Economic stimulus plan?

[MSimon]

That sure would be a miserable time. Cutting back on taxes can't work unless business is profitable.

Well no. Lower taxes encourage investment. And severely trimming our labyrinth of regulation would also help.

Say I'm thinking of a widget factory. In a low tax regime the net profits are 10%. In a high tax regime they are 3%. Under which tax scheme am I going to invest when the economy is in a slump and thus the risks are higher?

I'm predicting that the current policies lead to stagflation.

And public works? A good idea. First you pass a bill. Then you pass an appropriations bill. Then you announce the opening of the bidding process. When all the objections to the winning bid are satisfied the contract is let. Then the work starts. Then suppliers and workers start getting paid.

In the normal course of events by the time the money is flowing the economy is already on the rebound.

[seedload]

I really don't understand this argument or why it takes place.

It should be a fundamental truth that government employment is inherently less productive than private employment. Why we still argue this is beyond me.

Government should not spend money to stimulate the economy. Government should take less money out of the economy.

Just cut taxes and reduce government and we will do fine. It is such a simple formula.

"A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor and bread it has earned - this is the sum of good government. "

- Thomas Jefferson

[Aero]

In the normal course of events by the time the money is flowing the economy is already on the rebound.

True, but you overlook the point that business rebounds because it looks down the road and becomes optimistic about the future. Knowing that jobs, hence sales and cash flow are right around the corner, when government gets its act together to fund and spend, business invests and prepares to build inventory, hence the economy rebounds. What would the rebound look like if there were nothing to see down the road but desolation.

Our money supply hence our economy is based on debt. For every dollar borrowed in the private sector, ten dollars or more are created on paper. The private sector borrows money to prepare for the rebound, fueling the economy. The government borrows money to fund these projects, but I don't know if the $1 to $10 private sector rule applies to government borrowing. Does anyone know because it makes a huge difference.

This private sector rule is why the mortgage crisis hit so hard. A $100,000 mortgage foreclosed takes $1,000,000 out of the economy. Our national economy is not a zero sum game. In making arguments along the lines of this thread, people overlook this fact and try to relate the economy to their own budget which usually is a zero sum proposition (game). But our national economy doesn't work that way.

[MirariNefas]

I really don't understand this argument or why it takes place.

It should be a fundamental truth that government employment is inherently less productive than private employment. Why we still argue this is beyond me.

Government should not spend money to stimulate the economy. Government should take less money out of the economy.

Just cut taxes and reduce government and we will do fine. It is such a simple formula.

I should be a fundamental truth... but it isn't. Governments aren't wise in how they spend their money, true. But when you allow people to keep more money, what happens to it? Does it all get spent? No, some percentage of it ends up in the bank. Well, great, so all that gets loaned out, right? No, some percentage of that stays in reserve. And the rest that gets loaned out and spent, that goes to someone. And what does that person do? Does he spend it all? No, he puts some in the bank, and some of that stays in reserve.... And thus the cycle continues, until all of the money is tied up in reserve somewhere.

When people are taxed less, they immediately keep some of that money in the bank. When a government spends money, they can guarantee that the first spender at least spends it all before it starts into the banking reserve.

What this means is that governmentally spent money ends up in circulation longer. The resource usage may not be as efficient, but when all you want is more dollars floating around to get financial markets going, government spending can be better. Or at least, that's what my econ teacher taught me about seven years ago.

[TallDave]

The resource usage may not be as efficient, but when all you want is more dollars floating around to get financial markets going, government spending can be better.

That would be true, except that to get the money in the first place the gov't has to tax people. That tends to reduce people's inclination to earn money, and the money tends to be poorly allocated anyway, which may actually do more harm than good.

What you're citing is the Keynesian view, btw. The last half-century has tended to vindicate the Friedman-Hayek view that it's best for the free markets to decide how to spend money.

[Mike Holmes]

Yes, the same theory that George HW Bush once called "Voodoo Economics." But still latched on to by latter-day Reaganites as the cure-all. The fact is that few economists buy this. If you feel that economists who study the phenomenon are clueless, then we all are, really.

But most businessmen will tell you that you have to spend money to make money. In an inflationary period, you cut spending, and get fiscally sound. In a recession, you spend to get things flowing.

Oh, wait... that's Reaganism, too. Huh...

Mike

[MSimon]

hence sales and cash flow are right around the corner, when government gets its act together to fund and spend,

Well sure. But first you have to wait for all the objections to a given contract to be resolved.

With business it is evaluate the proposals - spend the money.

[MSimon]

Governments aren't wise in how they spend their money, true. But when you allow people to keep more money, what happens to it? Does it all get spent? No, some percentage of it ends up in the bank. Well, great, so all that gets loaned out, right? No, some percentage of that stays in reserve.

Dude. Perhaps a little refresher on fractional reserve banking is in order. With current reserve requirements every dollar put in a bank creates $10.

So you spend $9 put one in the bank and the bank creates $9 more as investment capital.

But I get it. If the government confiscates your earnings that creates a big incentive to do what? Black market transactions. And it is not just for reefers. It is also for roofers.

http://www.sbctc.org/default.asp?id=140 ... pe=sitemap

There are estimates that 30% of the US economy is now underground.

And our new President has a plan to drive more of the economy underground and more money out of the country. The guy is an economic genius. Of course McCain would have been no better judging by his campaign talk. I'd say the Republicans dodged a big bullet by losing.

[MSimon]

The resource usage may not be as efficient, but when all you want is more dollars floating around to get financial markets going, government spending can be better.

So let me see: government spending causes pollution (waste). Yep. The Soviet Union has confirmed that proposition.

Now does waste contribute to net economic output - i.e. stuff that real people want? So let me see: would you rather have a pound of toxic waste or a pound of potatoes? Hard choice.

[Mike Holmes]

That's silly. Only government spending produces waste? And it produces no goods? And business produces only goods and no waste? Are you talking about relative proportions? Or just being facetious?

Nobody is saying that we wouldn't prefer the private sector to be doing the production. But they aren't right now, because nobody is buying. The expenditures would be, in theory anyhow, to put money into people's pockets to prime the pump. So that business would get back on track.

Or so, again, Reagan would have said. He'd just have done it while also cutting taxes. Creating a huge deficit. Which he did.

That's OK, the models agree that you spend to get out of a recession. The disagreement is largely only on what to spend it on. Military or domestic, guns or butter (to absurdly reduce the debate)? (Or rich/poor, if you want to make it a class-warfare thing).

On the other hand, I'm just fine with market retraction, if you want to go the "fiscally sound" way, and spend less, too. I personally feel that the compulsion to constantly expand our productivity is not particularly healthy. It just seems to be what everybody is clamoring for, and what capitalists claim is neccessary for survivial.

Our problem is less spending our way out of recessions (which we do well), but being fiscally conservative when the economy is rolling, and paying down the deficit then. I'd point out that it happened under Clinton, but then I'd get the usual reply that it was the Republican House under Gingrich that caused this to happen...

In any case, even adjusted for inflation, the current debt is high already, and we're in a recession. So, yeah, everyone knew that the winners of this election would be the losers of this election.

Mike

[MSimon]

That's silly. Only government spending produces waste? And it produces no goods? And business produces only goods and no waste? Are you talking about relative proportions? Or just being facetious?

Nobody is saying that we wouldn't prefer the private sector to be doing the production. But they aren't right now, because nobody is buying. The expenditures would be, in theory anyhow, to put money into people's pockets to prime the pump. So that business would get back on track.

Or so, again, Reagan would have said. He'd just have done it while also cutting taxes. Creating a huge deficit. Which he did.

That's OK, the models agree that you spend to get out of a recession. The disagreement is largely only on what to spend it on. Military or domestic, guns or butter (to absurdly reduce the debate)? (Or rich/poor, if you want to make it a class-warfare thing).

On the other hand, I'm just fine with market retraction, if you want to go the "fiscally sound" way, and spend less, too. I personally feel that the compulsion to constantly expand our productivity is not particularly healthy. It just seems to be what everybody is clamoring for, and what capitalists claim is neccessary for survivial.

Our problem is less spending our way out of recessions (which we do well), but being fiscally conservative when the economy is rolling, and paying down the deficit then. I'd point out that it happened under Clinton, but then I'd get the usual reply that it was the Republican House under Gingrich that caused this to happen...

In any case, even adjusted for inflation, the current debt is high already, and we're in a recession. So, yeah, everyone knew that the winners of this election would be the losers of this election.

Mike

OK government produces more waste. BTW how big is the crisis so far that requires government spending = to 1/2 years worth of GDP so far?

Well GDP is down a whopping .5%

===

Stagflation, Stagflation, my banker doesn't have near enough information.
The printing presses are running over time and yet folks don't want to spend one thin dime.
Stagflation, stagflation, I think it will wind up ruining the nation.

===

[Mike Holmes]

Hey, I'm the first one to say that this "crisis" is overblown. And that I think we should think twice or five times before "bailing" anyone out. After all, I'm not getting bailed out.

As I'm fond of pointing out to people who compare this to the great depression, the "massive" increase in home defaults of 50% means we've gone from 4% to 6%. As opposed to the 80% of people with mortgages who lost their homes in the depression.

When we forget to fertilize Oklahoma this year before planting, then I'll start worrying. Could it be that the capitalists are just looking for a way to keep their balance sheets positive?

Mike

P.S. Edited to note: just to disclose my own bias here, I work for a company that administers government welfare benefits (the department I work for, anyhow). We're not recession-proof, we're positively booming in a recession. My job has never been more secure. That said, if my job ever becomes obsolete, because we're all so well-off that nobody needs welfare, then I'll be fine losing my job here.

[MirariNefas]

Governments aren't wise in how they spend their money, true. But when you allow people to keep more money, what happens to it? Does it all get spent? No, some percentage of it ends up in the bank. Well, great, so all that gets loaned out, right? No, some percentage of that stays in reserve.

Dude. Perhaps a little refresher on fractional reserve banking is in order. With current reserve requirements every dollar put in a bank creates $10.

So you spend $9 put one in the bank and the bank creates $9 more as investment capital.

I'm well aware of this... dude. Nothing here changes my point.

[MSimon]

Governments aren't wise in how they spend their money, true. But when you allow people to keep more money, what happens to it? Does it all get spent? No, some percentage of it ends up in the bank. Well, great, so all that gets loaned out, right? No, some percentage of that stays in reserve.

Dude. Perhaps a little refresher on fractional reserve banking is in order. With current reserve requirements every dollar put in a bank creates $10.

So you spend $9 put one in the bank and the bank creates $9 more as investment capital.

I'm well aware of this... dude. Nothing here changes my point.

So the bank invests in what it considers prudent and the government hands it out to who ever has clout.

Which is better for the economy?

Ubi est?