Obama Reverses Rules on U.S. Abortion Aid
As mentioned in a prior post, giving women control over reproduction leads to peace on earth. Well done!
Day four also included work on the next federal stimulus to improve the economy. Rachel reported that President Obama will now be receiving daily economic briefings in addition to his daily intelligence briefing. Nice to know the POTUS is paying attention.
What continues to annoy me is the lack of agreement among economists about what measures will work.
My main sources of economic news/education come from Greg Mankiw's blog and Safe Haven. Mankiw is a Harvard economics professor who worked in the Bush administration. He links to articles across the political spectrum and has a disarming sense of humor concerning his profession. His own economic prescription is sometimes hard to discern, as Krugman points out, but it is safe to say that he is big on tax cuts.
Safe Haven is a nexus of doomsdayers, skeptics, and gold hoarders, the most celbrated contributor being Peter Schiff, famous for predicted the current global economic disaster. If you read this site, you will find those that believe hyper-inflation is in our future due to the recent gigantic increase in the US money supply, that the housing crisis had its roots in the early nineties when congress/HUD interjected politics into the mortgage business by mandating "affordable housing", and that the demise of the US auto industry is due to auto workers with a undeserved since of entitlement and auto execs in pursuit of perks with little regard for consumers or the competition.
So what comes of all these economic readings?
When one considers a financial stimulus, one must think ahead to what is to be improved. Economists and government officials who wish to improve the gross domestic product and the employment rate tend to favor government spending. This is because the formula for GDP is
GDP = consumption + investment + gov spending + (exports - imports)
As people are not consuming, companies are not investing, and our trade balance is negative, the only way to up the GDP is through government spending. To the extent that said spending creates jobs, then employment data is improved, and that is something that looks good on the news.
People that are looking to improve their net worth tend to be for tax cuts, as this is personal. Anyone who has taxable income will benefit, and to the extent that the cuts extend towards lower incomes, more people benefit. There is no telling what people will do with their recovered taxes, but the expectation is that some of it contributes to the consumption part of GDP.
Economists frequently mention multipliers, that is, the way when a dollar is spent, the recepient of that dollar then spends it again, and so on. The problem seems to be that economists don't really know what the mulitpliers are for different scenarios and spend a lot of time discussing methodology. This is an important issue because huge economic decisions are made based on whose numbers you believe. It appears that all must be taken with a grain of salt.
The bottom line for me is that bad (perhaps unintended) consequences happen when government tries to save us all from financial doom. Somewhere I read that the seed of our current financial crisis, as it relates to Wall Street, occurred when the Federal Reserve supervised the bailout of Long Term Capital Management, a hedge-fund that was considered too big to fail. This created a huge so-called "moral hazard", that is, an incentive for people to behave in extremely risky ways because the upside is huge and the downside is tempered by the promise of a bailout. The probability of a bailout increases with the amount of money you owe to others, so you are motivated to assume even more risk (debt) in an attempt to become too big too fail.
In hindsight, the proper role of government should be to let people experience the full consequences of risky behavior, while enforcing regulations that protect the regular investor.
Last I heard, the next phase of the stimulus will be a mixed bag: some tax cuts, some funding of local and state budgets, and some public works (17%). So there will be a little for everyone and know one knows if it will really work, but everyone knows that my childern and grandchildren will be paying for it.
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Thanks for this post - I often find myself at sea in financial writings, and you've done a great job of explicating basic concepts here while not attempting to gloss over complexities. I look forward to further financial posts.
ReplyDeleteThe stimulus package as it stands is full of items that can't be classified as a "quick jolt" to the economy - I know most about the education section, which includes many programs that I think are best qualified as long-term investments rather than what we would normally consider a bail out. Can't wait to hear what you think about the final deal.