"So if stimulus is partly a game of psychology"

Barbara Kiviat finds someone on my side:

"Obama talks stimulus. He hopes you are listening

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The spate of retailers reporting devastating December sales this morning provided a nice backdrop for President-elect Obama's speech in Virginia about why we need to spend another $775 billion to fix the economy. About 40% of that sum comes in the form of tax cuts, but the bulk of the fiscal stimulus would go to pay for new programs and projects—everything from the greening of federal buildings to the computerization of medical records.

The idea, just to be really basic about it, is that American consumers and companies aren't spending enough, so the government has to. There was a great article in the New York Times yesterday about how pretty much all most economists now agree that it's go-time on this count. Even Marty Feldstein, the champion of conservative economic thought who was a top adviser to President Reagan, has noted that lower interest rates aren't getting the job done because credit markets are screwy and that tax cuts only get you so far, so the "heavy lifting" will have to be done by increased government spending. (Quick historical recap: this hasn't been the consensus in the field of economics since the 1960s.)

But most economists also agree that fiscal stimulus shouldn't be an open-ended thing. This morning I was chatting with Andrew Dilnot, an economist at Oxford University who used to run the U.K's Institute for Fiscal Studies—what he described as a cross between the Congressional Budget Office, the National Bureau of Economic Research and the Brookings Institution. He argued that fiscal stimulus should be geared toward priming the pump—that is, getting private players to start spending again. "The strongest argument for doing these sorts of things is that it's a way of the government demonstrating that they're not going to allow the economy to slide into a depression, that they'll spend the money necessary ( THAT'S MY POSITION. IT'S THE EQUIVALENT OF THE GOVERNMENT GUARANTEES NEEDED TO STOP A CALLING RUN, ONLY THIS IS A PROACTIVITY RUN. HERE, THE GOVERNMENT NEEDS TO BE A SPENDER OF LAST RESORT, AND, ONCE AGAIN, ONLY THE GOVERNMENT HAS THE RESOURCES TO BE BELIEVED AS A SOLR. IT SHOULD ALSO BE CLEAR THAT I BELIEVE THAT HAVING THESE GUARANTEES WILL STOP CALLING AND PROACTIVITY RUNS IN THE FUTURE. THE POINT OF THE GOVERNMENT GUARANTEES SHOULD BE TO KEEP PEOPLE FROM PANICKING, THEREBY KEEPING THE NEED FOR GOVERNMENT ASSISTANCE TO A MINIMUM. )," he said. "If people believe it's going to be okay, then people who are putting off buying a new car or house will instead say, I shan't lose my job, I'll go ahead and do that( THAT'S THE WHOLE POINT. I AGREE. A HUMAN AGENCY EXPLANATION. )."

So if stimulus is partly( COMPLETELY. OTHERWISE, IT'S SIMPLY GOVERNMENT SPENDING AS OPPOSED TO PRIVATE SPENDING. ) a game of psychology, then it would make sense to ease off the extra spending once the economy picks back up( YES ). Get consumers and businesses confident enough to spend again, and then let them take over( YES ). In an interview on Wednesday, Obama nodded at that logic. "I'm not out to increase the size of the government long-term," he said. "My preference would be that the private sector was doing this all on their own( MY POSITION AS WELL. )."

I'm guessing that sounds pretty nice to most folks, especially considering the amount of money we've already spent on fixing the economy. But is it true? Jay Newton-Small has a piece up on Time.com that considers how Obama's stimulus package gives him a running start on a bunch of items on his long-term agenda. If we head down this road and GDP rebounds, do we suddenly cut funding? I know a lot more about economics than I do politics, but I'm guessing most legislation doesn't come with an easy on-off switch( THAT IS A CONCERN ).

Though that's not to say I'm against spending money to increase the energy efficiency of two million homes or to build broadband access to all corners of America so that small businesses, no matter where they're located, can be globally competitive. These are good ideas as far as I'm concerned.( GOOD IDEAS. I AGREE. )

All I'm saying is when we start buying computers for schools and paying people to put up windmills let's be clear about whether we're doing these things to save the economy—or if we'd be trying to do them in the long-term anyway.( FOR THE INFRASTRUCTURE PART OF THE STIMULUS, THIS IS ESSENTIAL. )

Here's one of my favorite parts of Obama's speech:

Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made transparently, and informed by independent experts wherever possible. Every American will be able to hold Washington accountable for these decisions by going online to see how and where their tax dollars are being spent. ( WONDERFUL )

I can't wait.

Barbara!"

My view of the importance and use of a stimulus is exactly the same, which is why I don't believe that we need to do as Paul Krugman says:

"More stimulus notes

Mind the gap

1. The new CBO budget and economic outlook is out. Above is its forecast( BS ) for the GDP gap — the hole stimulus has to fill( WHY DOES IT NEED TO FILL THE HOLE BY ITSELF? ). I’d guess( THAT'S WHAT IT IS ) that the CBO estimate, which has unemployment averaging 8.3 percent in 2009 and 9 percent in 2010, is actually too optimistic (see 3, below), but even so it puts the Obama plan in perspective: a 3% of GDP plan, with a significant share going to ineffective tax cuts( NOT CLEAR AT ALL ), to fill an 8% or more gap.

2. How ineffective? Howard Gleckman of the Tax Policy Center says Lots of Buck, not Much Bang.:

Here's his point:

"Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today’s recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring. ( IT'S AMAZING HOW PEOPLE CAN INTUITIVELY DIVINE WHETHER OR NOT AN ECONOMIC INCENTIVE WILL WORK. I HAVE NO IDEA WHAT HE'S BASING THIS VIEW ON. IT SEEMS LIKE A POSITIVE MOVE TO ME. )

I can’t begin to imagine how the variation on this idea--credits for not laying someone off--would work( HERE I AGREE ). My head throbs at the concept of the IRS trying to administer a rebate based on intentions. Worse, these breaks would never work unless they are refundable and, to be honest, giving such credits to failing business makes my skin crawl. In reality, it would become yet one more bailout—only this time taxpayers wouldn't even get stock for their trouble."

Back to Krugman:

3. The official BLS numbers won’t be out until Friday, but the ADP jobs estimate, based on private payroll data, is spectacularly grim. "( AND ACCORDING TO THE BIG PICTURE, NOT VERY USEFUL. )

Krugman's view is Mechanistic. The economy is like an engine. It needs a lot of oil. I don't credit this view at all. If there's one view that always wastes money, it's a mechanistic view of human behavior.

I would prefer an incentive for investment, but adding workers isn't a bad alternative. Let me explain something: We're fighting the fear and aversion to risk. One way to attack that is to target incentives to minimally effect this. The alternative is much more than spectacularly grim. There's no proof that any of these measures will be effective, least of all picking an enormous figure based on a graph of useful but inexact numbers. The idea that overspending poses no risk is beyond belief. It is itself a panicked reaction to our crisis. We've had a number of those recently, and, as of now, the record is mixed at best.