On the American Recovery and Reinvestment Plan
I'll give this blogging thing another shot. For in a world rife with conservative talking heads and conservative organizations, some of us have that one group that gets under our skin more than it should. Keith Olbermann is pathological about Bill O'Reilly. Robert Greenwald has Fox News. And I have the American "Family" Association.
I get this pathology by way of my lovely fiancee. Her father gets the Action Alerts from the AFA and duly forwards them to the entire family, and then my fiancee forwards them to me for various reasons, often to question the veracity of the claims made in them. Thursday she forwarded me an e-mail with this title: "The House just passed a bill raising taxes on every citizen by $3,333!"
Don't worry, I got the vein back into my forehead.
So I'm using this great medium to discuss the American Recovery and Reinvestment Plan; i.e. the economic stimulus bill. Is it a tax increase? Well, there's a kernel of truth in that, of course. Any money that we spend today does have to be paid for at some point. Any tax cuts that we offer today have to be made up for at some point, too. On that latter point, Republicans seem to be a little late getting to the party, but it's nice that they finally recognize this.
The ARRP creates a budget shortfall of about $825 billion, give or take a McNugget. About two-thirds of this is new spending, the other third is actually tax cuts. The AFA's $3,333 figure only works if you figure a stimulus plan of $1 trillion, so that only works (or is close enough) if you count the tax cuts as tax increases. That's a nifty piece of accounting. It's actually not totally off base; taxes we don't pay now we just have to pay later. But I vaguely recall Republicans standing on the Capitol steps waving cheques and claiming that George W. Bush had "cut taxes" even though there were absolutely no corresponding decreases in spending. In fact, federal spending reached record levels under Bush II. It is very curious that conservatives did not apply the same rigorous accounting methods back then. Very curious indeed.
But we'll gloss over that--for now. It is true that the ARRP leaves a bill of $825 billion that will have to be paid eventually. But does that make it a bad idea? The answer depends on a very wonkish question of economics. Basically, right now we're having a recession that conservatives assured us could never happen. Almost every recession since the Great Depression has been more or less intentionally caused by the Fed. I realize that makes the Fed sound like a bunch of bastards, but they had their reasons. The Fed (Federal Reserve Board) has a dual mission: to ensure full employment and price stability (low inflation). These goals are in direct conflict. Basic economics tells us that if unemployment gets too low, it will cross past the point where it creates greater economic growth and to where it will just accelerate inflation. High inflation is really bad, so when the economy has started to overheat, the Fed has raised interest rates, that is, the cost of borrowing money. This cools down the economy. When growth is sluggish, the Fed slashes interest rates, and this gets the economy growing again. The Fed certainly has not discharged its duties perfectly, but it has done a pretty good job keep growth high and inflation low. This is called "monetary policy," and free-market conservatives assured us that it was the only tool we'd ever need to regulate the economy. If production lags, the Fed will just slash rates, and everything will be just fine.
That theory has encountered a nemesis: reality.
Monetary policy has already done yeoman's work in keeping the economy afloat. Actually, in a rare and happy instance of the Bush administration doing something right, we've had maybe the best person possible in charge of the Fed, Ben Bernanke. In his academic career, Bernanke wrote extensively about monetary policy at the zero bound. In English, that roughly translates as "Things the Fed might try if it got really desperate."
The Fed started tapping into those ideas over a year ago. The Fed has been inordinately creative in applying monetary policy, and interest rates are, for all practically purposes, at zero. That means there is really nothing left the Fed can do to lower the cost of borrowing or stimulate the economy. (You can't make interest rates negative; if you did, lenders would just hoard money.) Luckily, there is one tool left at our disposal, if we have the conviction to use it: fiscal policy.
Fiscal policy comes to us from a legendary economist named John Keynes. For eighty years or so, there has been a running battle in economic circles between conservative ideologues and the Keynesians (pretty much everybody else) over a great many things. One of them is something called Say's Law. Say argued that supply creates its own demand. Basically, he argued that the reason people make money is so that they can spend it. And this is largely accurate. In normal times, if someone just handed you a bunch of found money, you would probably not run it to the bank; you would probably spend it. Thus, the conservatives argue, the money that people make by producing things, they will immediately turn around and pump back into the economy; so as long as we maintain supply, demand will take care of itself. (Hence their name, supply-siders. )They argue that the only role of government in boosting the economy is staying out of the way by keeping taxes low and regulation light so suppliers can supply, and everything will be peachy.
And, I should emphasize, conservatives argue that this will work all the time. Keynes, who wrote much of his work during the Great Depression, argued that there will be times every once in a while when this law fails to hold. He persuasively argued that the Depression was caused by something akin to engine trouble: the market was having trouble getting the economy started again. He theorized that the only thing that would get the economy kick started would be a massive influx of government spending to pick up the slack from consumers. And, as it turned out, that's exactly what lifted us from the Depression. On a lot of levels, the current economic crisis looks a lot like the Depression. The market is suffering from a lack of demand, and likely only the government can step in and prop it up.
If you know anyone who took their stimulus checks and used it to pay off credit card debt, or anyone who is saving every penny they can now to replenish paper losses in their stock portfolio or the value of their home, or anyone trying to build a cushion in case they next their job next, then you see why the usual rules aren't applying. Republicans argue that we can stimulate the economy with tax cuts, but common sense tells us that a lot of people will just wind up hoarding that money in their bank accounts. For that reason, I'm actually not a big fan of the tax cuts in the ARRP. I'm not against tax cuts on principle; I just think they'll be a very inefficient way of stimulating the economy and that they were put in there largely for appearances' sake. I actually think that the stimulus bill should involve more public spending.
Another way to think of our economy crisis is that we have a savers' paradox. When times get back, it's wise for an individual to save more. But when everybody tightens their belts all at once, it's actually counterproductive. Markets for goods dry up, and people are actually worse off than they would have been if saving hadn't gone up. We see this savers' paradox in our own lives. One day to break the paradox and get the economy moving is to issue a lot of federal debt and use it to pay for practical public spending. Thus, when consumer spending slacks off, public spending picks up that slack, and while many people hoard money in their personal accounts, the ironically detrimental effect of that saving is melted away as each person's share of the federal debt becomes larger. This allows the economy to recover until it can get back to the point where we really want it to be: with public spending back on the wane, consumer spending back at robust levels, and the federal government running surpluses to pay off the debt issued to help us break out of the downturn.
Keynes argued that in terms of getting the economic engine started, it hardly mattered what we spent the money on; we could just easily pay some people to dig holes and other people to fill them back up. Of course, as long as we're going to spend the money, we have an obligation to spend it in the wisest ways possible, in ways that will leave a lasting beneficial legacy beyond just getting the economy going again.
The AFA e-mail alleges that the ARRP doesn't do this, that it's "so filled with pork you could BBQ it!" The irony is that I can't remember ever seeing a spending package this large that contained so little pork, at least by federal government standards. As examples of this so-called porkfest, the AFA mentions outlays for STD prevention, fish passage barriers, improving ATV trails, renovating and modernizing the Department of Commerce, supporting supercomputing activities for climate research, and supporting the beekeeping industry. They allege that there's tons more pork where that came from, but no other examples are actually given, and this from a group with every incentive to make the package look as wasteful as possible.
First off, some of those aren't bad ideas. I especially noticed that the AFA immediately latched on to STD prevention like it was a bad thing. At least they didn't go as far as Mark Steyn, a troglodyte posing as a columnist who argued that it would encourage loose morals in women. And of course, the AFA has a knee-jerk opposition to anything studying climate change, too.
But the grand total of the six most egregious outlays the AFA could find is, at most, a mere $700 million. That is less than one one-thousandth of the stimulus package, and most of that is in the STD prevention plan, which Republicans may actually successfully kill anyway. The ATV trails outlay is $25 million. That is one-fortieth of one billion in a $825 billion plan. And while ATV trails are not a major priority, it is labor-intensive work, so as far as economic stimulus goals, it's actually pretty efficient.
So the AFA attacked the ARRP by distorting what it is. In reality, the vast majority of the spending goes toward some very important national priorities. In fact, I was very encouraged by how shockingly wise the priorities were. Here's what the vast majority of the stimulus money is really being spent on:
*Investing in alternative energy. This is a crucially important mission for our economy, our environment and our diplomacy, and the investments we make in alternative energy will likely pay large dividends.
*Modernizing America's electricity grid. This is perhaps the least talked about aspect because it's the least exciting, but its perhaps the most important. Much of our wind energy potential is in the Dakotas; much of our solar energy potential is in the desert. Not many people live there. In order to harness the bounty of alternative energy, we need to make major investments in creating a grid befitting this century.
*Modernizing homes and building to make them more energy efficient. This is another labor intensive project, and another that will greatly benefit our environment and reduce our future energy costs, allowing us to recoup much of this money in the long run.
*Modernizing health records. Like the electricity grid, this gets less buzz because its importance is far more than people actually realize, and like investments in energy efficiency, it will help pay some of its own cost by drastically reducing annual costs, in this case on health care. The scary truth is, much of America's health information is kept only in 20th-century style paper files (think of the giant rooms of files you've probably seen in your doctor's offices), and this spending will computerize much of these records and finally usher in 21st-century style record keeping.
*Infrastructure. The plan will help build new roads and highways, which helps improve our economic efficiency. Also, infrastructure spending in America has not kept up with our nation's needs for many years, and our infrastructure has shown the strain. We are actually overdue for making this more of a budget priority to begin with.
*Equipping schools with more computers and expanding broadband access across the country. The strictly economic benefits of this are much more difficult to quantify, but in a digital economy, improving our Internet infrastructure is a very high level priority.
These are all extremely judicious uses of taxpayer money. In fairness, one of the few things that conservatives have been right about is that the federal government has usually not been terribly wise at setting spending priorities. So with a caveat that my expectations are very low, I'm extremely impressed with the foresight in this spending package. It is actually the antithesis of what the AFA makes it out to be, and the wisdom shown largely validates my faith in Obama.
That's not to say this is a free lunch. Yes, very much of the spending is very wise and much of it will produce tangible savings in the future. Yes, every dollar we spend will have a multiplier effect that will increase the boost to the overall economy. Yes, a lot of the spending is going to pay for people's salaries, and those people will pay taxes, so the cost of the stimulus in the very short term is slightly inflated. But it is very true that this plan will increase the size of the federal debt, and that debt will have to be paid back later through a great deal of fiscal discipline.
The e-mail I got claims that "It will be your grandchildren and their children who will pay this tax." I really don't know how old the AFA's target audience is, but I'm 27 years old, and I will most definitely be part of the cohort that pays the bill for this spending. And I, for one, am okay with that because I know this plan will provide a vitally important boost in helping us avoid a Japan-style economic drought and/or deflation trap that could depress economic growth for years. And it will leave lasting impact that will improve the world I live in decades down the road. The national debt is not a zero-sum game. The economic benefits this plan confers will create the economic growth that will help us pay for its costs. It's no cheer to the unemployed or underemployed that at least they have a smaller share of the national debt that way.
That's pretty much my substantive stance on the stimulus plan. Time permitting, I plan to write a follow-up blog entry on the politics of this debate, which is even more up my alley. Especially, I plan to talk about the newfound concern with federal debt by the party that practically invented the federal debt. But that's another issue. My conclusion here is that the stimulus plan is an important piece of legislation that deserves our support, and it looks nothing like what hard-line conservatives have made it out to be.
I get this pathology by way of my lovely fiancee. Her father gets the Action Alerts from the AFA and duly forwards them to the entire family, and then my fiancee forwards them to me for various reasons, often to question the veracity of the claims made in them. Thursday she forwarded me an e-mail with this title: "The House just passed a bill raising taxes on every citizen by $3,333!"
Don't worry, I got the vein back into my forehead.
So I'm using this great medium to discuss the American Recovery and Reinvestment Plan; i.e. the economic stimulus bill. Is it a tax increase? Well, there's a kernel of truth in that, of course. Any money that we spend today does have to be paid for at some point. Any tax cuts that we offer today have to be made up for at some point, too. On that latter point, Republicans seem to be a little late getting to the party, but it's nice that they finally recognize this.
The ARRP creates a budget shortfall of about $825 billion, give or take a McNugget. About two-thirds of this is new spending, the other third is actually tax cuts. The AFA's $3,333 figure only works if you figure a stimulus plan of $1 trillion, so that only works (or is close enough) if you count the tax cuts as tax increases. That's a nifty piece of accounting. It's actually not totally off base; taxes we don't pay now we just have to pay later. But I vaguely recall Republicans standing on the Capitol steps waving cheques and claiming that George W. Bush had "cut taxes" even though there were absolutely no corresponding decreases in spending. In fact, federal spending reached record levels under Bush II. It is very curious that conservatives did not apply the same rigorous accounting methods back then. Very curious indeed.
But we'll gloss over that--for now. It is true that the ARRP leaves a bill of $825 billion that will have to be paid eventually. But does that make it a bad idea? The answer depends on a very wonkish question of economics. Basically, right now we're having a recession that conservatives assured us could never happen. Almost every recession since the Great Depression has been more or less intentionally caused by the Fed. I realize that makes the Fed sound like a bunch of bastards, but they had their reasons. The Fed (Federal Reserve Board) has a dual mission: to ensure full employment and price stability (low inflation). These goals are in direct conflict. Basic economics tells us that if unemployment gets too low, it will cross past the point where it creates greater economic growth and to where it will just accelerate inflation. High inflation is really bad, so when the economy has started to overheat, the Fed has raised interest rates, that is, the cost of borrowing money. This cools down the economy. When growth is sluggish, the Fed slashes interest rates, and this gets the economy growing again. The Fed certainly has not discharged its duties perfectly, but it has done a pretty good job keep growth high and inflation low. This is called "monetary policy," and free-market conservatives assured us that it was the only tool we'd ever need to regulate the economy. If production lags, the Fed will just slash rates, and everything will be just fine.
That theory has encountered a nemesis: reality.
Monetary policy has already done yeoman's work in keeping the economy afloat. Actually, in a rare and happy instance of the Bush administration doing something right, we've had maybe the best person possible in charge of the Fed, Ben Bernanke. In his academic career, Bernanke wrote extensively about monetary policy at the zero bound. In English, that roughly translates as "Things the Fed might try if it got really desperate."
The Fed started tapping into those ideas over a year ago. The Fed has been inordinately creative in applying monetary policy, and interest rates are, for all practically purposes, at zero. That means there is really nothing left the Fed can do to lower the cost of borrowing or stimulate the economy. (You can't make interest rates negative; if you did, lenders would just hoard money.) Luckily, there is one tool left at our disposal, if we have the conviction to use it: fiscal policy.
Fiscal policy comes to us from a legendary economist named John Keynes. For eighty years or so, there has been a running battle in economic circles between conservative ideologues and the Keynesians (pretty much everybody else) over a great many things. One of them is something called Say's Law. Say argued that supply creates its own demand. Basically, he argued that the reason people make money is so that they can spend it. And this is largely accurate. In normal times, if someone just handed you a bunch of found money, you would probably not run it to the bank; you would probably spend it. Thus, the conservatives argue, the money that people make by producing things, they will immediately turn around and pump back into the economy; so as long as we maintain supply, demand will take care of itself. (Hence their name, supply-siders. )They argue that the only role of government in boosting the economy is staying out of the way by keeping taxes low and regulation light so suppliers can supply, and everything will be peachy.
And, I should emphasize, conservatives argue that this will work all the time. Keynes, who wrote much of his work during the Great Depression, argued that there will be times every once in a while when this law fails to hold. He persuasively argued that the Depression was caused by something akin to engine trouble: the market was having trouble getting the economy started again. He theorized that the only thing that would get the economy kick started would be a massive influx of government spending to pick up the slack from consumers. And, as it turned out, that's exactly what lifted us from the Depression. On a lot of levels, the current economic crisis looks a lot like the Depression. The market is suffering from a lack of demand, and likely only the government can step in and prop it up.
If you know anyone who took their stimulus checks and used it to pay off credit card debt, or anyone who is saving every penny they can now to replenish paper losses in their stock portfolio or the value of their home, or anyone trying to build a cushion in case they next their job next, then you see why the usual rules aren't applying. Republicans argue that we can stimulate the economy with tax cuts, but common sense tells us that a lot of people will just wind up hoarding that money in their bank accounts. For that reason, I'm actually not a big fan of the tax cuts in the ARRP. I'm not against tax cuts on principle; I just think they'll be a very inefficient way of stimulating the economy and that they were put in there largely for appearances' sake. I actually think that the stimulus bill should involve more public spending.
Another way to think of our economy crisis is that we have a savers' paradox. When times get back, it's wise for an individual to save more. But when everybody tightens their belts all at once, it's actually counterproductive. Markets for goods dry up, and people are actually worse off than they would have been if saving hadn't gone up. We see this savers' paradox in our own lives. One day to break the paradox and get the economy moving is to issue a lot of federal debt and use it to pay for practical public spending. Thus, when consumer spending slacks off, public spending picks up that slack, and while many people hoard money in their personal accounts, the ironically detrimental effect of that saving is melted away as each person's share of the federal debt becomes larger. This allows the economy to recover until it can get back to the point where we really want it to be: with public spending back on the wane, consumer spending back at robust levels, and the federal government running surpluses to pay off the debt issued to help us break out of the downturn.
Keynes argued that in terms of getting the economic engine started, it hardly mattered what we spent the money on; we could just easily pay some people to dig holes and other people to fill them back up. Of course, as long as we're going to spend the money, we have an obligation to spend it in the wisest ways possible, in ways that will leave a lasting beneficial legacy beyond just getting the economy going again.
The AFA e-mail alleges that the ARRP doesn't do this, that it's "so filled with pork you could BBQ it!" The irony is that I can't remember ever seeing a spending package this large that contained so little pork, at least by federal government standards. As examples of this so-called porkfest, the AFA mentions outlays for STD prevention, fish passage barriers, improving ATV trails, renovating and modernizing the Department of Commerce, supporting supercomputing activities for climate research, and supporting the beekeeping industry. They allege that there's tons more pork where that came from, but no other examples are actually given, and this from a group with every incentive to make the package look as wasteful as possible.
First off, some of those aren't bad ideas. I especially noticed that the AFA immediately latched on to STD prevention like it was a bad thing. At least they didn't go as far as Mark Steyn, a troglodyte posing as a columnist who argued that it would encourage loose morals in women. And of course, the AFA has a knee-jerk opposition to anything studying climate change, too.
But the grand total of the six most egregious outlays the AFA could find is, at most, a mere $700 million. That is less than one one-thousandth of the stimulus package, and most of that is in the STD prevention plan, which Republicans may actually successfully kill anyway. The ATV trails outlay is $25 million. That is one-fortieth of one billion in a $825 billion plan. And while ATV trails are not a major priority, it is labor-intensive work, so as far as economic stimulus goals, it's actually pretty efficient.
So the AFA attacked the ARRP by distorting what it is. In reality, the vast majority of the spending goes toward some very important national priorities. In fact, I was very encouraged by how shockingly wise the priorities were. Here's what the vast majority of the stimulus money is really being spent on:
*Investing in alternative energy. This is a crucially important mission for our economy, our environment and our diplomacy, and the investments we make in alternative energy will likely pay large dividends.
*Modernizing America's electricity grid. This is perhaps the least talked about aspect because it's the least exciting, but its perhaps the most important. Much of our wind energy potential is in the Dakotas; much of our solar energy potential is in the desert. Not many people live there. In order to harness the bounty of alternative energy, we need to make major investments in creating a grid befitting this century.
*Modernizing homes and building to make them more energy efficient. This is another labor intensive project, and another that will greatly benefit our environment and reduce our future energy costs, allowing us to recoup much of this money in the long run.
*Modernizing health records. Like the electricity grid, this gets less buzz because its importance is far more than people actually realize, and like investments in energy efficiency, it will help pay some of its own cost by drastically reducing annual costs, in this case on health care. The scary truth is, much of America's health information is kept only in 20th-century style paper files (think of the giant rooms of files you've probably seen in your doctor's offices), and this spending will computerize much of these records and finally usher in 21st-century style record keeping.
*Infrastructure. The plan will help build new roads and highways, which helps improve our economic efficiency. Also, infrastructure spending in America has not kept up with our nation's needs for many years, and our infrastructure has shown the strain. We are actually overdue for making this more of a budget priority to begin with.
*Equipping schools with more computers and expanding broadband access across the country. The strictly economic benefits of this are much more difficult to quantify, but in a digital economy, improving our Internet infrastructure is a very high level priority.
These are all extremely judicious uses of taxpayer money. In fairness, one of the few things that conservatives have been right about is that the federal government has usually not been terribly wise at setting spending priorities. So with a caveat that my expectations are very low, I'm extremely impressed with the foresight in this spending package. It is actually the antithesis of what the AFA makes it out to be, and the wisdom shown largely validates my faith in Obama.
That's not to say this is a free lunch. Yes, very much of the spending is very wise and much of it will produce tangible savings in the future. Yes, every dollar we spend will have a multiplier effect that will increase the boost to the overall economy. Yes, a lot of the spending is going to pay for people's salaries, and those people will pay taxes, so the cost of the stimulus in the very short term is slightly inflated. But it is very true that this plan will increase the size of the federal debt, and that debt will have to be paid back later through a great deal of fiscal discipline.
The e-mail I got claims that "It will be your grandchildren and their children who will pay this tax." I really don't know how old the AFA's target audience is, but I'm 27 years old, and I will most definitely be part of the cohort that pays the bill for this spending. And I, for one, am okay with that because I know this plan will provide a vitally important boost in helping us avoid a Japan-style economic drought and/or deflation trap that could depress economic growth for years. And it will leave lasting impact that will improve the world I live in decades down the road. The national debt is not a zero-sum game. The economic benefits this plan confers will create the economic growth that will help us pay for its costs. It's no cheer to the unemployed or underemployed that at least they have a smaller share of the national debt that way.
That's pretty much my substantive stance on the stimulus plan. Time permitting, I plan to write a follow-up blog entry on the politics of this debate, which is even more up my alley. Especially, I plan to talk about the newfound concern with federal debt by the party that practically invented the federal debt. But that's another issue. My conclusion here is that the stimulus plan is an important piece of legislation that deserves our support, and it looks nothing like what hard-line conservatives have made it out to be.
posted by Ithakid | 8:15 PM
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