There is a shouting match going on about what economic policy we should be following. One of the camps whole-heartedly support Keynesian stimulus, the other rejects it. This morning’s exemplars of the divergent viewpoints are columnist E. J. Dionne and Tim Cavanaugh at Reason.com.

Mr. Dionne favors fiscal stimulus. Big fiscal stimulus:

President Obama has only one option as he ponders a world economy teetering on the edge: He needs to go big, go long and go global.

Obama should not be constrained by what the Tea Party might allow subservient Republican leaders in Congress to do. He should state plainly, eloquently and in detail what he thinks needs to happen. Neither history nor the voters will be kind to him if he lets caution and political calculation get in the way.

Going big means immediate action to boost the economy, even though this will increase the short-term deficit. His proposals to continue the payroll tax cut, extend unemployment insurance and enact patent reform are good, but they are not enough.

The federal government needs to come to the aid of state and local governments again; the budget cuts they are being forced to make are precisely what the economy does not need now. We must find ways of boosting spending as quickly as possible on roads, bridges, transit and other building projects, including a new program to rehabilitate the nation’s dilapidated schools. And the administration needs to do far more to resolve the mortgage mess, which is holding back consumers.

Tim Cavanaugh presents the flip side of the coin:

Is it possible that the choice between budget-balancing and job creation is a false choice?

Does government actually create jobs?

Is there any reason to believe at least $2 trillion in fiscal stimulus and $2.9 trillion in monetary stimulus since 2008 have made a positive difference in the economy—especially considering that most economic indicators are worse than the worst-case scenarios that were made public when those spending decisions were approved?

How does a deal that contains no actual cuts, adds to an existing $14 trillion pile of public debt, and preserves spending for cowboy poetry qualify as an “austerity” budget?

And how many times can the Keynesian consensus fail the test of outcomes before it goes away for good?

I’ve already outlined my views here.

Given the recent experience and the country’s serious budget problems (remember: it will require more than $600 billion dollars of combined additional revenue and cuts per year just to stabilize our fiscal situation) I continue to think it’s incumbent on those who propose aggressive fiscal stimulus in the present and even higher taxes and deeper cuts in the future to provide some specifics on how they plan to spend the dough. “Infrastructure spendin” isn’t a specific. “Bridges to nowhere” are infrastructure spending, too. Does maintaining the scheduled step pay increases for big city school district teachers or seniority pay increases for police officers count as effective fiscal stimulus?

In reaction to a post from Doug Ross complaining about the mollycoddling of today’s children, James Joyner responds:

Like Doug, I worry that we’re coddling our kids, robbing them of the joys of childhood as well as the earned confidence that comes with taking risks and succeeding.

Yet, while I lament the Nanny State more than the next guy, we shouldn’t kid ourselves, either. The cost of the more carefree existence of that bygone age was more than some cuts, bruises, and chipped teeth. More kids died, were permanently maimed and paralyzed, and had birth defects when Doug and I were growing up than now.

I’m considerably older than James or, apparently, Doug. I think the world has changed quite a bit since I was a kid and not merely in the ways that James or Doug point to.

I think the difference is that kids are a lot more supervised now. I spent my first nine years in a rough, inner city-type neighborhood. There was a brothel on the corner of the street where we lived and the girls used to give me nickels to go buy cigarettes for them from the tiny store across the street. The woman next door ran numbers.

From the time I was about five until I started school I spent nearly all day every day either playing in our backyard (an open sewer ran through it), playing with neighborhood kids in the streets, or just kicking around the neighborhood. We ran, we wrestled, we jumped, we played games. Not video games or board games. Hide ‘N Seek. Tag. Red Rover. Dodge ball. Soccer (soccer had been big in our town since the early 19th century). Baseball.

After I started school once school was out I was on my own again. Once I had a bicycle I rode all over town, perhaps as far as ten miles away from home.

After I turned nine I spent a lot of time reading but that’s a different story.

My parents thought nothing of this, at least in part because that’s the way they had grown up, too.

We had a television but most TV watching was after dinner with the family.

When we moved from our tough city neighborhood to the tonier lily white suburb that my siblings thought of as home I just wandered farther afield. I spent a lot of time at the Y—it was about five miles away and I rode my bike. That was where I began studying judo.

I think that parents are too trepidacious to allow the life I led now. I don’t know if they’re better informed, overly cautious, or if the world is actually more dangerous. I think it’s more dangerous and I think the reason is drugs.

Politico reports a story from one of President Obama’s townhall meetings:

At Wednesday’s town hall in Atkinson, Ill., a local farmer who said he grows corn and soybeans expressed his concerns to President Barack Obama about “more rules and regulations” — including those concerning dust, noise and water runoff — that he heard would negatively affect his business.

The president, on day three of his Midwest bus tour, replied: “If you hear something is happening, but it hasn’t happened, don’t always believe what you hear.”

When the room broke into soft laughter, the president added, “No — and I’m serious about that.”

Saying that “folks in Washington” like to get “all ginned up” about things that aren’t necessarily happening (“Look what’s comin’ down the pipe!”), Obama’s advice was simple: “Contact USDA.”

“Talk to them directly. Find out what it is that you’re concerned about,” Obama told the man. “My suspicion is, a lot of times, they’re going to be able to answer your questions and it will turn out that some of your fears are unfounded.”

Politico decided to take the president’s advice and see what happened. The answer: bupkis. After being bounced from federal agency to state agency and back to another federal agency again and again they gave up, still without getting the answer to the original question.

Now imagine that there were an official, possibly an elected official, whose job it was intercede with his or her constituents on matters of just this kind. And imagine that there was a phrase used to describe it: constituent service.

Yes, that kind of job is exactly the kind of thing that Congressmen are supposed to do for us. The problem isn’t just that the executive branch has gotten too big for its britches (or for the ordinary citizen to cope with). It’s that the districts of those who’re supposed to be doing the coping have grown so big that only a small number of louder voices get served. Money is speech, you know.

Not everything about how our government is supposed to work is written into the text of the Constitution. Congressmen are not just supposed to sit in Washington, write laws, raise money, and run for re-election every couple of years. They’re supposed to come back to their districts and interact with their constituents every so often, too.

Today I’m seeing a flurry of comment from across the political spectrum targeting the NRSROs. Since 1975 when the SEC changed the rules to require that the debt of publicly-held companies be rated by Nationally Recognized Statistical Rating Organizations, what were originally seven such firms have dwindled by merger to three over the years.

Mike Shedlock:

The Rating Agency Model, as it now exists, pays raters on the basis of how much volume they do, not on how well they rate anything. If you are willing to rate pure garbage as AAA no matter what it is really worth, you get a lot more “action” and make a lot more money.

And action the “big 3” got. And everyone, turned a blind eye to the process, because no one likes to end a party, especially a party that whores are throwing with Greenspan and Bernanke cheerleading like a pair of pom-pom girls at the big game.

Michael Hudson, writing at naked capitalism:

The behavior of leading banks and ratings agencies Cleveland and other similar cases – of promising to give good ratings to states, counties and cities that agree to pay off short-term bank debt by selling off their crown jewels – is not ostensibly criminal under the law (except when their hit men actually succeed in assassination). But the ratings agencies have made an compact with crooks to endorse only public borrowers that agree to pursue such policies and not to prosecute financial fraud.

To acquiescence in such economically destructive financial behavior is the opposite of fiscal responsibility. Cutting federal taxes and Social Security payments to obtain a more positive S&P “opinion” would give banks an ability to “pull the plug” and force privatization and anti-labor austerity plans by refraining from rolling over the U.S. debt – and cutting taxes Tea-Party style rather than funding spending by taxation on a pay-as-you-go-basis.

There is an inherent and irreconcileable conflict of interests in the rating agencies being paid by those whom they are rating rather than by prospective borrowers as it used to be prior to 1975. There is simply no way in a real world governed by real human passions and interests in which such a scheme will not become corrupt.

And corrupt it became. During the housing bubble the credit rating agencies routinely gave AAA ratings to debt that events have proven were fall short of the highest level of credit-worthiness.

What good is a credit rating agency whose ratings cannot be relied on? If the salt loseth its savor with what shall it be salted? The NRSROs deserve the same treatment that Arther Anderson received for much the same reasons.

I’ll give Mish the last word:

Please send your congressional representatives an email or fax and tell them to scrap the NRSRO “Nationally Recognized Statistical Rating Organizations” rating entirely, ending the monopoly of Moody’s, Fitch, and the S&P.

Jesse’s Cafe Americain uses absolute advantage:

One of the theories in favor of free trade is the idea of comparative advantage, that is, that one country might have a natural advantage which they can exploit for their own benefit and the general benefit of the world. I am sure we all learned this in business school. I myself was quite a fan of Michael Porter in my day.

This theory is a universalisation of the idea that the naturally gifted pottery maker, for example, has an inherent talent that can be exploited, and can create and exchange pots for food, let’s say, from a farmer who has the advantage of owning suitable farm land and has the talent and tools to exploit it.

Makes common sense does it? Everyone does what they do best, and through the free exchange of products the aggregate good is increased. A nice simplistic maxim that underpins a broad economic and social philosophy, such as ‘from each according to their abilities and to each according to their needs.’

as an argument against comparative advantage and the most egregious example of managed trade in the world today:

So for example, a nation such as China can devalue its currency substantially in the 1990’s against the world’s reserve currency, and thereby set up a set of artificial import barriers and export subsidies, simply by manipulating their currency.

By the way, this is basic math. There are plenty of people who were denying it, and most of them stood to benefit from this charade. But it is true. Anyone who travels internationally and changes money understands it.

The underlying basis of the currency wars is the ability to artificially manipulate one’s currency, or even establish a pseudo-monopoly, for the advantage of one to the disadvantage of the others.

There are other methods to accomplish this and they are usually lumped under the title of industrial policy or mercantilism. A country has a set of laws and regulations that foster a certain stance towards issues such as worker’s rights, environmentalism, savings and consumption, wealth distribution and even human rights.

The more trade becomes independent of public policy and regulation, the greater the movement of all countries to the least common denominator of the broader policy stances of the mercantilist nations.

as an argument against free trade complaining all the while about unscientific know-nothings:

The fallacy that is repeated over and over by the non-scientific thinker (like too many economists and politicians for example) who use these simple examples and sayings is that one can extend things that might make sense anecdotally into general, almost universal principles writ large on the face real world, or more properly OVER the face of the real world, that at the end have little real fundamental connection with reality and the expected outcomes.

as an argument against free trade. Apparently, he didn’t learn as much in business school as he thought. You can put a potted plant into a college classroom where it can “listen” to lectures of the highest caliber all day long and even hang a piece of paper around the pot certifying its attendance and it still won’t have mastered the material.

I think there are good, practical reasons that “free trade” doesn’t work as efficiently as it should chief among them that free trade is anything but free. As Chesterton said in a different context it is not a case of having been tried and found wanting but of having been found difficult and not tried. That’s not an indictment of free trade but of international politics.

The effectiveness of trade in increasing wealth is so well documented it is hardly necessary to argue in its favor. Try googling “empirical evidence benefits of trade”. That should get you started. Let me give one simple, close to home example: the United States of America. The U. S. is a large free trade zone. Commerce among the states is vibrant and a great producer of wealth.

Larry Sabato (of the Crystal Ball) puts President Obama’s decline in approval below 40% into historical perspective:

The current White House certainly wouldn’t claim that President Obama is riding a crest of popularity just now. And there’s no guarantee that his wave will ever return. Nonetheless, it’s worth noting that three predecessors — Truman, Reagan, and Clinton — were reelected after having suffered the dirty 30s in the first term. Three others were not reelected — Ford, Carter, and Bush 41 (and arguably LBJ as well, though he withdrew before facing the voters in 1968).

Thus, there are precedents to be cited for and against Obama’s reelection. The only thing we’re sure of is that Republicans and Democrats will choose a different set.

The bottom line is that falling below 40% isn’t dispositive and, consequently, that isn’t the number to look at.

The number to look at is 30%. No post-war president whose approval rating has fallen below 30% has gone on to serve another term. And the party holding the White House has changed as well. There’s nothing magical about that number. However, given the distribution of the population between the two major political parties for a president to fall below 30% approval rating means that not only does he not have the approval of the opposition which is rather to be expected he has lost substantial support within his own party.

The city is resurfacing the street in front of my house and the course of the project to date may go some way to explaining why infrastructure projects don’t produce as many jobs as the proponents of fiscal stimulus projects might expect.

It’s been fifteen years or more since our street has received serious attention and the neighbors have been complaining to the alderman’s office for years about its condition. I don’t live on a main thoroughfare but, rather, a side street within a block or so of two major drags. During rush hour we get a flurry of traffic from frustrated motorists avoiding the crush on the main streets in addition to the regular neighborhood traffic of cars and delivery trucks.

Shortly after our street was resurfaced last time the city with its conventional exquisite timing elected to replace all of our storm drains intended to control the flow of water into the storm sewers. The roads were torn up again, the new drains installed, and the once neatly repaved street was patched haphazardly. I don’t think the drains had much effect and if a civil engineer had taken a look at our neighborhood he could have predicted that. I suspect no engineer was involved in the project. If a professional engineer was involved he should have been sued for malpractice—you can’t approve a project without a site inspection and none was ever one, at least not here.

At any rate a week or so ago signs started going up along our street warning us that we couldn’t park on the street from 6:00am to 3:30pm from the 15th through the 19th, all week. Midmorning on the 15th a crew and heavy equipment arrived, stripped the surface of the street, and left. That was the last we saw of anybody until today.

Yesterday our signs were replaced with new ones advising us that that project had been extended through the end of next week. Today a crew arrived to put up sawhorses, tear out the old storm drains, and install new ones. That took them a little over an hour. Then the second crew left.

I’m guessing that we won’t see any more action until next week.

At no time have we seen a city employee—this project is subcontracted out and each crew appears to work for a different company. The entire project is probably less than two days’ work. Why is taking so long?

The answer may be a mystery when viewed from afar but is obvious to anyone who’s dealt with the city. Anything other than minor road repair is subcontracted. There is an approved list of vendors (my company used to be an approved vendor for the city of Chicago). Contracts only go to approved companies.

The companies on that list have greater incentives to space projects out so they can execute with existing capacity than to add capacity so they can execute them faster. Additionally, there is no downside to letting the various crews execute their portion of the task when time allows rather than on a tight schedule.

As a consequence a lot of city infrastructure projects can be executed at a glacial pace by small crews run by a relatively small number of companies.

Not everyone thinks that Google’s $12.5 billion purchase of Motorola Mobility was a master stroke:

So I should be looking at Google’s purchase of Motorola Mobility as a brilliant move yet I am not. Instead, I am looking at this deal as a real opportunity for Apple (AAPL), Research In Motion (RIMM) and Hewlett-Packard (HPQ), all of which have their own operating systems for cell phones and/or tablets and all of which watched in horror as Google entered the market and soon gobbled up more than 40% of the wireless device market with Android.

But this is the downside for Google.

It can say, all day long, that Motorola Mobility will stay as a separate division and that Android will remain open and available for all to use, but that does not mean that those who have already stepped up to Android believe Google. The current Android landscape includes Samsung, LG, HTC, and scores of other phone and tablet companies, all of which believed that Google would continue to provide Android for them and they would all fight it out in the marketplace, each with their own special enhancements to their version of Android.

That’s certainly one argument.

I can only wonder what business the people at Google think that they are in? I think that they are in a service business: they search the Internet for people and provide enhanced visibility for their paying customers. The people at Google apparently think they are in the intellectual property business. I’m skeptical.

I’m even more skeptical that they’re in the hardware business. Yes, Google is now a very big company. But it’s a big company with little or no experience with supply chains or logistics or hardware design or production or negotiating production contracts or any of the thousands of other details.

What is their passion? I can’t imagine that it’s pads or cellphones.

As I write this I sit and look at my own smartphone, a Motorola Droid 2 Global. Will this be the penultimate generation of this phone?

The White House is apparently considering additional fiscal stimulus:

Aug. 17 (Bloomberg) — President Barack Obama plans to ask Congress for billions of dollars in fresh spending to boost the economy and reduce unemployment, with a new focus on helping the long-term unemployed, an administration official said. The president also will call for long-term cuts beyond the $1.5 trillion that Congress has charged a 12-member bipartisan “super-committee” of lawmakers to trim by late November, the official said.

The dollar amount of the additional long-term deficit reduction measures will exceed the cost of the short-term spending that he will propose, said the official, who requested anonymity because plans for the speech haven’t been completed. According to the official, Obama plans to unveil his priorities in a speech in early September and propose a mix of tax cuts and infrastructure spending, including extending two measures that expire at the end of the year: the two-percentage-point payroll tax cut for workers and unemployment insurance benefits.

Econ prof Steve Suranovic has posted a two part series on the dangers of debt. Part I is here. Part II is here.

For a stronger, more direct indictment of fiscal stimulus see ZeroHedge.

I think it’s about time that I laid out my views on fiscal stimulus.

1. I believe on theoretical grounds that a properly constructed fiscal stimulus can produce economic growth in excess of the amount of the stimulus itself by boosting aggregate demand. (i.e. can have a positive multiplier)
2. I believe on empirical grounds that improperly constructed fiscal stimuli can have zero or negative multipliers.
3. It is possible for fiscal stimulus to have social benefit in the form of doing things we want to do or economic benefit in the form of residuals, i.e. useful infrastructure spending.
4. It is also possible for a fiscal stimulus program to have no lasting social or economic benefits. The money can just be pissed down the drain.
5. The empirical evidence suggests this is just what happened.
6. The stimulus plan of 2009 was not properly constructed. It was too much a grab bag of Congressional hot buttons.
7. It is very difficult, possibly impossible, for Congress to construct a fiscal stimulus package properly.
8. The empirical evidence of the effectiveness of fiscal stimulus in producing a self-sustaining recovery is weak, cf. Japan.
9. None of the foregoing per se means that we shouldn’t engage in fiscal stimulus.
10. We are currently engaging in fiscal stimulus to the tune of roughly 10% of GDP.
11. That is likely to continue for the foreseeable future.
12. Total public debt is near or at 100% of GDP.
13. Primary default occurs when you must borrow to pay the interest on the public debt.
14. There is no realistic prospect of our paying down the present public debt to manageable levels.
15. We are presently paying about $500 billion per year in interest on the debt.
16. Double that and we have reached primary default.
17. Increasing the level of fiscal stimulus beyond the present 10% will hasten primary default.
18. Unless the economy has a growth spurt and all other things being equal a fiscal stimulus of an additional 10% would result in primary default in five years.
19. Primary default will occur even faster if interest rates rise.
20. Getting out of the hole by minting more money is courting a loss of confidence in the currency and hyperinflation.
21. Getting out of the hole by taxing more is risking a collapse in the economy. We’d need to raise almost three times the revenues we have now.
22. You can’t accomplish that with taxes on “the rich”.
23. There’s an impasse on the major expense items, e.g. defense, Medicare, Social Security.

Under the circumstances I think that it is incumbent on anyone who proposes additional fiscal stimulus to be very specific about how the money will be spent, for how long he or she plans to spend it, and what he or she expects it to accomplish. The long term is getting shorter all of the time.