Sunday, February 8, 2009

McCain on the Fiscal Stimulus

The GOP 2008 nominee for the Presidency appeared on Face The Nation and made some incredibly stupid remarks:

I think it’s a massive -- it’s much larger than any measure that was taken during the Great Depression ... I know America needs a stimulus. We need tax cuts. We need to spend money on infrastructure and on other programs that will immediately put people to work. But this is not it ... we got 44 votes, on a trigger, on a trigger that said that, once we have GDP growth for two quarters -- in other words, the economy recovers -- that we will stop the spending and we’ll put America on a path to a balanced budget.

Let’s take these in reverse order. Let’s suppose that by the time the recession bottoms out, the GDP gap is 8 percent or more. Even after a couple of quarters of modest growth, the GDP gap will still likely be massive but McCain would have us shift towards fiscal restraint?

McCain knows we need tax cuts and infrastructure but his own party is making sure that infrastructure spending is as small as possible to make room for more tax cuts. So what is it that he wants if “this is not it”. Incidentally, McCain says that he wants more bang for the buck but he concedes at the same time that the kind of tax cut we tried earlier during this recession has little impact on consumption. And yet he wants more tax cuts and less spending.

Now I will concede that an $800 billion fiscal stimulus is larger than anything we saw in the 1930’s in nominal aggregate terms. But nominal GDP was less than $100 billion back then. The proper comparison would have to be done either in real per capita terms or relative to GDP. But does Senator McCain not understand that we had very little fiscal stimulus during the New Deal, which is one reason why it took so long for the economy to get back to full employment? If McCain’s Republican colleagues have their way, we are going to repeat the policy mistake of not doing enough fiscal stimulus, which will insure that the current recession will be deeper and last longer.

Thank goodness we did not select this economic know-nothing to be President!


Anonymous said...

It seems weird to me that the solution is to throw arbitrary amounts of money around and increase the size of government. Besides, government doesn't create wealth anyway, right? It seems like the perfect way to destroy a functioning economy is to take money out of the hands of the earners and give it to politicians who love spending other people's money on random projects.

It seems to that government IS the problem. Couldn't a dramatic cut in taxes and a cut in government spending do the trick?

Any help would be appreciated. I am an undergrad student of economics trying to figure this out.

ProGrowthLiberal said...

Is Anon channelling Sean Hannity doing his best impression of Herbert Hoover's economic advisor?

Anonymous said...

Anonymous apparently doesn't understand the Keynsian analysis of recessions and the rationale for increased government spending !

My current analogy for the Republicans are people who run the furnace at 80 degrees in the fall when the outside temperature is 65 degrees but when it's 10 below outside and the kids are getting frostbite, object to turning on the furnace ostensibly to save energy !

Since the Bush administration ran $400 billion deficits during the "growth" part of the business cycle, $1 trillion deficits seem appropriate for the recession (i.e., if the furnace is at 80 degrees when the outside temperature is 65 degrees, then the furnace needs to be set at higher than 5 degrees when it's 10 below outside).

Richard H. Serlin said...

It's interesting, a generation ago it would have seemed very unlikely to most people that we would have ever had another depression; we've learned too much. But look how amazingly close a generation of Republican dominance brought us to a depression. If just a few percent more people had voted for McCain we would have had a depression (not to mention horrible long term growth, a fraction of what's experienced under Democratic administrations).

We now see that McCain would have vetoed anything but a few hundred billion of highly ineffective tax cuts, probably tilted heavily towards the wealthy. There aren't enough Democrats to override the veto, so this combined with a "pro-free-market anti-government" approach to the banking crisis would have resulted in a depression! That's how close we came, just a few percent of the voters!

Amazing, we were that close to the small government good old days of depressions and/or banking runs every generation, a small middle class, legions of little educated poor, and a super rich elite.