State Aid Is Stimulus . . . Don't Cut It

by publius

So we have a stimulus compromise.  Needless to say, I’m in the Pelosi wing at this point – and I hope she wrestles the needless and counterproductive cuts back in.

But here’s a more serious question – what exactly were Nelson and Collins trying to accomplish?  The whole thing seemed like a bad black comedy.  The negotiators seemed to be pushing for cuts, not because the cuts achieve any substantive policy objective, but just because the Senators had an ideological aversion to “bigness.”  Or something.

It’s all incredibly frustrating – it would be one thing if the Nelson/Collins crew cut measures that actually had no (or very limited) stimulus benefits.  But that’s not at all what they did – in fact, there seems to be little coherence to what they cut.  From what I can gather, they wanted to cut some stuff just to say that they had cut some stuff.

For instance, consider the state stabilization fund.  Details are still sketchy, but it seems like the Senate’s bold centrist compromise took a big axe to this program.  However, this program – derided as a “slush” fund – provides many critical stimulus benefits.  Let me say that again – the state stabilization fund will help stimulate the economy immediately by keeping people in jobs.

But don't take my word for it.  Go check out the CBPP, which has an extensive discussion of the benefits state aid would provide.  The nickel version is that states are running deficits, and will therefore be forced to make hard painful cuts (this is one reason why governments shouldn’t be mandated to balance budgets).  Anyway, here’s the CBPP explaining the pain to come:

When states cut spending, they lay off employees, cancel contracts with vendors, reduce payments to businesses and nonprofits that provide services, and cut benefit payments to individuals.  All of these steps remove demand from the economy and compound the economic slowdown, counteracting the effects of the recovery bill.  If states raise taxes to balance their budgets, the effects on demand are similar.  The Stabilization Fund would help prevent further cuts to K-12 and higher education, as well as other critical state and local services.

It honestly boggles my mind to see so much money taken out of this particular category.  Again, these cuts would be palatable if there were some semblance of a policy rationale for doing so.  But there’s none.  Instead, the fate of state budgets everywhere must take a backseat to the desires of Senators Nelson and Collins to be perceived as very serious centrists.   Forty billion dollars is a lot to pay to help protect two Senators’ ideological self-image.  Perhaps the two Senators could write a sympathy card to laid-off state workers reminding them of how important abstract concepts like centrist budget hawkery are to the nation's well-being.

To repeat the main point – state budget aid is an important stimulus.  It should not be cut.  Let’s hope Pelosi hangs tough on this.

Comments

[now_what]

The negotiators seemed to be pushing for cuts, not because the cuts achieve any substantive policy objective, but just because the Senators had an ideological aversion to “bigness.”

What part of this don't you understand? Conservatives don't like big government. And before you bore everyone with your objections, let's be clear what big government means.

Situation 1:
In order to solve a problem, the government uses tax money.....OK stop right there. That's big government. Conservatives don't want to pay their taxes. Period.

Situation 2:
The government illegally abducts American citizens off the street and holds them in secret prisons, tortures them, sends them to foreign countries to be tortured some more, and does all this all on the word of one member of the executive branch with no court oversight. That's not big government. You will find the word "taxes" nowhere in that description.

Some people really are that simple.

If you mentally replace sentences that are some sort of variation on, "I don't like big government" with "I don't want to pay my taxes", you will be much closer to understanding modern conservatism, which of course, is neither modern nor conservative.

[rook]

I hate to see some of these cuts, but Obama was elected partly on his promise to work towards bipartisan solutions. You have to respect him for following through on that. So much damage is done by the antagonistic relationship of the parties that I honestly think it could be worth $100 billion to get started on path towards cooperation.

To develop a mutually beneficial pattern of negotiation in an ongoing relationship, it makes sense to start by giving a little more than you absolutely have to (especially when you're in a position of power). Next, you wait and see if the other party (or at least the moderate crowd) makes the next productive step. I could see this working, especially if the public responds positively to Obama reaching out.

Or am I being unrealistically idealistic?

[Fraud Guy]

I think the other area that could take pressure here is the Governors. Have them rile their home bases against Senators, as, IIRC, even the Republican Govs are starting to see the need. Nothing like a Senator realizing that they may not have a state to go back to to slow them down.

[JayS]

There seems to be a lot of winking and nodding from the pundit class about how much of the bill is likely to come back in conference. This might be kabuki theater to give cover for cloture. Or these guys negotiating are irrational. Or both.

[bob mcmanus]

work towards bipartisan solutions. You have to respect him for following through on that.

The compromise also would cut $5 billion from a plan to help unemployed workers pay for health-care coverage, reducing the amount the federal government would pay for COBRA premiums to 50 percent from 65 percent.

No, I don't. If he signs it, or accepts the cuts to Head Start and the other desperately needed programs while insisting on even more tax cuts...I don't have to respect Obama at all.

[unfrozen caveman]

Stimulus solution:

1) Borrow $1T.

2) Create national bank.

3) Give $1T to national bank.

4) Bank leverages $1T into somewhere between $5T or $10T. In banking, a 1:5 or even 1:10 is quite conservative.

5) Banks make loans to deserving businesses.

[von]

This is ridiculous. The short-term part of the stimulus is nowhere near as large as it needs to be and the long-term portion of the stimulus is bloated and still poorly thought out. We're not following the lessons of the (successful) recoveries of the 60s or the 80s.

This measure will be passed and, hopefully, the country will recovery -- but this "stimulus" will have nothing to do with it.

[von]

By the way, the above comment concerns the stimulus package in general, not the specific component that Publius discusses (which has good and bad parts, but which ideology demands be portrayed as either GIGANTIC GOVERNMENT WASTE or THE ONLY SALVATION FOR MANKIND.)

[Sapient]

No, I don't. If he signs it, or accepts the cuts to Head Start and the other desperately needed programs while insisting on even more tax cuts...I don't have to respect Obama at all.

I am in favor of a huge bill and would, ideally, want to have all of these programs in it (including the honey bees). I believe that traditional Democratic programs have been shown throughout the past century to help the economy, and "spreading the wealth around" helps not only the poor but everybody else (except, perhaps, those who count their wellbeing in the multiple millions of dollars they have in the bank).

But if these programs aren't contained in this bill, what's stopping Congress from passing more next week, and the next week? If this bill is "bipartisan", and next week's bill is "partisan" (therefore delayed by Republican attempt at filibuster - an ultimately unsuccessful attempt, I hope), wouldn't we accomplish the same thing? Obviously, the sooner the better to stop the pain.

[Redhand]

From what I can gather, they wanted to cut some stuff just to say that they had cut some stuff.

And this surprises you? For members of the GOP, showing that you have power, any power, in the wake of the election is the only thing that counts.

[John Miller]

von, would you please describe short term part of the stimulus, and do not use tax cuts, tax rebates or tax credits in your explanation as we already know they are not effective.

Unfortunately the only type of stimulus that will ahve any impact both short and long term is spending, and in that I include unemployment benefits and food stamps.

I am not at all sure that Obama is pleased with this bill, but we will see. Also, complainers, unbderstand this is not the finished product. Pelosi seems to have a better sense of what is really needed, and hopefully the House will do major push-back.

[Phil]

unfrozen caveman, how exactly does your "stimulus program" stimulate the demand side of the equation?

[AnonymousInMa]

I've been trying this morning to better understand where the spending parts of the bill are targeted, and what are the details of the proposed cuts in the Senate compromise?

I'll readily admit that I don't really know how to go about doing this kind of research - I'd like to avoid having to actually read the 750 page document. So, if anyone could point me to a resource, or if von or others could weigh in with the details, I would definitely appreciate this.

Talking Points Memo had a summary of the initially proposed cuts from the Nelson-Collins compromise. But these just gave top level programs and the proposed cuts. Are these cuts more targeted? Regarding the cuts in the state stabilization fund that Publius highlights...Are these just general cuts to state aid that would have been left to state legislators to apportion or would it have been specifically earmarked (pardon the use of such an undesirable word) for certain uses? If so, what did they cut and what did they keep?

If anyone could shed some light on this or point me to a resource with this information, I'd greatly appreciate it.

[rea]

The Democrats need to take some of the things cut, like the state stabilization program, and push them through as a budget bill, which can't be filibustered (after waiting a decent interval to give these "centrist" senators some political cover) . . .

[unfrozen caveman]

Phil- you're right. it wouldn't necessarly stimulate demand. but there's no guarantee the senate plan would stimulate demand in any meaningful way either.

you should question the government's ability to stimulate demand in the first place. how will the government decide where to spend about $1T, or roughly 1/10th of estimated 2009 GDP? Isn't the cash really just going to those industries/companies with political pull rather than those industries/companies with viable business models?

and again, there's been no estimate on how many jobs this plan will create. everyone is using Moody's Mark Zandi's rough figures on how every dollar in spending creates something like 1.2 dollars in growth. but why the hell would anyone trust Moody's at this point?

[russell]

I honestly think it could be worth $100 billion to get started on path towards cooperation.

Cooperation toward what end?

Most states can't run a deficit. If they can't make their budget, they'll lay people off and cut public programs. By "public programs" I mean they will lay off cops, shut firehouses, reduce publicly provided health services, eliminate school programs, etc.

Is there any credible argument to be made that this will improve the economic situation? Or even that it won't make it much worse?

It's one thing to reach out and be open to the other point of view. It's another to make room for policies that are demonstrably harmful in the name of being "bipartisan".

[TS]

I'd just like to point out that it is also up to the states to decide to or not to cut education. Mr McCain's Arizona is, last I checked, 49th in education spending, and the state's current solution to budget problems is to cut University spending by 40%, crippling the already wounded education system here.

[Phil]

Got it, unfrozen caveman: Even though you called your plan a "stimulus solution," you can't actually describe how it would stimulate anything, and this it was irrelevant. Noted, and moving on.

you should question the government's ability to stimulate demand in the first place.

When they start posting here, I'll be sure to comment accordingly.

[unfrozen caveman]

Phil-

i'm sure you realize that increasing the supply of money available for investment is at least as important as stimulating the demand for money (or consumption).

[J. Michael Neal]

i'm sure you realize that increasing the supply of money available for investment is at least as important as stimulating the demand for money (or consumption).

Not for providing a stimulus it isn't. Investment is important in general, but completely useless in this regard.

[unfrozen caveman]

JMN- if you dispute the premise that cheap and available credit encourages investment, then there's no point in any further discussion.

[now_what]

We're not following the lessons of the (successful) recoveries of the 60s or the 80s.

No 90s recovery on the list? That's amusing.

We're not in a recession like those of the 60s or 80s. The longest recession since the Great Republican Depression of the 30s was 16 months. The current recession is in its 15th month and deepening.

This is not a normal business cycle recession. Its causes are different and its effects are, already, worse in many ways than anything since the 30s. Given all that you want to treat it like a recession from the 60s or 80s.

Why would we do that?

Second, the 80s recovery was far from successful by many measures. It did less to get people out of poverty than other recoveries, real wages stagnated, unemployment remained relatively high, and income inequality increased.

Now I know conservatives don't care about income inequality, but conservatives don't run the government any more. Hell, they barely ran it when they did run it.

[gwangung]

JMN- if you dispute the premise that cheap and available credit encourages investment, then there's no point in any further discussion.

Not relevant to this discussion, doncha think?

[TJ]

JMN- if you dispute the premise that cheap and available credit encourages investment, then there's no point in any further discussion.

No demand, no investment. No matter how cheap credit is.

Although I think your idea would be perfect for the remaining TARP money, instead of giving it to Citibank, et al.

[now_what]

if you dispute the premise that cheap and available credit encourages investment, then there's no point in any further discussion

A manufacturer has two factories. One is closed and the other running at half its capacity because lack of demand has caused the stock of inventory to shoot up.

Credit becomes available at a low interest rate. Does the manufacturer borrow to build a new factory? Of course not. The only thing will get him to do so is an increase in demand that gets rid of inventory and gets his other factories producing near their capacity.

Monetary policy in this case would be ineffective, making credit more available would be ineffective. Only fiscal policy would be effective.

[cleek]

2) Create national bank.

we could call it something snappy like "the Federal Reserve"

[Bernard Yomtov]

JMN- if you dispute the premise that cheap and available credit encourages investment, then there's no point in any further discussion.

He didn't dispute that. No one does.

The point, which has been repeated a million times, is that there is no investment, no expansion, no hiring, without demand. Demand. Customers. Buyers.

Even with an interest-free loan no one is going to start making more widgets when widgets are piled up unsold in the warehouse. The widget factory sits idle, the workers unemployed, not for lack of investment but for lack of customers.

[TJ]

we could call it something snappy like "the Federal Reserve"

Us lefty commies demand "The Peoples' Bank of Americatania."

[wonkie]

This coming home to me in a very personal way.

My state is short of money, as are many states. This is due to many factors but mostly it comes down to the loss of support from federal dollars dating back to when Bonzo the Stupid got elected, combined with rightwing demogogery over things like estate taxes which caused more reductions in revenue, combined with population growth, aging infrastructure...and so on.

So the current budget under discussion in our state house doesn't include health insurance for me. The primary reason why I have my job is health insurance. I quite literally cannot afford to keep my job if affordable insurance isn't part of the package. I will have to go back to my old job which is a prospect I dread.

But that's all about me. There is more to the situation. I provide in home health care for disabled people. Most of the health care providers are young, relatively uneducated women who would otherwise be working for the minimum wage if empoyed at all. Many could not afford to work for the minimum wage as they have kids and no way to afford day care. So without the current level of conpensation I expect that many care providers will find that they can't afford to keep their jobs.

Also many of our clients are low income people who would end up in nursing homes at public expense if care providers weren't available to provide the support that allows them to stay in their homes.

This is one expample of how supporting the state financially has a positive ripple effect throughout the state's employment situation and also an example of how the failure to use stimulus money to support the states will have a negative effect.

Of coure I understand that the stimulus package doesn't target insurance for health care providers. It doesn't have to. If the stimulus money pays for something else on the state's budget, that frees monoey up. Also if the stimulus has the effect of getting people on job payroll rolls, then more money ( not much directly as we have no state income tax) into the state coffers.

So, yeah, helping out the states is a very big deal.

[OCSteve]

To repeat the main point – state budget aid is an important stimulus.

I think I’m going to agree with you here. At least, I think that state spending is a more effective stimulus if we have to have out of control spending as a stimulus.

Plus – it’s simply unpatriotic to oppose Obama’s plan.

...Mr. Obama called Ms. Collins and Mr. Specter, as well as Senator Olympia J. Snowe of Maine, another Republican expected to support the deal, to acknowledge they were acting against pressure from their party and, one official said, to thank them for their patriotism in helping advance the bill at a critical time.

[gwangung]

This is one expample of how supporting the state financially has a positive ripple effect throughout the state's employment situation and also an example of how the failure to use stimulus money to support the states will have a negative effect.

Right wingers think the law of unintended consequences don't apply to their actions.

[Eric Martin]

At least, I think that state spending is a more effective stimulus if we have to have out of control spending as a stimulus.

Sure, we don't have to do anything really. The market fairy will fix everything. And she'll put a dollar under your pillow!

Alternatively, we could try cutting taxes for the wealthy, which, as George Bush showed us, are the perfect vehicle for delivering long term economic prosperity.

Good when there's a surplus, good when there's not. Good when there's a recession, good when not. Good in times of peace, and good when you're fighting two wars.

Magic!

Besides, it's not like the current economic crisis requires drastic action. See, it's just like all the rest!

[TJ]

At least, I think that state spending is a more effective stimulus if we have to have out of control spending as a stimulus.

After the last 8 years you really should have put a snark tag on that.

[GoodOleBoy]

I do agree that stimulus is needed. Whatever stimulus goes to states should go directly to the governors and the legislatures to decide where to spend it . Otherwise, its just the Feds spending some money in a particular state as they see fit.

Does anyone here know if the state stimulus funds go to the states unrestricted?

[Davis X. Machina]

Obama's congratulating Specter and Collins is not calculated to improve their standing within their own party.

They're out on a limb (of the crazy tree, to be sure) and he's gently sawing.

[KCinDC]

Davis, I think the limb is a problem only if the Club for Growth continues its help for the progressive agenda, and they've been indicating they're giving Specter a pass this time. If Specter and Collins have no worries from primary challengers that appeal more to the crazy base, then cooperating with Obama seems like a net positive for their reelection chances (unless the next two years go really badly, in which case incumbents may be in trouble all over anyway).

[gregspolitics]

Norm Coleman can claim responsibility for this. It appears that Olympia Snowe would have been a 60th vote if Al Franken was the 59th, but alas, he is not, and Senate rules require 60 votes (3/5) to pass emergency spending that increases the deficit if any senator (DeMented, excuse me, DeMint will do) calls for a point of order on the emergency. This is why the constant references to section 204(a) of S. Con. Res. 21 and section 301(b)(2) of S. Con. Res. 70 from the 110th Congress, but still applicable to the current fiscal year. It also seems to me that the spending cuts done are better than what Nelson and Collins originally proposed, and some more is certain to be restored in conference, perhaps in exchange for deleting the auto and housing tax provisions. After all, Nelson, Collins and Specter are now on board for the amount of stimulus and it would be hard for them not to be willing to compromise and let some of the House spending back in by eliminating these tax provisions, esp. since Obama seems to want some of it back in as well and will be pushing for that publicly next week. The House will then probably go along with the AMT fix since it really doesnt make sense in the current economic environment not to offset it with spending or other taxes this year.

[gregspolitics]

Part of the problem as well is the general state of economic ignorance&illiteracy, both in the public and in congress. As a result, too many people are scared of this much deficit spending,especially on top of the bailout $. Furthermore, much of this spending could still return in Obama's FY10 budget and the appropriations process.

[Bernard Yomtov]

Neither Snowe nor Collins is up for reelection in 2010. Collins won in 2008 by about 61-38, in a state Obama carried 58-40.

I don't think either one is close to being vulnerable, so it's hard for me to se that reelection considerations would play much of a role in their votes. Maybe there is some internal Republican caucus stuff going on that affects them.

[OCSteve]

Eric: I was essentially agreeing with publius’s point. And you, I think. You’re gonna harsh my mellow why? Habit?

TJ: After the last 8 years you really should have put a snark tag on that.

If you searched the blog, you would find somewhere in the neighborhood of 20+ comments from me berating Republicans for their insane spending and running up the deficit.

[Tony P.]

OCSteve, it's your second bit of snark at 1:06 that took another chunk out of my respect for you.

I am as cynical as anybody, and I look upon "patriotism" with the same fishy eye as I look upon "faith" with. Nonetheless, I think there is such a thing as patriotism, and doing something intended to protect your country from a threat counts as patriotism. "Our way of life" is threatened by depression more than it ever was by Saddam's WMD. Were you equally snarky about Dubya's implications, not so long ago, that "patriotism" consisted in supporting his particular proposals? Does it make any difference that the threat Obama is trying to counter does not require cooked intelligence to recognize?

--TP

[Decline and Fall]

My suspicion is that by cutting state aid, this opens the door for the right to claim that state employees lost their jobs due to the "Obama Stimulus Plan."

I can see the talking points now: "Obama and the liberal Congress have ground our economy even further down due to their reckless spending and tax increases. Thanks to the Democrats' mismanagement of the economy, there's no money left for policemen and librarians."

And then the left will say, "but that was the part some Republicans took out of Obama's bill."

If this is acknowledged at all, it will be pointed out that "many more Democrats than Republicans voted for the bill, and the whole 'stimulus' thing was the liberals' idea anyway, and Snowe and Collins aren't even conservatives so it's all the liberals' fault. That's what you get when you have tax and spend liberals controlling Congress and the Presidency. Vote Republican in '10."

[wonkie]

Re: patriotism.

Generally I don't like it when politicians claim patriotism or equate it with sup[port for certain policies.

That's because in my forty-some years of political awareness i have heard rightwingers assert that patriotism is the equivalent of support for a war. For the last eight years Republicans have been asserting that patriotism is equivalent to support of them.

So I have mixed feelings about Obama's use of patriotism. I approve of the notion that it is patriotic to support those actions which help the whole nation in the long run. On the other hand if Democrats staert runnning around equating pariotism with support for thier policies we will get to he point where the use of the word bnecomes meaningless.

Hey wait. Maybe that's a good thing.

[Tony P.]

Wonkie, I'm with you. As I said, I'm leery of patriotism myself. But I have less contempt for it than I do for hypocrisy and faux outrage. If you click on OCSteve' link, you will find this gem:

Hmm, bill opponents are not patriotic? Or are less patriotic? I know libs will line up to fret about whether Obama ought to be implicitly questioning anyone's patriotism merely for opposing a particular Administration policy.

HELP: I would be curious to see analogous examples from the Bush era. I recall the "We aren't questioning your patriotism, we are questioning your judgment" call and response and I recall a paucity of actual examples of patriotism being questioned (don't bore us with Max Cleland), but my memory is not what it used to be.

Those are the words of the blogger that OCSteve linked to. Judge for yourself whether the writer is a hypocrite, an amnesiac, or an honorable conservative properly aggrieved by what "one official" told the NYT Obama said to Collins, Specter, and Snow.

--TP

[wonkie]

Yeah, well, anyone who is "bored" by the memory of how max Cleland was treated deserves to have his/.her patriotism questioned.

[cleek]

Plus – it’s simply unpatriotic to oppose Obama’s plan.

if you listen closely, you can hear the world's tiniest violin playing a sad sad song for all the poor conservatives who think it's poor form to call into question the patriotism of your political opponents.

such a sad sad song. i cry a single tear.

[Johnny Pez]

Let’s hope Pelosi hangs tough on this.

I think you've just written America's epitaph there.

[Sam Simple]

This illustrates why a French Revolution-style uprising is needed in the United States. We have reached a point where the elected (ha-ha) politicians care more about their corporate patrons and their political parties (factions) than the American people. Time to start building gallows and guillotines on the National Mall and starting dragging these creeps out of the Capitol to face their doom.

[Michael Cain]

I'd just like to point out that it is also up to the states to decide to or not to cut education. Mr McCain's Arizona is, last I checked, 49th in education spending, and the state's current solution to budget problems is to cut University spending by 40%, crippling the already wounded education system here.

In some states, the budget makers don't really have that choice. Consider Colorado, where a bit over a billion dollars of General Fund spending has to be cut in FY 2008-09 and 2009-10. To cut that much means cutting in the "big six" areas that make up >90% of all GF spending: K-12 education, Medicaid, corrections, human services, and judicial. K-12 spending is mandated in the state constitution; the state runs relatively few optional Medicaid programs; cutting corrections means putting some seriously bad people back on the streets (in general, you have to be a seriously bad person to wind up in one of the state prisons); the biggest share of GF money in human services is for child welfare and the developmentally disabled, with very powerful constituencies; and cuts to judicial will wind up leaving more people in prison, making the corrections problems even worse.

Higher ed is the one place where cuts can be made quickly, and leave the legislators with some chance of being re-elected. Personally, I make it a 50/50 proposition that the state will abandon its four-year colleges and universities in the next couple of years. Even some of the Dems here are saying that the four-year schools would be better off if the state dropped direct financial support and removed restrictions on tuition and fees.

[Michael Cain]

...the "big six" areas that make up >90% of all GF spending: K-12 education, Medicaid, corrections, human services, and judicial.

Obviously, higher ed is supposed to included in the list of the "big six".

The world is made up of three kinds of people: those who can count, and those who can't.

[Paulie Carbone]

That post was SO cash. Do any of you guys like illegal street racing?

[Paulie Carbone]

All of you are fat, retarded, no-lifes who spend every second of their day looking at stupid ass pictures. You are everything bad in the world. Honestly, have any of you ever gotten any pussy? I mean, I guess it's fun making fun of people because of your own insecurities, but you all take to a whole new level. This is even worse than jerking off to pictures on facebook.

[mckinneytexas]

Publius claims, and most others here simply echo, that "state aid is stimulus". Seriously. And just how is this so? Can someone demonstrate how 'state aid' stimulates the economy by showing how it has done so in the past?

If massive state spending was an economic stimulus, then shouldn't California's economy be booming?

Sorry, but there isn't a state or a country that can demonstrate a causal relationship between massive government spending (deficits) and a booming, healthy economy.

Tax cuts without spending cuts produce higher deficits--this was the vice of the Bush years.

Higher taxes and higher spending will likely produce an even worse economy. Like it or not, most people are employed in the private sector. Taking money out of the private sector, reducing it by the cost of government overhead (salaries, building, benefits) and then remitting what's left to selected private sector beneficiaries is a patently ridiculous way of 'stimulating' anything. All you are doing is shrinking the private sector by the amount pulled out of it in additional taxes. And when you shrink the private sector, you shrink employment.

We are in a recession, i.e. a receding economy, which is producing high levels of unemployment. Employment will pick back up only when the economy begins to grow. Can a stimulus advocate identify a single line item in the 800 billion package--or a cluster of line items--that will cause the economy to grow and, in do doing so, demonstrate the cause and effect relationship of the line item and economic growth?

[Eric Martin]

Publius claims, and most others here simply echo, that "state aid is stimulus". Seriously. And just how is this so? Can someone demonstrate how 'state aid' stimulates the economy by showing how it has done so in the past?

State aid acts as a stimulus if there is a recession and state governments have to make massive budget cuts. Those cuts entail job losses which furthers the negative trends of the recession. Increasing state aid can forestall those job cuts at the exact time when such action is necessary.

Also, state aid can bolster aid programs and services to the lower clases, which are the best bang for the buck in terms of stimulus.

http://money.cnn.com/2008/01/29/news/economy/stimulus_analysis/index.htm

We are in a recession, i.e. a receding economy, which is producing high levels of unemployment. Employment will pick back up only when the economy begins to grow. Can a stimulus advocate identify a single line item in the 800 billion package--or a cluster of line items--that will cause the economy to grow and, in do doing so, demonstrate the cause and effect relationship of the line item and economic growth?

If government spending provides jobs, that eases...unemployment. Not really all that hard to fathom. See, ie, the New Deal and WW II in terms of pulling us out of the Great Depression.

[Eric Martin]

Try this link. The source is the extreme left leaning Moodys.

http://www.openleft.com/showDiary.do?diaryId=11354

[GoodOleBoy]

I'm trusting my memory on this but I believe charts that I have seen recently show that education costs have been increasing in recent decades at a rate higher than any other major category of expenses for households. It might be a good thing if states are forced to reduce taxpayer funding of these increases so that other things can happen, such as, taking a seriously look at why these expenses have gone up so much and alternative forms of accomplishing higher education objectives can thrive. I have not been able to get a handle on why, with all the capabilities offered by personal computing and the internet, we have not been able to slow these cost increases.

[Anarch]

If massive state spending was an economic stimulus, then shouldn't California's economy be booming?

California's economy was booming until the Enron debacle, and was still managing just fine until the combination of budgetary mismanagement -- I'd say the lion's share of that goes to Schwarzenegger, though it's not like any group in California's state government bathed themselves in glory -- and the bursting of the real estate bubble trainwrecked the joint. See, e.g., here for details.

[mckinneytexas]

"State aid acts as a stimulus if there is a recession and state governments have to make massive budget cuts. Those cuts entail job losses which furthers the negative trends of the recession. Increasing state aid can forestall those job cuts at the exact time when such action is necessary."

In other words, by keeping state employees on the job, the economy is 'stimulated.' If that were so, then the presence of state employees, kept on the payroll in face of mounting deficits, would have already stimulated the economy. It hasn't happened.

Further, you propose maintaining the public sector at the expense of the private sector. Where do you think all of the job losses are coming from? More importantly, demonstrate even one instance where a debt-heavy public spending state or country has grown its economy by doing so?

"Also, state aid can bolster aid programs and services to the lower clases, which are the best bang for the buck in terms of stimulus."

Please--one freaking 'study' untested by other economists? If Zani were right, then there would be a consensus among economists that Zani was correct. There is a much greater consensus among economists that private sector tax reductions have, in the long run, a much more beneficial impact on private sector hiring than any form of government spending. What we've seen in the last 8 years is that tax reductions unaccompanied by spending cuts produce short term growth with huge deficits which impact the strength of the dollar.

WWI is a great example of how government spending can fix an economy. Let's have a standing military of 12,000,000 personnel and a massive arms build up--just what you've been advocating in your other posts.

Eric, Publius and the OBWi Chorus ignore the private sector role, placing blind faith in government spending as the cure-all for this recession. Instead, what we are much more likely to experience with the 'stimulus' is (1) no meaningful stimulative effect and (2) a long term debt hanging over our head that severely limits future government spending.

[mckinneytexas]

I went to the OpenLeft site in which there appears a chart that states that 850 million in unemployment benefits will produce over 9,000,000 new jobs. Just think, for only $94.44 in unemployment benefits, a new job is created. Who believes this crap?

[Eric Martin]

In other words, by keeping state employees on the job, the economy is 'stimulated.' If that were so, then the presence of state employees, kept on the payroll in face of mounting deficits, would have already stimulated the economy. It hasn't happened.

This has more to do with staunching the bleeding. As I said, in a recession, state budgets get cut. That worsens unemployment and deepens the recession. It is just these types of cuts in a time of recession that led to the Great Depression. Hoover's theory - of tightening the belt in times of economic downturn - didn't fare too well.

You would have us repeat it.

Further, you propose maintaining the public sector at the expense of the private sector. Where do you think all of the job losses are coming from?

Not at all. State spending on infrastructure and the like leads to private sector jobs. Keeping money in state budgets stops job losses. It's not about prioritzation really, just smart economics.

More importantly, demonstrate even one instance where a debt-heavy public spending state or country has grown its economy by doing so?

More importantly, demonstrate how the current situation differs from the New Deal/WWII example of growing an economy through government spending. If you say, "debt heavy", explain how this makes a difference.

Please--one freaking 'study' untested by other economists? If Zani were right, then there would be a consensus among economists that Zani was correct. There is a much greater consensus among economists that private sector tax reductions have, in the long run, a much more beneficial impact on private sector hiring than any form of government spending.

Links? Cites?

Also, you fail to appreciate that this is not "normal circumstances" where typical approaches will suffice. This is a crisis. An extreme recession that needs drastic action.

WWI is a great example of how government spending can fix an economy. Let's have a standing military of 12,000,000 personnel and a massive arms build up--just what you've been advocating in your other posts.

Um, you know we could direct the spending to other areas than military. The point of the New Deal/WWII experience isn't that ONLY spending on the military can stimulate the economy and pull it out of a downward spiral.

There is nothing magic about a tank or a jet fighter that leads to special stimulative effects. Actually, spending on infrastructure can increase efficiency and productivity that can have positive effects down the road - in ways that straight military spending might not (with the same bang for buck at least).

[GoodOleBoy]

I agree with mckinneytexas, but our position is frowned on here. First. there is little recognition here that economic recessions are normal corrective processes and especially when there have been economic excesses. So the desire here is to avoid the punishment (there is not necessarily a relationship between those who contributed to the excess and those who suffer the punishment). The perception is that much of the punishment can be avoided by massive government spending. This is not true. The timing of some of the punishment and who is affected may be shifted, but it will not be avoided.

Government actions to reduce taxes, reduce spending, and reduce regulation would do more to stimulate the economy than more government spending. But most of those here see those actions as benefiting the 'evil capitalists' so they are knee-jerk opposed. Tony Abbott, former Australian cabinet minister, described it this way: why do we want to kill the chickens when we live off the eggs? we should feed the chickens.

I see too much short-term perspective and not enough recognition of the serious long-term consequences. I cannot be accused of too much self-interest here because I really don't see myself being damaged very much regardless of what action the government takes, but I project some very hard times down the road for today's young people.

[Eric Martin]

I went to the OpenLeft site in which there appears a chart that states that 850 million in unemployment benefits will produce over 9,000,000 new jobs. Just think, for only $94.44 in unemployment benefits, a new job is created. Who believes this crap?

Facilitating spending on the lower side of the economic curve (food stamps, unemployment) is the best way to pump up the demand side. That's what we need now. More demand. Because of the spending habits on the lower side of the curve, this is the best way to achieve it.

[Eric Martin]

Matt Yglesias does a good job of explaining the dynamic in this piece

[Eric Martin]

From the Washington Post today:

Philadelphia officials are leaving 200 police positions unfilled and cutting back on overtime.

Sheriff’s deputies in Polk County, Fla., are picking up more work after the state highway patrol froze hiring and four local police agencies disbanded.

And police in Atlanta are shouldering a 10 percent pay cut after all 1,770 employees and the police chief agreed to a furlough of four hours per week.

The nation’s economic trouble has hit state and local law enforcement, with two out of three large departments reporting budget cuts or hiring freezes. And at the same time, leaders at more than a quarter of the 233 departments that responded to a survey by the Police Executive Research Forum say they are noticing an uptick in property crime that they blame, at least in part, to economic unrest.

But, no, getting money to these police departments would somehow...not help the employment outlook?

Job freezes don't worsen the employment outlook?

Layoffs don't worsen the economic outlook?

Cutting down on the size of police staff during times of economic downturn won't compound upticks in property crimes?

[Gromit]

Do any of the supply-siders on this thread have any evidence that, after eight years of Bush tax cuts, our economic woes can really be blamed on high taxes? Who is tightening their belts because of taxes? Everyone I know is cutting back because of job insecurity and because their net worths have plummetted (thanks to the piss-poor regulation of the financial sector). Taxes don't figure in.

[mckinneytexas]

Eric, you support your position with a chart that is obviously garbage and when called on it, you simply assert that spending at the low end will ramp up the demand side as if the evidence you produced to prove this unproven point hadn't just been thoroughly discredited. Actually, if you give people money at the low end, they will spend it, probably until it is gone. Then, they won't have anymore money, unless you give them more. Then, they will spend it. You can give a dollar away one time, then it is gone, except for the hole it leaves in the country's future debt obligation.

Your WWII example won't work: the entire economy was harnessed for a single purpose and that was to defeat unconditionally three different countries on opposite sides of the earth. There was full employment because 9% of the freaking country was in uniform.

You cannot identify a single example of heavy government spending producing a healthy, long term economy. I can site any number of debt heavy states that do not have booming economies, beginning with California and ending with New York. France, Germanny, the UK, Sweden, etc. all spend heavily. Their economic growth is abysmal, unemployment is double digits and they all have huge, unfunded pension obligations.

You simply assert that government spending will have the effect you desire without any proof. You might as well say that prayer will do likewise. Yours is simply a different kind of faith.

Your most telling statement: "Also, you fail to appreciate that this is not 'normal circumstances' where typical approaches will suffice. This is a crisis. An extreme recession that needs drastic action."

I agree it's a crisis and I'd like to see it not become much, much worse--such as by shrinking the private sector even further for love of larger government. But crisis or no, you have no evidence, none whatsoever, that the proposed solution--your 'drastic action'-- will make the economy better, while there is clear evidence, e.g. nearly a trillion dollars added to an already bloated deficit, that very real harm will occur.

[John Miller]

mckinney, you state there is evidence that the curtrent plan willl make things worse. Please provide.

Eric pointed out the New Deal as an example of spending that helpd an economy grow.

Do you believe tax cuts help the economy? Please provide evidence. What about tax credits or rebates? If so, please provide evidence.

How does government spending which gets direct to private industry cause private industry to shrink? Please provide evidence.

[GoodOleBoy]

I certainly did not suggest that our economic woes were due to high taxes. I applaud people cutting back since we know much of the demand in our economy was financed with consumer credit at the expense of there being no savings.

I support tax cuts because I am convinced that government will always assume it can and should do more and one way to fight that is to cut off the money it needs. Now we know government can also satisfy this need through higher interest rates and increasing inflation, and the only way to avoid these outcomes is to curb the spending impulse. Does anybody here remember the late Carter years? Extremely high inflation, extremely high interest rates, and high unemployment. How did we get to that situation, pray tell? Spending was a much bigger factor contributing to negative economic outcomes in the eight years of Bush than tax cuts, just as it was in the seventies.

[Eric Martin]

Eric, you support your position with a chart that is obviously garbage and when called on it, you simply assert that spending at the low end will ramp up the demand side as if the evidence you produced to prove this unproven point hadn't just been thoroughly discredited.

Thoroughly discredited? You simply said, "no it doesn't." Your word doesn't really carry that much weight. I actually asked for cites and links. You have provided none.

Then, they won't have anymore money, unless you give them more. Then, they will spend it. You can give a dollar away one time, then it is gone, except for the hole it leaves in the country's future debt obligation.

And the money they spend will go to other businesses that can then use that money to retain workers or hire more, which will create more workers with more money to spend on more goods, etc.

Your WWII example won't work: the entire economy was harnessed for a single purpose and that was to defeat unconditionally three different countries on opposite sides of the earth. There was full employment because 9% of the freaking country was in uniform.

Luckily, we're not in the Great Depression, so we won't need to spend as much. But yeah, hiring people to do jobs for the government is what worked. That's the call for now: infrastructure spending on a massive scale.

Let's build supertrains, repair the electrical grid, repair crumbling infrastructure. Put people to work.

Unfortunately, we don't have an external enemy to focus our attention and justify the state spending. That's why people like you and I need to do the convincing. Hitler ain't around to do that for us.

You cannot identify a single example of heavy government spending producing a healthy, long term economy

Because I'm not trying to!!!

I'm a Keynesian, so I subscribe to the economic theory that says: spend more in times of recession, spend less in times of growth.

So heavy spending should be a temporary, stopgap to be adjusted as per conditions.

You simply assert that government spending will have the effect you desire without any proof. You might as well say that prayer will do likewise. Yours is simply a different kind of faith.

The proof can be found in studies of recession and spending. Keynesian economics. It hasn't, you know, been thoroughly discredited.

I agree it's a crisis and I'd like to see it not become much, much worse--such as by shrinking the private sector even further for love of larger government. But crisis or no, you have no evidence, none whatsoever, that the proposed solution--your 'drastic action'-- will make the economy better

Evidence: Hoover tried your method. That resulted in the Great Depression. FDR tried my method, the economy pulled out of the Great Depression. In fact, his New Deal was working well and then when he pulled back prematurely, there was a dip (circa 1937). Then when spending picked up again, the economy was brought out of the tailspin altogether.

That is my evidence.

while there is clear evidence, e.g. nearly a trillion dollars added to an already bloated deficit, that very real harm will occur.

What is the clear evidence?

Not saying that I disagree that deficits do real harm, but at the present, mine is the lesser of two evils.

[Eric Martin]

First. there is little recognition here that economic recessions are normal corrective processes and especially when there have been economic excesses.

Yes, but this is a much steeper recession in terms of job losses than we've seen in over thirty years.

In the past, the Fed would lower interest rates and we'd cut taxes to juice the economy. But we've already cut the interest rate to near-zero, and we've cut trillions in taxes over the past 8 years - past the point of utility.

Those tools aren't available.

Government actions to reduce taxes, reduce spending, and reduce regulation would do more to stimulate the economy than more government spending. But most of those here see those actions as benefiting the 'evil capitalists' so they are knee-jerk opposed. Tony Abbott, former Australian cabinet minister, described it this way: why do we want to kill the chickens when we live off the eggs? we should feed the chickens.

No, don't kill the chickens. No one is saying "kill the chickens." Not about helping "evil capitalists." Ferchrissakes, I'm a lawyer working and living in Manhattan taking home a pretty fat salary.

I AM a filthy capitalist. Just a Keynsian, and a fan of FDR and the recognition that filthy capitalism needs government correctives at times to keep up all its filthy good aspects.

But reducing spending right now is what Hoover tried, and it didn't work.

It never has.

Can you point to one instance in which that has worked: cutting spending during a recession to increase stimulus?

And further deregulation? We've already deregulated to the point of diminishing returns.

Do you realize what an enormous part deregulation has played in terms of the banking crisis?

The bill Clinton signed on his way out of office - the one that allowed bucket shops - was a disaster.

That would be the Commodity Futures Trading Commission (CFTC).

Not all deregulation leads to good economic outcomes. If you have specifics to propose, I'm all ears. But generic deregulation is not a solution now.

[russell]

In other words, by keeping state employees on the job, the economy is 'stimulated.' If that were so, then the presence of state employees, kept on the payroll in face of mounting deficits, would have already stimulated the economy. It hasn't happened.

No. By keeping state employees on the job, the economy is not further depressed. It doesn't necessarily fix what's broken, it just keeps more stuff from getting broken.

The government can't and won't tell private industry whether to hire or fire. It can, however, make decisions about it's own employees.

If we can get funding to the states, their folks will continue to have jobs. If not, not.

So the desire here is to avoid the punishment (there is not necessarily a relationship between those who contributed to the excess and those who suffer the punishment).

"Punishment" is, I think, a poor way to think about it. The folks who are being harmed are, by and large, not the folks who caused the problem, so I'm not sure the "punishment" would be effective, even it were desirable.

A better, more accurate word would probably be "damage".

The perception is that much of the punishment can be avoided by massive government spending. This is not true. The timing of some of the punishment and who is affected may be shifted, but it will not be avoided.

The proposition is that, by not letting the whole shooting match go down the tubes, you will preserve enough productive capacity to make up for the money spent.

Don't know if that's exactly what will happen or not, but that's the strategy.

Government actions to reduce taxes, reduce spending, and reduce regulation would do more to stimulate the economy than more government spending. But most of those here see those actions as benefiting the 'evil capitalists' so they are knee-jerk opposed.

No, folks here are opposed because the historical record seems to indicate that reducing taxes and spending are not effective ways to address the kind of situation we're looking at.

[GoodOleBoy]

Eric,

At least you agreed not to kill the chickens, but you didn't agree to feed them.

Do you really believe that Capitol Hill knows better how to spend and grow the economy than the filthy capitalists

[Nate]

von,

Since you have repeatedly said how concerned you are about the speed of the stimulus, can you tell me if you supported the original stimulus plan that was floated months ago, before the elections, while Bush was still in office? It would have had six more months (at least) to kick into gear, and already be taking effect.

If the speed of the stimulus is your primary concern, wouldn't it have been better to act then, rather than delaying until a new President came into office and forced the issue?

[Mike S]

As for chickens, the foxes were invited into the henhouse with a combination of tax cuts and deregulation. They've been gorging themselves on chickens for years, to the point of massive indigestion. The taxpayer has already been forced to fork over huge sums of money to alleviate the suffering of the poor foxes. Now the government wants to help the chickens, you know, feed them. And the economic conservatives are saying, "no, don't bother with the chickens,the foxes are already full. And besides, only foxes really understand the needs of chickens"

[Eric Martin]

Do you really believe that Capitol Hill knows better how to spend and grow the economy than the filthy capitalists

In some ways yes, in some ways no.

For example, would you say that the I-Banks and underwriters were better off with less regulation of CDOs and other newfangled securities?

I would say no.

Generally: Provide a good set of rules to guard against the forms of greed that lead to negative outcomes (market fixing, ponzi, monopoly) and other negative externalities (pollution, environmental degradation, unsafe products/medicines/foods) then let the filthy capitalists have a go at it.

And, um, we've been feeding the chickens quite generously over the past 8 years.

And with the TARP, we're providing a trillion tons of chicken feed just in the last few months.

[GoodOleBoy]

russell,

Yes, damage is a better word in my context than punishment.

I understand some think if we don't do this the way its being pushed we risk letting the whole shooting match go down the tubes, but last I checked barely over a third of America was agreeing with that.

[now_what]

Do you really believe that Capitol Hill knows better how to spend and grow the economy than the filthy capitalists

The filthy capitalists are all on Capitol Hill asking the government to spend money bailing them out after they wrecked their companies and the economy.

If that's the best appeal to authority you can come up with, it's a sickly one.

[John Miller]

GOB, did you ever hear of collaboration between the government and those "filthy capitalists"? That is what we are talking about here.

And really, why do you use the word "filthy" when discussing capitalists? Do you hold them in such low regard?

Personally, I know I and the majority of commenters here have no problem with capitalism.

[GoodOleBoy]

Well, those filthy capitalists should be out of business. But somebody is going to bail them out.

[GoodOleBoy]

John Miller,

Go to Eric's at 3:01 PM. I'm just joining him in poking fun. I think we all believe in capitalism but differ on how we see the government's role.

[KCinDC]

I went to the OpenLeft site in which there appears a chart that states that 850 million in unemployment benefits will produce over 9,000,000 new jobs.

The fact that you don't bother to distinguish between "million" and "billion" tends to undermine the credibility of your arguments. (Also, the table isn't actually suggesting that that much be spend on unemployment benefits -- only giving extrapolations for the results if the entire stimulus package were devoted to each of various possibilities.)

[now_what]

I applaud people cutting back since we know much of the demand in our economy was financed with consumer credit at the expense of there being no savings.

Personally I'd rather see the increase in savings be done through the economy growing and people saving part of that growth rather than through an economic catastrophe that rivals the Republican crash of the late 20s and early 30s.

People aren't cutting back through choice. They can't borrow against their homes like they used to because their equity has disappeared, they can't use credit cards because credit card companies are closing accounts at a record rate, they can't borrow money from banks because the banks have tightened their standards. All those things may be good things in the long run, but in the long run we are all dead and there is a way to reduce the pain of deleveraging in the short run.

[GoodOleBoy]

I saw somewhere recently, I don't know if it was here where we see a lot of numbers and stats, that something over 20 million people work for governments at all levels. I also recall that the employment numbers show that most job losses are in private sector jobs. I can also say that I have seen a lot of anecdotal evidence that many private sector employees, in order to keep their present employment, take pay reductions in one form or another.

Since a significant part of the dispute on the stimulus package revolves about state spending and state budgets, would it help our current situation if government employees, at all level, took some tolerable percentage reduction in pay and benefits as a general approach to avoid potential reductions in workforce levels resulting from the recession?

[Nate]

GoodOleBoy,

Not particularly, no. See the post over on Matt Yglesias's site about "the paradox of thrift". If the government employees all took pay cuts, they would have less money to spend, therefore would have to cut back on their individual spending, which would still have the effect of decreasing demand, since people are buying less stuff, which would hit all the private sector people those government employees would have been shopping at, which would STILL lead to private sector layoffs. It might be good on the absolute level, in keeping people from losing their jobs, but it wouldn't do anything to prevent things from getting worse. It would encourage things to get worse.

What the stimulus bill should do, and may not after all this "compromise" is to try and pump money back in to the economy now so people don't lose their jobs and houses and everything else as much as has been happening. But it should ALSO set the stage for finding a way out of the bubble economics we've been living in. Partly it should do this by investing in infrastructure upgrades and maintenance that the private sector has been avoiding while chasing short term profits. And partly it should do this by helping create and encourage new manufacturing and service methods that we can grow on. This part needs to be followed up by either something in the stimulus, or shortly after it, designed to help change the prevailing "wisdom" of Wall Street, which put short-term profits ahead of everything else, and paid CEOs so handsomely they didn't have to care about the long term status of their company, because after a year or two, they were set. And much of that wealth was determined by stock prices at the time they jumped ship.

So complaints about the size of the bill, or how everything in the bill won't kick in RIGHT NOWNOWNOWNOW miss the point. It needs to be big, because we're falling off the damn cliff now, so it's going to take a lot just to hit less hard, avoiding the cliff isn't an option any more. And if things aren't changed, and go back to what the status quo was, we'll just find ourselves back here again soon enough, only with even more of the country's wealth siphoned off to make a very few mind-bogglingly wealthy, and the rest of us even more in debt when that bubble pops.

[russell]

Do you really believe that Capitol Hill knows better how to spend and grow the economy than the filthy capitalists

I'm not sure that's the right question to ask.

The right question, IMVHO, is who is in a position to limit the damage caused to the economy.

I have my own questions about whether the stimulus bill, as written, will do a good job or a bad one of limiting the damage. I imagine it will be a mixed bag.

But the private sector is not in position to even make the attempt. Or at least, it is not making the attempt. Everybody is just clinging to whatever cash they have and waiting for the next round of bad news.

The line we always hear from conservatives is that the government should not intrude in the private economy except in case of market failure.

If what we see now isn't a failure of the market, I'm not sure what one looks like.

[GoodOleBoy]

russell,

I do truly appreciate where you are coming from but I will not agree that we have a market failure. The market has done about what I would have expected in the face of two really bad behaviors: excessive consumption fueled by unwarranted consumer credit and leverage totally disconnected from risk. Could we not see that eventually the market would correct for this.

[GoodOleBoy]

My last post does not mean that I am opposed to the government helping to provide a safety net for the needy a la foodstamps, extended unemployment benefits, and similar.

[Eric Martin]

My last post does not mean that I am opposed to the government helping to provide a safety net for the needy a la foodstamps, extended unemployment benefits, and similar.

Well, that's what a large part of the stim bill is.

Also: The market will correct certain features, and not correct others. Some regulation is needed to avoid the negative outcomes that you cited because of perverse incentives.

[now_what]

excessive consumption fueled by unwarranted consumer credit and leverage totally disconnected from risk. Could we not see that eventually the market would correct for this

Who is we?

The Bush administration couldn't see that, nor could the Clinton administration. Both allowed the financial industry to increase the amount of leverage it was using. And both failed to stop the financial industry from finding ways to evade regulation. For example, they did not apply the regulations of the insurance industry to credit default swaps even though credit default swaps are, in effect, insurance, and unregulated issuance of them has the same problems as unregulated issuance of insurance.

As for market failure, if there is unemployment, there is market failure. Free markets clear. If there is excessive inventory in housing, there is market failure. Again, free markets clear.

When markets fail, government usually steps in. When markets fail and government doesn't step in, worse things happen than government stepping in.

[russell]

The market has done about what I would have expected in the face of two really bad behaviors: excessive consumption fueled by unwarranted consumer credit and leverage totally disconnected from risk.

That's a really good point, and you are correct, the market has done about what one would expect.

I think that maybe the term "market failure" needs to be unpacked. I'm sure economists give it a specific and particular meaning, and I may well not be using the term correctly.

So, here's what I'm talking about when I say "market failure".

First, the fact that we have a situation where leverage is unconnected from risk is, IMVHO, in and of itself a case of market failure. A properly functioning market should serve to make the real risk of any investment or transaction transparent. It should also provide feedback and incentives to prevent folks from leveraging themselves far beyond their ability to make good on the commitments they've made.

The market that we call our financial system failed to do these things.

You are also correct about excessive consumption.

Our economy, generally, is heavily oriented toward consumption as the engine of growth. That's all well and good, except the growth in GDP that consumption has created has not been matched with an increase in the wealth of about 80% of the population. Not for about 35 years.

Combine that with easily available credit in the form of borrowing against home equity and lax vetting in the consumer credit industry, and voila, yes, we have a problem.

I don't mean to minimize the role of personal irresponsibility, but these other things are also factors. Our economy for the last couple of decades has been based on debt, rather than on the actual creation of value.

I think you are correct to say that what we see is the reasonable and inevitable response of the market to all of that.

So perhaps instead of "market failure" I should say "the utter hollowing out of the US economy".

In either case, the damage is real, and the private sector is either not able or inclined to provide a remedy.

So either government steps in or there is no remedy other than to let it all play out, whatever that means for the 300+ million people who live here.

Because there is no other institution capable of addressing a problem of this scale. None that I can think of, anyway.

My last post does not mean that I am opposed to the government helping to provide a safety net for the needy a la foodstamps, extended unemployment benefits, and similar.

I get that, and appreciate it.

I share your sense that it would have been better if the stimulus bill were broken up into parts, with the first effort focussing exclusively on the safety net -- foodstamps, unemployment, etc. I'd add a moratorium on foreclosures in there for folks facing hardship.

I'd also have added funding for the states in there, because much or most of that money would end up, basically, keeping the wheels on in one form or another.

The folks that states employ are folks like cops, firemen, teachers, and the like. The programs states run are generally closer to problems they're intended to address. That last is generally a conservative point, I'm surprised to have not seen it mentioned on this thread (unless I missed it). I'd be hard pressed to think of an effort that would yield better value for dollar spent than financial support for the states.

[karen marie]

states are already making cuts.

superior courts in massachusetts no longer have court reporters in civil sessions -- they laid off all the per-diem court reporters in early january, civil sessions are now recorded (with no monitoring of whether anything is audible), all the "official" reporters are in criminal sessions, and there are too few "official" reporters for all thosee criminal sessions.

i'm going to have to stop preparing transcripts for indigent criminal defendants in april because there will be no money left in the budget for the current fiscal year to cover the cost and there isn't any money for a supplemental till the new fiscal year starts in june.

but, hey, it's just our legal system, so what the hell.

[Phil]

Government actions to reduce taxes, reduce spending, and reduce regulation would do more to stimulate the economy than more government spending.

Reduce regulation? Anyone who has a memory span of more than 15 seconds who believes any of our recent problems -- of both the economic and salmonella types -- stem from too much regulation should be dragged to a bathtub with their taxes and held under until the bubbles stop coming up.

[Anarch]

Could we not see that eventually the market would correct for this.

This reminds me of an argument I read some years back about global warming and other environmental catastrophes. The gist was that the Earth's climate is a complex feedback mechanism; that we as humans lacked the capacity to destroy the earth; that life has flourished under extreme conditions; therefore, anything that humans did would inevitably be "corrected" back to a life-bearing equilibrium.

This argument is completely valid, but it misses the key point: just because a system attains an equilibrium, doesn't mean that equilibrium is a desirable one. Venus' atmosphere (approx. 850 F) and Mars' atmosphere (approx. -80 F) are both stable equilibria, but neither are good for humans. Even more temperate equilibria would be catastrophic for civilization, if not all of humanity.

The same thing is true of market corrections. Yes, a new financial equilibrium will likely be attained -- though there's no guarantee of that -- who's to say whether it will be an equilibrium that we would like?