Stimulus

Dean Baker is a down-to-earth guy who calls it like he sees them. Here's his post on the stimulus:

Stimulus Arithmetic

There is considerable confusion over what impact we should expect from the stimulus and when. Much has been made of the fact that only a relatively small portion of the stimulus (@15 percent) has yet gone out the door. This is not a bad record in terms of spendout, but it also should not be excuse for waiting.

In terms of spendout, it takes time to spend money even for the most shovel ready projects. If we are repairing a bridge, even if everything moves quickly, the project itself might take several years. The government will not make the full payment for repairs in the first month.

On the tax side, the government has put in place a schedule of lower tax rates so that we are all paying lower tax rates. That will continue through 2010. So, we have already had 3 months of lower tax rates, with 18 more yet to come, that's about 15 percent of the total period. So, we've done reasonably well in getting the money out the door.

But, we should already be seeing most of the impact that we will see. The logic is simple. The tax cut put another $45 in our paychecks in April, in May, and in June. We will continue to see this extra $45 a month for the next year and a half, but that will not be a further boost. In other words, insofar as we will spend more each month because of this extra $45, we presumably are already seeing this effect. There will be no further uptick in consumption based on this money.

So, we have probably already experienced most of the boost that we will get from the stimulus. The economy would have been in worse shape without it. Consumption is higher than it would have otherwise been and state and local governments have been able to keep many programs funded that otherwise would have been cut. People have jobs (most obviously in state and local governments) who would have been unemployed in the absence of the stimulus.

However, the stimulus clearly was inadequate to get the economy back towards full employment. With the unemployment rate almost certain to cross 10 percent this summer, it should be clear that we badly need more stimulus.

You can't ask for a more transparent analysis of why the current stimulus just won't do it.

Krugman has long been calling for another stimulus package because he always thought Obama shortchanged the country with his initial package. Most economists, except the ideological right, see the need to stimulate to replace the missing spending caused by the private sector retrenching due to the hard hits they have taken in income, housing, and wealth.

I'm not an economist, but if you have a choice between employing people productively and adding to the overall wealth of a society or condemning them to unemployment and underemployment, the first option is preferable. The arguments against government action:

• Ensuring full employment you undermines the dynamism of the economy, i.e. the necessary restructuring, the shifting of jobs to growth areas and away from dying area. I can concede that government support may reduce dynamism. But to advocate running an economy at less than a full rate, condemning many to misery, to ensure "full" dynamism is bizarre.


• Government interference "poisons" the miracle of free markets. I can concede that government programs create incentives that might run against what a fully free market would achieve. But I don't accept that government action is always "interference". As seen from the recent collapse, government has an essential role as rule-maker and regulation enforcer.

The bottom line for me is that facing the harsh "discipline" of a totally free market is crazy. We buy insurance policies to take the edge off disasters. Government is like an insurance policy. Its role is to take the edge off the harsh realities of capitalism.