What's the other side's plan, again? by mattsteinglass
November 7, 2009, 9:52 pm
Filed under: Economics

Here’s an unexpected statement from Megan McArdle:

To me, unemployment is a far more important indicator than GDP.  Given how rich America is, the misery from losing a job far outweighs a few percentage points of variation in incomes.

I agree. That’s why we need more government stimulus spending, ultimately paid for through higher taxes on rich people after the economy recovers. If Megan has a better idea for increasing demand at a time when consumers’ and businesses’ propensity to spend has collapsed, I haven’t seen it.


6 Comments so far
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McArdle is right about the problem and it depend who the other sides. I think the plan might be to hope dead, Austrian economists can be more popular with the electorate than they were with living economists.

But I’m not sure about your plan. We can absolutely afford to raise taxes on the rich to a not-unlimited extent but I don’t think we can afford to tax the rich every time the house wants to do something. We can also use some more stimulus but I see two problems with that: For one, I’m not convinced we do that well. For another, temporary government stimullus creates jobs that won’t last and foster skills that may not be valuable in two years, while private sector jobs created today might be more sustainable and do better enriching lifetime earnings.

If the government wants to commit to something durable like transportation improvements or the electric grid and start now, that seems like a better, though smaller, form of stimulus than the last bill.

Comment by citifieddoug

I think that stimulus efforts should focus on shoring up state budgets against cuts; education, particularly protection against cuts (since that requires no complicated planning); and, finally, infrastructure and green-energy investments. Declaring long-term plans for raising investment in the latter would boost business confidence in sectors that we know are going to have to grow anyway. And cuts to state budgets and education spending aren’t happening because of rational restructuring of the economy, they’re happening because there’s a recession and we don’t have the money to do a lot of things we ought to be doing to invest in the future.

I agree that we should try not to spend much on protecting dying industries, and that our capacity to borrow from future rich people is not unlimited. But I think when we’re talking about savaging the California state university system, that’d be a place where we could spend with a high, rapid multiplier that would also pay off as an investment in the long term. For example.

Comment by Matt Steinglass

You caught me by surprise. I spend a lot of time in Sacramento between January and July watching the state budget develop. I watch the Republicans take moral stands they don’t understand and can’t articulate, like zombies hungry for tax relief, having lost their appetite for brains. And I watch Democrats start to talk about bipartisanship and then blame Republicans for the fact that Californians don’t work hard enough to provide funding for prison guards and other sick and unfortunate creatures. And when I hear about stimulus to make state budgets whole, I cavil because I fear the federal government will commute the only sentence capable of concentrating the minds of our leaders. But you’re right- making whole the state university system would help in both the short and the long-term. OK.

Comment by citifieddoug

Sorry Matt, FDR tried that during the 1930’s. It only prolonged the Great Depression.

Comment by scammaj

Three issues here i’d like to discuss.
First of all, deficit government spending has not been seen to benefit the economy; as the value of the dollar is not fixed to anything, the more the government spends, the more money it effectively creates, thus making all money worth less. The government can disguise and delay this effect somewhat by using the world market (aka the buying/selling of Chinese bonds), but in the end, those bonds must be collected.
Secondly, taxing the rich might seem like a great idea on the surface, but think for a moment about who you work for, and how your business got started. Chances are it got started by some rich guy with some capital. I, for one, would rather leave money with ‘some rich guy’ who, acting in his own self interest might create a new company to make even more money, rather than take that money away to be spent on LCD screens in some random government office.
Thirdly, the federal government interfering in state budgets is the last thing that need to happen. If the federal govt. wants to increase the amount of money that the state govts have, then all they need to do is give the American people money. They will spend it, thus giving the states more tax revenue. I can only imagine the type of bill that would result from attempting to fund the state deficits federally. “10Billion in funding for the state of California,2 billion to build roads in Witchitaw, 3 billion to the Humane society of Portland, and so on.” If you honestly don’t believe that this would happen at the federal level of govt, you need to read the bank bailout bill (100bil. just thrown in for kicks) and have a serious reality check on the state of American politics.
(On second thought, rather than waste your time reading that bill, you might as well get started reading the 1900 pages of the house health care bill. Now just imagine a bill like this, multiplied by 50.)

Comment by josephstrife

joseph, this claim about how government spending works is really not true, as you’d realize if you thought it through:

“as the value of the dollar is not fixed to anything, the more the government spends, the more money it effectively creates, thus making all money worth less.”

First of all, you’re confusing government spending with monetary expansion. They’re different.

Second, what you’re saying here would only be true if GDP were fixed. But we know that it’s not, and especially not when we’re in a situation where the economy has lots of unused capacity, as it does in a recession. When government spending leads to the employment of otherwise unused capacity to create real goods with real value, then, yeah, there’s more money flowing around, but that’s because it’s buying more stuff. And that doesn’t push up inflation at all. In other words, if the government spends an extra $40,000 and that means workers keep their jobs and build 2 more $20,000 cars, you don’t have inflation. The same thing is true if the mechanism is that the government sends out unemployment checks worth $40,000 and the individuals who receive them spend $40,000 on two new cars, allowing those auto workers to keep their jobs.

Basically, you’re laboring under the misunderstanding that government spending and debt are categorically different from private spending and debt. In most ways, they’re not. When businesses borrow money and spend it, that creates credit growth, the same as when the government borrows money and spends it. It drives economic growth when government does it, just like it does when business does it. It doesn’t necessarily lead to inflation in either case, unless the rise in spending goes faster than the rise in productivity. But with productivity growth at astronomical levels right now, the government could spend vastly more money without any risk of triggering inflation.

Comment by Matt Steinglass

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