The economy, the stimulus, and what we are seeing right now

Well, I have done my fair share of cabitching over the past few days on the health care issue, but I am going to put that topic aside and focus on the economy and stimulus. I have recently been in debates with people over the stimulus, why it was needed, and why it worked. I recently came across this article by Josh Bivins. In it he states the following. . .

The consensus of macroeconomic forecasters is that ARRA contributed roughly 3% to annualized growth rates in the second quarter. This means that absent its effects, economic performance would have resembled that of the previous three quarters, when the economy contracted at an average annual rate of 4.9%. In short, the recovery act turned this quarter’s economic performance from disastrous to merely bad. This is no small achievement, but with even more public relief and investments, the U.S. economy could do much better.

We can attribute approximately 3% of the growth or net GDP to the stimulus. Even though we contracted by 1%, the total would have been over 4% had the stimulus not been implemented. There is also something else that I would like to share with people, and it is on how much money adds to the GDP and the economy depending on where it is spent.

Here is an excerpt from an economist that goes through the margin propensity to consume or MPC.


What is apparent is that some tax cuts, or really rebates, can have a substantial effect. But in most cases, tax policies will have a relatively minor impact on aggregate demand, relative to increases in spending on goods and services. That's because the first round of injection of the dollar into the economy via tax reductions or transfer increases initially augments disposable income, and then, by indirectly increasing consumption, increases GDP over time. In other words, for an increase in transfers, the impact of one dollar increase in outlays by the government is:

(c(1-t)) + (c(1-t)) 2 + (c(1-t)) 3 + .... = c(1-t)/(1-c(1-t))

Whereas for spending on goods and services:

1 + (c(1-t)) + (c(1-t)) 2 + (c(1-t)) 3 + .... = 1/(1-c(1-t))

Where c is the marginal propensity to consume (MPC) out of disposable income, and t is the marginal tax rate.


What does all of this mean? Well, when you have a tax cut, your MPC is lower than when you spend the money in stimulus. In other words, you get a lot more bang for the buck when the government increases spending rather than cuts taxes in a recession. Not only go you get the GDP increase in more dollars than you put in (unemployment insurance benefits get a 1.62 rate of return to the GDP) you also get more jobs (okun's law), more growth and more revenue in terms of taxes. This is why a LOT of the stimulus has been dedicated to infrastructure. The money to repave 128 for example puts money into the local economy, which in turn creates jobs, and increases the velocity of money locally. It is a win, win, win situation. . .except that we have to pay it all back.

Now, that is why I am a fiscal conservative, and I want the government to run a surplus. It was why I was against the Bush tax cuts to begin with, because I knew it would cause us from going from $200Billion in the black to over a trillion in the red. It is why we ALWAYS should be running a balanced budget, and why I really despised the republican party for what they did to our country. If we continued to spend as we did under Clinton, this wouldn't be nearly as bad of a hit as it is going to be in the future. The reason you run surpluses is for exactly times like this.

Yes, I am a Keynesian at heart, but I also have a lot of free market in me as long as everything is regulated. If we had the same government from 2000-2008 as we did from 1992-2000, we would have been in a much MUCH better position to handle the crisis. Now, we need to start to tighten up the bootstraps of government, and yes I did just say that and I do support the health care bill being passed. We are going to pay for it, but we are also cutting costs as we go, and it will make it more efficient in the long run. Improvement through efficiency, that is how things work in the private sector, and it is how things are going to work in our government. I am glad we have people in there that finally know what they are doing :)

Peace Out,
Michael

I hope everyone has a great weekend!