Paul Krugman: Stimulus Gone Bad

I'm getting pretty tired of Democrats caving in on important issues rather than standing up and fighting for their core principles:

Stimulus Gone Bad, by Paul Krugman, Commentary, NY Times: House Democrats and the White House have reached an agreement on an economic stimulus plan. Unfortunately, the plan — which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape — looks like a lemon.

Specifically, the Democrats appear to have buckled in the face of the Bush administration’s ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective.

Those are harsh words, so let me explain... Aside from business tax breaks — which are an unhappy story for another column — the plan ... ensures that the bulk of the money would go to people who are doing O.K. financially — which misses the whole point.

The goal ... should be to support overall spending, so as to avert or limit the depth of a recession. If the money ... doesn’t get spent — if it just gets added to people’s bank accounts or used to pay off debts — the plan will have failed.

And sending checks to people in good financial shape does little or nothing to increase overall spending. ... Give such people a few hundred extra dollars, and they’ll just put it in the bank. In fact, that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001.

On the other hand, money delivered to people who aren’t in good financial shape ... does double duty: it alleviates hardship and also pumps up consumer spending.

That’s why many of the stimulus proposals we were hearing just a few days ago focused ... on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. ...

There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy. Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.

But the Bush administration has apparently succeeded in killing all of these ideas...

Why would the administration want to do this? It has nothing to do with economic efficacy... Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can’t call a “tax cut.”

Behind that refusal, in turn, lies the administration’s commitment to slashing tax rates on the affluent while blocking aid for families in trouble — a commitment that requires maintaining the pretense that government spending is always bad. And the result is a plan that not only fails to deliver help where it’s most needed, but is likely to fail as an economic measure...

And the worst of it is that the Democrats, who should have been in a strong position — does this administration have any credibility left on economic policy? — appear to have caved in almost completely. ...[B]asically they allowed themselves to be bullied into doing things the Bush administration’s way.

And that could turn out to be a very bad thing.

We don’t know for sure how deep the coming slump will be... But there’s a real chance not just that it will be a major downturn, but that the usual response to recession — interest rate cuts by the Federal Reserve — won’t be sufficient to turn the economy around...

And if that happens, we’ll deeply regret the fact that the Bush administration insisted on, and Democrats accepted, a so-called stimulus plan that just won’t do the job.

Comments

[anne]

http://krugman.blogs.nytimes.com/2008/01/24/why-worry-about-a-poor-stimulus-plan/

January 24, 2008

Why Worry About a Poor Stimulus Plan?
By Paul Krugman

So the stimulus plan agreed to by House Democrats is a real piece of, um, bad legislation. It could have been even worse — it could have been the plan Bush wanted, which would have delivered virtually no stimulus at all. But it's very, very weak.

But why worry, aside from the big waste of funds? Because there's a real chance that we'll be very sorry that we didn't get a serious stimulus plan.

This plan leaves recession-fighting entirely up to the Fed. And as I've pointed out before on this blog, the Fed may not have enough ammunition.

People say that the last recession was brief and mild. But that's an artifact of the way the NBER defines recessions — basically as periods when everything is going down. Once something starts going up (usually GDP), it's labeled a recovery. But in the last two recessions the thing that matters most — employment — kept falling long after the official end of the recession:

[Chart]

And in the last two recessions the Fed kept cutting interest rates long after the recessions were supposedly over — all the way down to just 1 percent in 2003:

[Chart]

Indeed, as Alan Greenspan has revealed, the Fed still feared the possibility of "corrosive deflation" * well into 2003.

What finally created a convincing recovery was the housing boom. But that turned into a bubble, which has burst big time.

We don't know for sure by any means, but it definitely looks possible that this slump will be worse and more persistent than 2001-2003. And housing won't come to the rescue this time. Meanwhile, the Fed has less room to cut: interest rates can't go below zero (banks will just sit on cash rather than lend money out at a negative rate), and they started lower this time than they did in 2000.

The bottom line is that Ben Bernanke could definitely use some fiscal wind at his back. But thanks to the lousy deal announced today, he won't get it.

* http://opinionjournal.com/editorial/feature.html?id=110010981

[Lafayette]

MT: Specifically, the Democrats appear to have buckled in the face of the Bush administration’s ideological rigidity, dropping demands for provisions that would have helped those most in need.

Like the sun rising in the East

May I give a bit of solace by saying "Half a loaf is better than none at all?" What can the Dems do? Filibuster till the cows come home? That will serve what purpose? The Dems cannot make policy, they can only try to condition it.

And, lead-head -- because he's a lead-head -- doesn't want to play their game. This administration is the Walking Dead. And, the plight of Road-kill on the Highway of Life is certainly not very high in their list of priorities.

Extremists the world over are convinced that God is on their side. And such nonsense that the poor will be with us forever. As if, like the sun rising in the East, there's nothing we can do about it.

Eleven more months of this insanity. Let's remember how insane Political Immobility can be next time we vote ...

[Lafayette]

Article: ... we’ll deeply regret the fact that the Bush administration insisted on, and Democrats accepted, a so-called stimulus plan that just won’t do the job.

Maybe, maybe not.

You wanna be the Republican candidate for PotUS next November in the midst of a Perfect Recessional Storm brought about by this Republican administration?

Not me ....

[wjd123]

Here is an article written last week by Dean Baker about Republican vulnerability and the Democrat's chance to exploit it. According to Baker, the way is open for the Democrats "to craft a stimulus package that really helps the US economy."

http://commentisfree.guardian.co.uk/dean_baker/2008/01/stimulating_politics.html

Yesterday we were shown that the Democrats aren't capable of exploiting anything even when they hold all the cards. It's very discouraging.

I'm going to take this bad stimulus package as an opportunity to find out what John Edwards is made of. I've been thinking of voting for him in the New York primary. However, I have three problems with Edwards, he voted for NAFTA, he voted for the war on Iraq, and he voted for the bankruptcy bill. He has apologized for all three votes. That's never been good enough. I'm happy that he has seen the light but he has never convinced me that he has gotten religion. I need to know when and were he got it? I need to know that his presidency won't end up in another list of apologies?

This economic stimulus bill is his chance to show me that he has changed. If he is the advocate for the poor he says he is this is a perfect opportunity to show it since it's the poor who can provide the greatest bang for the buck in stimulating the economy. They will spend all the money the government sends their way. This economic stimulus bypasses most of them. And John Edwards says he is an advocate for the poor.

I expect Hillary to vote for this type of middle class stimulus plan after she has made her usual qualifications. One such qualification I'm sure will be that it doesn't do enough for the poor.

I expect the same of Obama, he'll sign off on this type of package in the name of bringing America together. He might not mention that the poor are left out in the cold because that would put a damper on his togetherness theme.

I expect Edwards to oppose the bill. I don't want him thinking about those voters who are getting something who he might offend by denouncing the package. That would be something the old Edwards would do. No, I expect him to show me that he has gotten religion by opposing passage of this type of stimulus package. It's a bad package for stimulating the economy. A much better package would be one that includes the very people he champions. I expect him to show his fighting spirit. I don't expect him to reluctantly support the package under the guise that a bad package is better than no package at all. For once I expect him to know a bad bill when he sees it and to stand against it.

[Cyrille]

"May I give a bit of solace by saying "Half a loaf is better than none at all?" "

In fact, I'm wondering whether nothing at all may not have been better.

Some percentage of those tax breaks will do something for the economy, but it won't be much. Yet 100% of that is going to be added to the Government debt, and that's not exactly negligible. Besides, DumbleU will be able to claim he has enacted a big stimulus plan, which may help Republicans fight harder against actually useful actions.

I do hope the electorate will not be fooled and realise which politics are to blame for such a sorry situation.

[anne]

There could have been a limited time struggle with the provisions of a stimulus package by a reasonably united Democratic Congressional majority, even a quick presentation of a package to the President forcing a veto. I wish there had been a struggle. But, there is enough pressure for a stimulus package that what the Congressional leaders agree to will be accepted with near unanimous support. No Democratic Presidential candidate could vote against a stimulus package that was approved by the Congressional leadership.

[save_the_rustbelt]

Assuming the Democrats win the House and Senate this year, will they keep Reid and Pelosi in the leadership positions?

[save_the_rustbelt]

the plan ... ensures that the bulk of the money would go to people who are doing O.K. financially

I had several phone calls yesterday from people asking if they should go ahead and file their tax returns (yes), and they are seem quite certain they can use the money (young and not well off generally, my childrens' generation) so perhaps PK is a little too pessimistic on that score.

[anne]

http://www.nber.org/digest//apr05/w10784.html?tools=printit

The Treasury distribution portion of the stimulus package, from evidence developed following the 2001 distribution, should be largely and quickly counsumed when checks come.

[anne]

http://www.nber.org/digest//apr05/w10784.html?tools=printit

April, 2005

How Households Responded to Tax Rebates of 2001

The authors find that "the average household spent 20-40 percent of its 2001 tax rebate on non-durable goods during the three-month period in which the rebate was received." Further, "[r]oughly two-thirds of the rebates were spent during the quarter of receipt and subsequent three-month period." In dollar terms, households increased their expenditures on food by $51 and their expenditures on non-durable goods by $179 on average in the quarter of receipt, which correspond to a 2.7 percent rise in expenditures on food and a 3.2 percent rise in expenditures on non-durable goods. These findings run counter to the Permanent-Income Hypothesis.

The authors also investigate whether some households were more likely to spend the rebate than others. They find that "[t]he expenditure responses are largest for households with relatively low liquid wealth and low income, which is consistent with liquidity constraints."

In all, the rebates totaled $38 billion, or about 7.5 percent of personal consumption expenditures on nondurable goods in the third quarter of 2001. The authors' estimates imply that the rebates increased aggregate consumption expenditures on nondurable goods by 2.9 percent and 2.0 percent in the third and fourth quarters of 2001. The timing and magnitude of this response is consistent with the rebate program playing a large role in counteracting the 2001 recession, which ended in the fourth quarter with strong growth in aggregate consumption.

[Red Stater]

I am a rich republican with 7 kids with a huge 12 passenger van that pollutes our delicate little planet. My carbon number is 4,569. I am going to take my $3000 buy a bunch of Styrofoam, wipe my butt with it and throw it in a lake.

HAHAHAHAHAHHAHAHAH.....

[Dickeylee]

So is anyone talking about amending the bankruptcy bill they all claim is horrible? Anybody? I believe Dodd was last fall, but the silence from the other candidates is deafening. When unemployment hits 6-7% by April, bankruptcies will skyrocket, everyone knows this, so when you can't make your court appointed re-payment schedule, then what? As the top 50% in aggregate average income can't discharge any debt at all, just schedule a reorganization plan.

[ken melvin]

Aha, the old switcheroo, again. Give the tax rebates to those who don't need them and pay for them by taking money away, i.e., with spending cuts, from those in need.

GWB is a conservative elite. He knows full well that he lives off those who work for a living and those who do not work for a living contribute nothing to his livelihood (they are in fact a threat to his living standard).

[Adrian]

Can you imagine the effects on public opinion, i.e. how people will vote in November, if the Democrats had not caved in on core issues like bringing home the troops and this stimulus package.

Republicans would have had a field day claiming they were sacrificing the troop’s lives for political gain, that families were being thrown on the streets because the democratically controlled congress would not allow the government to give them billions of dollars in assistance.

The Bush administration has managed to turn a congress that has tried time after time to pass legislation that is both popular and beneficial, into one of the most unpopular in history. They would have loved nothing more than to see the democrats fight this bill, stopping the government from giving money to the people would have to be one of the most unpopular things they could do. Fighting too hard will not produce any results while Bush holds the veto pen, it will just leave us with a republican agenda for the next 4 years, maybe 8 years considering the difficultly of beating an incumbent... 8 more years of policy that is bad for America and the rest of the world.

[dirtyal]

I heard a comment from Reid that the senate will have to weigh in and that it's not quite a done deal yet. So, maybe there is still some hope.

I'd be interested in the thoughts of some of the regular posters as to the fact that a third of the package is accelerated depreciation for businesses. Apparently, that did not work one iota when Reagan did it back in the 80's. All it caused was construction of new buildings that stood empty for the longest time.

[bakho]

Bush believes that the government (other than military) can not or should not do anything to help the American people (other than get out of the way). Bush views the stimulus as a "base" war. Political favors to the wealthy GOP base VS political favors to the Democratic "base" of poor and working class Americans.

In Bush world, this is NOT about helping the economy, this is preventing Dems from "buying" votes from their "base" with political favors.

Thus the disconnect and inability of Dems to negotiate concessions.

[Andrew]

A draft, instituted immediately, would be the perfect fiscal stimulus package. Worked for FDR after years of tiptoeing around Keynes' advice to run up a huge deficit in order to get us out of the Depression. I'm surprised those wacky neo-cons haven't suggested it yet. Perhaps there's a clause against a draft in one of their Blackwater or KBR contracts.

[dirtyal]

Anderew: Don't joke about that stuff. Think about what the wacko neo-cons would do if they could bring back conscription. It would make the 60's look like the best time our country ever saw.

[pgl]

As you linked to earlier, Paul had a similar blog entry which also links to the CBPP analysis with similar thoughts. Over at Angrybear, I've been hitting on the same theme. But today, I provide some comic relief by noting some real insanity on this issue from last night GOP debates.

[anne]

http://www.cbpp.org/1-24-08bud-stmt.htm

January 24, 2008

Reported Stimulus Package Would Provide Little Immediate Boost Due to Removal of Most Effective Provisions
By ROBERT GREENSTEIN

Changes reportedly made last night in the stimulus package would reduce its effectiveness as stimulus. Although the package includes a reasonably designed tax rebate, the two most targeted and economically effective measures under consideration — a temporary extension of unemployment benefits and a temporary boost in food stamp benefits — were zeroed out, apparently at the insistence of House Republican leaders.

The two respected institutions that have rated stimulus options in recent days — the Congressional Budget Office and Moody's Economy.com — both give their two highest ratings for effectiveness as stimulus to the two measures that were dropped.

Of all tax and spending stimulus options that CBO examined, the only two that it found would have a large "bang-for-the-buck" as effective stimulus and act fast to boost the economy are the unemployment insurance and food stamp provisions. Both could start injecting more consumer purchasing power into the economy within one to two months. The planned tax rebate checks, in contrast, are not likely to be sent out until June.

Economy.com found that for each dollar spent on extended UI benefits, $1.64 in increased economic activity would be generated. For each dollar in increased food stamp benefits, $1.73 in new economic activity would be generated. No other options rated as high.

In contrast, Economy.com found that for each dollar in "accelerated depreciation" — the main business tax cut in the package — only 27 cents of increased economic activity would be generated. CBO and a Federal Reserve study in 2006 found that the business tax cuts adopted in the last recession, which closely resemble those in the current package, had only modest stimulative effects. Despite this evidence, the package apparently contains at least $50 billion in business tax cuts while excluding unemployment insurance — the single measure most focused on the people hardest hit by the downturn — and food stamps.

The business tax cuts also would cause states to lose at least $4 billion in state revenue, due to linkages between federal and state tax codes. The package contains no fiscal relief for states, not even to offset this loss. As a result, many states will have to enact deeper and more painful budget cuts, likely hitting areas from health care and education to aid to local governments. Those state budget cuts will also act as a drag on the economy.

The unemployment insurance and food stamp provisions apparently were rejected by House Republican leaders, who reportedly said that the inclusion of spending measures would be unacceptable to the House Republican Caucus and would derail the package....

[dd]

Perhaps Democrats "buckled" in return for higher conforming loan limits without additional GSE regulation that benefits bubble states like California, Nevada and NY.
http://online.wsj.com/article/SB120123250591916143.html?mod=PageOne_1
Welcome to the nationalization of the jumbo mortgage market.

[Winslow R.]

"I do hope the electorate will not be fooled and realise which politics are to blame for such a sorry situation."

I'm reading a book written almost a decade ago, called the 'Sovereign Individual'. It predicts accurately the corruption we are seeing with the Bush administration as part of a 500 year shift from power held by the nation state to autonomous individuals.

I'd like to see the next election prove the ballot box can clean out the rot but, according to this book, I will be disappointed.

[save_the_rustbelt]

Whatever Bush's sins, Reid and Pelosi buckled rather quickly. dd may be on the something.

No one seems willing to answer my question about future Dem leadership.

Whaddaythink?

[robertdfeinman]

Mark Thoma says:
I'm getting pretty tired of Democrats caving in on important issues rather than standing up and fighting for their core principles

Perhaps this is a misunderstanding of what the "core principles" are.

Here's my hypothesis.
The Dems have been out of effective power for 40 years. Those who go into politics to push progressive change saw no reason to run for office just to be relegated to being a backbencher for a minority party. What we got were mediocre legislators who ran for self-aggrandizement, or to play Santa Claus in the district, or for a sinecure.

Those who carry the progressive passion (Waxman, Rangel, etc.) are all from the time before the Gingrich era and still have the true liberal spirit. Unfortunately they are an aging and declining group. Recent Dem winners have been those who would have run as Republicans in an earlier time. This current cycle is the first time that we are seeing any progressive candidates step forward.

The ideological followers of Gingrich and DeLay are leaving because they have no strong leader to follow. They are ideological foot soldiers, not independent thinkers.

What is left is the centrist, unimaginative, dregs from both parties. They have no "core" or any other principles.

[ECONOMISTA NON GRATA]

"And the worst of it is that the Democrats, who should have been in a strong position — does this administration have any credibility left on economic policy? — appear to have caved in almost completely. "

Let me see... Ummmm..... Have I missed something here..? Has this administration retained any credibility on anything....? Do the Democrats have any credibility on anything...? Have the Democrats not caved on everything....? I don't know, it seem to me that we have a pretty good pattern to look at here. Perhaps I'm wrong.

Best regards,

Econolicious

[Lafayette]

Cy: "In fact, I'm wondering whether nothing at all may not have been better."

Given the enormity of the crisis, the PotUS was obliged to do something. Or his Secretary of the Treasury would have quit. In fact, his Treasury Secretary was head of one of the Investment Companies responsible for the sub-prime mess.

[Goldman Sachs made a great deal of its multi-billion dollar bonus pool running a hedgefund touting sub-prime SIVs. Henry Paulson assumed his position as Treasury Secretary just as the sub-prime mess was breaking finally in the US last summer. Read here. How convenient for him ...]

What was finally arranged was clearly insufficient, but given the nature of the beast, it was better than nothing at all. Which he was quite capable of doing, pronouncing his "unshakable faith in the market system to correct the imbalances".

Pure tosh, but quite in keeping with his character..

[donna]

The economy must limp along until its failure can be blamed on the Democrats. Then the Republicans can sit back and rave about "what those evil Democrats are doing" for the next eight years while they clean up the mess the Republicans left.

Those of us who are old enough recognize that this pattern occurs after EVERY Republican to Democrat turnover in the presidency.

[hari]

Incidently Prodi Gov resigned after losing confidence vote in Senate in Rome last night.

The problem of Italian Parliament - compared to US Congress - is that there're (God knows!) how many small parties represented in it. Consequently, Prodi found it difficult to keep left and right members of his coalition in lock step with him and his policies.

The problem with US Congress is different since differences in ideological seperation is getting somewhat bizzare, as politics of staying power predominates.

HRC, if elected, will surely give Paul reason to sing his songs again!

O'Bama is a different kettle of fish and, perhaps, still struggling to know his own way forward in a cumbersome Congress.

When ideology trumps, then politics becomes exciting. Nixon was such a politician - in spite of his domestic policy history. He was a liberal in global politics and opened China to US trade!

Demos are more or less lost in the fog...and still can't find their way.

[markg]

For the last few years I have been hearing pundits say Americans have too much personal debt and their savings rate is too low. And now Krugman is against the fiscal stimulus because it will be used to pay off debt or be saved. I favor eliminating the employee portion of the regressive FICA tax and eliminating the cap on the employer portion to make up the difference. That should provide enough stimulus for savings, debt reduction, and increased consumption.

[Lafayette]

rdf: I'd like to see the next election prove the ballot box can clean out the rot but, according to this book, I will be disappointed.

Boggles the mind

The ballot box results in leaders who are a reflection of ourselves. What do We look like?

It would be interesting to have that discussion, given all the finger-pointing at our politicos. What makes anyone think they are different from you or me?

Aside from the fact that the richer ones get elected to higher office (Senators, PotUS) are they individuals with really, truly different behaviour or values?

We complain about the Chinese but are the first ones down at WalMart to buy a new LCD TV (Made in China). We know full well that we are energy gluttons, but the SUVs are still roaming the streets of America. We enjoy watching svelte Hollywood stars but all look like overweight dumbos. Damn few of us are foolish enough to have a savings account and we all play the equity market for more and quicker value. Television is continually selling miracle diets, but we all eat fast-food regularly. A great many believe in God, but still fewer go to church.

We are only fooling ourselves if we think politicians should be any different from us. So, if we expect so little of ourselves, why do we expect so much of them?

That riddle boggles the mind.

[billy]

What was finally arranged was clearly insufficient, but given the nature of the beast, it was better than nothing at all. Which he was quite capable of doing, pronouncing his "unshakable faith in the market system to correct the imbalances"

What is being arranged is to unload all the toxic crap from Wall Street to the taxpayer. The conforming limits are being raised, so that all the toxic mortgages can be refinanced into toxic GSE mortgages

http://www.haloscan.com/comments/calculatedrisk/7465057597117571660/#391943

Tanta, What might be some of the additional steps needed to complete the offloading of the toxic mortgages onto the FHA?

You know, I was wondering about that myself. But I was afraid to speculate out loud, for fear I'd give them ideas.

I suspect it might involve changing the rules on the "streamlined" FHA refi such that you can do one when the old loan is not FHA. (Currently the "streamlined refi" is available only FHA-to-FHA.)

That and increasing the maximum LTV for refis to 100%.

http://www.haloscan.com/comments/calculatedrisk/7465057597117571660/#391930

I read FHA does 97% + gift (3% from comnnunity or something.) Is this true?

Yep.

Angelo Mozillo has been begging for this for a long time, so that he could unload all the junk off Countrywide to the taxpayer.

And it's already happening. The brokers are into it.

http://www.brokeruniverse.com/grapevine/thread/?thread=288826

[kthomas]

Red Stater, send me your money. Feel free to jump into the lake, you don't need money for that.

[billy]

Of course, the govt and the Fed knows nothing about all this. Heck even if it is advertised 243 hrs on the radio and the internet, they look at "data". No problem if the data is all fraudulent and garbage, and reality all round on TV, news and conversation and plain common-sense contradict the data.

As long as the data provides an alibi to cover their ass, they can pretend that they were fooled by the data, and they continue enabling the Wall Street pigs.

[dirtyal]

I just found this quote in a New York Times article. It struck me as funny and ironic at the same time.

“The economy is working these things out,” said David R. Henderson, a libertarian economist at the Hoover Institution at Stanford. “We’ve got the housing crisis and the subprime, and all these things take a while to settle. The government just doesn’t have the discipline to kind of let things work out.”

Isn't that great from the Hoover Institution? Herbert is still alive and well and appears not to have learned anything in more than 75 years.

[bakho]

The recent stimulus debacle is why presidential leadership is so important. The president has the power to block legislative effort. Negotiations are not symmetric.

The Dems want to get something done quickly. The president wants to use the mandate to get something done quickly to deliver the goods to his base of wealthy special interests. ANY negotiations will immediately result in the Dems having to give up something to wealthy special interests to get anything at all that would be a stimulus.

This is why Pelosi sounded so exasperated after the deal was announced.

If anyone has a better suggestion as to how Bush could have been brought to a different deal, please make a suggestion. Merely complaining that about the deal is just whining.

[dd]

Stimulus gone bad or banks gone wild?
Goldman Sachs Says to Cut 5 Pct of Workforce
http://www.reuters.com/article/bondsNews/idUSL2565777020080125
So much for robust profits:
"The company had declined to provide details on mortgage-related write-downs but said losses and offsetting gains from hedges were both "modest."

We still are in round one; next up monoline bailout so that that CDS booked profits don't vanish.
It's a no-brainer for Rockefeller Democrats.

[Fred]

Forget the food stamps and unemployment insurance and similiar handouts. That just makes the Democrats look bad in the eyes of the middle class, at least after the Republicans put some spin on it "once again, the Democrats are squandering money on irresponsible poor people who don't want to work..."

The real problem is increasing the limits on GSE loans and otherwise allowing the agencies (including FHLB) to go hog-wild with bailouts. What we need is a bonfire of bankruptcies so as to make it clear how bad the government is mismanaging things and this is just going to stop that. If the Republicans try to spin things "see, the Democrats are allowing the economy to collapse", the Democrats can respond "no bailouts for flippers and Wall Street bigwigs", which has enormous appeal to the vast majority of the middle class. Better to have the economy go down in flames now, then fix things after the next election with some massive fiscal stimulus (cuts in taxes on the poor, new spending). The only way to keep asset prices artificially inflated right now is via a huge bailout (hidden in misleading agency balance sheets or off-balance accounts) and that will preclude future fiscal stimulus.

[Marc]

"The president wants to use the mandate to get something done quickly to deliver the goods to his base of wealthy special interests."

I'm surprised no one is discussing the actual details of the plan, rather its more bush bashing as usual (which normally is warranted). I actually think this represents a bipartisan agreement, rather than then dems folding per krugman/thoma. If you look at the rebate, it’s specifically targeted at the middle class (i.e. voting public), not the upper class (republicans interest) or the extremely poor (democrats interest). For individuals, if you make less than $75K you get the full $600 ($150K for family's with $1200 rebate + $300 per child). The tax rebate then gets phased out up to $87K (for every $100 over $75k you subtract $5 from the $600 rebate). This is hardly a tax cut for the rich, its targeted to people who pay income taxes and aren't in the upper class or extremely poor. I understand Krugman's point that to act as a stimulus you need to give it to people who spend (i.e. extremely poor), but I don't think their will ever be a tax rebate that's focused on people who don't pay any income taxes.

[Gerard MacDonell]

Marc: I would not expect any replies to your valid points. Nor would I expect a reply to this comment: we are not in a liquidity trap, so the main macro effect of any stimulus package beyond say 6 to 9 months will be to reduce the extent and duration of Fed ease. There was a time when Krugman used to insist on monetary policy dominance, but it no longer suits his ideological agenda, so he has dropped it, and none of the liberal academics bloggers hold him to account for it. They just repeat his arguments with uncritical endorsement. As a liberal, I find this pretty embarassing.

[btg]

i haven't had the chance to read all the comments above, but i ask "will giving money to trailer trash to buy more cheap junk (imported chinese - not good ol job creating american junk) at WalMart.

better to do a little relief for the unemployed (extend benefits), but then also crank up spending on infrastrucure, police and other actual services, and stop cutbacks that will reduce the levels of these things.

says...

btg,

Calling people trailer trash is a little weak, ya think?

But, it will be interesting to see how much of the 2008 "stimulus" package is absorbed by WalMart.

[James Killus]

I know that this seems paranoid (but what is a sane state of mind when they really are out to get you?), but periodically I need to remind people that we have gone back to the days when J. Edgar Hoover had a file on every member of Congress, and every political player in Washington. We have warrantless wiretaps and who knows how much in the way of covert surveilance, etc.

Except it isn't Hoover who has these files, these days, it's the White House (Lyndon Johnson is said to have gotten a number of such files from Hoover, using God only knows what kind of quid pro quo). Hoover used his espionage for purposes of covert blackmail, according to his own political ideology (which saw communists under every bed). The current dossier managers just have a different ideology, but it is in support of similar "principles."

When Democrats "cave," one might ask just what sort of pressure is being brought to bear, and on whom. Certainly it's possible (as dd and STR have suggested) that there's some ordinary political horse trading going on, but we don't live in ordinary times any more, and people need to remember that.

[anne]

http://krugman.blogs.nytimes.com/2008/01/25/who-gets-stimulated/

January 25, 2008

Who Gets Stimulated ?
By Paul Krugman

Fast work by the people at the nonpartisan Tax Policy Center, who figure out who gets what from tax plans. They now have distribution tables for the stimulus proposal announced yesterday, and they more or less match my expectations.

Here’s what it looks like, by quintiles of the income distribution:

[Table]

I’d guess that the top two quintiles are unlikely to be liquidity-constrained, so the rebate will have little effect on their spending. But they get 58% of the money. The bottom two quintiles, which are the place you’d most expect to have an impact, get only 21% of the money. Split the difference on the middle quintile, and you’ve got a plan where around 2/3 of the outlay is likely to be ineffective.

Now. I’ve been in touch with some people on the Hill, who say that the glass is best viewed as 1/3 full rather than 2/3 empty — that it’s only thanks to the Democrats that people likely to spend their rebate are getting anything at all. And they have a point: this plan will produce some stimulus, while the Bush plan would have done virtually nothing.

And I suppose that it may be true that this was the best Nancy Pelosi could get. But I just can’t bring myself to celebrate.

[anne]

http://krugman.blogs.nytimes.com/2008/01/25/who-gets-stimulated/

Qunitiles Share of Rebates

Lowest 6.5
Second 14.3
Third 21.1
Fourth 31.0
Highest 27.1

[knzn]

I don't see what this has to do with the Democrats' "core principles". The purpose of a stimulus bill is not to help the poor but to stimulate the economy. It happens to be the case that helping the poor would be a better way to stimulate the economy, but in this case, that's a pragmatic issue, not one of core principle. Only the Republicans have a core principle at stake here, and although the principle ("tax cuts are good, and government spending is bad") is idiotic, it is, for the Republicans, not a pragmatic issue. Surely that is a core principle of today's Republican party, while the opposite formulation ("government spending is good, and tax cuts are bad") is not a core principle of today's Democratic party.

It is a shame that that rogue Société Générale trader ended up putting on so much pressure to get the deal done quickly, or the Democrats might have held out for something better. But, as a pragmatic point, considering it's a Presidential election year with a Republican currently in office, I don't think the Democrats had a whole lot to gain by pressing for an effective stimulus bill.

[paine]

can any of this buy more then deck chairs ???

[2slugbaits]

KNZN,

"I don't see what this has to do with the Democrats' "core principles". The purpose of a stimulus bill is not to help the poor but to stimulate the economy."

Bingo. That's exactly right. The fiscal stimulus package is not supposed to be an overhaul of the tax system; it's only supposed to lean against recessionary winds. The fiscal package should be judged on how well it is apt to actually stimulate the economy, and not on equity concerns. If Krugman's complaint is that the stimulus package is likely to be weak because too much of it goes to people who are likely to save it, then fine; but if those folks actually do save their rebate checks, then doesn't this undermine a lot PK's concern about the package's effect on national saving?

Lately Krugman has been losing it.

[2slugbaits]

I don't know why Krugman refers to the tax rebates as tax cuts. They aren't. It was probably politically useful for Democrats to try and convince our idiotic President that they were tax cuts (Bush will sign anything if you call it a tax cut!), but surely Krugman knows better. A tax rebate is akin to an increase in autonomous spending. It works its way through the multiplier whereas a tax cut works by actually changing the multiplier. Like I said, Krugman is losing it.

[robertdfeinman]

OK, I'll ask the same naive question I always raise when incentives are discussed. (If I get a good answer, I'll stop asking the question.)

What is "savings"? I understanding taking the check over to Walmart.

If I take the check and deposit it in my local bank what then? The bank loans out the money or buys notes from the Treasury (lending to the government). The money is then spent by the recipient. The difference is that in one case I determine how the money is "spent", in the other I delegate the spending to some one else. Why is one a stimulus and the other not?

[Matt Kolb]

I have read Krugman in the past and merely disagreed. More and more I think he is just out of touch. When does he intend to review his record and see that very little of his thinking has been correct? Since the first Bush administration he has focused on America's income statement and neglected to review the country's balance sheet. The prosperity that now circles the globe is a direct result of open markets, not re-distributed wealth.

The Bush tax cuts worked! Denial of that fact leaves one on shaky ground. Thats why even Democrats have formed a plan that resembles the previous cuts. His partisanship is obvious to the point of making his commentary irrelevant. Sad end for a (formerly) good thinker.

[2slugbaits]

Matt Kolb,

"The Bush tax cuts worked! Denial of that fact leaves one on shaky ground. Thats why even Democrats have formed a plan that resembles the previous cuts."

The 2001 and 2003 certainly did not deliver on their promise. The left the country poorer and less able to navigate the threat of a recession today. And the current stimulus package does is rebate oriented and does not change income tax rates. You might want to call a rebate a "tax cut" but in terms of effect it's better to think of a tax rebate as a spending increase.

[bakho]

In reply to Marc- about a third of the proposed stimulus is NOT rebate that phases out at $174K, but $50 Billion to business interests. So Bush is directing 1/3 of the money to his base. The other 2/3 goes to a mixed group that is split between his base and the Dems and very little money goes to the unemployed and people that are natural Dem constituents.

The part that the Dems wanted can be a stimulus. The part Bush wants is not very stimulatory. Bargaining with Bush is like making a deal with JR Ewing.

[2slugbaits]

Bakho,

I think we can agree that Bush is a doofus, but it's not entirely fair to say that Bush got his way on everything and the Democrats just caved in without a fight. The compromise did manage to add about 30 million people that would not have received any benefit under Bush's initial proposal. As far as the goodies for business, here again it could have been a lot worse. Investment tax credits will at least pull previously planned investment forward, which should help GDP numbers. I'm not so crazy about the accelerated depreciation allowances, but it's better than lowering the corporate tax rate. Anyway, get used to half-baked measures, because if Hillary Clinton wins the nomination and manages to beat John McCain (far from certain!), the Democratic majority in Congress will still be very narrow. So even if the Democrats won't have to deal with an intransigent President, they will still have to deal with endless filibusters.

[knzn]

robertdfeinman, let me try this. When you deposit the money in the bank, it doesn't actually get loaned out; it gets withdrawn by the Fed. That's an oversimplification, but it's roughly what happens. If you deposit money in the bank, it makes more money available in the banking system, which tends to push down the federal funds rate; but the Fed has a policy of controlling the federal funds rate, so it will act to offset your deposit by selling treasury bills (or, more precisely, probably, by buying fewer treasury bills than it otherwise would).

This raises the question of why we would need a fiscal stimulus in the first place, because if it wanted to, the Fed could just put more money in the banking system (causing the federal funds rate to fall), and there would be more loans and more purchases and we'd get the same stimulus. And the reason has to be something bad about low interest rates, but it's not clear exactly what. Maybe we're worried that low interest rates would weaken the dollar too much and cause an import price shock. Or maybe we're worried that interest rates will go down to zero (as they did in Japan), in which case banks might be unwilling to lend out the money that the Fed creates (since they wouldn't be taking any loss by just holding it, and the risks of lending might be too high).

[Cosi]

The reason the political process has not produced the ideal form of fiscal stimulus -- getting more money into the hands only of those at the lower end of the income/wealth end, the folks who will spend the highest portion of it immediately -- is because doing so is seen as unfair to the vast majority of the population who don't wish to have more of their wealth transfered to others.

I have a solution, one that does not present this perceived (and, I would say, actual) fairness problem associated with more wealth transfer to the poor (or lower end) and yet still would be effective and efficient in providing stimulus.

Let me preface it by saying I lean toward no fiscal stimulus at all, preferring to let the Fed, rather than politicians, try to manage economic cycles.

But if we are to have fiscal stimulus, a key objective is obviously that it be effective & efficient in terms of immediate stimulus per dollar lost to the Treasury. Getting more money in the hands of lower income/wealth individuals (who will spend a higher portion of it immediately) via tax rebates (particularly employee payroll taxes) and increased transfer payments (e.g., food stamps) fit that criterion, but have a fairness problem in that they represent increased wealth transfer, albeit for the (at least ostensible) purpose of stimulus.

As a result, our political process has produced tax cuts more focused on the middle class than would be most effective and efficient.

So here's my crazy idea to ensure efficiency & effectivess while avoiding that fairness problem: Government issued gift certficates (instead of those cash rebates) that must be spent within 3 months, issued to most/all of the population. Granted, since money is fungible it won't all be incremental, but we could help ensure that by precluding necessities (as distasteful as that sounds), such as food, gas, heating oil, etc., since that's stuff that would be purchased anyway. Using such gift certificates would ensure that a high portion of each stimulus dollar is spent immediately.

I do see the drawback of the expense of processing (government fulfillment of) these gift certificates, but I'm guessing that that expense (or more precisely the incremental expense over that of administration of cash rebates) would be small relative to the size of the stimulus and relative (in qualitative terms) to the benefit of greater fairness.

Another drawback to my "gift certificate" idea is that the processing delay (mainly on the fulfillment end) could inhibit and/or delay the multiplier effect, although that's just an assumption on my part, I have no idea of magnitude, and no idea of the extent to which that problem could be mitigated by streamlining/accelerating the fulfillment process. And of course, some retailers (and perhaps others) honoring the gift certificates would have to adopt a new process and spend some time on it, but here, too, magnitude might not be significant and would be lower the next time this tactic were used (due to learning/experience curve, etc.).

Lastly, this concept has political challenges, too, inasmuch as some will see it as inappropriate and inhumane to have a stimulus that does not help those who are struggling financially with necessities. But we have programs, perhaps imperfect, to help people with groceries (food stamps) and general income support and healthcare, and perhaps temporarily expanding them a bit could help my approach more politically achievable and would also address that humanitarian problem to some extent.

[Lafayette]

GM: They just repeat his [Krugman's] arguments with uncritical endorsement. As a liberal, I find this pretty embarassing.

Not in this blog they don't. I, for one, see to that. Others as well.

Krugman gets a lot of play in this forum. He provides often good debate fodder. No one here thinks we walks on water, however -- so let's stop the libeling, shall we?

You've not been here long enough, so be careful with your comments.

[Lafayette]

Cosi: The reason the political process has not produced the ideal form of fiscal stimulus ... is because doing so is seen as unfair to the vast majority of the population who don't wish to have more of their wealth transfered to others.

And, I'm sure you have polled the vast majority of the population to corroborate such an absurd notion?

Do let us know when you have better evidence for your nonsense. There is also good reason to believe that Americans may have had enough of Corporate Welfare.

November will tell ... it's the only poll worth reading.

[Worker]

Heard the gubmints giving me $300 and went to get me teeth whitened. But g'damn Pelosi figured me rich. I says, y'ever see a rich man with teeth this yellow? But she don't care 'cuz I gotta job.

[Worker]

Give Krugman credit that he didn't try to include a
fuel oil subsidy as targeted "stimulus", as many great politicians have. Stimulus for who, The Saudi Arabians?

And where are the environmentalists when we are trying to pay people to consume more fossil fuels?

[Worker]

Cosi, if somehow I become eligible for a gubmint gift certificate, I will buy everyone here a drink with it, except Anne who I will buy a whole 6 pack.

[anne]

As Paul Krugman properly points out, the stimulus package which is typically conservative will have less impact than necessary, will be slower in taking effect, and wastefully includes tax cut provisions for business that will have no effect on the current slowing of growth.

By the way, this stimulus program involves, of course, a tax cut. Not that a tax cut is unimportant or unwelcome, however, but there will be a tax cut.

[anne]

Beer? I am grateful, but beer? I am forever being offered home made beer by the manager at Whole Foods, who uses fruit flavors, so I have assorted fancy bottles of fruit beer which will stay unopened unless I inherit a bat cave, but I am always thankful and leave bulbs as an offering since giving a small parrot is tricky.

[anne]

http://www.nytimes.com/2008/01/26/us/politics/26mccain.html

January 26, 2008

Fiscal Mantra for McCain: Less Is More
By DAVID LEONHARDT

Senator John McCain said that, if elected president, he would cut spending sharply while lowering taxes at the same time.

[Here then is the special conservatism of increasing military spending, while cutting spending and lowering taxes. Cutting what?]

[zinc]

The best stimulus would be to re-implement the usuary laws.

[Lafayette]

Worker: But she (Pelosi) don't care 'cuz I gotta job.

Ever have a look at Nancy's teeth?

Sparkling pearl white ... like her Net Worth. (Or that of her family ... whichever.)

[ilsm]

worker,

How bout opening a tab at some decent gin mill in Chicago?

I be there let me know.

[bakho]

Do Dems really have a choice? If Bush is NOT on board, his GOP allies in Congress will block or bottle up the legislation. The Dems have a slim majority in Congress which puts them in a weak position. All the power lies with the president and his GOP allies in Congress when something needs to be done quickly.

Bush and his GOP buddies have managed to block SCHIP for months with no short term political damage. They will try to place the blame on the Dems to avoid damage at the polls in November, something they do well.

The Dems are in a very weak position. How successful have the Dems been at passing ANY legislation in the face of GOP roadblocks? Not successful at all. This is because the Dems have a very weak political position, not that they are not trying. The Republicans would like the public to believe otherwise. Don't perpetuate the myth.

[anne]

What is interesting and discouraging is having Paul Krugman who is an astonishingly honest and inciteful and courageous columnist belittled for pointing to glaring policy weaknesses of a Presidential candidate, as the weaknesses of George Bush were pointed to and Krugman was called shrill repeatedly. The policy weaknesses Krugman is pointing to are indeed pronounced.

[Cosi]

Lafayette,

Re: "I'm sure you have polled the vast majority of the population to corroborate such an absurd notion? Do let us know when you have better evidence for your nonsense."

Thanks for the snark. I guess I should respond in kind.

Are you familiar with the concept of "inference". No, I don't have "evidence" in the sense that you are defining it. But I ask myself -- applying some common sense here -- why would the politicians in Washington devote so much of cost of the rebates to middle-income folks rather than to focus it on lower-income folks which would be the most effective and efficient? Can you guess the answer? Think now -- how do politicians decide which positions to take? Maybe you've guessed it by now: The reason is that they wanted to appeal to a much broader set of voters instead of telling most voters that they (the politicians) were going to take a lot more of their (the voters') money (more precisely, assume more debt on their behalf that they will eventually have to pay one way or another) so that the politicians could give away that taken money to OTHER folks (i.e., wealth redistribution). The politicians probably knew including the middle class would be less effective and less efficient, so why, other than the above reasoning, would they opt for the less effective, less efficient option?? Obviously they felt that doing so would be more politically popular, right? And why would it be more politically popular? Maybe because middle class people would rather they get some of that money, too, instead of the stimulus amounting to government taking more of their money and giving it to others? Is any of the above rocket science?

[btg]

"Calling people trailer trash is a little weak, ya think?
But, it will be interesting to see how much of the 2008 "stimulus" package is absorbed by WalMart."

i was being sarcastic or snide - i guess my point is that jst as krugman now thinks that imports do have an effect on wages, the high of imports also reduces the effectiveness of any stimulus package, particularl in the context of china pegging its currency to the USD.

my guess is that any stimulus that goes into people's pockets will either deduce debt or be used to purchase things other than housing or other domestically produced durables. much of the stimulus will leak out of the economy - there is also a multiplier effect or a reduction of it, which ever way you look at it. in the end - the stimulus means more government debt, more borrowing from asia, and more imports in north america, and very little in the way of any lasting improvement to either the quality of life of most americans, or to american competitiveness.

giving away money and getting nothing for it is no way to build up a country - better to spend the money directly on things that will improve infrastructure, reverse the decay of cities or the environment (uh, like spending money on new orleans) or deal with issues like global warming.

a stimulus package can provide a short term boost in confidence, but in the medium and longer term, better to spend the money on things that matter and let those workers who are hired spend the money at walmart or elsewhere, instead of skipping the part where people actually create things in return for the money.

[btg]

oh - there is a good chalmers johnson article on truthout.org - http://www.truthout.org/docs_2006/012308E.shtml

[anne]

Agreed; still, a cleverly fashioned spending stimulus would provide for sustained as well as reasonable rapid gains, but directed spending through federal-state revenue sharing would be long in political negotiating, while direct social-development spending is opposed by the President. I had hope for a better distributed package however, but this Congress has only stood against the President once that I remember. *

*When was that veto over-ridden?

[anne]

George Bush had no reason to veto bills from a Republican Congress, while in this Democratic Congress only a water projects bill veto was overridden. Putting together such a public works bill takes time however, and getting by a veto taken more time and time is needed for projects to begin.

[ken melvin]

The time to have acted probably was around mid-05. I think that progressively since 1980 we have been living off our equity whether as under maintained, non-replaced, or unbuilt infrastructure; or by borrowing on inflated assets. If not broke, we've certainly lived beyond our means. Now, they will want to pay for this 'stimulus' by cutting spending on social programs and infrastructure; and further inflation of assets.

[anne]

http://www.cbpp.org/1-26-08fa.htm

January 26, 2008

Dispelling Confusion on Food Stamps, Tax Rebates and the Stimulus Package: Speaker's Statement on Food Stamps Was Mistaken
By Robert Greenstein

House Speaker Nancy Pelosi made tough choices in the stimulus package, securing a tax rebate that includes most low-income working families while dropping provisions for temporary increases in unemployment and food stamp benefits. Unfortunately, in defending those choices at the National Press Club on Friday, she mistakenly provided an inaccurate description of the food stamp provision that was dropped.

The Speaker said: “What was bandied about was a 10 percent increase in food stamps. Do you know what that translates into for a person on food stamps? Ten cents a day. Ten cents a day. I thought it was more important to put a check for $1,000 in the hands of the mom in that family.”

These food stamp figures, however, are not correct. For a mother and two children — such as a mother working at the minimum wage — the 10 percent food stamp increase under discussion would have provided an increase of $352 to $396 in food stamps. The 10 percent increase would have provided families of three with $44 more per month in food stamps (an increase of well over $1 a day), and this increase would have been in effect from April or May through December (i.e., for eight or nine months).

(The Speaker’s mistake was understandable; food stamp benefits are sometimes described as averaging $1 per person per meal, and 10 percent of $1 is 10 cents. But the $1 figure refers to the level of food stamp benefits per person per meal, not per person per day. In addition, the proposal that was under discussion would increase the maximum food stamp benefit by 10 percent, which translates into an increase of about 15 percent in the average benefit.) ...

[anne]

I think the mistake should be clarified by Nancy Pelosi, since I undertstood as did many. I hope Pelosi understood and was not misled and simply made a mistake in speaking.

[bakho]

Anne pay attention.
Republicans are in the position of strength.
Republicans are content with the status quo and perfectly willing to block most legislation.
Republicans are backed by Bush veto.
Republicans + Joe Lieberman + Dick Cheney can out vote the Dems on Iraq 51-50 (49 + Sanders).
Only 40 Republican Senators can block most anything. (There are 49 Republicans, 9 more than necessary).
Republicans care more about party loyalty and ideology than poll numbers. Almost all of them are in "safe" districts.
Over half of our Senators come from states that make up less than 20% of the US population including 40 Republicans in "safe" states.
NOTHING makes it through Congress and gets sent to Bush unless there is massive public support and major defection by Republicans.
Congress not standing up to Bush has almost NOTHING to do with Democrats and EVERYTHING to do with Bush Republican allies in Congress who can and will block most attempts.

Democrats in Congress are in a weak bargaining position.
Democrats lack the votes to steamroll the Republicans.
Democrats lack the votes to override a Bush veto.
Democrats are not unified on all issues.
Having a Democrat in the WH would completely alter the dynamics.

Democrats are in a VERY WEAK position. Republicans keep repeating the message that the Dems are "in control" because it deflects criticism of Republican obstructionism.

Beating up the Democrats every time the Republicans block them just encourages the Republicans to continue to block good legislation. It is a win-win for Republicans. Republican special interests thank Republicans for their votes and the Democrats get all the blame.

We got a bad stimulus bill because Bush was able to block the best ideas. This is the fault of Bush and the Republicans in Congress who are more than willing to back him up. Nothing changes until Bush leaves and a lot more of his supporters are voted out.

[Lafayette]

bakho: Nothing changes until Bush leaves and a lot more of his supporters are voted out.

The fence-sitters

The first, above, is inevitable (thank God) but not the second.

Americans have moved sentimentally to the Right. This tide has not yet passed and it will be interesting to see how much the disgust for lead-head will lead to a generalized rout of the Right in Congress.

I'm not betting on it.

Those who decide this vote are the fence-sitters. And, McCain is sufficiently popular with Dems-on-the-Right to entice a cross-over vote. With Obama as Dem-candidate, that could be not a trickle but a flood. (Or, just abstentions.)

We have, in the making, a replay of 2004.

The nub of political sentiment in America is this: Despite all the discussion in this blog about Income Inequality, most Americans think that it would be very nice indeed to become a millionaire. And, they could not care a fig that 1% of the population either are already billionaires or are heading directly to becoming one.

So, the next Republican government (and legislature) will not do a DAMN THING to change the status quo. It will just wait for the economy to improve and unemployment will reduce to, say, 4% -- enough to give the Chattering Classes enough money to go spend it at Wal-Mart on junk food and junk imported gadgets.

"I buy, so I exist".

[wjd123]

The compromise did manage to add about 30 million people that would not have received any benefit under Bush's initial proposal.--2slugbaits

Since when do Democrats measure success by what they took from Bush. Success here would be a plan that actually stimulates. This isn't about compromising but being effective.

The Democrats are in a position to vote out any plan they please. That plan should be the most effective one: the one that will keep the recessionary trough from being any deeper than need be. Vote that plan out and send it to Bush. If an effective plan doesn't pass it will be the fault of an unpopular president and a Republican minority that is willing to back him by sustain his veto.

If no stimulus plan gets passed and the economy go into a deep recession Democrats can blame it on the Republicans who insisted on a plan that wasn't effective and an intransigent president that seems hell bent on screws up everything he touches for ideological reasons.

Politically, this isn't the impossible Gordian knot that many blog comments present it to be. It's a matter of calling the Republican's bluff when you know they are holding a weak hand. They don't need a deep recession on Bush's watch.

He'll be the president who got us into a recession along with his Republican enablers if they make it possible for his veto to be sustained. Most economist recognize that Democratic suggestions are the most effective way of mitigating a recession and the Republican suggestions aren't. If we do go into a recession, effectiveness, not compromise is the cover Democrats will need to keep Republican sniping ineffective.

There are flaws in the Democratic part of the stimulus plan but they are easily solved. For instance, I worry about the Wal-Mart shoppers. Their stimulus to our economy is made weaker because of greater imports, the very imports that the poor might spend their a transfers on.

The answer is to make the transfer in the from of dated script that can only be used for goods and services produced in America. The poor can still use the money they saved to buy their toaster made in China but American workers will stay employed and have their paychecks to spend and further stimulate the economy. It a matter of who the stimulus goes to first.

Since the purpose of the stimulus is to mitigate the recessionary dip it won't matter if things soon go back to a weak economy because the stimulus will have been as effective as possible. The reason compromise looks so political inviting to both parties is because there will probably be a recession no matter how deep. A compromise means that neither party can blame the other. That fear can be avoided by the Democrats selling their plan as the best way to mitigate a Republican recession and not as a way to keep us out of it.

[ken melvin]

The announcement by several repub pols that they'll not be running for reelection is a good sign (something to do with the polls, I think). There remains a pot full of the dumber than dirt Gingrich/DeLay crowd. This dumbness Rene Lafayette cogits to is endemic the populace, including the media. Few indeed want to hear a discussion of the real issues (just the sound bite mam/sir), thus the likes of GWB and Cheney vs. an Al Gore, John Kerry, Howard Dean, ... or George McGovern. Reptiles for the reptilians.

[Lafayette]

wjd: If no stimulus plan gets passed and the economy go into a deep recession Democrats can blame it on the Republicans who insisted on a plan

Nice theory, but the sad fact is that any more dithering will hurt perhaps not you but a great many ordinary people.

I can agree that this recession was provoked (mostly) by the sub-prime lending scandal. The sub-prime mess was one of fraud and it is unconscionable to blame fools, even when people behave foolishly, for Predatory Practices.

There was clearly a lack of supervision of lending institutions and this laxity can be laid at the doorstep of the Fed, which has/had the responsibility of finance markets oversight.

Consider this excerpt from testimony by an FRB Director in 2002 after Enron broke:
The focus of today's hearing on how complex structured financial products provided by banks and other financial institutions may have been used by their customers to obscure financial statements and hamper sound analysis by creditors and investors, or to engage in questionable or improper tax strategies, is timely. Events of the past year, such as the bankruptcy of Enron, have focused attention on the need for strong risk management, sound accounting, improved disclosures, and more active corporate governance to avoid the kinds of losses that have been costly both in human and economic terms.

From the above, and after sub-prime, one would think that they have learned nothing.

The Fed believed wrongly, until recently, that such oversight extended upwards to banks and markets but not downwards to the base market, i.e., that of initial customer interface. (It is at this interface that the Truth in Lending Act comes into play.)

Regardless, the careless use of SIVs is clearly a bank's fault since it accepted the bad loans, restructured them and resold them as "high return, real estate secured loans". There was almost a boldface lie, but apparently the accrediting agencies bought it hook, line and sinker. Marketing Hype goes a lonnnnngggg waaaayyyyy in Sales.

A component of the government is clearly responsible. So, it is the Federal Government that should be supplying the effective solution. It is apparent that this government thinks the "fools had it comin' to them". After all, some "old soldiers" at the banks have already fallen on their swords -- but they took a nice Retirement Pension along with them.

[hari]

Lafayette -

What about the resported news that Bernake was directly instructed to cut rate after the meltdown in Asia/Europe?
GWB apparently called him personally, it's reported.

[Marc]

"In reply to Marc- about a third of the proposed stimulus is NOT rebate that phases out at $174K, but $50 Billion to business interests."

You do realize businesses have to spend money in order to get the benefit, if they don't, they do not get any money. Now this might not change a business behavior (their spending may be planned prior to the tax break) but it does require business spending which I think everyone would agree with is a good thing.

In terms of info off of krugmans's blog from "Cut and Paste Ann", its worth digging into a little bit. Below are the quintiles and stated income.

Lowest 6.5 (14,385>X)
Second 14.3 (14,385X)

My understanding of the quintiles is that they look at household income tax returns and sort them in value, ignoring if the return is filed jointly (family) or by an individual. Therefore this can result in some distortion if you want to understand what type of individuals are getting the rebate. For example, a person earning $25,000 falls in the second group that receives 14.3% of the rebate ($600). Now, if two individuals who make $25,000 each are married, they fall into the 4th group since they make $50,000 combined and that group receives 31% of the rebate ($1200). This makes it look like the upper quintile is getting a larger share of the return, but in reality, all the individuals make the same amount of money.

Another way to look at this is to understand that married couples on average earn more money than an individual, and therefore they will get a larger absolute share of the rebate. Then add in children at $300 a pop, they will get an even bigger share of the tax rebate. Therefore, a family of 4 (2 parents/2 kids) get $1800 while an individual receives $600. Overall, each group of people make the same amount of money individually, but it looks like the upper quintiles get so much more of the rebate since they are married versus being single.
Its great to use the info from taxpolicycenter.org for talking points/headlines, but if you dissect the information, this does not look like a hand out for the rich. If you make more than $87,000 (which isn't a lot in major metropolitan areas) you don't get a thing.

[anne]

Imagine me, you do realize, me being able to, like, read:

http://www.cbpp.org/1-24-08bud-stmt.htm

January 24, 2008

Stimulus Package Would Provide Little Immediate Boost Due to Removal of Most Effective Provisions
By ROBERT GREENSTEIN

In contrast, Economy.com found that for each dollar in "accelerated depreciation" — the main business tax cut in the package — only 27 cents of increased economic activity would be generated. CBO and a Federal Reserve study in 2006 found that the business tax cuts adopted in the last recession, which closely resemble those in the current package, had only modest stimulative effects. Despite this evidence, the package apparently contains at least $50 billion in business tax cuts while excluding unemployment insurance — the single measure most focused on the people hardest hit by the downturn — and food stamps.

The business tax cuts also would cause states to lose at least $4 billion in state revenue, due to linkages between federal and state tax codes. The package contains no fiscal relief for states, not even to offset this loss. As a result, many states will have to enact deeper and more painful budget cuts, likely hitting areas from health care and education to aid to local governments. Those state budget cuts will also act as a drag on the economy....

[anne]

Marc:

"My understanding of the quintiles is that they look at household income tax returns and sort them in value, ignoring if the return is filed jointly (family) or by an individual. Therefore this can result in some distortion if you want to understand what type of individuals are getting the rebate."

Agreed.

This is a middle class tax rebate that will be largely and reasonably quickly spent after distribution. The rebate should have a meaningful effect from July to December, adding to the effect of Federal Reserve action. The business tax cut will have a proportionally smaller stimulus effect.

* Thanks to Marc for properly explaining the Tax Policy Center categorization:

http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=1741&DocTypeID=2

[anne]

Paul Krugman:

"And sending checks to people in good financial shape does little or nothing to increase overall spending. ... Give such people a few hundred extra dollars, and they’ll just put it in the bank. In fact, that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001."

Then we can expect as much as 67% of the personal tax rebate to work as a stimulus over 6 months, and less than 27% of the business tax cut. So, the stimulus may be an expected $95 billion of $150 billion allocated.

[bakho]

wjd123 says...
"The Democrats are in a position to vote out any plan they please."

Not really. EVENTUALLY, the Dems could vote out any plan they please BUT the Republicans could block it for several months and hold up other business of Congress. Part of the point is to do it right away, not 6 months from now.

You underestimate the power to block legislation that an ideologically committed minority in Congress can wield if they don't care a whiff about governing. The GOP don't care about governing. The Dems do. This makes the negotiations asymmetrical. The Dems lack the votes to steamroll the obstructionists.

[Lafayette]

hari: What about the resported news that Bernake was directly instructed to cut rate after the meltdown in Asia/Europe? GWB apparently called him personally, it's reported.

We'll never know.

But, Bernanke does not take orders from the Prez. Unless he wants to. The Fed is collegial in that there is a Board that should influence the decisions of the Board Chairman.

The system of power balancing (amongst the three branches of government) was designed for each group to be independent -- and that idea was extended to the Fed.

The Fed is "supposedly" independent of either elected branch of government, Executive or Legislative. As for the third, Judicial, it rarely mixes with the Supreme Court.

Of course, the above is admittedly open to interpretation. Either persuasion or pressure that may come into play -- or both. The Mafia, for instance, are masters of the second method. Highly effective, I am told.