Posts Tagged ‘Economic stimulus’

USA failing to make the needed public investment

June 2, 2016

blog_net_government_investment

If you own a house or an automobile, you know you have to spend a certain amount on maintenance to keep it in good repair.  If you don’t, you’ll have problems and a bigger expense in the long run.

The same is true if you own business property, except that if you’re in business, you would want to expand and improve and not just maintain things as they are.

Governmental infrastructure needs to be maintained as well.  Our roads and bridges, airports and seaports, water and sewerage systems and other facilities don’t take care of themselves.

The chart above shows there’s a problem.   Net investment—investment minus depreciation—has fallen over the years.  In some years, it has been a negative figure, meaning the federal government isn’t keeping up with what is needed.

Putting people to work on public infrastructure projects is a good way to stimulate the economy, which has been largely missing during the current recovery.  But the main reason is that public investment is necessary if we are to have a good economy.

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There never was an “economic stimulus”

August 24, 2015
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Source: the Wall Street Journal

All the recessions since World War Two were followed by an “economic stimulus”.   The current one is the exception.  As the chart above indicates, government spending—combined local, state and federal government spending—has actually declined.

The idea behind “economic stimulus” was that increased government spending would put people to work and put money in circulation so that the recession would not have a domino effect and develop into a full-fledged recession.

Of course some of this was not intentional.  Spending for unemployment insurance and other safety net programs automatically increases in hard times.

For the idea to work, there has to be deficit spending.  There is no economic stimulus if governments take as much money out of the economy through taxes as they inject through spending.   Keynesian economists think this should be offset by government budget surpluses when the economy is booming and needs to be cooled off.

You could argue about whether this is justified and how much effect it really works.  I personally think that the severity of the Great Recession is due to the long-range decline of American wages in inflation-adjusted terms.

But it is interesting to note that the current recession is the worst since the Great Depression of the 1930s and that it is the only one followed by an actual decrease in government spending.

LINK

Chart of the Day: Here’s Why the Recovery Has Been So Weak by Kevin Drum for Mother Jones.

The success and limits of economic stimulus

February 28, 2012

New unemployment insurance claims

It is a fact that economic recovery began after President Obama took office.  I believe that the recovery was helped by his economic stimulus program and by programs already in place such as food stamps and unemployment insurance.  These helped cushion the effects of the recession and allow recovery to take place.  I can’t prove this.  There is no way to go back in time and run another scenario in which the government stood aside and allowed events to take their course.

The problem is that the recovery is so slow, and that even when and if economic conditions get back to the way they were before.  During the supposed expansion preceding the 2007 recession, wages were declining (in terms of buying power), American manufacturing was being eroded and poverty was increasing.

Below are some charts which illustrate the weakness of the current economic recovery.

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How much did the economic stimulus help?

September 2, 2011

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The economic stimulus plan enacted with the leadership of President Barack Obama, Senate Majority Leader Harry Reid and then-House Speaker Nancy Pelosi did not end the Great Recession, but, as the following charts show, it did do some good.

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While the jobs recovery is encouraging, economists believe that it is necessary to create 90,000 to 260,000 new jobs per month just to keep up with the population increase.  That is why the unemployment rate hasn’t gone down.

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America’s long hard road to recovery

June 15, 2011

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Under the Obama administration, the decline in U.S. jobs slowed and then reversed.  But growth in jobs falls short of what is needed.  As the chart (taken from the Zero Hedge web log), the United States would have to add 250,000 jobs a month just to get employment back to 2007 levels by election day 2012, and to catch up with the growth in the labor force by election day 2016.

The chances of this happening are small.  The federal government’s economic stimulus program is coming to an end, while state and local governments continue to lay off employees and cut back program.  The state and local economic depressant offsets the federal economic stimulus.

The economic slowdown in China, financial problems in Europe, the destruction caused by extreme weather, the continued decline in house prices, the continuing foreclosure crisis, the growing burden of student debt – all are brakes on the U.S. economy.

Because the economy was over-stimulated going into the recession, historic methods of economic stimulation haven’t had their expected effect.  I think the federal government should put people to work directly.  You say we can’t afford it?  There are nearly 14 million people who are willing and able to work, but are unable to find jobs, while there is an enormous amount of work that needs to be done.  Can we afford to waste their ability?

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Fairy gold and economic stimulus

November 8, 2010

Poul Anderson wrote a short story 26 years ago entitled “Fairy Gold” which illustrated how economic stimulus is supposed to work better than anything else I know of.

Poul Anderson

The situation was that a brave but penniless young man wanted to join a voyage of merchant adventurers, but lacked the money to buy a share of the expedition.  His sweetheart wanted him to stay home and work in the pottery shop which she inherited from her grandfather.  Unexpectedly, a bunch of elves maneuvered him into fighting an ogre and at sundown, as a reward for his victory, gave him a a five-pound gold coin, with the warning to spend it quickly.

The young man exchanged the enormous coin for regular money with a banker, and bought himself a share of the ship’s expedition.  The banker exchanged the gold for diamonds at a profit; the jeweler bought pearls from the ship’s captain.  The captain gave the gold to a beautiful aging courtesan, whom he loved, and she bought the shop from the young man’s sweetheart in order to have an income when her beauty faded.  Without responsibility for the shop, the young woman saw no impediment to joining the young man on the expedition.  She rushed to join him, just as the sun came up and the gold coin evaporated, because it was fairy gold.  But although it wasn’t real, everyone concerned was better off for having had it.

Last week the Federal Reserve Board conjured up $600 billion out of nothing, which it will use to buy government bonds.  The board hopes the $600 billion will go sloshing through the economy, and create effects similar to the fairy gold in Poul Anderson’s story.

Maybe it will.  It certainly is not going to evaporate at sunrise.  But it may not go circulating through the economy, either, as might have been the case in earlier recessions.  All classes of people and institutions are in debt – individuals, businesses, local governments, banks.  The prudent thing for them to do if a little extra money comes into their hands is to put it away.  Or invest it in a foreign country, where interest rates, unlike in the United States, are higher than near-zero.

Financial legerdemain got us into the mess we’re in.  I don’t think we can count on financial legerdemain to get us out.

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