I am writting this because I feel deeply about our nation and what are country to become the country it should be: a nation of opportunities for all Americans. In this moment our economy is in the midst of an economic disaster which has only been surpassed by the Great Depression. That Great Depression can be repeated if government does not take action right now. For that reason we need Barack Obama to understand that he has the votes in the House and in the Senate to get the best plan out there passed.
Update: What I mean by no compromise is having a stimulus package of the highest amount possible and a middle class tax cut in it. Nothing more. Republicans are the ones who need to compromise in the part of the spending. The middle class tax cut was an Obama's promise. Just think about it, how can moderate republicans who face elections in 2010 will explain their constituents that they voted against tax cuts?
Second update: Some democrats are already saying that it needs to have less tax cuts and more gov spending. Thank God for the good democrats out there who are telling Barack Obama that we got the mandate for change and republicans better compromise.
Right now discussion of the plan Obama proposes calls for 775 billion of stimulus, divided in 300 billion for tax cuts and 475 for government spending for 2 years. In other words 40% of the plan is tax cuts and 60% is gov. spending. This plan has many weaknesses.
- Too much of the plan is tax cuts. During the last 8 years we have experienced the philosophy of tax cuts from the Bush administration. We have seen how most of the money given is not SPENT BUT SAVED. Nonetheless, in the Obama plan he proposes a middle class tax cut among his tax cut plans. This idea alone is important for it to be in the plan since our middle class is struggling paying the high costs of living. Nonetheless all the other tax cuts for businesses he proposes are either innefective or just too expensive to regulate.
- Tax cuts do not stimulate the economy as much as gov. spending. According to Dr. Krugman a tax cut has an "overall multiplier on tax cuts is 1.". What this means is that for every dollar given in tax cut our government gets 1 dollar back. This of course occurs only if the dollar in tax cut is spent, but most is not. He even mentions that "business tax cuts, which make up the rest, are much less effective" ( than a multiplier of 1)
- The area of spending proposed in his plan is too small. According to Dr. Krugman which examines the Okun's law, which is basically the relationship between unemployment and real GDP. That law states that when real gdp grows 2-3% unemployment goes down 1%. As Krugman states
Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.
Evidently, he also mentions that the multiplier for government spending is 1.5, which means that for every dollar of gov. spending we get 1 dollar and 50 cents in stimulus.
When you combine both the Okun law with the multiplier effect you understand by simple math that the stimulus plan of Obama will not be very effective.
If you calculate: 300x1+475x1.5= 1012 billion in real GDP in 2 years or 506 billion a year.
Evidently, economic calculus suggest that the economy if nothing is done will get from 9%-10% unemployment rate. Lets take the worst option and assume it is 10%. If we follow the Okun's law unemployment will lower 1.68% in 1 year which would make it 8.32% unemployment.
8.32% unemployment is higher than it is right now. Do we want Obama to be blamed by republicans with the phrase gov spending doesnt work, we were right the stimulus needed to be 100% tax cuts. No, we do not want that to happen,
specially when we have a majority in both houses and we only need 1 republican vote to get to 60 in the senate. We got a mandate for change and this stimulus package will be more than a test to see if we can get our economy on tract but a test to see what policies work better and more effectively. We need to prove Americans that gov spending is not evil but the best and most efficient way to not only create millions of jobs but also to put our economy in the level of real unemployment which is 5%.
If we want our economy to reach maximum potential we need to invest at least 1.5 trillion in gov spending, because 300 billionx 5 =1.5 trillion. We also need to keep those middle class tax cuts a campaign promise.
I leave you with what Dr. Krugman says: it is better to spend more than to spend less.