DKos is an interesting place. I have been around here since almost the beginning and have fought as many have fought against the excesses of the Bush administration. Bush's disrespect for the rule of law, his anti-choice and anti-worker behavior, encouragement of tax cuts for the rich and cutting of basic services, scaremongering the country into an ill-conceived war, killing hundreds of thousands of people for no reason, and the inefficacy and uselessness of the Congressional Dems in dealing with all of the above; all of these things I have worked with others on this site in my own small way to help rectify and repair.
But now, for the first time, the recent economic crisis has exposed major fault lines between me and most of the rest of the community here. I don't count myself alone here, there are other members of the site who think as I do, to a greater or lesser degree. But I/we are definitely the minority.
This diary attempts to explore these differences and discuss the stimulus and similar programs in a reality-based way, and hopefully in a respectful mutual dialogue.
First of all, I do not believe that opposition/support to the stimulus plan is a progressive litmus test. Progressives might want the same things, but discussion of this stimulus package is an empirical discussion about what effects the package will have. Those of us who believe that the stimulus package will make the economy worse, not better, are duty bound to oppose it and promulgate our views. This position is not Republican, it's not "wishing for the states / poor people / unemployed people" to fail, it's not opposing progress, or jobs, so save it. It's about what is best for our economy, long term.
Now that we've gotten the above out of the way, let's discuss the assumptions made by those who advocate the stimulus package. Assumption Numero Uno: Keynesian economics works. This is the basic assumption made by all stimulus advocates. If Keynesian economics does not work, then all people, conservatives and liberals alike, would be forced to agree that the stimulus package is a bad idea and must be scrapped. "But Keynesian economics has been proven to work!". Maybe, maybe not. Let's see.
Fundamentally, the main premise of the stimulus package is that massive deficit spending will save the economy. Proponents of the stimulus point to the New Deal and the massive public works programs started by FDR and point to the GDP growth, and note that when FDR cut the deficit in '37, the recession returned. The Great Depression is the sole example advocated by stimulus advocates. If the Great Depression is ignored, there is no modern example of successful Keynesian stimulus.
Let's consider in detail what exactly is involved with deficit spending. In deficit spending, a nation imports goods and services from other countries, based on a promise to provide greater value of goods and services in the future. Based on this fact, it is completely expected that a nation's standard of living will rise while the nation is engaged in deficit spending. Consumptive industries will stop deflating and will begin expanding again. Extra money injected into the economy will make its way around, salaries will rise, there are more goods and services available, demand picks up, voila! Problem solved, right? We've just gotten something for free. Right...?
I dislike argument by analogy, but I'll indulge this once because the analogy is apt. Deficit spending is a lot like a low-income person who gets ahold of a credit card with a $30,000 credit limit. Before, this person was just scraping by with almost no discretionary income. Life sucked. Now, with the credit card, they can live large a little while. Go on trips, buy a new computer, big-screen TV, you name it! They're living large... until they either voluntarily decide to stop deficit spending, or are forced to by their credit card issuer.
At that instant, their lifestyle plunges back below their initial crappy existence, since they have the same economic problems they had before plus a massive debt service payment! In addition, if they are on a variable-rate credit card, they are in even more dire straits, because depending on the particulars of their financial situation, staying out of bankruptcy might depend on the credit card interest rate remaining low.
So here, we can see exactly how the New Deal worked out: we had a fake economic productivity bubble brought on by deficit spending that began to collapse as soon as FDR stopped deficit spending. Then we were interrupted by World War II, which included very degraded living standards for everyone (victory gardens, rationing, etc etc). At the end of WWII, the rest of the world was flattened, allowing the US which had a massive industral base, to run huge trade surpluses, along with concurrently rising standards of living. The US got out of the Great Depression by reversing its deficits because the rest of the world was flattened.
The true test of a deficit stimulus package is whether you can ever stop deficit spending without things coming apart again. In this vein, I firmly believe that Obama will not ever stop deficit spending voluntarily, because his political future depends on reliance on deficit spending to keep the game going longer, like FDR without World War II. Barring truly catastrophic events, the rest of the world economy will continue to chug along, so the choice is to continue to maintain standards of living now with deficit spending and hope things don't come apart (what other President do we know who tried this recently?), or we take our medicine, allow deflation and systemic renormalization, and Obama probably doesn't get re-elected.
Bringing the commentary back to our national economy, we can see how deficit spending will "help" us... temporarily. However, just as with FDR, as soon as we decide to stop deficit spending, or are forced to stop (more on this in a second), our situation will be much worse than previously. Our GDP is something close to $14T, so if we spend $1T on this in a year, that's 7% of GDP. If we're at the current 2% T-bill rate, interest-only debt service on this is going to be $20 billion/year, or 0.14% of GDP. If we retire this debt over 10 years, we're costing ourselves 0.84% of our GDP over those ten years, so we end up paying 8.4% of 2009 GDP.
But, what happens if interest rates go up? What if foreign lenders decide that US debt is too risky to fund at 2% for 10-year bonds; what if rates go to 5%? Now we're paying 0.35% of GDP on top of the 0.7%, or 1.05% of 2009 GDP over ten years is ~10% of a year's GDP to pay it off! Remember that US debt is traded on an open market: a market which is the same as a credit card company in that it can raise interest rates on US debt at any time!
Barack Obama and the US Congress are not all powerful: the market's opinion of what they are doing is supreme. The market can force Obama and Congress to stop deficit spending by raising interest rates appropriately. Also, the market can force Obama and Congress to cut spending, including military, entitlement, and other spending. If interest rates rise too high, then the government will be forced to divert this money to debt service! The government will be powerless to prevent this outcome if the market decides that it must be so, and the result may be massive cuts in social security, medicare, military spending, etc.
And for those who are in the inflationista "we can just print the appropriate money" camp, well, no, we can't, for the same reason that we can't just run up debt willy-nilly. If we try to print at a 10% rate, T-bill rates will just rise to 15% or whatever to cover the debt, and since US workers have no pricing power with respect to foreign workers, the inflation will simply eat the nation alive. Then, we try to print money to cover that debt, and interest rates rise again to compensate, and so on and so on. Deflation sucks, but hyperinflationary spirals are a nightmare that often end with total government collapse and anarchy: see Zimbabwe. You can't "just print" money to deal with a situation.
So, let's summarize. Nothing is free. Money spent on anything now, including food stamps, Medicare, Social Security, warrantless wiretapping, tax cuts, the war in Iraq, hydrogen cars, high-speed rail lines, bridges, roads, state government bailouts and state employee pensions, federal pension bailouts, etc etc is all money that must be paid back and will have a greater anti-stimulus effect in the future than it has a stimulus effect today. Some of the above I support, but I support these things on their merits and with a full awareness that the money will need to be repaid, not out of some idea that "jobs need to be created".
The government exists and draws its power from the economic productivity of the private sector. Transferring economic productivity from the private to the public sector may be necessary at times, but we cannot delude ourselves into thinking that this generally is a "good" thing. For example, I support food stamps, even to the point of nationalizing food production if necessary. But I support it on humanitarian grounds, not on some idea that it will help the economy. It won't.
The proper course of thought for government programs is:
"We need X to get done. How can we do it cheapest?"
Not:
"We need some way to create jobs. Let's do project X!"
Are there worthwhile government projects that will be net positive GDP (rail, and the like)? Sure! But this economic downturn should make us less willing to engage such projects, not more, and should force us to spend as little as possible on them.
I've written a lot here and I'll stick around in the comments to discuss. I support fiscal responsibility no matter the President. I was horrified by Bush's behavior and am afraid that Obama may make similar errors. If we are wrong, we will not have a second shot at this.