The deal will, without question, give the economy a short-term boost.
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. . . I(Paul Krugman) believe that stimulus can have major benefits in our current situation . . .
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The actual stimulus in the plan comes from the other measures, mainly unemployment benefits and the payroll tax break. And these measures (a) won’t make more than a modest dent in unemployment and (b) will fade out quickly, with the good stuff going away at the end of 2011.
Let me start with the "sort-term" boost. The only boost I believe will be from what the economy would have been without the stimulus. The "major benefits" are only minor. Why do I say that. First, extending unemployment benefits adds no money to what is currently happening. In particular, someone who is receiving unemployment benefits is not going to spend anymore because the benefits have been extended. Further, not everyone is going to have their unemployment benefits extended. Thus the unemployed will put less, not more money into the economy. Think about it.
Next let's look at the payroll tax break. This is so small as to be laughable, less than 80 dollars a month for many. Without an increase in demand, corporations are not going to do anything.
Other measures like tax breaks for corporations will not do a damn thing. Why should corporations invest those tax breaks into anything. Corporations have excess capacity and without demand corporations will still have excess capacity. Put another way why build when there already is too much built.
Next consider state, county, city and local budgets. They are all in trouble and there have already been cutbacks. In 2011 the cutbacks will be larger, resulting people being laid off and lower wages. This in turn will raise unemployment levels which without any real federal stimulus will result in decreased demand. Then there will be another round robin of corporations laying off workers due to decreased demand. Yeah, the economy will not be as bad as if there were no stimulus, but the economy will continue to get worse.
Aggravating these problems is the perception that the US is not doing enough to deal with the debt. The answer is that the US is doing almost nothing to deal with the debt. Raising taxes on income of high earners, deep cuts in defense spending, reducing energy costs, and reducing medical costs are necessary. None of this is happening. As a result fewer people want to risk buying treasury bills. To lure people to buy treasury bills interest rates will be increased. Adjustable rate mortgages will go up. New mortgages will also suffer from increased interest rates. This will cause more people not to buy homes and the value of homes will decrease. More will be tossed out of their homes.
And then there is the debt commission. President Obama claims he wants to deal with the debt. The recommendations from the debt commission do not deal with the debt. Austerity does not work. Bottom line if any of the recommendations are followed, life will get worse.
Having said all this, Krugman is dead on target with the observation that
What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.
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The point is that while the deal will cost a lot — adding more to federal debt than the original Obama stimulus — it’s likely to get very little bang for the buck. Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.
Yet he totally misses with:
The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income.
This is what almost everyone thinks. The real root of the problem failure to adjust to a changing Economy. The economy is changing because of The Information Technology Revolution. Robert Reich captures some of this in The Future of Manufacturing, GM, and American Workers (Part I) where he writes:
For now, though, some background. First and most broadly, it doesn't make sense for America to try to maintain or enlarge manufacturing as a portion of the economy. Even if the U.S. were to seal its borders and bar any manufactured goods from coming in from abroad--something I don't recommend--we'd still be losing manufacturing jobs. That's mainly because of technology.
When we think of manufacturing jobs, we tend to imagine old-time assembly lines populated by millions of blue-collar workers who had well-paying jobs with good benefits. But that picture no longer describes most manufacturing. I recently toured a U.S. factory containing two employees and 400 computerized robots. The two live people sat in front of computer screens and instructed the robots. In a few years this factory won't have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots.
Part of the solution to the changing economy is proposed by Jame K. Galbraith in Whose Side Is the White House On?
First, it seems to me that we as progressives need to make an honorable defense of the great legacies of the New Deal and Great Society — programs and institutions that brought America out of the Great Depression and bought us through the Second World War, brought us to our period of greatest prosperity, and the greatest advances in social justice. Social Security, Medicare, housing finance — the front-line right now is the foreclosure crisis, the crisis, I should say, of foreclosure fraud — the progressive tax code, anti-poverty policy, public investment, public safety, and human and civil rights. We are going to lose these battles– get used to it. But we need to make an honorable fight, to state clearly what our principles are and to lay down a record which is trustworthy for the future.
Beyond this, bold proposals are what we should be advancing now; even when they lose, they have their value. We can talk about job programs; we can talk about an infrastructure bank; we can talk about Juliet Schor’s idea of a four-day work week; we can talk about my idea of expanding Social Security and creating an early retirement option so that people who are older and unemployed or anxious to get out of the labor force can leave on comfortable terms, and so create job openings for younger people who, as we’ve heard today, are facing very long periods of extremely aggravating and frustrating unemployment; we can talk about establishing a systematic program of general revenue sharing to support state and local governments, we can talk about the financial restructuring we so desperately need and that we’ll have to have if we are going to have a country which has a viable private credit system and in which large financial power is not constantly dictating the terms of every political maneuver.
If the above was happening, house prices would have continued to increase. People would have been able to afford their mortgages, and demand would have remained high. Of course more would still need to done, particularly in the area of negotiating new trade agreements with our trading partners; helping all nations to adjust to the new economy; and improving the standard of living world wide.
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