Wednesday, January 23, 2008

Close Nomination for Dweeb of the Week by Angry Bear

Well the following got me wondering,The Weak Economy and Presidential Politics: Could Someone Tell RUDY About the Balanced Budget Multiplier? Why would you tell a candidate about such a minor economic theory? In an open economy where much of consumer expenditures are import products, then even the basic Keynesian multiplier effect is in question. If it it hard to convince Liberals about the multiplier effect then what is the chance of them understanding the BBM? CATO states that about 35 cents are returned over the long term for a one dollar deficit spending through tax cuts. The CBO gives even less returns of about .7 cents for a dollar of deficit spending. So how much will a BBM increase income while not increasing inflation?
With all the recent talk about combating the supposed oncoming recession, Adam Nagourney ponders whose candidacies this will help most and suggests this will help Romney and Clinton. Why Romney? Well I guess the public thinks a business background means one makes great economic decisions (banging my head against the wall). And Senator Clinton was First Lady when Bill Clinton convened and actually listened to some very good economic advice (more on this later).
Well, I will be more comfortable with the economic decisions of a country from a business leader than say a career politician, housewife, doctor and especially a Lawyer for 35 years. Some careers can warp peoples perceptions of the economy. While I am sure Clinton had some good advisers, in 20/20 hindsight, he should have increased taxes more and done more to reduce the debt and not resisted the balanced budgets that the Republican Congress had presented.
Nagourney notes that some Republicans want fiscal stimulus in the form of tax cuts, while some Democrats want more government spending. Senator Obama’s call for tax rebates has me wondering whose nomination he is really seeking. As we talk about deficit financing, we should give Andrew Samwick some time at the microphone:
Forget the "stimulus" label, this is merely additional deficit spending. There is no discussion of repaying the money through higher taxes in the near term. Based on the President's remarks this morning, the deficit bill will be for about $150 billion. So this proposal is just another $150 billion of some future generations' resources that we will be using for our own consumption today. Why are we entitled to pass them this additional debt?
Yes, some good points that PGL and Samwick (Fiscal Stimulus? We Don't Need No ...). Which brings up my point when the economy was actually overheating with unemployment figures below 4% and the creations of bubbles that we faced in equities (Dot-Com bust) and housing Clinton should have raised the tax levels. As I have stated before, I think the Fed has very little ability to control bubbles but the US Federal Government does have the ability through taxes and incentives to head off some of the effects of bubbles.
Former Mayor Rudolph W. Guiliani of New York was more sketchy as he answered questions about how he would handle the financial upheaval. Addressing a reporter he knew from New York, he pointed to his experience as mayor in suggesting that he was prepared to handle the crisis, but offered no details on what he thought should be in a stimulus package, or what taxes should be cut. “Congress and the president should do a stimulus package and they should do a spending reduction package,” he said. “You’re familiar with that; we used to do that in New York.”
Cutting government spending is not demand stimulus. Of course, RUDY wants to cut taxes but does he not get the balanced budget multiplier, which basically says that if we cut government spending by the same amount as we reduce taxes, then aggregate demand will decline.
But how much is this effect going to be? There could also be a question whether a Fiscal Stimulus a good move now? I would doubt that it would be more that 1% effects. PGL also fails to understand Supply-Side Economics where the long-term effects of an over-bloated bureaucracy leads to lower long-term economic growth. Thus Rudy seems willing to take the short-term risk and shot for the long-term benefits.
OK, back to the Clinton era of Rubinomics where the policy dilemma was how to cut the deficit but also stimulate aggregate demand. One idea, which I’d hope someone might float, might be to accelerate government spending programs but not increase long-term government spending. We might also try to backload any tax increases. The idea would be to move the sum of private and public consumption forward as we promise to those who are making investment decisions that we will get our fiscal house in order and hopefully later increase national savings. That might actually encourage investment rather than crowd it out.
Yes, some good suggestions here. But I do have to question how much "crowding" out actually happens in our open economy?
Andrew Samwick is not alone in his disdain for fiscal stimulus as the primary tool for increasing aggregate demand as Greg Mankiw has had several excellent posts on why we should be relying more on monetary policy. Greg even found a 1994 quote from Paul Krugman:
When monetary expansion is ineffective, fiscal expansion...must take its place. Such a fiscal expansion can break the vicious circle of low spending and low incomes, "priming the pump" and getting the economy moving again. But remember this is no by any means an all-purpose policy recommendation; it is essentially a strategy of desperation, a dangerous drug to be prescribed only when the usual over-the-counter remedy of monetary policy has failed.
A dangerous drug indeed and if we took the medicine prescribed by Dr. RUDY, it would have the opposite of what is the desired effect.
I think we do rely more on Monetary Policies, but as Paul Krugman points out if that fails we should see if Fiscal Policies can help out. Of course what is worst is if Fiscal Policies and Monetary Policies are struggling in opposite directions, like in a row boat with both rowers facing each other. Now there are times when they may be faced in opposite directions as when stagflation appears in an economy as Reagan faced in the early 80s.

As far as the dangerous drug, I think an over-bloated government bureaucracy may be the most dangerous drug of all. And lastly, he may be right that we have gone to the well of Fiscal Stimulus too many times and not enough times of putting back what we took out. (I tried hard to not mix metaphors.) LOL.

Links:
Proposed Fiscal Stimulus: My View

Peddling Prosperity: Economic Sense and Nonsense in an Age of Diminished Expectations (Paperback) by Paul Krugman

Balanced budget

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