Ignorance on Parade -- Updated Thrice [Bryan]

This is not a stimulus plan, it's a spending plan. It won't create the promised jobs. It won't activate our economy.

Senator Mike Johanns (R)

I have rarely seen such breathtaking displays of ignorance as I have in the past few days. I am trying to decide who is dumber when it comes to the economic stimulus package, the media or the politicians like Johanns. It's a tough call.

Let's review where we are at . The economy is in serious, serious trouble. This is reflected in economic data out today, as well as personal experience. I know several families who have lost their jobs. How did we get here? Well, in 2005 the housing bubble pops. House prices decline. Banks heavily invested in bad loans nearly go under, and people see their equity evaporate or turn negative. Credit almost completely freezes. No one lends money and people feel poor. Businesses and families start to restrict spending, and investors get stingy. Businesses then need to cut back on production. Jobs are then lost. Due to this unemployment, people then buy even less, leading to more production cuts and more failing businesses. More jobs lost. This leads to yet more cuts in consumer spending and investment...and so forth and so on.

One way to deal with this problem is for the Federal Reserve bank to lower interest rates -- this makes lending easier and can entice spending. Alas, the Fed has lowered interest rates to zero and things keep getting worse. To break this cycle, somehow spending needs to pick up again, but no one is going to start spending or investing on their own in this climate.

Luckily, since John Maynard Keynes was around, we now have the idea of "counter-cyclical fiscal policy" solutions. When spending takes a nose dive, Keynes realized that the government can step in a make up the difference. The government can increase spending directly or lower taxes and hope that people will spend themselves. What happened in the Great Depression was that spending was cut and taxes raised at very inappropriate times (thanks to both Hoover and FDR), which is why it turned out so bad. Now we know better. We even know what kind of budget expenditures work best as stimulus: aid to low income families, unemployment benefits, and infrastructure investment (see chart below, which shows the amount of effective stimulus per each government dollar spent).

Now, most Republicans want to exclusively cut taxes for stimulus. While some tax cuts are necessary for quick stimulus, they are less preferable for two reasons. First, notice from the chart that tax cuts don't stimulate all that effectively -- people (understandably) don't spend their tax cut in tough times unless they need to. Second, tax cuts miss the chance to spend money in ways that help us to solve our big social problems. Last year, when the stimulus tax rebate checks arrived, pornography sales increased 20-30%. Imagine: instead of stimulating with porn, we invest that money in medical and clean energy research, broadband expansion, Pell Grants, roads and schools, bridges, high speed trains, and so forth. This is the stuff that makes for long term economic success. Porn doesn't. Tax cuts alone can't make the community investments that really make a difference.

It is maddening to me, not that people like Johanns disagree about the details here, but they don't even seem to understand the basic principles at issue. Either they do not understand, or they want to embarrass the other side so badly that they are willing to let the country burn to score a political victory.

Behold the fall of civilizations.

Update: I should add that expected shortfall in demand from the current recession is a whopping $1-2 trillion. So the problem with the current $900 billion stimulus is not that it spends too much; rather, it spends too little.

Update 2: So it looks like the Republicans have pushed for less spending on food stamps, state aid, and infrastructure. This is all a very bad idea. It is the opposite of what we want to do.

Update 3: I was talking to some guys today who said (1) we should worry that the government is just printing money (presumably this is a worry about inflation), and (2) just giving money to people in food stamps makes them dependent.

With regard to (1) I should point out that inflation is the least of our worries right now. If our currency does start to lose value (and prices rise) we should worry. But the Consumer Price Index has been falling recently. Deflation is the worry right now, not inflation. With regard to (2), I should point out that this is all about economic stimulus. Poor people need the money and will spend it. If that is the goal, you can't stimulate any better way. The increase is temporary whatever the case.