David Shemano wrote: > Let's see, in the past 8 years, > we have had tax reductions, two > wars, and huge increasing budget > deficits. Who among you is > going to say with a straight > face we have not had a huge > fiscal stimulus? The stimulus > worked great for 6 and 1/2 years > until we all realized the stimulus > had gone into building homes for > people who can't afford them. > > So as we deal with the hangover of > the last stimulus and stumble > toward rationality, Nobel winner > Paul Krugman is arguing that the > solution to our difficulties is a > bigger fiscal stimulus? The > problem with Bushonomics was that > we did not have enough tax > reductions, wars and budget > deficits? You all realize this is > insane, don't you?
Let's break down Bush's fiscal stimulus into its main pieces and use basic macro to sketch its effects: (1) massive tax cuts for the rich and (2) military spending. Tax cuts (delta T) to a group of people have a smaller multiplier effect than additional government spending (delta G) targeted to same group. In a ridiculously simple economy, delta Y = [1/(1-k)] delta G, where Y is real output, and 0 < k < 1 is the marginal propensity to consume. On the other hand, delta Y = [k/(1-k)] delta T. On top of that, it's well known that rich people have a substantially lower k. You give them an extra dollar (in reduced taxes or a G handout) and they are not likely to spend it in current consumption. They'll put it away. But say their k = .5 (i.e. they spend in consumption one half of the extra dollar the government gives them), then the their T multiplier is 1 -- i.e. there's no multiplier at all, since you just get delta Y = delta T. Now make k < .5 (not unusual among the extremely rich, main beneficiaries of Bush's largese) and you have a contractionary effect of tax cuts! Military spending is a form of G, which has a greater multiplier effect than T. Let alone the fact that it is fundamentally wasteful (of people and resources), especially when the war is contrary to the interest of regular Americans. The higher multiplier items in military spending are the salaries of soldiers -- again, because they have the highest k's. G money appropriated by Bechtel, Halliburton, etc. doesn't have much of a multiplier effect, because the Cheney's of the world have low k's. Moreover, in the long and not-so-long run, a large portion of this type of G amounts to massive public divestment, as documented by Stiglitz and Bilmes. That's aside from the fact that ridiculously simple macro models tend to exaggerate the size of the multiplier. So, for the most part, the boom in real estate wasn't due to Bush's fiscal stimulus. It was mostly the result of cheap global money in a financial climate of anything goes. Although we tend to blame Greenspan for the easy money, the fact is that the cheapening of money in the early and mid 2000s wasn't mainly his fault. The reserves built by Japan, China, and oil-exporting countries were mainly parked in USD-denominated debt. That's what kept the rates low. We need, not only a larger fiscal stimulus, but also a smarter fiscal stimulus. While in the very short run it may matter less, where exactly delta T and delta G go is crucial to the performance of the economy in the long run. G = G-investment + G-consumption. In turn, G-investment and G-consumption can be decomposed into good (in public health, education, social equity, infrastructure, science, technology, environment) and bad (military, pollution-inducing/anti-social infrastructure, waste). Guess which one we owe to Bush and which one we need. _______________________________________________ pen-l mailing list pen-l@lists.csuchico.edu https://lists.csuchico.edu/mailman/listinfo/pen-l
