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Recession ahead & The Stimulus Swindle

In These Times

At www.inthesethesetimes.com or monthly by subscription

 

February 11, 2008 By Jared Bernstein and Lawrence Mishel

Jared Bernstein is a senior economist at the Economic Policy Institute and author of the forthcoming book, Crunch: Why Do I Feel So Squeezed? (And Other Unsolved Economic Mysteries) (Berrett-Koehler, 2008). Lawrence Mishel is president of the Economic Policy Institute.

In Escape from Recession, Economic Policy Institute economists Jared Bernstein and Lawrence Mishel give readers a useful primer on the need for -- and limitations of -- a congressional economic stimulus package. As President Bush signed the bill yesterday, In These Times talked to Bernstein about the specifics of the package and the possibility of Democrats proposing further measures to minimize the effects of an ensuing recession.

1) Maneuvering by the Senate Democrats yielded what some are calling a more decent deal than expected. Would you agree?

The deal that Bush has agreed to sign this week is better than the original House deal in that it reaches about 20 million low-income seniors who would have been left out. Presumably, a) they need the money, and b) theyll spend (not save) the rebates and that will help boost consumption a bit more.

2) What proposals didn't make the final version of the bill that should have?

The package could have been a lot better. As we noted in our article, expanding unemployment insurance and investing in public infrastructure -- schools, roads, bridges, waters systems -- gets you a much better bang for the buck and could be done in such a way as to help states that are quite strapped right now.

3) There's been talk that the Democrats are gearing up for an even larger second stimulus plan, one that could include revisions to the tax code. Is that likely to work its way through Congress or is it a political gambit? If it does, could it help minimize the effects of the ensuing recession?

I've not heard anything regarding tax code revisions. Remember, stimulus is by definition temporary, and while our tax code could use some revamping (which it may well get if the next President is Clinton or Obama), it doesn't make sense to do this in the context of stimulus. I do think that Congress will go back to some of these issues if the economy remains weak and unemployment is rising by late in the year, especially if there's evidence that lots of folks are using up their 26 weeks of unemployment insurance. If that happens in enough places, look for an extension to UI to pass later this year.

Click here to read Escape from Recession from our March issue.

Senior Editor David Sirota touched on the same subject in his recent column The Stimulus Swindle. Sirota ponders why a package to energize our sagging economy took so long to surface in the first place.

 

 

 

The Stimulus Swindle  --  David Sirota

 

“Stimulus” — you’ve probably heard this nebulous, scientific-sounding word this week. Every politician suddenly wants economic “stimulus,” and wants you to think this “stimulus” is unequivocally good.

But here’s the question: Why are we talking about “stimulus” only now? After all, most people have been hurting for quite a while. Paychecks have been stagnating, foreclosures have become commonplace, health care premiums continue their double-digit increases — and up until recently, conservatives greeted such hardships with saccharine fantasy.

Following government reports showing a surge in income inequality, Treasury Secretary Hank Paulson last year gushed that the economy is “as strong as I have seen it in any time.” In the summer, as the housing crisis exploded, President Bush said the economy was “thriving.” This month, as the Labor Department reported another drop in wages, Republican Rep. Michele Bachmann (Minn.) said not to worry, her state is doing just great because “we have more people that are working longer hours, we have people that are working two jobs.” And with word that there are now 195,000 homeless veterans nationwide, Bill O’Reilly insisted on Fox News that really, “there’s not many [homeless veterans] out there.”

Message: Nothing to see here. The economy is fabulous. Move along.

Lately, though, the rhetoric has switched. Paulson now says there is an “urgent need” for action, and President Bush is demanding a “stimulus” package from Congress.

And that gets us back to the critical question: Why the sudden shift? Because the group demanding help has changed.

Before, it was just commoners complaining — regular homeowners, wage earners, troops coming home from Iraq, you know, the 99 percent of us who can’t afford the thousand-dollar-a-plate political fundraisers.

But now Wall Street is panicking. In the last month, the financial industry’s profit margins dropped thanks to mortgage defaults brought on by irresponsible lending. And when the corporate executives who underwrite campaigns start whining, politicians develop “stimulus” schemes using the blight of layoffs, foreclosures and wage cuts to justify tax cuts for those doing the laying off, foreclosing and wage cutting.

Specifically, most GOP presidential candidates are demanding corporate tax cuts as the “stimulus” to improve American competitiveness, ignoring a recent Treasury Department report noting that the United States already has among the lowest effective corporate tax rates in the developed world. Republicans like John McCain, fresh off a Merrill Lynch fundraiser, say we need not expand unemployment benefits and food stamps to help workers and give the economy a reliable Keynesian boost. No, they say we must hand over more cash to the same financial industry that just gave its executives $39 billion worth of year-end bonuses.

Leading figures of both parties seem eager to help limit the debate over “stimulus” and make the final package a corporate goodie bag. According to the Washington Post, Democratic Sen. Max Baucus (Mont.) asked economists affiliated with The Hamilton Project — a Citigroup-backed think tank — to testify to Congress at its initial hearings on a stimulus package. Labor economists, by contrast, were not invited.

You might think Citigroup’s central role in creating the current financial crisis would disqualify it from influencing legislation addressing that crisis. But remember, Citigroup gives lavishly to Democratic politicians and pays Democratic financier Bob Rubin roughly $10 million a year as a top executive.

Not surprisingly, congressional Democrats appear poised to support a package stripped of increases in safety-net programs and comprised primarily of business tax cuts. This, even though experts agree the former would have an immediate economic impact and the latter will take at least six months to hit. As usual, We the People are told to wait patiently as moneyed interests claim their latest gift from Washington.

President Bush is undoubtedly pleased. He said he wanted “stimulus” built primarily on tax cuts and no new public investment — more proof of his desire to win the Most Out of Touch President title from Herbert Hoover (at least Hoover proposed new infrastructure with the tax cuts he claimed would prevent the Great Depression).

Let’s be clear: There’s nothing inherently bad about Washington interacting with Big Business, and nothing conceptually wrong with “stimulus” as a concept. But as this recession intensifies, there’s a big problem with politicians catering exclusively to Big Business and an even bigger problem with converting “stimulus” into yet another code word for “swindle.”

David Sirota is a senior editor at In These Times and a bestselling author whose newest book, "The Uprising," will be released in June of 2008. He is a fellow at the Campaign for America's Future and a board member of the Progressive States Network -- both nonpartisan organizations. His blog is at www.credoaction.com/sirota.

More trickle down shit from the NEOCONS: 

The right wing has continually made the argument that the 2003 tax cuts were the primary driver of the current recovery. Powerline's John Hinderacker is the latest pervayer of this myth:

From Huffington Post, Sept. 18,  2007

 

The stock market is at record highs, unemployment continues at historic lows. What's not to like? Of course, one can always question the link between prosperity (or the lack thereof) and government policies. But in President Bush's case, it seems pretty obvious that his tax cuts prevented what could have been a disastrous downward spiral. At a time when our economy was subject to the double-whammy of recession and the bursting of the tech bubble, the terrorist attacks of September 11, 2001 could easily have sent the economy into a tailspin.

The problem with this statement is it gives no mention of the effects of interest rate policy on the US economy. As I will demonstrate, record low interest rates were in fact the primary driver of this economic expansion, not the 2003 tax cuts.

 

 

 

The chart above is from the Federal Reserve of St. Louis and it is a chart of the effective Federal Funds rate. This is one of the interest rates the Federal Reserve can directly increase or decrease at the Federal Open Market Committee meeting. Notice the Federal Reserve started to aggressively cut the effective Federal Funds rate on January 3, 2001 when they cut the rate from 6.50% to 6%. They continued to cut the rate aggressively for the remainder of the year. The rate dropped to 1.75% on December 11, 2001. There is a standard economic proposition that it takes 12-18 months for interest rate cuts to move through the economy and have their maximum impact. Under this logic, the interest rate cuts would have started to have a complete stimulative effect in the first half of 2003 which is exactly when the US economy started to grow at a decent rate.

Why is there a lag time? There are several reasons. The first is consumers like to wait and see if the drop in rates is a permanent change in Fed policy or a one time event. In order to ascertain the Fed's real policy intentions, consumers need to see more economic data which takes awhile to come out. There is also the issue of when the Fed usually cuts rates. This usually happens when the economy is already slowing or when there is a perception the economy will slow. When this happens consumers are simply more risk adverse and are less likely to take out a loan.

However, the total amount of mortgage borrowing that has occurred as a result of record low interest rates is clear from the following chart.

According to the Federal Reserve's Flow of Funds total household mortgage debt outstanding has increased from $5.325 trillion in the fourth quarter of 2001 to $10.143 trillion in the second quarter of 2007. In other words, US households have almost doubled their mortgage debt outstanding during this expansion. Econ 101 explains the reasons for this massive increase in debt: when the cost of a product is low, people buy more of it. Interest rates are the "cost of money" -- the amount it takes to borrow funds.

When you add that much money to the economy, it is bound to grow. It's that simple.

So, no John, the tax cuts had jack to do with this expansion. Record low interest rates had everything to do with the latest expansion. Anyone with a economic knowledge knows this. Of course, that would imply you have economic knowledge.

 

 

There are two graphs in economics, interest-rates—00-07, & householdmorgagedebt-00-07

People have an inability to do very fundamental things in their own interest.  Four glaring examples are obesity, tobacco smoking, recreational drugs, and financial brinkmanship.  Companies and financial organizations exhibit the same type of stupidity.  Thus we have the herd mentality which produced the S&L collapse, the internet bubble, and on the micro leave Enron, and World.com.  Government knowing these weakness and responding (when it acts as a mediator and promotes the public weal) will intervene to reduce harm.  We have nets such as social security and medical, and for big business there are regulations which help to reduce political activism among the masses.  But when corporations buy political clout, it is like an alcoholic buying a bar.  Neocons and their fellow travelers (the Democrats) have produced great economic peril--jk. 

Neoliberals have cooped democracy, and at the head of this is the financial community.  Don’t be fooled by the rhetoric, the system is about profits.  It aint the words or legislation, but actions which reveals the shadow government.  As Aristotle observed:  “A democracy exists whenever those who are free and poor are in sovereign control of the government:  an oligarchy when the control lies in the hands of the rich and better born.

For the best account of the Federal Reserve  (http://www.freedocumentaries.org/film.php?id=214).  One cannot understand U.S. politics, U.S. foreign policy, or the world-wide economic crisis unless one understands the role of the Federal Reserve Bank and its role in the financialization phenomena.  The same sort of national-banking relationships as in our country also exists in Japan and most of Europe. 

 

These International bankers and Rockefeller-Standard Oil interests control the majority of newspapers and the columns of these papers to club into submission or rive out of public office officials who refuse to do the bidding of the powerful corrupt cliques which compose the invisible government -- Theodore Roosevelt, New York Times, March 27, 1922

Teddy Roosevelt's advice that, "We must drive the special interests out of politics. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains."