Wednesday, January 23, 2008

Fiscal Stimulus: Little Bang for the Buck

CNN reports on the politics of fiscal stimulus:

A one-time tax rebate is at the heart of an economic stimulus package being negotiated by House leaders and Treasury Secretary Henry Paulson on Wednesday … The tax rebate would be similar to the $300 to $600 checks that were sent out in the summer of 2001.While there is bipartisan agreement that a stimulus package should be moved quickly, Democrats and Republicans still disagree on who should receive the rebates.

As the politicians iron out their differences, let’s think about this from an economic perspective.

Those who preach the Life Cycle Model (LCM) would tell us that that one-time rebates will be mostly saved with very little aggregate demand stimulus. In other words, a big impact on the current deficit but little impact on consumption demand just when we likely need it.

There is a possible rebuttal to this LCM view that goes like this. Lower income households are likely liquidity constrained so a tax rebate is sort of like the loan they could not get from the bank. So if we target this temporary tax relief to lower income types, then maybe we will get a strong bang for the buck.

But back to the politics where it has been standard operating procedure for the GOP to shift taxes onto the young by giving most of the tax breaks to rich older dudes. And these rich older dudes are not likely to be so liquidity constrained, which means the LCM view likely is valid if we let the GOP have its way. But isn’t this the real problem with the use of fiscal policy – partisan agendas tend to trump what most reasonable economists would consider the most effective means of handling our economic issues.


Myrtle Blackwood said...

PGL: "..partisan agendas tend to trump what most reasonable economists would consider the most effective means of handling our economic issues. "

Yes. And partisan agendas define what our economic issues are.

It's interesting to note that this CNN article doesn't mention the dire state of the living planet as one of our 'economic' issues. One is led to believe that an economy is composed of nothing but money and spending. As usual, no mention of the source of all wealth is made.

What if the Ford, Rockefeller, Carnegie Foundations and Co were removed from Government and I were running the US economy instead instead of them?

I'd direct the fiscal stimulus to those economically-challenged and pay them to go house to house installing energy-saving devices, insulating their houses.

*Teams of gardeners to grow organic healthy food locally.

*Teams of foresters to replace the dead and dying tree monocultures with appropriate biodiverse species that can cope with climate change.

*Removable of government subsidies for destructive forms of agribusiness and agro-forestry.

Recognise that the 'right to life' is the obligation to refuse to engage in pre-emptive wars. Withdraw the troops from Iraq and Afghanistan.

A right to life is also to be left a viable planet along with guaranteed access to appropriate housing, food, clothing , education.

There we have it. An economic platform that would involve more spending, less consumption of resources, better welfare for us all and a drop in the national deficit.

"….the Green Revolution was a brilliant Rockefeller family scheme to develop a globalized agribusiness which they then could monopolize just as they had done in the world oil industry beginning a half century before. As Henry Kissinger declared in the 1970?s, “If you control the oil you control the country; if you control food, you control the population.” Agribusiness and the Rockefeller Green Revolution went hand-in-hand. They were part of a grand strategy which included Rockefeller Foundation financing of research for the development of genetic engineering of plants and animals a few years later...

"Doomsday Seed Vault" in the Arctic
Bill Gates, Rockefeller and the GMO giants know something we don?t
By F. William Engdahl. December 4, 2007

Anonymous said...

The argument over fiscal stimulus, spending vs. saving is complete balderdash, the people who save the money will put it in the bank, and the bank lends it out to a spender.

The partisan agenda is obviously to give money to poor people, which is fine. It will help those people a tiny bit. But it's not going to generate some sort of recovery. The problem with our economy isnt' that people aren't spending enough.

ProGrowthLiberal said...

well? You are arguing Say's Law. What is save must have been invested. Hmmm. If Say's Law is valid (read the General Theory by Keynes for an argument as to why it's bogus) then recessions are not even possible. Never mind what happened during the 1930's or three times in the 1950's or three times in the 1970's or those recessions in 1982, 1990, and 2001. They could not have existed!

Anonymous said...

Here is a simple question that my naive level of economic science fails to comprehend. If we have an economic crisis on our hands, why isn't anyone suggesting that the enormous expenditures related to war must be discontinued? How about the trade imbalance, doesn't it play some role? I don't think that tariffs are realistic, but why not require imports only when their labor costs are not below some target percentage of our own scales for work? It seems unlikely to me, but I'm an economic neophite, that recession can be forestalled through simple financial manipulations. It took some pretty complicated financial manipulations to get us to this point.

Myrtle Blackwood said...

Jack said: "How about the trade imbalance, doesn't it play some role? I don't think that tariffs are realistic, but why not require imports only when their labor costs are not below some target percentage of our own scales for work?.."

The trade imbalance is a reflection that the most powerful parts of the US Government and that of the Chinese government are united. They seek maximum exploitation of the world's resources and people.

Nations have lost their 'national' governments. Governance has lost its meaning. A relative handful of corporate-mafia men rule the world.

Anonymous said...

No argument from me on that score. In effect what we've discovered is that starting with Nixon (with mighty assistance from Henry K.) followed by the two Bushmen interspersed by Clinton, our presidents have been collaborating with the Communists and a variety of other totalitarians.

Do we still have a Congress?

Anonymous said...

"If we have an economic crisis on our hands, why isn't anyone suggesting..."

Jack you are on a more productive track than anybody, because you are trying to find the underlying cause.

I don't think there'e anything like a "subprime mortgage crisis", I just think that poor people got whacked by high utility bills and couldn't pay their mortgages. If the economy had kept growing, there would be no subprime mortgage crisis.

Peter H said...


Don't the Permanent Income Hypothesis and Life-Cycle Model imply that low and middle-income inviduuals have the same MPC as upper-income individuals? That seems to contradict what I know about income distribution and spending.

Peter H said...

Have you ever heard of James Duesenberry, PGL? There's an interesting article by Robert Frank about consumer behavior that discusses him and dissects the Permanent Income Hypothesis:

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