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Why the Stimulus Plan Won’t Work: Part 2 February 2, 2009

Posted by neoavatara in Politics.
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So, my piece on the likely failure of the stimulus plan has been one of my most popular posts ever.  But I wasn’t able to cram everything Iwas thinking, so I thought I would add to it today.

1. The New Deal – I talked about it extensively in the previous piece.  The Wall Street Journal has an excellent editorial today that ironically agrees with many of my thoughts.

People mistake FDR’s New Deal as an economic stimulus plan.  It was nothing of the sort. It was purely a jobs program.  Now, even in historical perspective, it is fair to say that FDR had little choice but produce jobs programs when unemployment was 25%; the survival of the nation was at stake.  But don’t confuse this with an economic revival program.

The number of people overall working during the New Deal had increased versus 1932.  But the total number of hours worked by individuals DECREASED.  The WSJ Op-Ed points this out nicely.  So what does that mean?  It means, as a whole, America was less productive as a nation under FDR.  In other words, we had more jobs, but our actual production level did not keep pace, i.e. there was little or no economic growth outside of the government.  And this is true even if you take 1939, 7 years after FDR came to power, versus 1932.

Per capita consumption (how much each person spent on their own) remained 25% less in 1939 than in 1929.  So how much economic recovery did FDR really provide?  Here is a key passage in the WSJ editorial:

Why wasn’t the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal. Productivity grew very rapidly after 1933, the price level was stable, real interest rates were low, and liquidity was plentiful. We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936. Similarly, Nobel Laureate Robert Lucas and Leonard Rapping calculated on the basis of just expansionary Federal Reserve policy that the economy should have been back to normal by 1935.

So what stopped the economic recovery? The irony of all ironies:  The New Deal itself! The new deal increased the welfare state as needed at the time, but it inherently prevented the openess and growth that is necessary for the free market to thrive.  Competition was limited; the labor force was tightened (it was much harder to fire and hire people); price and wage controls.  And worst of all was the he National Industrial Recovery Act (NIRA), which tossed aside the nation’s antitrust acts, and created virtual mini-monopolies through out the economy, virtually stifling any new business in those protected fields.  The NIRA was eventually ruled unconstitutional, though the basic principles continued even after court case concluded.

So what does this tell us about today?  Government sometimes must expand to provide basic support services.  But overextension of government can sometimes be the cause of more pain.  The New Deal rescued millions in the short term, but lengthened their pain over the entire decade of the thirties.  Maybe it was necessary for the crisis at hand.

The question that now begs to be answered is, is the huge government intervention going to slow or quicken the pace of economic recovery?  Will it decrease or increase the severity and length of the pain from the recession?

Some will ask what my solutions are.  Well, I have an entire post dedicated to the subjectBut ultimately, what the New Deal teaches us is that government can provide a safety net, but in the end is very poor at providing economic growth. So therefore, we need to stimulate the free market, in order that businesses produce jobs.  How you do that can be up for debate. But just increasing the size of government has been shown not to work.

UPDATE:  An excellent piece in the New York Times on the failure of the Japanese stimulus plan to do anything other than create more debt.

“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.”

“Roads and bridges are attractive, but they create jobs only during construction,” said Shunji Nakamura, chief of the city’s industrial policy section. “You need projects with good jobs that will last through a bad economy.”

So the lesson?  Some infrastructure spending (like the dollars spent to make green technologies grow as an industry) likely will be worth it, while your usual day-to-day road projects are likely not to create any stimulus at all.

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Comments»

1. John Clayton - February 2, 2009

“The Wall Street Journal has an excellent editorial today that ironically agrees with many of my thoughts.”

Histarical! Swow me one Republican that has ever had an origional thought. Of course it “Ironically agrees” you all just spit back the same talking points.

Republicans always say government is the problem, then they take office and prove it!

neoavatara - February 2, 2009

O.K., first of all, what original thought is in the current stimulus plan? If you are going to throw bombs, at least defend them. Second, if you look at my suggestions, I have not heard them anywhere else. Has anyone else suggested tying taxes on cars to gas mileage upfront? Has anyone else suggested green technologies to be completely tax free? I don’t think so. The lack of new ideas on the left, especially now that they are in power, is embarrassing.

2. andrea - February 2, 2009

The WSJ is hardly an objective source. When jobs are created, regardless of whether they are in the public or private sectors, people consume more and they pay taxes; it is mathematical. The American worker (see consumer) has taken a beating since Reagan turned the big guns of government against labor. A union struggling to increase the standards of living of its members was portrayed as “greedy” while the CEO making a 100 million and bankrupting the company in the process was labeled “a successful entrepeneur”. The ideological pigheadedness of the WSJ, neovatara, and co, is simply mindboggling in view of the debacle this coutry is facing. What will it take so you at least keep quiet? The stimulus – to have a chance to succeed – needs to have a major work expansion component and a “buy American” clause. Otherwise, we will invest the almost 1 trillion in the economic recovery…of China.

neoavatara - February 2, 2009

Nobody is an objective source. Would you like to name one? I am certainly not arrogant enough to think I am totally objective. That said, please discount my arugments, or the WSJ, with some facts if you can.

When jobs are created by the government, understand that first of all we are all directly paying for those services. Second, the government doesn’t necessarily produce anything. Yes, when you pay 10 people to lay grass on the National Mall, you are increasing those 10 people’s incomes. But what are they producing? Nothing. Insteand, you have those 10 people producing a product for a business, then those 10 people have their incomes; the business is able to make a profit on their product; and any middle men make money on the transaction. There is a much bigger economic effect. Additionally, those people now pay into the tax system, and allow for more government expenditures.

As for CEO versus labor unions, I would argue that both have been greedy at some points. I by no means am going to sit here and defend the stupidity of people getting bonuses when we have to bail out their corporations, for example.

Your rampage on the failure of the American worker is just false. There were many more union workers actually working under Reagan than Carter…but don’t let facts get in the way of a good liberal argument.

What will it get to take to get me to be quiet? Likely a bullet to the head. It is my first amendment right, and no one, especially people like you, will stop me. I want to get people back to work; if it is with big government, so be it. But historical precedents show that big government has difficulty in really putting people back to work. Again, don’t let facts deter your rant. I am not an idealogue in the sense that I am against bad government. I am an idealogue, however, when it comes to bad policy. And so far, this stimulus plan is bad policy.

3. S.O.T. - February 2, 2009

The government is notorious for stifling economy. The housing crisis was the result of gov’t meddling. Forcing banks to write loans to poor applicants is not a recipe for success. Even if the gov’t swears they will buy up those assets, the buck has to stop somewhere and it has. The market will correct itself if given the opportunity.

4. Jim - February 2, 2009

Neovatara,

I, for one, encourage you to excercise your right to free speech. And I admire that you defend it as passionately as you do. However, 24 yrs (Yes, including Bill Clinton’s run as President) have shown exactly what tax cuts get us. Debt. Same thing that credit gets us. Debt. Debt that we can’t pay. Debt that increases year to year. At least under Clinton, the spending of Government was under control. Need I remind you that it was Mr. Bush and his neo-Cons who gave us the current budget deficit via his tax cuts and irresponsible spending. It’s simple arithmetics. If you reduce the income, and increase the output, you loose. That’s a fact. It’s a fact that the Conservatives have been claiming for years is the focus of their “smaller government is better”. Yet, in the past 8 yrs, the Republicans have increased the size of government significantly. And reduced the income of the government. So, good luck with getting me to buy into tax cuts. And I hope no one takes you up on the bullet thing. One less mind is always a bad thing…

neoavatara - February 2, 2009

Thanks for the support.
As for tax cuts, I think is is tough. You need fiscal discipline to carry out tax cuts, and clearly the examples you have given show that we often are not that disciplined. And absolutely, Republicans deserve a lot of the blame for this, and almost wholly the blame for the last 8 years. I have no sympathy for Republicans talking out of both sides of their mouth. However, as the Clinton era showed, lowering taxes and limiting growth of government can be a boon to the economy. The problem right now is that we are going to grow debt, regardless of tax cuts or not. So if we are going to deficit spend, we better get the most bang for our buck. And I am not sure the Obama stimulus will give us that kind of response. I think we need to do some tax cuts to stimulate the free market, while at the same time increasing government spending to reduce the pain that the unemployed are feeling right now. I don’t think anything that is skewed too much either way will succeed.

5. andrea - February 3, 2009

How gracious of you admitting that republicans are for the most part responsible for the quandary the country is in; nothing like failure to instill some humility in otherwise arrogant and insensitive people.
You seem to believe that only tangible property should merit our attention as if the 10 gardeners of the mall were of complete social and economical insignificance. These 10 people get paid, pay taxes, and buy goods and services which in turn are generated and/or handled and transported by other Americans whom in turn also get paid and so it goes on and on. My youngest child could figure this one out. On the other hand, you give a juicy tax cut to an already rich person and he or she – yes – might run to open a factory and employ people but I bet that 9 out of 10 will instead go to the nearest store and purchase a fur coat or upgrade to a more luxurious automobile.
Investing in infrastructure, schools, renewable sources of energy, universal healthcare, etc, does not – apparently – produce tangible items such as shoes ot bolts. But those improvements strenghten the nation, enhance our quality of life, and create an brighter and healthier future for our children and their children.
To summarize, the 2 choices we have are whether we will live under the cut-throat capitalism, profits-over-all, ractionary philosophy that you republicans, conservatives, and gun-totting evangelicals advocate, or this nation will become a beacon of enlightenment, humanity, tolerance, and progress.

6. andrea - February 3, 2009

You make these statement like “the Great depression was caused by the New Deal” or “there were more union workers under Reagan than under Carter” which are the most brazen distorsion of the facts.
Reagan was the most anti-labor president since the late 1920’s – he fired an entire union of federal employees – the air traffic controllers. He started the slide downward of the living standards of the American middle class. As for FDR and the New Deal, they saved this country from the brink of a revolution Bolshevik-style. FDR is probably the best president this country ever had – with the possible exception of Lincoln – regardless of all the revisionism of the WSJ.

7. neoavatara - February 4, 2009

Funny…middle class incomes, in inflation adjusted dollars, hit their height during the Reagan years. Again, don’t let facts get in the way of your points.

Second, you realize that the government ALREADY has gardeners on the payroll…so in fact, it is questionable whether any new employees would be hired. Additionally, you miss the point. The ‘product’ of these employees is simply to make the grass look good; a laudible exercise, but one that is a ‘dead end’ economically. Instead, if those 10 people, say, built a box that could be sold, then the box would go to a store; the store would get economic benefit as well; and then the product would stimulate the economy even more. Government can stimulate the economy, but can NEVER stimulate it as much as free enterprise. Even my 3 year old could understand that…in response to your childish remark.

I am not against infrastructure spending. Not in the least. But let us not fool ourselves that the infrastructure spending is going to stimulate the economy. It will give a small boost, but that is all. Why? Because unlike private industry, which can keep producing their product, infrastructure spending by definition has an end point; after the money is gone, the economic boost is over.

As for Reagan and the air traffic controllers; if they went on strike today, I bet Obama would do the same thing; you cannot let a single union damage the country as a whole.

FDR is one of our great presidents. But like Lincoln, let us not deify him. Lincoln is my hero; but he was far from perfect. Neither was FDR. He was, after Lincoln and maybe Washington, the third best president IMHO. So don’t misunderstand. But that does not mean that everything he did was right. The New Deal may have been necessary, but it lengthened the economic recession of the 1930s; it was an imperfect solution to a difficult world. Deifying him does him an injustice; we need to understand the choices he made, good or bad, and try to do better.


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