As should not be too surprising as the economic news deteriorates the chorus for a new, larger stimulus package rises.

Robert Reich:

Before I turn to the President, though, let’s be clear: The lousy economy is due to insufficient demand. Consumers – who are 70 percent of the economy — can’t and won’t buy because they’re running out of cash. They can’t borrow against homes that are worth a third less than they were five years ago, and most consumers are bad credit risks anyway because they’re losing their jobs and their wages are dropping. They also have to start saving for the kids’ college or for retirement, which will cut their spending even more.

Without enough consumers, businesses won’t hire enough people and pay them enough to reverse the vicious cycle. So we’re dead in the water. Even the stock market has caught on to the truth.

Which means government has to step in to boost the economy – as it has every time the economy has fallen into recession over the last eight downturns. Include the massive spending on World War II that lifted us out of the Great Recession, and it’s nine. The Fed can help, but it can’t do it alone. And it’s least helpful after a huge asset bubble has burst because the financial system won’t channel low interest rates where they’re most needed – to small businesses and average consumers.

This time we tried one stimulus that was way too small relative to the size of the falloff in demand that started in 2008 — especially given that states and locales cut their spending by almost as much as the federal government increased it.

So we need another – a bold jobs plan.

Harold Meyerson:

Mr. President, it’s time to go big on the economic solutions. It’s time to propose a massive second stimulus, offset by some serious tax hikes and budget cuts once the economy regains a semblance of good health. Republicans won’t go for it, but they don’t go for small economic solutions either, be they extensions of unemployment insurance or a miniaturized infrastructure bank. (The current level of GOP commitment to infrastructure would about cover the purchase of a Lego set.)

Economically, the case for a massive stimulus is a good deal stronger than the case for the rather minimal one that you’re calling for — extending unemployment insurance and the payroll tax cut, and establishing an infrastructure bank. A major stimulus is the only conceivable source of substantially increased economic activity and jobs for at least several years.

I won’t link to Paul Krugman’s repeated demands along these lines due to the NYT’s paywall. You can find them for yourselves—it’s not hard.

In my view the Obama Administration, abetted by the president’s overconfident and excessively eager to please economic advisors, squandered its prime opportunity for an effective stimulus package following Barack Obama’s historic 2008 election with an inadequate plan that was targeted more at maximizing political impact than economic impact. I also think that there are good reasons to doubt that even a much better constructed fiscal stimulus plan can be effective under the present circumstances. As Ken Rogoff has repeatedly pointed out our present problem is too much debt. Ameliorating the effects of too much debt with more debt is pretty unlikely.

It’s also been pointed out to me recently that the most devout Keynesians and neo-Keynesians are Platonists who disdain mundane things like evidence on the grounds that their models should be enough to satisfy everyone and real world evidence cannot produce metaphysical certitude.

I’m not looking for metaphysical certitude but I do think that a little empirical evidence would be nice. Evidence of previous successes, for example. Japan’s many attempts at fiscal stimulus for ending their own lengthy slump have not been effective.

BTW, while I’m on the subject at least here in Illinois the claims of anti-stimulus budget cutting are greatly exaggerated. The state, county, and city budgets have gone up year over year in both nominal and real terms. What hasn’t gone up is revenues.

It is also true that the state, county, and city governments have laid people off. How can both of these things be true? Simple: like the rest of us the state, county, and city budgets aren’t getting as much for their dollar as they used to. Healthcare expenses have increased. Prevailing contracts require that public employee pay rises. Consequently, layoffs and increasing budgets at the same time.

I’ve posted this stuff already. If you don’t believe me you can look it up for yourselves.

However, if we’re bound and determined to put another fiscal stimulus plan into action here’s my modest proposal for such a plan:

1. Make it a one year plan. If it’s effective, put another plan into force next year.
2. Pick a number but be prepared to defend that number to the death.
3. Eliminate Davis-Bacon requirements so the maximum number of people get the maximum amount of benefit with the maximum level of output.
4. Make it a direct WPA-style government employment program (which is, after all, what Keynes himself recommended)

i>No writers’ projects, artists’ projects, or other make-work projects. All infrastructure (in the sense of roads, bridges, etc.).

I also think that the academics and pundits who are recommending fiscal stimulus need to have some skin in the game. I’m open to suggestions but I’m thinking of a commitment to resign their tenured positions, their columns, etc. if GDP hasn’t risen by an agreed-upon amount after an agreed-upon interval. Talk is cheap.

My guess is that the results of such a plan would be very disappointing and followed by a series of recriminations about how inadequate it was, etc. What do you think?

Update

Joseph Stiglitz:

But the real answer, at least for countries such as the US that can borrow at low rates, is simple: use the money to make high-return investments. This will both promote growth and generate tax revenues, lowering debt to gross domestic product ratios in the medium term and increasing debt sustainability. Even given the same budget situation, restructuring spending and taxes towards growth – by lowering payroll taxes, increasing taxes on the rich, as well as lowering taxes for corporations that invest and raising them on those that do not – can improve debt sustainability.

To my eye it looks as though Dr. Stiglitz has a much clearer view of what constitutes a “high-return investment” than I do. Building another 1,000 miles of interstate would be a sizeable infrastructure project. Would it be a high-return investment? I don’t see it. Would we receive a high-return for spending another couple of hundred billion on the same lousy education? Because that’s what would happen if we just dumped more money into the system.

I’ve given my ideas for high-return investments. Nobody seems interested.

Former Federal Reserve governor Kevin Warsh and former Florida govenor Jeb Bush have taken to the opinion page of the Wall Street Journal to encourage a pro-growth “grand strategy” for the U. S.:

Policy makers should cease the barrage of ad hoc, short-term policy initiatives. Is increased federal spending across government agencies a grand strategy? How about checks in the mail to spur spending? Cash for clunkers to move auto inventories? Fast trains and faster Internet? Mortgage modification programs and fleeting tax credits to re-stoke home ownership?

Inducing consumers to do today what they would otherwise do tomorrow is hardly a grand strategy. Hundreds of billions in “stimulus” spending has stimulated little but more debt. Forty-eight months have passed since the onset of the financial crisis, 26 months since the recession technically ended. Yet job creation remains remarkably weak, and markets deeply uneasy.

We can’t go on like this.

Among the measures they propose are:

1. Allowing large banks to fail.
2. Reforming Social Security.
3. Simplify the tax code (lower rates, eliminate deductions)
4. Stabilizing the regulatory regime
5. Ratify already negotiated free trade agreements
6. Improve the educational system
7. Re-industrialize

There’s also an oblique reference to the tactics used to bail out General Motors (“The growth strategy also demands an abiding respect for the rule of law”).

Some of those (#1, #5, #7) I agree with wholeheartedly. I’m skeptical of the vital need to reform Social Security (the greatest threat to the system’s viability right now is the prospect of a lengthy curtailing of FICA revenues) and baffled by their failure to mention the real dog in the manger, healthcare, explicitly. I think they’re far too short-sightedon their proposals for reforming the educational system. If I were king, I’d organize a cooperative of large states, say, New York, California, Florida, Texas, and Illinois, have them each close down one floundering state university, and use the money to create a high-quality, fully accredited, up-to-date online university, available to all comers at a nominal cost. I remain skeptical of the dollars and cents value of most higher education but I think it’s worth putting to the test and this would certainly do it.

I’ve complained about the short-sighted, closed-minded, claustrophobic character of the palette of policies in the common discourse before both directly and obliquely. There are any number of policies that don’t require tax increases or spending increases to implement that would help get us out of the ditch:

• Ratify already-negotiated free trade deals
• Eliminate Davis-Bacon requirements.
• Rationalize intellectual property law
• Streamline and normalize state and local regulations
• Stop subsidizing offshoring.
• Confront Chinese mercantilism

And that’s just off the top of my head. There are probably thousands of such measures.

I think that Messrs. Warsh and Bush may be overestimating the prospects for growth and what growth will do for us. First, I would claim that there are no prospects whatever for longterm growth over 3% real increases in GDP per year and 2% real increases in income. As I’ve previously documented here those are the longterm trends in the United States going back to the foundings of the Republic, growth in other developed economies is slower, and we haven’t experienced sustained growth at a faster rate than that for a very long time.

But, second, the level of growth that would be required to dig us out of the hole we’ve been digging for ourselves for the last 20 or 30 years is plainly too high.

By all means go over and read Kenneth Rogoff’s latest op-ed over at Financial Times. In it he notes that in the war against the economic slump we’re in we have not yet begun to fight or at least not yet begun to fight effectively:

Everyone agrees that bold action is required, but what kind of bold action? It is far from clear that any huge temporary fiscal stimulus will rev up the engine enough to achieve self-sustaining growth. Higher government debt adds an overhang of higher expected future taxes on top of pre-existing private debt overhang. True, in the classic analysis of a zero interest rate liquidity trap, the ideal policy is a money-financed temporary surge in government spending. But the canonical model completely ignores debt overhang.

The most direct remedy, of course, would be to find expeditious approaches to cleaning up balance sheets whilst maintaining the integrity of the financial system. In the case of Europe, this involves very large debt writedowns in the smaller periphery countries, combined with a German guarantee of central government debt in the rest. In return, Germany will have to receive a disproportionate share of fiscal power in a more deeply integrated union, for at least as long as it is making substantial transfers. In the case of the US, policymakers need to offer schemes to write down underwater mortgages, perhaps in return for other concessions such as giving the lender a share of any future home price appreciation.

He further suggests effecting moderate inflation, i.e. debasing the currency, and engaging in structural reforms to social programs.

Recommended reading.

Unfortunately, the sides are chosen, the battle lines are already drawn, and you’ve got one side attacking anything other than massive fiscal stimulus as idiotic and the other decrying their opponents as socialists. Increasingly, the world is reminding me of an old Star Trek episode “Let That Be Your Last Battlefield” in which old enemies are so committed to their age-long conflict that they can’t see anything else.

Just one brief thought. Thinking of “austerity” in terms of how spending relates to GDP isn’t that productive. Take the city of Chicago, for example. If the city borrows $100 million and spends it the city’s GDP goes up by $100 million. That doesn’t mean that city revenue increases or that there’s been some underlying improvement in the city’s economy. It just means the city has more to spend.

From Scott Sumner’s blog:

The real after-tax rate of return on the 30 year Treasury is now negative, assuming a 30% MTR. That means the tax rate on capital now exceeds 100% in real terms over the next thirty years, which doesn’t seem particularly conducive to capital formation.

I found something puzzling in this post from Brad DeLong:

Even with a Congress gridlocked and neutralized, the Fed and the executive had enough power through their ownership of Fannie and Freddie, through the Federal Reserve act, and through the TARP to do everything necessary to guarantee a strong recovery.

But the problem I did not see in the summer of 2009 was that the stimulus skeptics were the operational managers of the government, while the stimulus advocates were staff without line responsibilities.

Hence nothing happened.

And Peter [ed. Orszag], Larry [Summers], and Christy [Romer] left.

And their successors–Jack [Lew], Gene [Sperling], and Austen [Goolsbee]–are very smart men and dedicated civil servants, but they lack the strong substance-matter knowledge and aggressive policy views of their predecessors.

I find a problem with this view: each of those mentioned above, Drs. Orszag, Summers, and Romer, on numerous occasions stated quite clearly that the amount of stimulus requested by the Obama Administration was exactly what they got and was what was necessary. Either they were wrong or they were lying.

I don’t subscribe to the “once wrong, always wrong” ad hominem fallacy but I think its converse is true: once wrong, asserting infallibility is a stretch.

Maybe he has direct, specific, personal knowledge to the contrary but I rather suspect that Dr. DeLong is resorting to something we might call the “fallacy of intelligent agreement”. The line of reasoning goes something like this. I’m smart. I think A. Anybody who doesn’t think A is dumb. I know that Person X is smart. Consequently, Person X must agree with me. Therefore, Person X must have been sidelined.

Contrariwise, I don’t think that every intelligent person, even every intelligent person in my own field must necessarily agree with me. No single person is in possession of all of the facts or will invariably draw the correct conclusion from the facts. Sometimes there is no singular right conclusion.

There is one more gold nugget in the post worth pointing out:

Three years ago I would have said–I did say–that Ben Bernanke was among the best available candidates for Fed chair and that Tim Geithner was among the best available candidates for Assistant to the President for Economic Policy.

Today I think they both suffer from the sunk-costs problem.

I think he’s being extraordinarily and uncharacteristically kind.

There’s a rather odd op-ed in the Wall Street Journal this morning. Bret Stephens doesn’t think that President Obama is particularly smart:

When it comes to piloting, Barack Obama seems to think he’s the political equivalent of Charles Lindbergh, Chuck Yeager and—in a “Fly Me to the Moon” sort of way—Nat King Cole rolled into one. “I think I’m a better speech writer than my speech writers,” he reportedly told an aide in 2008. “I know more about policies on any particular issue than my policy directors. And I’ll tell you right now that I’m . . . a better political director than my political director.”

On another occasion—at the 2004 Democratic convention—Mr. Obama explained to a Chicago Tribune reporter that “I’m LeBron, baby. I can play at this level. I got game.”

Of course, it’s tempting to be immodest when your admirers are so immodest about you. How many times have we heard it said that Mr. Obama is the smartest president ever? Even when he’s criticized, his failures are usually chalked up to his supposed brilliance. Liberals say he’s too cerebral for the Beltway rough-and-tumble; conservatives often seem to think his blunders, foreign and domestic, are all part of a cunning scheme to turn the U.S. into a combination of Finland, Cuba and Saudi Arabia.

I don’t buy it. I just think the president isn’t very bright.

There are some whose intelligence I respect who see President Obama as a mastermind, a person of surpassing intelligence. I don’t see it quite that way but I don’t really know. My intuition suggests to me that, like most presidents including his predecessor, he’s a reasonably bright person of the “professional class”, significantly smarter than the average person but by no means brilliant.

It’s just an intuition. Whether or not being extremely intelligent is a requirement to be president being a relentless self-promoter certainly is, at least it has been for the last century or so (“the bride at every wedding, the corpse at every funeral, the baby at every baptism”). If there were actual evidence of extraordinary intelligence on the part of the president I suspect that we’d hear about it. Over and over again. If not from the president at least from his admiring supporters. Indeed, rather like Bill Clinton, I interpret the relative silence about things like SAT scores and GPAs as more likely to cast doubt on the notion of brilliance than enhancing it.

I would consider his reported intolerance of dissenting ideas (Lawrence Sumner) another signal.

Most of all I don’t think great intelligence is particularly necessary or even desireable in a president. We have had very effective presidents who weren’t astonishingly intelligent and certainly weren’t particularly intellectual, e.g. Eisenhower, and terrible presidents who possessed extraordinary intelligence, e.g. Nixon, Wilson.

I suspect that President Obama is at least reasonably intelligent. What concerns me much more than his intellect is what I perceive as his great predisposition to rely on his advisor. Too much reliance on his economic advisors on the economy, too much reliance on his military advisors on Iraq and Afghanistan.

The chart above was produced by long-time commenter Andy who blogs occasionally at his own blog, Organizing Entropy. It’s part of an ongoing discussion that’s been going on in comments that I thought worth promoting to the front page. The discussion is about the frequently encountered claim that taxes are lower than ever before (or lower than they’ve been since 1995 or 1983).

As I see it Andy’s chart supports everybody’s perceptions.

1. It is true that taxes as a percent of income has fallen from its highs.
2. It is also true that taxes are not at an all-time (or even post-war) low.

I note that all of the valleys in taxes as a percent of personal income are associated with recessions and the last two peaks are associated with bubbles. That’s an artifact of the reliance on the income of those in the highest decile. And there’s your rising income inequality, too. Earners in the top percentiles get more from assets and inflated assets prices are what make bubbles.

Perhaps I’m misinterpreting them but as I see it Dr. Krugman and those who agree with him argue that all that are necessary to resolve our fiscal dilemma are to a) raise taxes on the top earners and sometimes b) reduce defense spending. I think that a) is based on a cherry-picking of the evidence and is unlikely to yield as much revenue as they think it will. I think that b) is correct but needs to be combined with a revised strategic and grand strategic plan.

Among Republicans in Congress there appears to be a group (a dominant group) that believes that if we lower tax rates additional revenue will be realized. I think that is, as P. G. Wodehouse might have said, far from hinged.

My view:

1. We need to reduce defense spending (see above for caveats).
2. We need healthcare reform.
3. Social Security needs a few tweaks, e.g. raising the retirement age or some version of means testing (it already has some means testing cf. the sliding scale of payments), but no major corrections.
4. A properly constructed revision to the personal income tax could yield additional revenues
5. Foreseeable minor revisions to the personal income tax are unlikely to be properly constructed.
6. More attention should be focused on the deduction side than on the rate side, e.g. caps on mortgage interest deduction.

We would probably get more real mileage by reducing marginal income tax rates, eliminating FICA, and imposing a VAT but I don’t see any real prospect for those measures (and all of them would need to be implemented together for such a plan to work).

I also think that revenue increases are politically necessary, that the Simpson-Bowles commission got it about right, and that the president’s failure to get behind the recommendations of the commission that he appointed is one of the saddest aspects of the entire fiscal fiasco.

Gerard Vanderleun predicts that that the killer question for the 2012 presidential debates will be “Are you better off now than you were a month ago?” (hat tip: Glenn Reynolds)

I think we’ll be lucky if it’s not “Brother, can you spare a dime?”

This is filed under the Humor category. It’s a wisecrack. At least I hope it is.