Blogs > HNN > STIMULUS - SPENDING OR TAX CUT?

Oct 31, 2008 3:23 pm


STIMULUS - SPENDING OR TAX CUT?



In a recent IMPACT 08 Robert Rubin, top economic adviser to Barack Obama, insisted that regardless of the expected billion dollar Federal budget deficit, the top priority of the next president must be a stimulus package of at least 1% to 3% of the GDP. He said:

AT THE VERY LEAST WE HAVE TO ESTABLISH FISCAL CONDITIONS BUT IN THE FIRST PLACE WE HAVE TO HAVE A VERY LARGE FISCAL STIMULUS. THE DEBATE ON THE FISCAL STIMULUS, THE SHORT-SIDE OF IT, AMONGST THOSE WHO SUPPORT IT, IS SHORTLY 1% OF GDP AND THE LONG SIDE IS $300 BILLION. WHEN THE CONGRESSIONAL BUDGET OFFICE ANNOUNCES THE DEFICIT PROJECTIONS IN '09, MY GUESS IT WILL BE A NUMBER SOMEWHERE IN THAT NEIGHBORHOOD OF 9 HUNDRED BILLION OR TRILLION DOLLARS SO WE HAVE A VERY SERIOUS FISCAL SITUATION UPON WHICH WE WILL BE PILING ADDITIONAL DEFICITS.

SO WHILE I THINK IT'S IMPORTANT TO DEAL WITH A FISCAL STIMULUS, I THINK HE HAS TO FIND A WAY TO MARRY THAT IN A WAY THAT IS REAL AND THEREFORE CREDIBLE WITH THE MARKETS WHERE THEY PLAN TO RESTORE OUR SOUND FISCAL CONDITION ONCE THE ECONOMY IS HEALTHY AGAIN. AT THE SAME TIME, HE HAS ENERGY, HEALTHCARE, BASIC RESEARCH, INFRASTRUCTURE, EHE QUIPPING THE POOR, AND AN ENORMOUS ECONOMIC ISSUE AND YOU CANNOT DO THAT ALL AT ONE TIME, UNLESS HE WANTS TO DROWN HIMSELF, AS HENRY SAID, THE THRESHOLD DECISION IS HOW MANY OF THESE PRIORITYS CAN I ADDRESS IN THE FIRST INSTANCE AND WHICH ONES SHOULD THEY BE?

In other words, just like Clinton in 1991, Obama will have to prioritize. He can do tax cuts or spending but not both, at least, not immediately. Clinton chose tax increases and spending. Today recent Nobel price for economic winner Paul Krugman is making the argument for Obama doing the same. How? By arguing that the drop in consummer spending means that American consumers can no longer be relied upon to continue fulfilling their traditional role. He writes:

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

He ignores that the numbers he quotes are also for a single quarter. To strengthen his argument he adds:

Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.

In other words, we can expect the next 3 months to be worse. This ignores the huge influence the high oil prices had on consumer spending during those months. I suspect he knows that the coming of Christmas season when combined with recent drop in oil prices and stock market stabilization may challenge his assumption. So, he argues that Congress must act and the Bush administration should go along with it before the new numbers can undermine his argument.

Why the hurry? Because Krugman wishes to promote a massive new stimulus package consisting of new spending instead of tax cuts and he wishes outrageous deficits to justify Obama's failure to deliver on tax cuts. As Obama is committed not to renew the Bush tax cuts, we may face a tax increase at recession time. The word infrastructure is being bandied about again. Yes, Clinton redux. Krugman writes:

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response. . . .

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.

I hope Bush will just say no. Too often, infrastructure is just another word for pork. Yes, pork, of the type John McCain has been fighting all his life and of the type which is bound to flourish if Obama is elected.

Also see, Charles Krauthammer the economic case for McCain.

Obama calls those who do not wish to pay higher taxes, SELFISH



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