreclose.
>
> If 20 plus million american's engagte in civil disobediance and stop
> paying their mortgage they can't put everyone in jail, they can't
> ruin everyone's credit rating (that will only hurt the banks in the
> long run). That is the first step.
>
> If the government continues to bail out the banks and not main street
> the next step is to stop paying your taxes. If every american decides
> that our current government does not represent the people but special
> interests are they going to throw everyone in jail. The american
> people are not represented by the people they elected. we got rid
> of the british under the principle of taxation without representation.
> the second amendment gives us the legal right to carry arms in case
> tyranny should happen to take away our voice in government. It is
> time fr the pople to stand up for a government that has their best
> interest in mind, not those f special interest.
>
> Therefore, I urge the american people to start their protest with
> a mortgage holiday. As MLK said "we shall overcome someday"

Jul 14 01:22 PM

[TLassen:]

because if the US does not follow the G20 coordinated efforts it will fall further behind economically. According to Keynesian economic principals, it is generally accepted that counter-cyclical deficit spending will spur economic growth. So in recessions, government spending on infrastructure, HC, education and R & D stimulates growth and puts people back to work. During expansion periods though, governments must increase taxes, cut spending and balance budgets. That has absolutely nothing to do with socialism., these are economic principals that industrialized countries have adopted successfully for the last 50-60 years. Are Keynesian principals perfect? By no means, but offer us the alternatives. The previous admin refused to cut spending (by adding trillions of $ in military expenses), did not attempt to pay off the debt, and it's refusal to increase corporate and personal income taxes during the 'boom years' is one of the reasons for the economic troubles the US is going through presently

"So, unfortunately, we are the world's protector, letting many others
enjoy the luxuries they find in socialism. If we follow in kind, then the whole picture changes"....

Industrialized countries ...socialism....please maybe social-democracy....but socialism?
Go tell the average European or Canadian that they are socialists and they will educate you quickly.....

On Jul 14 01:17 PM awake09 wrote:

> So, we should be following industrialized nations' example? That
> will gain us what, exactly? Since many of them have socialized health
> care, then that means we need it too? If it wasn't for US strength
> around the world, with huge expenditures in defense systems that
> keep them safe, they wouldn't be able to afford their health care.
>
>
> So, unfortunately, we are the world's protector, letting many others
> enjoy the luxuries they find in socialism. If we follow in kind,
> then the whole picture changes.

Jul 14 06:16 PM