Disappointment

I would be considered in most circles to be a left of center moderate, with a bias towards facts and objective opinion. But this fiscal stimulus debate has been completely disappointing and disconcerting so far. My hope is that the posturing is politics and the end result will be positive. 

My major qualm has been the Obama team's blind ignorance to facts. There are some who say this stimulus plan is diverse to stimulate the economy in different way through all avenues. The facts say something far different.

There are a few problems, one as this graph from the CBO via Paul Krugman shows, there is an output gap. Meaning the economy is functioning about 8% below capacity. Monetary policy is at the zero bound and fiscal policy needs to stimulate demand.

This is dire because just like the psychology involved in bubbles, during deep recessions there is a self-reinforcing adverse psychology pushing everything lower. 

With that in mind the best one can hope for is big, drastic fiscal stimulus done in the most efficient, effective manner. And flat out, the Obama proposals do not seem to be the most effective "Bang for the Buck" according to Marc Zandi (Refer to Page 3). When Zandi ran the numbers the three most effective sources of fiscal stimulus per dollar were: 

• temporary increase in food stamps - 1.73
• extend unemployment insurance benefits - 1.64
• increase infrastructure spending - 1.59

the three least effective sources were:

• accelerated depreciation - 0.27
• extending the Bush tax cuts - 0.29
• cut corporate taxes - 0.30

And the Obama team seems wiling to make these sorts of tax cuts a major portion of the legislation. And why? So, they can run up 80 votes in the Senate. Although the comparison is not completely symmetric, LBJ helped pass a toothless Civil Rights act before 1964 and 1965 because he made it a compromise bill. The Obama team seems to be willing to do the same with a bad fiscal stimulus plan - bad is the correct term because it is a waste of taxpayer money not to send money to the most efficient, effective use.

When the fiscal stimulus is voted on, the Obama teams and  Democrats will have 59 seats in the Senate and a tidal wave of public support behind them. Why pass a bad compromise bill? When they could pass a great piece of legislation with 60 votes.  

How do I know this outline of legislation is bad. One, the quantitative numbers from Zandi (who by the way actually likes the Obama plan) and other sources show quite clearly the most effective sources for stimulus especially in a period of aggregate demand shock (tax cuts provide supply not demand). Two, the average estimate from professional economists, stimulus included, is that unemployment will peak at 8.4% and that growth will resume in December or so, but that once growth resumes it will resume at a slow rate.

This fiscal stimulus gives the Obama team to grow public support for progressive policy and the opportunity to do what is right for the economy. However, their willingness to provide half measure when full are needed (see Japan in the 1990's) will end up not stimulating the economy as is needed and will end up hurting them politically when we have sclerotic growth in 2010. 

I hope I am wrong, but if this opportunity is lost another may not be found again.