Regulation of Credit Default Swaps would have significantly reduced, and possibly eliminated the problem we are currently having, we would not have had as large a real-estate bubble, nor as large a crash, banks would probably not have evaporated under the strain of what remained.

As for throwing money at the solution, I don't really buy that it will be done in a way that helps. If I had to solve it I would spend every penny on infrastructure, which is in effect a blanket subsidy of the economy, without being a "stick it in your pocket and run away" sort of bail-out, as we saw with the banks.

Spending on regulation and enforcement could have helped, but at this point I don't really expect anything but crash and burn. When mobs of people are starving in the street, then Washington will pay to put them all back to work rebuilding the electrical grid, mostly because that's cheaper than prison, or revolution, until then I don't think much of what they spend will do any good.

Lame post. First of all, it's .78 trillion, which is only a big difference when one considers that the difference is $220,000,000,000. Second, you have set up a straw man by calling for proof, but asking only for "theoretical explanations, historical examples, or other data" none of which, of course, are proof. I guess I understand what you're getting at, but as one of the "lot of intelligent users on this site" I think you should streamline your thinking before presenting it to the group. I'm not hating, I'm just sayin'.

>> ^RhesusMonk:
Lame post. First of all, it's .78 trillion, which is only a big difference when one considers that the difference is $220,000,000,000. Second, you have set up a straw man by calling for proof, but asking only for "theoretical explanations, historical examples, or other data" none of which, of course, are proof. I guess I understand what you're getting at, but as one of the "lot of intelligent users on this site" I think you should streamline your thinking before presenting it to the group. I'm not hating, I'm just sayin'.


I'm not trying to set up a straw man, because I'm not trying to disprove anything here. I am only interested in viewing and understanding the evidence which shows how and why a stimulus will correct the economy. Whatever choice is made, it should be well understood, don't you agree?

Positive proof beyond a shadow of a doubt is impossible. Even the proponents of the stimulus (like me), aren't 100% sure it will work.

The empirical evidence in favor of it mostly comes from the Great Depression and New Deal era, but it can be found in much smaller cases throughout the decades since. I've read the alternative histories that claim the New Deal failed, or worsened the situation, but there are more than a few counterarguments, including my favorite from Krugman, which essentially said it failed because it wasn't big enough, and the onset of WWII finally got government "stimulus" up to the right levels.

I've read economists with arguments against the stimulus who seem rational enough; by and large they're concerned about whether the short-term effects will help more than the long-term effect of the increase in debt. Others seem to act as if their theory of economics has already long since settled the question of whether government spending can ever have a positive effect, and just list off the extent of damage it will certainly do, regardless of its detail or composition. The Treasury View in other words.

Most of the Republican party plans seem to be made up of completely non-economic ideas: Do Keynesian stimulus, but do it with ineffective tax cuts alone. That way, you get all the downsides of stimulus, with none of the advantages, and then in 4 years they can campaign against Obama for having raised the debt to no effect! Win Win!

I'm in favor of the stimulus because I believe in most of what's in it from a political perspective, even the things the Republicans are cherry picking as "ridiculous". They may not be optimal at generating short-term stimulus, and therefore shouldn't be part of this package, but I'd be in favor of them in their own right. That said, I think the overwhelming majority of it is aimed at projects that would have both short- and long-term benefit to the economy, and a lot of what's now getting cut in this final phase are some of the best parts (infrastructure, research, and education funding) for long-term value.

I am skeptical about the utility of the short-term stimulus, but I'm not at all skeptical about the utility of the long-term investment in basic infrastructure, and maybe the whole Keynesian "prime the pump" idea will work after all too.

Sometimes theories are difficult to test, but the goal is to prove a hypothesis to at least some degree of reasonable certainty. Its okay if we don't prove it 100% or even 50%, but at least we can amass some evidence which supports it, can't we? Failing to form a positive proof says nothing of whether the hypothesis that governmental spending can improve the economy is true or not. However, any support or evidence towards such a proof can give us at least some confidence that it might be true.

This bailout won't work. Period.

Show me where I'm wrong.

>> ^NetRunner:
I am skeptical about the utility of the short-term stimulus, but I'm not at all skeptical about the utility of the long-term investment in basic infrastructure, and maybe the whole Keynesian "prime the pump" idea will work after all too.

An example of a long-term investment that is/was regarded as a success in mitigating an economic downturn: Germany, March 23rd, 1977, "Programm für Zukunftsinvestitionen" (ZIP). Interestingly enough, it was the last German chancellor with an economic background who initiated it.

Despite the peaks in oil prices in 1973/78 draining an estimated 1% GDP out of the economy and a counterproductive monetary policy by the Bundesbank, this program combined with two small stimulus packages in 74/75 helped keep the economy growing, create a six digit number of additional and sustainable jobs and keep inflation at less than half of what comparable nations had at that time.

^perfect, thats exactly the kind of evidence I had in mind. It looks like the program translates to "Program for future investments" but I'm having trouble finding information about it in English. Do you have any details on the program, or information on how it created sustainable jobs and reduced inflation?

Top 10 Reasons to Oppose the Stimulus

http://www.freedomworks.org/publications/top-10-reasons-to-oppose-the-stimulus

>> ^imstellar28:
It looks like the program translates to "Program for future investments" but I'm having trouble finding information about it in English.

Probably more along the line of "Program for long-term investments", because although it was running about two years, it was supposed to have effects 10, 20 years down the road - and it still does, 30 years later. You won't find many informations about it in online publications. Maybe a small reference to the "ZIP 1" here and there, but that's it. There's hardly any information about it online in German, much less English.


Do you have any details on the program, or information on how it created sustainable jobs and reduced inflation?

It didn't reduce inflation, it just didn't cause it to explode either, like it is often claimed nowadays. It went up sure enough, but not more than in countries who didn't use a stimulus package at that point. Here's a graph for it, Germany is represented by the graph marked with "D" - the pink one on the first page.

The program itself was ~24 billion DM ($12 billion in 1977) spread over two years. The money was to be spent on the local level (community, city) for the most part and the largest single position went into new streets (~2-3 billion DM according to a press release from 1977). Energy infrastructure, r&d for alternate energy sources, water infrastructure, (public) transportation and housing were other large areas of spending. However, black coal was also subsidized - had lots of jobs in the 70s, even though it was a financial black hole.

The investment into housing/construction (both private and commercial) ran into a problem though. The investment was increased by a nominal ~11% compared to normal investment and caused a growth in construction of about 15%, which surpassed the industrial capacity and 9% went straight into increased prices. It should have been stretched out over more years, so preparation is the key if it's not supposed to in vain.

Other than that, it was basically the last time Germany had a decent growth in GDP.

As for the debt created: public debt went up, naturally, but the rate of indebtness actually decreased noticably towards the end of the 70s. And in total numbers, corrected for inflation, public debt increased twice as much during the new goverment in the 80s.

What is the alternative?

Waiting for the banks to feel like lending again?

Waiting for big business to feel like employing Americans again?

How long do we have to wait?

Until you are homeless? Until you are hungry?

Maybe, to prove a point, you and your family could live in your car for a few months, to reveal the might of a free market.

For fucks sake am so sick of this nonsense in the media as a whole, the democrats are applying textbook macro economics while the republicans are only pushing forward further tax cuts as a cure all for the economy.

It's just so fucking stupid.

>> ^rougy:

The free market didn't do this to the economy, my sweet prince. We've been over this a million times. It wasn't lack of regulation but rather government intervention in the market that helped to lead to this terrible economic disaster.

Even then, it's not all the fault of government intervention in the marketplace. Oh no. That spendthrift war in Iraq has hurt us greatly, as well. You want to know the first step in fixing our economy? We end the wars abroad and start closing down military bases:

"According to the Defense Department's annual 'Base Structure Report' for fiscal year 2003, which itemizes foreign and domestic U.S. military real estate, the Pentagon currently owns or rents 702 overseas bases in about 130 countries and HAS another 6,000 bases in the United States and its territories." cite

That's a lot of money. Imagine closing down those 702 bases abroad? And, do we really need 6,000 bases in our 50 states? But, then again, if we starting closing down those bases then we'd be taking away jobs from soldiers, and I'm sure you liberal-hearted pro-laborers would be offended by that, right?

^rougy:
What is the alternative?


This thread isn't about alternatives to the stimulus, it is about evidence for the stimulus. $780 billion, $1 trillion, etc. is a lot of money to stake on "what is the alternative". Given that not only a large amount of money, but the economic outlook for at least several decades is on the line, don't you think we should provide evidence to make the best decision? radx has already provided a historical example, does anyone else have anything to contribute? Farhad2000, you mention textbook macro economics, can you explain the theory behind government spending improving the economy?

Its an honest question to ask for evidence supporting a theory which is about to be implemented nationwide at great monetary cost, especially a theory where so much is at stake.

>> ^blankfist:
The free market didn't do this to the economy, my sweet prince. We've been over this a million times. It wasn't lack of regulation but rather government intervention in the market that helped to lead to this terrible economic disaster.

Which government intervention? You repeat these talking points as if they're self-evident, yet you've failed to explain how a crisis in the private banking industry was foisted upon them by government regulations. If there's a regulation out there that said "you must leverage yourselves well past your asset level", I've not seen you or any other market fundamentalist quote it.

That's not to say I agree with rougy's overall point of "what else could we do?" as the defense of stimulus.

imstellar's right that the debate should be waged using real data points from history even with the understanding that there's never going to be a perfect fit to our current situation out there to be found.

I'm trying to track down rigorous studies of past examples, but most of what I'm finding is talking about theory and the current program, not past programs. The rest of what I'm finding are sweeping generalizations about the Great Depression, or the 1980's deflation in Japan. Economists who're in favor of stimulus say that the New Deal worked, and that Japan's attempts at stimulus failed because they didn't invest in projects with real long-term value. Opponents of the current program emphasize Japan's problems as disproof of fiscal stimulus, and then say that WWII, not the New Deal ended the Great Depression (without mentioning that WWII was also fiscal stimulus).

In other words, it seems to be something that people are just divided on political ideology, and the economics is used to justify the economists' political philosophy.

Which is icky.

^theory is okay if historical data is hard to find or validate, even if its something as simple as a high level explanation. Anything really, which supports the hypothesis which we can aggregate here in this thread would be useful.

I lean heavily on Paul Krugman for theory. Here's one of the most basic articles from him on why we need to look at fiscal policy (because we've hit the zero lower bound on monetary policy).

http://krugman.blogs.nytimes.com/2009/01/19/getting-fiscal/

Here's him on the dangers of entering a deflationary trap if something isn't done quickly:

http://krugman.blogs.nytimes.com/2009/02/04/about-that-deflation-risk/

And a less optimistic take:

http://krugman.blogs.nytimes.com/2009/01/30/damnification/

Here's Robert Reich being particularly shrill:

http://robertreich.blogspot.com/2009/02/senate-republicans-and-stimulus-playing.html

And Joeseph Stiglitz being similarly strident:

http://www.nytimes.com/2008/11/30/opinion/30stiglitz.html?_r=2

I've been sporadically checking on most of these guy's blogs, and they are mostly rebutting the opposition to the stimulus put forth by various other economists.

^Do Krugman, Reich, or others have longer articles which give more details or explanations for the zero-bound problem, the issues with deflation, the output gap, and how the stimulus addresses them? It sounds like a possible avenue to support the hypothesis if more information can be provided.

The stimulus is not really written to address the topics you mentioned since writing a bill like that would make the US into the USSR, the bill is two fold the way I see it, it aims to help those in dire need now (unemployment insurance and food stamps) and it is written to spur on investment spending in the long term through fiscal expenditure (infrastructure spending). The aim is to increased aggregate demand in the whole economy in the short term and reduce the job losses.

Now people instantly say why don't we just give tax cuts and this will give the same effect? It has been done already and it didn't work, you had a large tax cut in 2008 that did nothing to alleviate the economic crisis we face today. People simply saved or paid off debt which does not generate economic activity. e.g. from Krugman in Jan.2008

Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can’t call a “tax cut.” Behind that refusal, in turn, lies the administration’s commitment to slashing tax rates on the affluent while blocking aid for families in trouble — a commitment that requires maintaining the pretense that government spending is always bad. - Stimulus gone bad

The same thing will happen again if tax cuts are given, at the same time the tax cuts would be essentially government income that is written off and only adds to the budget deficit.

This is where monetary policy of controlling the economy through the money supply basically could not avert the problems we face today, the Fed is keeping interest rates low but you do not see increased economic activity due to lack of consumer/business confidence in the economy as a whole. We face a liquidity trap, the banks and financial institutions are simply unwilling to make any kinds of loans to spur economic activity.

You can read more about the exact steps summed up nicely at NYT since am not going to rewrite everything http://topics.nytimes.com/topics/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html

Will this work and make the US spurt flowers tomorrow? No. The economy will keep spiraling down, since effects like this take years to transmit through the entire economy. Remember that the Housing bubble, sub prime mortgages and other issues were highlighted nearly 2 years ago before the actual effects started being seen. But this bill will help Americans in need now.

Blankfist doesn't really know what he is talking about, and is buying into the conservative blame game, it was deregulation in the derivatives market that helped created this crisis, all Greenspan needed to do at one point to prevent alot of this is say the words "Housing bubble" - http://www.videosift.com/video/Klein-Blames-Greenspan-Deregulation-for-Economic-Crisis

We will see how it pans out. However am with Krugman and Stiglitz, I don't think it goes far enough at all, the program needs to be much larger. In Krugman's words:

According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger.

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

Just wait a few months for this stimulus to be ineffective, the Republicans come out and politicize it, criticize it saying it didn't work because it was stupid and we needed more tax cuts. But is a difficult situation, you got large government debt on one hand, and you need a large stimulus on the other. How do you reconcile those.

>> ^NetRunner:


http://www.videosift.com/video/Dr-Paul-on-the-Senate-Stimulus-Compromise

>> ^imstellar28:
^Do Krugman, Reich, or others have longer articles which give more details or explanations for the zero-bound problem, the issues with deflation, the output gap, and how the stimulus addresses them? It sounds like a possible avenue to support the hypothesis if more information can be provided.


Here's a link with a lot of discussion about the zero bound problem, and with some talk about the deflationary issue, most of it by Ben Bernanke:

http://economistsview.typepad.com/economistsview/2008/03/monetary-poli-1.html

Here's a trove of Krugman papers on the situation in Japan in the 90's, and the deflationary liquidity trap that he believes happened there:

http://web.mit.edu/krugman/www/jpage.html

(and from the other articles I linked, he clearly thinks we're on the brink of a similar situation here and now)

Here's discussion of what is meant by an output gap:

http://www.tutor2u.net/economics/content/topics/macroeconomy/outputgap.htm

How stimulus is intended to cover that gap is by increasing government spending (represented by the letter G in the Aggregate Demand equation), to pump more demand into the system to try to catch back up to supply.

Also, the Wikipedia page on Liquidity Trap is a pretty damned good summary of the whole thing, really.

Good, so the stimulus is designed, in part, to fix the output gap by increasing demand. Now what we need is proof for two things not listed in those articles:

1. evidence that an output gap is undesirable
2. evidence that government spending can increase demand, both short and long term.

Right now, the above articles mention that we have too much supply and not enough demand, hence an output gap. The articles mention a little bit about inflation but do not explain why this is an undesirable condition. If I apply the principle to my personal finances, it seems like I would rather have more supply than demand -- i.e. I would rather have more stuff than I need. To me, it seems like it would only be bad if I didn't have as much as I need. So, wouldn't having too much demand, and not enough supply actually be the undesirable condition because then there are food shortages, gas shortages, etc? It seems like when there is "too much" what happens is prices go down? Can anyone explain why that is undesirable?

>> ^imstellar28:
2. evidence that government spending can increase demand, both short and long term.

The increase in long term demand by government spending is mostly just a fracture of the short term increase. But providing a long term demand is not the primary objective of a stimulus package.
It's a bandaid and as such only supposed to keep demand from plummeting until the underlying cause of the crisis is fixed. In this case, that would be the availability of credit. How that problem can be fixed is another issue altogether, so I'll ignore it for the moment.

Now, there are problems of government spending as a means to absorb a drop in demand. For instance, it has to be planned properly to be effective and it takes time until the first payments take place. Another issue is the previously mentioned misallocation: if spending increases demand in a particular area beyond available capacities, it will only raise prices (inflation) and not create any additional demand.
Getting the cash to the ones who are most likely to put it into consumption seems like the key, the unemployed come to mind or generally folks receiving social security.

And it has to be done quickly, because ...

>> ^imstellar28:
1. evidence that an output gap is undesirable

... an output gap causes deflation. Dropping demand leads to lower prices, which leads to reduced production, which leads to unused production capacity, which leads to production capacities being liquidized and people getting fired, which leads to a drop in demand ... happy hour!

So, if the drop in demand is not absorbed quickly, production capacities will be lost already and any additional demand through spending could be unsatisfiable. If capacities are to be kept and insolvencies to be avoided, demand has to be created as soon as possible. Any delay will have a multiplying effect on the cost.

So, wouldn't having too much demand, and not enough supply actually be the undesirable condition because then there are food shortages, gas shortages, etc?

Shortages make an increase in production capacity profitable and therefore create jobs. Oversupply makes production less profitable or even unprofitable and causes capacities to be reduced to keep efficiency high.


Now, everything I just wrote might as well be a load of horseshit. I neither have an economic background nor a particular interest in it and I'm limited to a European perspective, which might not be applicable to the USA. So I'm basically talking out of my ass here, hope you don't mind.

^ Despite radx's horseshit disclaimer -- which applies to myself as well, except I'm a USA resident -- he's right on the money. If you're looking for more rigor, there's Okun's Law, which is an observed statistical correlation between output gaps and unemployment that seems fairly constant over time.

Really, the chief concern is that negative output gaps lead can lead to deflation.

As to why government spending can increase demand in the short term, that's easy. The government buys stuff from private businesses, cars, buildings, schools, etc. are built by private firms dedicated to doing that stuff. Those firms that land a big government contract will be able to hire more people (presumably reducing unemployment), who now have money of their own to spend, which results in an increase in demand.

How this helps in the long term depends a lot on what the government spent the money on. If it built things like schools, hospitals, clean energy, upgraded rail, highways, ports, etc. the resulting public assets will provide value to companies that exploit them (and they all exploit schools and hospitals when they hire people), and potentially lower barriers to new businesses entering the market.

It's like an episode of Kitchen Nightmares, only the whole country gets the benefit.

We have tried spending money. We are spending more than we have ever spent before and it does not work ... After eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!

--Henry Morgenthau

Treasury Secretary under FDR, after 2 terms of FDR's "New Deal".


The Scamulus is an expensive rain dance. Obama does his rain dance today on a pile of taxpayer money and LO!--it rains...3 years from now!

It took 18 months for Reagan's tax cuts to take effect; the difference between those cuts and Obama's scheme is when the economy recovers this time, people won't end up with more money in their pockets: Obama's taxocrats will be there to seize it.

If Obama's Stimulus is really the only way to revive the economy, then what explains those periods of HUGE growth when taxes were low and government interference was minimal? If government's spending future generations' money is so great, why stop at a trillion? How about 5 trillion more?



http://www.freedomworks.org/publications/top-10-reasons-to-oppose-the-stimulus

http://www.ritholtz.com/blog/wp-content/uploads/2008/12/bailout-pie.png

*discard

Discarding this post - discard requested by original submitter imstellar28.