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About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved ...  (More)

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Stimulus and the National Economy

Uploaded: May 19, 2012
A reader asked what I thought of stimulus efforts for the national economy.

The economy still suffers from a lack of sufficient demand to more fully employ unemployed workers. Consumers for good reasons do not have the resources or inclination to borrow to support much higher rates of growth in consumption. While business investment and exports are rising, construction and government spending are restraining growth.

The Euorpean experience in my opinion indicates the folly of short-term aggressive austerity measures and I expect European countries will move somewhat away from austerity and toward stimulus. As a personal anecdote we just came back from Greece. A friend who worked for the Greek airline had his pension cut in half as part of the recent austerity. Without passing judgment on what happened, it is still true that cutting incomes for many Greek families will push the eocnomy toward recession, which is happening across many countries in Europe.

The tone of recent posts in Town Square reflects the tone of national debate and lack of compromise in moving the economy forward.

We have twin goals of stimulating growth and long-term deficit reduction and our politics seems incapable of sensible solutions.

Any stimulus should be directed to long-term goals such as infrastructure investment, federal support for R&D and facilitating access to higher education--with possible support for states facing education layoffs.

We will face tough choices at year end in meeting deficit reduction goals as we remain gridlocked in DC.

Comments

Posted by Kelton, a resident of ,
on May 19, 2012 at 12:00 pm

Didn't realize that you were posting 3 distinct threads.... from the state thread:

"Economic growth will remain modest until these world, national and state issues see progress."

That progress will come sooner when the poor decisions to chase austerity are rectified. Europe has shown us that austerity only slows growth, further hampering the climb to recovery.

Even Governor Romney has admitted that to cut spending continues the recession: "I'm not going to cut a trillion dollars in the first year. And I heard a question. Why not? And the answer is: taking a trillion dollars out of a $15 trillion economy would cause our economy to shrink and would put a lot of people out of work."

If elected, Romney will pursue stimulus as fast as he can, in that he can get the economy back on track fast enough to recover an give him a shot at a second term. Romney supported stimulus in 2009. He will cut some safety net programs, and of course cut his taxes, but will not jeopardize recovery and limit his 'destiny' for two terms. He admits such with his budget 'plan' that actually adds to the deficit (increases the deficit mostly because of his 'personal' tax cuts for millionaires and billionaires, along with more DOD spending and stripping the safety net.)

What of the talk of cutting spending? I answer with a question - what Republican president has cut spending? Bush? Bush 1? Reagan? Ford or Nixon? Nope, nein, non, nee.... zero, zip, nada.

We need jobs bills. Pay for them by returning to the Clinton balanced budget era. Clinton spending, Clinton tax rates.

Jobs create revenue. Austerity does not. The Feds need to help states get out of this mess by putting folks back to work.


Posted by Spending-Is-The-Job-Of-Congress, a resident of ,
on May 19, 2012 at 4:03 pm

> What of the talk of cutting spending? I answer with a question -
> what Republican president has cut spending? Bush? Bush 1? Reagan?
> Ford or Nixon? Nope, nein, non, nee.... zero, zip, nada.

Before we ponder this question very much, let's take a little refresher course on Federal spending, and say hello to the Constitution of the United States:

Web Link

Presidents are not kings. Sadly, too many people with agendas are always trying to overturn the Constitution--replacing the law of the land with their own twisted views of how things ought to be done.


Posted by stephen levy, a resident of ,
on May 20, 2012 at 6:56 am

stephen levy is a registered user.

I did set up three posts--one on the CA economy (this one), one on the topic being disucssed here (national policy) and one on the topic Jon wants to talk about (the CA budget.

Readers are obviously free to respond wherever they want but it might be less confusing if the three posts are used for the three topics.

While the CA budget and economy are related they are really two separate topics. The economy is in slow recovery, currently doing a little better than the national average as a result of strong Bay Area job gains. And the budget continues with deficits unresolved as a result of the unwillingness or inability of the two parties in the legislature to reach an agreement that should be relatively easy compared, say to the European or U.S. budget deficits.

My ideas are in my budget post.


Posted by Joe, a resident of ,
on May 21, 2012 at 7:56 am

> And the budget continues with deficits unresolved as a result
> of the unwillingness or inability of the two parties in the
> legislature to reach an agreement that should be relatively
> easy compared, say to the European or U.S. budget deficits.

Assuming that spending is not the problem .. but a lack of revenue generation is the problem .. we (collectively) could overturn Prop.13--replacing it with a tax system that allows elected officials to set all tax rates at any level they want.

Property taxes, for instance, could easily be set at 2%-5% of the market value of all property by State/local governments. This would doubtless raise 150%-200% more in property taxes, alone. There really is not reason that everyone who owns a $1M home should not be paying at least $30K (minimum) for the privilege of living in that home. For homes of lesser value, yearly property taxes of $5K-$10K should be expected of those homeowners. No reason that a renter's tax should not be passed, given that the number of renters is about 50% of California's population ($300 to $500 a month would seem like a good target for the initial taxation level). And all property tax exemptions should be discontinued—which will put an end to the loopholes too many use to escape paying "their fair share".

In like fashion, no reason that the State income tax should not be doubled, at least. Living in California is a privilege that should carry financial consequences—one of which is to pay for the services that have been so graciously provided by the government.

Sales taxes could be increased to any level that the Legislature deems necessary to continue to pay its union work force, as well as helping to push up the labor costs on all union-related projects funded by the government. A solid middle class can be sustained by doubling government salaries in the coming years.

All auditing functions should be discontinued. There simply is no reason spending money on tracking costs and waste—much easier to simply raise taxes to make up for any poor use, or fraudulent use, of government funds. And since there has never been any linkage established between tax rates, and the general health of an economy—there is no reason that tax collections (and spending) should not seek to consume at least 75%-85% percent of the California's economic output, at a minimum.

How glorious life would be--if we would just get rid of Prop.13! That would be the answer to all of our problems!


Posted by Paul Losch, a resident of ,
on May 21, 2012 at 10:01 am

Paul Losch is a registered user.

We now are in a global economy, and we have not figured out how it can work efffectively. RIP Adam Smith, comparative advantage still makes sense theoretically, but as a practical matter, it is not a easy row to hoe.

State and local governments lack the financial resources to maintain the municipal and educational systems that still appear to valued by taxpayers--until they are asked to pay for them.

The US Federal Government has a role to play, although it may be different than what it is right now. The challenge in DC is that there is so much polemic and by and large people who really do not understand economics, but have the right to pass bills about it.


Posted by John, a resident of ,
on May 21, 2012 at 11:05 am

"The challenge in DC is that there is so much polemic and by and large people who really do not understand economics..."

One word: Greece.

Why would any rational person want DC (Athens) to solve our problems? If printing presses could solve major economic problems, Greece would be leading the world!

Paul, of course " it is not a easy row to hoe." Where did you ever get the idea that it was? Harvard Biz School? Time to get real, Paul.


Posted by Doyle, a resident of ,
on May 21, 2012 at 11:24 am

It is easy. Do what every President faced with recession has done - stimulate the economy and create jobs. Reagan, Bush1, Clinton, etc.. Jobs create more demand which create more jobs, which generates revenue to pay off the relatively meager investment in stimulus and jobs. It's the first thing Governor Romney wil do if elected, he has told us he will tread lightly on spending cuts. Look it up.

While looking it up, check out his budget proposals, he adds trillions in debt. see his website for details.

Greece = America is a far right fallacy.

If the US debt was an issue, why would countries line up to give America loans at RECORD LOW interest rates?

Even Japan, with double the deficit (as % of GDP) is paying near record low levels because, unlike Greece, we have strong economies and a sovereign currency.

Even Romney understands, that's why he proposes adding trillions in debt if elected.


Posted by Joe, a resident of ,
on May 21, 2012 at 11:46 am

> State and local governments lack the financial resources to
> maintain the municipal and educational systems that still appear
> to valued by taxpayers--until they are asked to pay for them.

Statements like this are truly mind boggling. It would be one thing to make a case, and then prove that there is "no money left" in the US, but clearly, that is not the case.

Why not let's start by actually coming up with an accurate tally of all of the current infrastructure/educational systems, survey these sites/buildings/systems, and provide the public with a bill for what it will cost to continue to manage this stuff? Currently, it's not clear that anyone in government, at any level, has the slightest idea about asset management. State and local governments just seem committed to acquiring more and more assets, without having the slightest idea how much they have, or how much it will cost to properly service/maintain/decommission these government-managed facilities.

Without actually having these inventories done at least every five years—how can anyone make statements about what government can, or can not, do?

Keeping in mind that over 50% of the Federal budget (and now deficit) seems to be spent on wealth redistribution (Social Security, Medicare, Medicaid, and so on), it's pretty clear that there is a lot of money being spent paying people to not work! It's pretty clear that our "social safety blanket" is probably going to bankrupt the country. So—isn't it time that the voters be providing a clear accounting of all of the "free stuff" that they are supposed to "value", so that maybe we can have a rational discussion in this country about the next fifty years' spending, and taxation, levels?

At the moment—the account of government spending, and obligations, is very difficult to find. Let's start there. Let's "open the kimono" and see just how bad things are. Then, we can move on to "government doesn't have the funds "


Posted by guest, a resident of ,
on May 23, 2012 at 6:50 am

Government stimuli here are half measures, which turn into quarter measures once dissipated to line pockets.

Stimulus spending was to repave Lytton Ave. from Alma to Guinda. Only half was repaved.


Posted by O>>VEEVVEEE, a resident of ,
on May 24, 2012 at 1:03 am

[Post removed by Palo Alto Online staff.]


Posted by John, a resident of ,
on May 31, 2012 at 6:52 pm

Stephen,

Please comment on this warning about large banks being forced to buy national debt.

Web Link

Thank you.


Posted by John, a resident of ,
on Jun 3, 2012 at 2:15 pm

I am still waiting, Stephen.

You are a professional economist, and a good one. You have a public forum, on this Weekly forum, as well as your own website. You need to answer difficult questions, even if they do not conform to your own model. This is not the time to duck, Stephen.


Posted by neighbor, a resident of ,
on Jun 3, 2012 at 2:51 pm

I don't think Stephen is obligated to respond to random postings. Like anyone else, he can if he finds it interesting.

In the recent Economist, they observed that Obama's attacks on Bain Capital and Romney were concerning, given that Obama consistently implied a conflict between profit and job creation - obviously without consistent profit, there can be no stable jobs, and with good profits comes more money to invest, creating future good jobs. While stimulus may be helpful, without the profit engine, the economy can never sustain. Does anyone thing Obama is on the right track here?


Posted by Doyle, a resident of ,
on Jun 3, 2012 at 3:27 pm

"given that Obama consistently implied a conflict between profit and job creation "

Where did Obama say that?

Obama is the Business President - the Dow is up from 8,000 under his watch to 12,100, even after a bad week.

"obviously without consistent profit, there can be no stable jobs, and with good profits comes more money to invest, creating future good jobs"

Gotta call bullpucky on that one too, or at least the inverse.

"Profits at big U.S. companies broke records last year, and so did pay for CEOs. The head of a typical public company made $9.6 million in 2011.... That was up more than 6 percent from the previous year and is the second year in a row of increases. The figure is also the highest since the AP began tracking executive compensation in 2006." Web Link

Corporations are enjoying RECORD PROFITS; where are the jobs, John Boehner?

John Boehner told us in 2010 that his was the jobs jobs jobs congress. The third bill they voted on was abortion, followed by a record number of abortion bills in 2011. 2012 looks to shape up the same.

On Thursday, the orange speaker talked about jobs at a meeting in the morning - ""Let's call bulls--- bulls---," he told House Republicans in a closed meeting this morning. "This election is about jobs, jobs, jobs."".

That afternoon he held another abortion vote. HR 3541.

Where are the jobs, Mr Boehner?


Posted by John, a resident of ,
on Jun 3, 2012 at 7:15 pm

>I don't think Stephen is obligated to respond to random postings

Oh come on!. Stepehn Levy started this thread on the effect of the stimulus on the national economy. A responsible question, which I asked, dserves a serious answer.


Posted by stephen levy, a resident of ,
on Jun 4, 2012 at 1:59 pm

stephen levy is a registered user.


The thread is in response to a reader's question about stimulus policies for the U.S. economy. I am happy to discuss that topic and gave my ideas in the initial post.

The case for stimulus is stronger now as a result of the slowing recovery. The lessosn from Europe are pretty clear. Austerity (raising taxes and cutting spending) when applied too soon and too severly will throw an economy into recession. Now European countries are beginning to realize their mistake and moving toward recognizing that nations are connected economically and now is the time to put attention on economic recovery.

The U.S. lesson should be clear--more stimulus now and adoption of something like the Simpson Bowles or Gang of Six large long-term deficit reduction.

Profits are important but as an earlier poster noted, corporate profits are at record levels. There is no rationale for most companied to invest for expansion (they do invest to increase productivity) when consumer and world demand is so low.

The normal response to low demand is policies to increase demand and the usual argument between Republicans and Democrats is over the mix of tax cuts and spending increases.

While profits ARE important they are not the problem now. Low demand is the challenge as consumers are recovering from losses in their wealth and slow income growth.


Posted by Doyle, a resident of ,
on Jun 4, 2012 at 4:07 pm

awwww, geez, you had to bring up the SB commission.... sigh.

Before anyone gets started, let's make a couple things clear.

Simpson Bowles was a failure. It never issued a report under the terms everyone agreed upon during it's creation. The co-chairs issued a report, but it was not accepted by the commission, not the Boehner controlled House, nor Reid's Senate.

SB also overreached - their charter did not include a number of issues they attempted to address anyway, such as Social Security. Simpson gave his usual slant on Social Security nonetheless, how we must cut support for our elderly, cut benefits, older eligibility age, means testing, etc..

Of course, with Simpson on board, the commission never entertained the one simple fix that makes Social security solvent through the end of the century *without* cuts or means testing, and that is a removal of the cap on payroll taxes for those earning over ~$110,000 a year.

Have at it, boys...

That said, austerity is not the answer. Stimulus to add jobs, create revenue and then target a balanced budget during the resulting "good times", just the was Bill Clinton did when he achieved two balanced budgets. After a new stimulus creates jobs, continue the way Clinton did in 1993, in moving towards a balanced budget - the 93 era tax rates.

As outlined by Kelton above - no Republican President has EVER BALANCED A BUDGET by cutting spending.

Of course, no Republican President has ever balanced a budget, actually.


Posted by Doyle, a resident of ,
on Jun 4, 2012 at 4:11 pm

Let me add one point...

"Simpson Bowles was a failure. It never issued a report under the terms everyone agreed upon during it's creation. The co-chairs issued a report, but it was not accepted by the commission, not the Boehner controlled House, nor Reid's Senate."

It was (sort of) accepted by one person. During the "debt ceiling" negotiations last year, one person laid out a roadmap to a $4 trillion deficit reduction - the so-called Grand Bargain, which was immediately rejected by John Boehner.

That person, the one who offered a deal to cut $4 trillion off the deficit?

President Barack Obama.


Posted by John, a resident of ,
on Jun 4, 2012 at 9:29 pm

Stephen,

Please comment on this warning about large banks being forced to buy national debt. It is a part of how the stimulus actually works.


Web Link


Posted by stephen levy, a resident of ,
on Jun 5, 2012 at 11:10 am

stephen levy is a registered user.

John,

I fail to see anything in the web story or anywhere else that provides credible evidence that the U.S. government is forcing banks to buy Treasury bonds. Moreover, could you esplain why you think this alleged event is tied to the debate over federals timulus policy?

The market is showing strong demand for U.S. government debt as well as debt in stronger European countries while interest rates on less secure bonds in Greece, Spain and Italy are high.

In addition to the other arguments for stimulus efforts now that I and other posters have presented, this is a great time to borrow and invest while long-term interest rates are so low. We should as a nation be taking advantage to borrow at low interest rates (reducing future interest liabilities) and making the strategic investments that will support economic growth.


Posted by stephen levy, a resident of ,
on Jun 5, 2012 at 11:15 am

stephen levy is a registered user.

Doyle,

As I write above I think this is a great time to borrow and make strategic investments in infrastructure, federal R&D and in our students.

These investments will also provide additional needed support for demand and job growth.

I do believe also that we need to credibly address long-term deficit challenges and I used Simpson Bowles and the Gang of Six as proposals that had the right order of magnitude for deficit reduction.

I have written many times that raising the cap on Social Security contributions is a good idea as you suggest but the major deficit challenge is elsewhere, primarily i9n health care costs.

Stimulus now and a firm credible plan for long-term balance between federal spending and revenues (including some increases in revenues) is my idea of the way to go.


Posted by Anna, a resident of ,
on Jun 5, 2012 at 12:28 pm

We've had deficits of about $1.5 TRILLION(!) per year for the last three years without any meaningful improvement in the economic situation. How much more stimulus does Stephen Levy want? Would he advocate, say, doubling the deficit for this additional stimulus to $3 Trillion? Or would even he realize that's totally insane and would destroy the markets along with the currency?

And if he's advocating a more politically realistic addition to the deficit for his stimulus - say another $200 billion - does he really think this will make a difference? I.e., would a deficit of $1.7 trillion result in different economic performance than a $1.5 trillion deficit?

I think Levy hasn't got much to offer here...but he does apparently like to hear himself talk.


Posted by stephen levy, a resident of ,
on Jun 15, 2012 at 2:22 pm

stephen levy is a registered user.

The economics of reducing the deficit for the long term are pretty clear as Europe has been so kind to show us.

It is foolish to reduce the deficit in the next year or two by taking money out of the economy. The debate ought to be about the best mixture of short term spending and tax cuts balanced with firm measures to reduce the growth of federal spending on health care (many choices but hard to do), cutting tax breaks that make no sense and reducing defense spending prudently over the long term.

A rush to so called austerity now is pushing European countries into recession and generating push back that will eventually lead to European stimulus efforts. Rising unemployment is no way to balance a budget.

Our deficit path is a serious but long term problem with most coming after 2020 but we need to start soon.

The markets are telling us two things about investors if anyone cares what they think--1) U.S. debt is being bought all around the world and we have the chance to borrow and invest at historically low interest rates and 2) the stock market goes up whenever there is talk of stimulus here or in Europe.


Posted by Pearl, a resident of ,
on Jun 15, 2012 at 2:31 pm

Anna: You've got nothing. Austerity doesn't work in getting out of recession, never has, never will. Look at recessions under republican presidents, they spend like drunken sailors to provide stimulus.

Mitt Romney has flat out stated he will not cut spending for fear of slowing the economy by 5%, the definition of depression.

Of course, even though Mittens said it multiple times, one doesn't know if he:
- understands it
- owns it (or is lying again)
- can stand up to Congress, whichever way the chips fall in November

Good thing about Mitt, if you don't like what he said, just google it, you can find him saying the opposite at some point.






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