Consider this: Stimulus plan won't work
President Obama is pressing Congress to approve his stimulus package. As lawmakers debate the plan, commentator Susan Lee says one argument they should consider is that a stimulus won't work.
Susan Lee (Susan Lee)
More on Commentaries, America's Financial Crisis
TEXT OF STORY
Kai Ryssdal: Obviously there are different points of view about what kinds of spending make for good stimulus. There hasn't been much talk yet though, about doing nothing. And that leaves plenty of room for commentator and economist Susan Lee.
Susan Lee: No doubt about it: Almost a trillion dollars is a huge number. And so it's good that we're having a huge debate over the stimulus package. Is it too big? Too small? Should it be mostly government spending? Or mostly tax cuts? We're debating everything except for the most important question: Will it work?
There is a respectable body of opinion, held mostly by academic economists, that there's no stimulus in a stimulus. This argument, called 'ricardian equivalence' after the British economist David Ricardo, goes like this: In an economic downturn, the government wants to boost demand by spending more money than it takes in taxes. But how will the government get that extra money? Not by raising taxes. That's foolish in the middle of a recession. The only way for government to get extra billions of dollars is to borrow it.
But, as this over-leveraged country is beginning to understand, debt must be paid back. And how will the government pay back the debt? You guessed it. By raising taxes -- later, when the economy is going gangbusters again.
The hooker is this. When people realize that their taxes will have to go up eventually, to pay off the debt, they'll start saving today. And so the extra money motored out by the government will be off set by the money motored in by taxpayers. The net may very well be a checkmate. Government spending goes up and private spending goes down. And demand stays the same.
Although there's some evidence that Ricardo himself didn't believe in equivalence, academic economists have been debating it for decades. Some objections are theoretical. For example, not everyone can save today for an eventual tax hike down the road. And the empirical evidence is mixed.
Now, of course, one can always stand on the acceptable ground that academic economists wouldn't know a payroll from a sesame-seed roll. But, before hitting the economy with a deficit that could top 10 percent of gross domestic product, shouldn't Congress take a look at the argument that a stimulus won't work? Shouldn't it question whether the economy will get any bang for so many billions of bucks?
RYSSDAL: Economist Susan Lee lives in New York City.
Comments
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From chicago, IL, 03/27/2009
I hope the stimulus works for all our sake.
From Bronx, NY, 03/03/2009
i think if the stimulus package does not work then we will continue to be in this recession which will probably later become another depression. but even though i say this i agree with congress about a back up plan . we cannot rely on this package alone.
From Albany, NY, 02/17/2009
To those of you who have attempted to use the nonpartisan CBO's report for your own purposes (cherrypicked?), perhaps you should read it. They do say that the stimulus package will slow GDP growth in the long term, but only by 0 to 0.2%. Compared to the short term GDP stimulus estimated at 1.4-3.8% as soon as 4th quarter 2009, the long term effects are inconsequential. For employment, the package is estimated to create 800,000-2,300,000 jobs by 4th quarter 2009 and have no long term impact. Sounds pretty good to me! I have no stake in this battle besides wanting our country to thrive, and take offense to those who would twist a story just to support their argument. Perhaps you should have considered that before you even mentioned the report?
From Saint Louis Park, MN, 02/12/2009
I disagree w/ Mr. Pettengill's assertions.
Reagan inherited a mess from the Carter administration (remember the 'misery index?') of double-digit inflation plus double-digit interest rates. Paul Volker, the Fed chariman at the time, was raising interest rates to halt inflation. He succeeded. Noone can question this assertion. Noone can argue that it didn't come with a lot of pain, but it took YEARS to undo the mess of Keynsian assumption that govenment spending and printing money could boost the economy in the long term.
An economy the size of America's doesn't 'turn on a dime.' It takes time to build confidence. But government spending and regulation can make things worse. It can also prolong recessions, and reduce economic growth.
What we are experiencing now is NOTHING compared to the economic crisis of 80 - 82. Even with unemployemnt nearing 8%, we have lower unemployment now than we did back then. We have lower interest rates now than we did then. What's different is that we had a president who understood that it would take a lot of pain, but that Americans would overcome the wreckless government spending of the 70's. Once Wall Street caught wind that a new philosophy was being followed, the stock market proceeded to rise that lasted for two-and-a-half decades.
I would argue that Clinton's signing of NAFTA did more to lift us out of the recession in the early 90's than his raising of taxes. Economic growth was sustained in the Clinton years when there was a Republican congress that REDUCED THE RATE OF GROWTH in federal spending. I would also argue the lack of government intervention by Clinton when the market bubble burst in March of 2000 was wiser than the present intervention by Bush and Obama and the Democratic congress.
FDR's spending didn't get us out of the Depression in the 30's. Disagree? Then explain why the unemployment rate in 1938 was over 20%. What changed? Ramping up military spending for WW II, with capital coming from Great Brittan. Keynsian spending by the government can artificially pump money into sectors of the economy, but the corresponding taxes that inevitably follow stifle economic growth.
Don't trust what anyone says on this list: don't trus me, Mr. Pettengill, Ms. Lee, or anyone else. DO RESEARCH YOURSELF. Go to the Congressional Budget Office's website and download a PDF of US spending and economic growth from 1960's through 2008. Belive it or not, even though the federal debt grew during the Bush years, in 2005 and 2006, US Federal debt shrunk *as a percentage of US GDP*. After the Dems took control of congress, this was no longer true. In fact, spending has been worse under Democrats in congress than Republicans. Ask yourself: who argued that Freddie Mac and Fannie May should reign in mortgage lending? Who benefitted from Freddie and Fannie lobbying? What caused the economic mess we are in? I would argue that government intervention in the mortgage industry, through regulation and 'public/private' entities like Freddie and Fannie, put us in this crisis of confidence. Does government spending and control really create wealth? Ask yourself, which people have been lifted out of abject poverty - Chinese during the "great leap forward," or Chinese after Deng Xiaoping's economic liberalization? Same people. Different attitudes about what government should and should not do. Did economic liberalization help Asian economies? Did massive government spending (as a percentage of GDP) help sub-saharan Africa?
Above all, don't spend money because it's the 'patriotic' thing to do. Do what is right for your personal circumstance, but heed what your grandparents told you -- don't spend more that you make, save for a rainy day, participate in community: not by overpaying taxes, but by putting in TIME to participate at your school, house of worship, getting to know your neighbors, etc.
Mr. Pettengill's vision of the economy will be the one Congress and the President will pass and sign into law tomorrow. We're being fed a version of Keynes that dwarfs anything that has been tried earlier. Spending on such a scale should mean success or failure will become obvious soon. In November, if Barak is telling us to be patient, that the turnaround is "just around the corner," then Keynsian theory will have failed.
As for Reagan's 'unproductive investment in destruction,' I'd say that the fall of the Soviet Union, along with the freedom enjoyed by tens of millions of former Eastern Europeans, was well worth such investment.
From SC, 02/11/2009
I don't think Mrs. Lee was trying to give to one side or the other but just expressing another point of view. We have to stop toting this party line. This isn't about republican or democrat but, I agree with Ms. Yamilkoski and Mr. Mcgraw. We need to worry about spending to much adn we need to listen to many sides of the story. There is a man on here trying to sell his invention, why can't he get money from this bailout package so he can create jobs. Am I' trying to save money for future tax hikes, have been for awhile, since Clinton. Government does it every so often, one person comes in and lowers taxes the other raises them. Truth is, rasing taxes does generate cash flow towards GDP but, we need some kind of stimulus to create jobs so we can raise taxes but, lets not give it to banks but, small businesses, regional and national banks and to those who made bad decesions on ARM loans. Giving money to those who got loans they couldn't repay will give the banks what they need. Close that book and whatever bank surives, surives. It may sound like a bad idea to give money to borrowers who made bad decsions but 1. who can afford a lawyer to keep from repaying banks or privae citizens and 2. the IRS can just take whatever people don't pay back. After all that you probably still spend less than the current stimulus package.
From hoffmanEstates, IL, 02/10/2009
5. Certainly another disaster brought on by every voter who ever voted Republican. Green energy is the only answer. I have several adaptations of how green energy can quickly 1 restore the housing market2. Sell 1 million additional hybrid cars by the end of 2010. How to prevent 500,000 bankruptcies. But not one government agency, president Obama's campaign the government department of energy has ever answered over 15 e-mails phone calls and faxes with specific solutions and proof. Free clean solar energy multiplied by two times the output, my invention, will soon reduce the cost of solar for homes and businesses by 70% before the end of this year. Yet nobody will look at the proof. I've tried Tony Maatia at WBEZ 6 times not even the courtesy of her reply. The patented invention I have received with the assistance of the engineering department at northern Illinois University has been totally blocked out by every website. And every voice mail system from banks so-called VC sources and totally ignored yet my invention with a new upgrades and solar panels by the end of 2009 can reduce homes and businesses cost of electricity to $.15 a kilowatt hour and be put on 500,000 homes and businesses this year without a dime of upfront money or down payment. Do you feel that this would be worthy of a presentation on your program? I am also probably the best reporter on the global renewable energy energy in the entire USA
02/09/2009
Save money in anticipation of a tax hike in a few years? What are you smoking? How about spend money I make today on food, utilities, cloths for my kids?
Please stimulate my economy to the point where I will earn enough to pay taxes - I dare you!
From Pueblo, CO, 02/08/2009
Personally, I appreciate hearing several sides to stories so that I may make up my own mind about issues. I don't want to hear just "left" leaning opinions any more than I would want to hear just "right" leaning ones. What is wrong with digesting several points of view and engaging in respectful discussions about such matters? It's not pandering at all. I am a registered Democrat who subscribes to two local public broadcasting stations and I'm unsure whether this stimulus will work, either. The problem in the economy is the need to deleverage and I don't see how more leveraging by the government will dig us out. In fact, there is a very large chance it won't. Read writings by Robert Prechter, H.S Dent and others for more insight into this possibility. It seems profits are privatized while loss is publicly subsidized. And bailing out the shadow banking system and banks probably created moral hazard which contributed to the meltdown.
From Dallas, TX, 02/07/2009
I wish to note that the CBO, the nonpartisian Congressional Budget Office, said on Wednesday that the stimulus would be harmful over the long haul. This in the Washington Times by Stephen Dinan. Seems Ms Lee's comments are right on target.
From Mesa, AZ, 02/07/2009
Ms Lee is just so wrong, on so many different levels, and it is this kind of crazy talk that is going to make us long for the good old days of the Great Depression. We are in the early stages of a deflationary death spiral, with so many thing leveraged against so many other things that there is no bottom. We must break the downward spiral now before it gains any more momentum, or it will be too late to do anything but pray! The best we can hope for at this point is that the government can print and spend enough money to create the fear of inpending hyper-inflation. By creating the fear of hyper-inflation it will compel the Chinese and other countries and individuals to go on buying spree to redeem thier dollars for American products and other assets which will at least provide a hedge against inflation. The buying frenzy caused by the desire to unload dollars, might provide the boost the economy needs stop the deflationary spiral. It's not solution to our economic crisis, but we would at least live to fight the inflation battle another day. I don't expect the stimulus package to do much more than slow the rate of deflation. I hate government overspending even more than the next guy! But I assure you, at this juncture, the inflation card is the only one we have left!
From Batavia, OH, 02/06/2009
I think Susan Lee is way off base, but let us suppose that she is correct and that the stimulus will eventually cause taxpayers to save more (is there anyone out there now saving for your taxes to go up in 2012 when we are coming out of this thing? I didn't think so, but anyway ...), what happens? Well, there is more spending in the economy now, when it needs it. Taxpayers have a recognition lag about the need to save more, then, because times are tough, they have an implementation lag and can't save more immediately. They decide to save more when times are good. Then, since they will save over time, there is an effectiveness lag. So the net effect is stimulus to the economy now when it really needs it, and demand removed gradually from the economy later, when it probably needs to be slowed down to prevent overshooting potential GDP anyway. It's a new kind of automatic stabilizer. Moreover, to ensure that savers don't outsave the government now, the stimulus should be really, really big, beyond the capacity of most people to match it with current savings adjustments. Please, NPR, if you must give time to right wing cranks, at least get a mainstream economist in there as well.
From Henderson, NV, 02/06/2009
I agree with much of what Susan Lee has to say. I am worried that the government (and we who are supporting the stimulus action) are acting as naive as those home purchasers who signed up for ARMs with no idea of how they would ever pay the mortgage when it went up. Now we feel sorry for them that they were ignorant and duped. I have heard nothing about the terms of the loans we are GETTING - only about the terms of the money we want to provide as part of the stimulus. Where is the money coming from, under what terms, how long do we have to pay it back, is it fixed, are we mortgaging our future, etc. That should be just as important as how to loan it out.
From CA, 02/06/2009
Why do they need to raise taxes to pay for debt? In this new paradigm, they just monetize the debt (print money: also known as wealth creation). It's a win-win for current generation and next generation. You merrily party on debt, create wealth out of thin air and pass that wealth to your children. I dont see any problem with this. Do you?
From Schaumburg, IL, 02/06/2009
The only reason I listen to your constant broadcast of David Frum of the AEI is "know your enemy." Add Susan Lee to that list. Why are you pandering to these right-wing and libertarian flacks? Their bonuses depend on getting their BS on shows like yours. You are being played.
From Elko, NV, 02/06/2009
rush to War
rush to Bail-Out
rush to Stimulate
no time to answer questions
the sky is falling
the sky is falling
(when will the sheeple ever learn?)
From merrimack, NH, 02/06/2009
Susan Lee argues that maybe higher taxes will have a negative affect on the economy. Well, the data as I see it, says that higher taxes will create strong economic growth.
TAX CUTS DO NOT CREATE JOBS NOR STIMULATE THE ECONOMY!!!!
The evidence is absolutely clear:
Reagan got his tax cuts in 1981 and the Reagan recession began in 1981. Reagan agreed to what conservatives call the biggest tax hike in history in 1982, as well as tax hikes in 83, 84, 85, and the economy grew and created millions of jobs.
Bush agreed to higher taxes which lost him the election and then Clinton raised taxes, and the result was the longest job creations period since the Reagan job creation run that started after Reagan agreed to the largest tax hike in history.
And today we still have in effect the Bush tax cuts of 2001, 2003, 2006, and 2008 which make taxes lower than during both the Reagan and Clinton years of massive job creation, and in the six months after the 2008 tax cuts were implemented, a 2.5 million loss of jobs.
Tax cuts don’t create jobs, and one might argue that tax cuts kill jobs.
Let's return to the crush Clinton tax burden with the longest expansion in history, and modest government spending.
Or in response to the worst economy since Reagan took office, let's raise taxes year after year and also engage in massive government spending, this time, instead of Reagan's unproductive investment in destruction (munitions systems), this time on productive sustainable energy production, infrastructure building, science and technology research, healthcare reform to help businesses compete in the future, and I think we will see at least the second longest economic expansion like the Reagan crushing tax burden years post 1982 after the biggest tax hike in history.
From merrimack, NH, 02/06/2009
Susan Lee argues that maybe higher taxes will have a negative affect on the economy. Well, the data as I see it, says that higher taxes will create strong economic growth.
TAX CUTS DO NOT CREATE JOBS NOR STIMULATE THE ECONOMY!!!!
The evidence is absolutely clear:
Reagan got his tax cuts in 1981 and the Reagan recession began in 1981. Reagan agreed to what conservatives call the biggest tax hike in history in 1982, as well as tax hikes in 83, 84, 85, and the economy grew and created millions of jobs.
Bush agreed to higher taxes which lost him the election and then Clinton raised taxes, and the result was the longest job creations period since the Reagan job creation run that started after Reagan agreed to the largest tax hike in history.
And today we still have in effect the Bush tax cuts of 2001, 2003, 2006, and 2008 which make taxes lower than during both the Reagan and Clinton years of massive job creation, and in the six months after the 2008 tax cuts were implemented, a 2.5 million loss of jobs.
Tax cuts don’t create jobs, and one might argue that tax cuts kill jobs.
Let's return to the crush Clinton tax burden with the longest expansion in history, and modest government spending.
Or in response to the worst economy since Reagan took office, let's raise taxes year after year and also engage in massive government spending, this time, instead of Reagan's unproductive investment in destruction (munitions systems), this time on productive sustainable energy production, infrastructure building, science and technology research, healthcare reform to help businesses compete in the future, and I think we will see at least the second longest economic expansion like the Reagan crushing tax burden years post 1982 after the biggest tax hike in history.
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