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August 24, 2010

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this is gonna be good

In practice, that means the stimulus plan is the main reason the U.S. economy grew during the second quarter. The Commerce Department estimates the economy grew 2.4% in the second quarter, a figure most economists expect to be sharply revised lower in a report due Friday.

I'm not quite sure what to make of this statement. How sharply? Half a percentage point? Two and a half percentage points?

I am going to make a distinction that isn't really discussed anywhere else I can find, so I have no cite. I think these numbers reflect the fact that government spending has, and can, support the economy while not stimulating it.

The government continues to spend the stimulus money with somewhere between 50 and 33% left to spend depending on the source. This money certainly is supporting the economy. What I haven't seen is the stimulative effect beyond that support.

In reviewing the last few months earnings report it was noted time after time that earnings had improved while the top line was still lagging.

Companies have adjusted to the "new" normal and cut jobs and other expenses to make profits, but they are not investing in new employees and capital expenses to support growth.

The cash for (whatever) programs are gone, perhaps causing a trailing downturn for both cars and housing.(cite

I am not really complaining about the stimulus, I believe it has done as well as could be reasonably expected. I just think the low end of the CBO estimates are probably more accurate and it is providing support without the multipliers we had hoped for.

A key indicator, IMO, lies in the recent uptick in acquisitions, that seems to be the only place companies are spending their pent up cash. This is a way for companies to increase the top line, take out more costs to strengthen the bottom line while not using the money to invest in growth that they don't anticipate. When HP and Dell are fighting to spend several billion dollars of cash to buy 3par it is because they don't have anyplace they think that a several billion dollar investment will create organic growth, which is what we need.

Organic growth depends on demand.

Demand depends on ordinary people having money to spend.

Ordinary people having money to spend depends on broad-based employment, secure jobs with adequate pay.

Jude Wanniski was wrong.
No matter how much supply-side stimulus is applied, no matter the incentives provided to so-called "producers", demand is required for real economic growth.

As long as the real unemployment rate is over 15% (and it is), the economy will continue to go sideways or down.

Marty is correct to distinguish "support" and "stimulate". Most simply put, a LITTLE government spending supports, while LOTS of government spending stimulates, the economy.

And by "spending", I mean buying things and hiring people. I do not mean giving small tax cuts to people who have small incomes and large debts, or large tax cuts to people with huge incomes and nothing better to do with their money except buy up existing companies.

--TP

I think these numbers reflect the fact that government spending has, and can, support the economy while not stimulating it.

what are your definitions of "support" and "stimulate".

because it seems to me that a short term stimulus which is unable to overcome deep, fundamental, problems will be indistinguishable from short term support.

This is a way for companies to increase the top line, take out more costs to strengthen the bottom line while not using the money to invest in growth that they don't anticipate.

Without growth, capitalism dies. Companies acquiring each other does nothing for growth. Thus the private sector is currently not interested in the slightest in growth.

Discuss.

"because it seems to me that a short term stimulus which is unable to overcome deep, fundamental, problems will be indistinguishable from short term support."

This is true, but it is the distinction I am making. Short (or long) term spending that doesn't overcome the negatives in the economy is simply support. It has an impact on GDP this quarter but can't create the multiplier effect necessary to be stimulative.

Following blocked text were random thoughts spurred simply by TP's comment that I decided not to delete:

Tony is half right, and probably more than half right, except that in an economy that is as heavily weighted toward services as ours it is hard for the government to directly buy enough to impact overall GDP.

So, except for large construction projects, it is hard for them to directly impact the highest unemployed concentrations and, it is not clear, to me, that the government can actually spend enough more money on value added things fast enough to impact the economy.

The primary benefit of general tax cuts (let's exclude everyone that makes earned or unearned income greater than 250K so we avoid that argument) is that you get lots of people spending money on lots of different things. Both the direct and psychological impact is felt by a broader range of people faster.

I appreciate, and agree with, the point that we shouldn't be giving tax breaks to large corporations, they have cash and aren't spending it anyway (maybe a tax cut for large scale hiring). What we need is to convince them to spend it because everyone else has the money to buy their stuff.

What we need is to convince them to spend it because everyone else has the money to buy their stuff.

Interesting.

Either (a.) These corporate hoarders are acting irrationally since the demand for goods and services is actually there despite all evidence to the contrary; (b.) Markets are irrational since supply and demand are there, but somehow the price mechanism is broken; or (c.)Your whole premise is simply wrong.

Give me "C" for $300, Alex.

It has an impact on GDP this quarter but can't create the multiplier effect necessary to be stimulative.

can't or didn't ?

So, the stim produced something between X and Y according to Tuesday's numbers but we expect those numbers to be chopped on Friday, and this is evidence the stim worked?

or D you have no clue what I said.

If you create demand then you convince them there is a market to invesst in, or did you miss the whole "primary benefit of general tax cuts" part of demand creation?

cleek,

in this scenario: "Short (or long) term spending that doesn't overcome the negatives in the economy is simply support"

it can't.

Oh hey, I have an idea! Instead of shoving money through the same banks that crashed the economy, and are just sitting on it or using it to buy up their competitors now, how about the government just takes a whole bundle of cash, hires a bunch of unemployed people, and puts them to work doing work that needs to be done, but corporate execs and investors don't think will meet the level of return on investment they want.

Replace water and sewer pipes, fill potholes, pick up garbage, clean out invasive plants, teach schools, run state parks, paint buildings, put on plays in empty storefronts. Basically, the WPA. Because when we have work that needs doing, and people who need work to do, we don't have two problems, we have one obvious solution (to steal a line from the Slacktivist). But of course that's Socialism!!!one!

I have to back up Marty on the demand question, bobbyp. I think the point is not simply to convince firms that there is demand where there isn't, but to induce demand that firms will recognize and act upon.

But, Marty, I don't think it's a question of the multiplier so much fundamentally changing the economic conditions. The multiplier can exist within the context of short-term gains that don't continue beyond the stimulus. It's just a matter of people working and spending their money, supporting other people's jobs and income and so on. That can be as temporary as the stimulus, but it's still a multiplier.

What we need is value creation in the form of public goods that create a fertile environment for private enterprise to produce futher value creation in the form of private goods (if I'm not just making up my own terminology).

So, the stim produced something between X and Y according to Tuesday's numbers but we expect those numbers to be chopped on Friday, and this is evidence the stim worked?

Not all the evidence, but a portion of it, yes. You can read the report for the rest of the evidence.

the stimulus plan is the main reason the U.S. economy grew during the second quarter

This could be true regardless of the actual rate of growth. And that is being asserted by the CBO.

Also, employment.

"But, Marty, I don't think it's a question of the multiplier so much fundamentally changing the economic conditions."

hsh,

I agree with this except that the multipliers are greater when the initial spending is broader. The second or third tier effect is like the diminishing wake from a rock thrown in the creek, the more rocks thrown the more area those wakes cover creating greater sustainability of the water in motion. One rock, one wake, diminishing quickly, leaving large portions of the water essentially untouched.

I think we agree after all, Marty.

The stimulus is supposed to 'prime the pump', not lift the whole economy. It's up to the business sector to man the pump handle. They aren't pumping, in fact they are de-priming the pump by continuing to shed jobs.

the government needs to do more to "stimulate" the economy. what it's currently doing is simply trying to prevent it from getting worse. the government needs to put even more money into the economy.
Not only do they need more money, but they need to divide the distribution of this money as well.
"trickle down" ( giving money to big corporations whick trickles down to the workers, which in turn these workers may buy things) but often, i believe that the money doesn't always "trickle down" how you want it to. and that the "trickle up" ( giving money to the citizens/workers which in turn they buy things from the businesses.) is much more effecient, because lets face it, people with money LOVE to spend it. it ensures businesses will recieve their share from the "trickle up" method. However, i do believe that maybe 25% of stimulus money should go to businesses for "trickle down" and 75% of stimulus money going to workers for "trickle up".

thats just my two cents. (:

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