Ive been alright.. Gonna get back in the game myself tonight... Took a couple of weeks off too.... Just had a new Bambino so Ive been off work for a few weeks.. Gotta go pick up the crib furniture today and put it together (FUCK).. and then after that gonna hit a poker tourney.. and bet some games...
The Winner for the day is Wisconsin...
i'm sure we all hope it doesn't fail. Here's Jim Jubak's take, a good read:
http://articles.moneycentral.msn.com/Investing/JubaksJournal/your-5-point-economic-rescue-guide.aspx
Will it work? Will the stimulus package now being yammered out by the House and the Senate actually pull the economy out of recession?
The good news is that stimulus packages can work. Even better, we've got lots of experience with what doesn't work.
The bad news is that we don't know very much about how much size matters. Huge packages clearly work. Small packages clearly fail. But we don't know much about where to draw the line.
And we don't know much about how to get the maximum bang for our buck. The truth is that just as what John Maynard Keynes called "animal spirits" play a huge roll in starting a recession, so, too, do emotions determine when a recession will peak and end. Most economic policy -- and most economic theory -- is built on an assumption that human beings behave rationally. Good luck with spending money effectively on that foundation. What you need to know
So what do we know about whether the stimulus package will work? Here's my five-point guide to the good, the bad and the ugly of economic rescues:
1. Economic stimulus packages can work -- if they're big enough.
The Great Depression proves that. Oh, I know that you've read or heard endlessly that the New Deal didn't end the Depression and that only World War II did. But let's get our facts and terminology straight, shall we? The New Deal, despite all its activist programs, was never very big on economic stimulus. And besides being a global war, World War II was the biggest stimulus package ever.
Let's look at some unemployment and budget numbers from the Depression years. In 1928, before the 1929 crash on Wall Street, U.S. unemployment was just 4.2%. In 1930, the rate was nearly twice that, at 8.2%, and by 1932 it had climbed to 23.6%.
The Hoover administration didn't believe in deficit spending as a way to stimulate the economy. The conventional economic wisdom of the day, to be fair, called for a balanced budget as a solution to a collapse in business demand because, it was theorized, that would demonstrate the soundness of government finances and restore confidence in the economy. In 1930, the federal government ran a budget surplus of almost 20%.
Franklin Roosevelt's initial budgets for 1933-37 look like massive stimuli if you compare government receipts to government outlays. In 1933, the deficit was 128% of government receipts, and in 1934, 123%. But those numbers are deceptive because we're talking about a period when government tax receipts collapsed along with the economy. President Herbert Hoover's 1932 budget ran a deficit equal to 5.9% of gross domestic product because government receipts had collapsed to $2.8 billion from $4.2 billion in 1930. In 1934, in many ways the peak of New Deal stimulus spending, the deficit had climbed to 9.6% of GDP.
The unemployment rate dropped to a still-startling 16.9% in 1936, but that looked pretty good compared with the 25% peak rate during 1933, and that was enough for the Roosevelt administration to revert to economic orthodoxy. In 1937, the deficit fell to just 2.9% of GDP, and in 1938 the administration almost balanced the federal budget with a deficit of just $100 million. But in 1938, unemployment climbed again, to a shocking 19%. It stayed high through 1939, 1940 and 1941 even as deficits ran at less than 4% of GDP.
It's this climb in the unemployment rate that justifies the claim that the New Deal didn't end the Great Depression. That's a fair conclusion, but it's also fair to say the rise in unemployment in Roosevelt's second term was a result of rolling back the economic stimulus of his first term. Government spending was lower in 1937, 1938, 1939 and 1940 than it had been in 1936. The New Deal's lack of success in reducing unemployment from 1936 to 1940 wasn't because deficit spending and economic stimulus had failed as policies but because the Roosevelt administration had rolled back its stimulus program.
If you want to see stimulus at work, I'd say look not at Roosevelt's second term but at World War II. Sure, comparing peacetime and wartime economies is extremely difficult -- the draft ended unemployment, for example -- but there's no denying that the war was economic stimulus on a huge scale. In 1942, for example, the government's budget deficit was 141% of receipts, and in 1943, 228%. The deficit hit 9.8% of a much bigger economy in 1942 and then climbed to 16.8% in 1943.
(Just for reference, if you add the remaining $350 billion from the Troubled Assets Relief Program, a $900 billion stimulus package and a projected budget deficit of $1.2 trillion, the deficit for fiscal 2009 comes to about 16.3% of U.S. GDP.)
The momentum built up in the war years carried the economy for decades. By 1960, unemployment was still only 5.5%, and GDP had climbed to $519 billion from $97 billion in 1930.
2. When it comes to economic stimulus packages, failure is a relative term.
In trying to judge the current proposed stimulus package, it's important to discriminate between short-term boosts to the economy and long-term effects that set an economy on a new, more productive track.
No, the New Deal didn't end the Great Depression. It didn't manage to fix the problems of production and demand that had led to the crisis. And it didn't put the economy on a long-term track to recovery. So if that's your benchmark, then the New Deal was a failure.
But in the short term the New Deal did provide real stimulus to the economy. The New Deal did keep unemployment from increasing above 25% of the work force, and it did reduce the rate to 16.9% in 1936. That's an 8.1-point drop from the 1933 peak. For comparison, the official unemployment rate in December 2008 was 7.2%.
The effects didn't last when the stimulus was cut back after 1936, but even in the short run the New Deal's stimulus program did make life better for millions of people. It brought electricity to rural areas that had never had electric power. It gave millions of people jobs during a time when a job of any sort made a critical difference. (Full disclosure: My dad's first job was building a fish hatchery with the Civilian Conservation Corps.) It created hope at a time when hope was in short supply. And it put in place programs such as Social Security and bank deposit insurance that changed the country for the better.
The current stimulus package as passed by the House contains a shot of stimulus such as extended unemployment benefits and health insurance coverage through Medicaid that will boost the economy in the short run and diminish suffering during the downturn. These efforts aren't likely to have much long-term effect.
The package also includes money for long-term investment designed to increase the economy's productivity. In this part of the bill you'll find everything from money for extending the Internet to improving education and increasing energy efficiency.
You can argue, as the plan's opponents have, that the package spreads itself too thin by going after stimulus and investment, or you can argue that, by mixing the two, the plan tries to diminish short-term pain while setting the economy on a new, productive track. I'd go with the second argument myself.
3. Economic stimulus packages don't work if they're small, slow or inconsistent.
How do we know this? The Japanese ran exactly that kind of stimulus effort in the 1990s, and it was a dismal failure. Japan's announced stimulus plan was huge: about $1 trillion in spending and multiple tax cuts. But it was parceled out in 10 packages of $100 billion to $250 billion over 10 years. And much of the announced spending never actually materialized because spending by the national government on infrastructure such as roads and bridges was frequently dependent on matching spending from local governments that simply didn't have the cash.
Still, by 1997, Japan's GDP growth had climbed to 2.5% -- and then the government, like Roosevelt in 1937, decided the job was done and increased taxes. The government raised the national consumption tax by 2 percentage points, to 5%, in 1997. Not surprisingly, Japan's economy sank back into recession.
(There's a chilling warning here for U.S. policymakers and taxpayers: The Japanese government increased taxes that year in an effort to raise money to pay off some of the debt that it had built up financing the stimulus. The premature effort to restore fiscal sanity tanked the economy again. That doesn't bode well for U.S. attempts to pay off the debt we've taken on in this crisis.)
4. Economic stimulus packages don't work if undermined by tighter monetary policy.
Japan again provides the U.S. with a useful lesson. At the beginning of what became Japan's lost decade, the Bank of Japan introduced a tight money policy. In 1995, the bank reduced interest rates by 1.25 percentage points, to just 0.5%, by September of that year. That looks like a loose money policy that would, you'd think, get growth going by reducing the cost of borrowing for companies and consumers. But by that time the country had sunk deeply into deflation.
Just as inflation makes it cheaper to borrow because borrowers can repay their loans in the future in dollars or yen that are worth less, so deflation makes a loan more expensive, since the dollars or yen paid back in the future are worth more. (That is, in the future the same amount of money will buy a greater quantity of less expensive goods and services.) With deflation running at 1.5% to 2% in Japan, the Bank of Japan's 0.5% interest rate was equal to a real interest rate of 2% to 2.5%. Contrast that with the current U.S. interest rate of 0.25% and inflation rate of 0.7%, which make the real interest rate a negative 0.45%. In real terms, it costs less than nothing to borrow at the Federal Reserve's target rate.
5. If you want to stimulate an economy, which is better: a tax cut or an increase in government spending?
The answer is a rousing "it depends." The goal of any stimulus package is to create spending that increases economic activity. Putting a dollar of tax cuts in the hands of consumers and businesses will do that -- if they spend it. If they put it in a bank because they're afraid that the next rainy day will bring a flood, that won't stimulate the economy. If they pay down debt with the tax cut -- and don't increase spending elsewhere -- that won't stimulate the economy either.
Government spending will create spending if the government actually spends the money. Japan, you'll remember, didn't spend everything announced because it required matching funds that local governments didn't have. And government spending can take a long time to get rolling. The most recent study by the Congressional Budget Office of the $819 billion stimulus package passed by the House notes that the tax cuts in the bill would get into the economy more quickly but that only 64% of the money in the bill would get into the economy within 19 months.
Right now, if you're trying to build the most effective stimulus package, the data argue that more tax rebates and cuts should go to people we're sure will spend it -- because they need it for necessities -- and that any package should include a big dose of government spending because, again, we're sure the government will spend and not save. U.S. consumers have flipped over into savings mode. That's great for our future but tough on the economy now.
The savings rate climbed to 2.9% of after-tax income in the fourth quarter of 2008 from 1.2% in the third quarter and just 1% in the fourth quarter of 2007. At the same time, declining rates of credit card payments indicate that U.S. consumers are so stretched that they're paying a smaller portion of their balances each month. In November, according to the most recent data available, consumers repaid just 16.1% of their balances. That's down 2.5 percentage points in the past year, one of the biggest declines on record. It suggests that any money a stimulus package gives to consumers will go to debt reduction rather than new spending. Again, that's great for the long-term health of the U.S. consumer but not so great if you're trying to get an economy out of a recession now.
Will it work? It had better
So how does the current stimulus package stack up? Reasonably well for something coming out of Washington's legislative sausage factory. (You really don't want to know what goes into making this stuff.) It's a reasonable size but quite probably -- and I know this is shocking -- a little small. It avoids the dribble-out problem that sunk Japan's stimulus efforts. It includes a decent amount for short-term stimulus and pain reduction. And it throws in some money for programs such as universal Internet service and extending electronic record-keeping to more of the health care system that will help increase productivity in the long run. It's a decent mix of tax cuts, tax rebates and government spending.
If we're serious about setting the U.S. economy on a new, more productive course -- and we'd better be serious if we're to have any hope of paying off the bills run up in this crisis -- the current stimulus package isn't enough. It's disappointingly light on infrastructure investment. It doesn't do enough to retrain existing workers or improve the training of tomorrow's workers. Its investment in tomorrow's technologies is pitifully small. (Hello, the first generation of U.S. hybrids uses Japanese battery technology.)
I hope that we'll come back to revisit these issues once this omnibus stimulus package has motored out of town. (For what happens if we don't, see my column "U.S. living standards in jeopardy.")
The biggest problem, of course, is that someday we've got to pay for all this stimulus. That will be easier if this package works and if, thanks to subsequent packages and the efforts of U.S. companies and workers, the U.S. economy starts growing at 2% or better a year. What we most want to avoid is doing what Japan did and spend the money ineffectively, getting no growth bang for our buck and then still get stuck paying the bill for decades to come
