Too Much Stimulus

I'm not an economist, but neither am I a neophyte. I've had an amateur fascination with economics that began in college and was rekindled when I read the Wealth of Nations fives years ago. I regularly challenge myself with various books and articles.

So I want to put in my two cents on the Stimulus Debate. I'm against any further massive stimulus packages. I will grant that a stimulus package can have some good effects. But I believe the short term gain is not worth the long term side effects.

BTW: If you end up agreeing with me please sign this petition: http://nostimulus.com/

Setting aside a moment whether the the stimulus would even work, I look at this way. We need to take our medicine. Recessions, even big ones, are good. Let's let the medicine do what nature intended: cause us to reset our living and saving habits to a more sustainable level.

Now back to the stimulus. Will it work? The Keynesian philosophy is that for every dollar of government money spent, there is a multiplier effect. One study suggested the multiplier is around 1.4. So we spend a trillion and GDP grows by 0.4 trillion. Sure, if your goal is to get the economy going, that is great. Adding 0.4 trillion to a 13 trillion economy can help. (A multiplier less than 1.0 would mean that the stimulus was harming the economy by crowding private investment and channeling economic activity into less productive venues.) So yes, stimulus packages can work.

But can there be any drawbacks to an additional massive stimulus program? I can think of some

1. All of the lowing hanging socialist fruit has already been picked! We already have a major stimulus package in effect. Unlike the Great Depression, we already have major social programs in place that guarantee payments to those who are hardest hit. We have employment insurance. President Bush has already signed into law an increase of unemployment benefits up to 39 weeks. That's a major stimulus package. We also have medicare recipients whose benefits guarantee a steady flow of stimulus to the health care industry. Need I mention social security? Just remind yourself how much the government already force feeds the economy here: www.usgovernmentspending.com.
   
2. How about the long term? The chickens have to come home to roost. Higher taxation or inflation must pay for the stimulus. Granted, the multiplier effect I talked of will generate more tax revenues (just as the Bush Tax cuts did) So that helps. But assuming tax revenue of 10% of GDP, you'd need a multiplier of 10 to have the stimulus pay for itself. (stimulus * 10 * 0.1 = stimulus) With a more realistic multiplier of 1.4, you don't get a free lunch. (But I will grant that multipliers can be much higher if spent on the right things)
   
3. Lag time. My gut instinct is that if we manage to keep the financial sector stable, this recession will work itself out within a year. Some economists have estimated that the lag time for stimulus packages can be such that the positive effects come after the recession is already over. Then, just as the private sector is getting going again, it is suddenly competing with government expenditures, and you get much more price pressure (inflation) and the allocation of resources is more heavily weighted to government projects which are less efficient than private ventures.
4. Even assuming that the stimulus works great and it comes in time to make a difference, what confidence do you have that the government can ever wean itself of the greater power and control over the economy? I have worked in government. I know exactly how governments operate versus the private sector. We don't need a long term society that is weighed even more heavily toward government control. The New Deal already set the bar so high that we have an impending baby boomer crisis. Let's not plant more seeds to destroy our once great country.

One more point that needs to be brought up. President Bush did not lead as a fiscal conservative. This stimulus package debate should be answered by simply looking at how well Bush's policies turned out! Government expenditures grew under President Bush by trillions of dollars. I'd have to check, but I think Bush outranks every president since Roosevelt in terms of adjusted dollars (probably not in terms of GDP) The Iraq war, Homeland Security, Prescription drugs, No child Left Behind, billions in bailouts last year. This was all government stimulus. Look where it got us? Yes there were almost 7 years of interrupted economic growth, but the chickens came home to roost.

Here are a few articles written by economists on the stimulus debate:
Against
Mankiw
For
Krugman
Middle of the Road
Cowen and also this

Other Links
Pro And anti-Stimulus arguments back in Jan 2008 (Remember the stimulus checks last year?)
Refutation of the Keynesian Multiplier
Is More Government The Answer?

Alexander Hamilton: the greatest founding father you never knew

"If Washington was the father of the country and Madison the father of the Constitution, then Alexander Hamilton was surely the father of the American government"-- Ron Chernow

This last year I was richly rewarded by reading Ron Chernow's "Alexander Hamilton". I will never look upon American history the same. Alexander Hamilton is greatly under appreciated. Hamilton's importance easily matches that of Washington, Franklin, Jefferson, Adams, et al. Hamilton was key to winning the Revolutionary War. He was key to getting the Constitution ratified. He was key to establishing a successful national government. He laid the foundation for modern American capitalism. He wrote volumes on law, government, and finance. Too much cannot be said of his accomplishments.

From Chernow's well written book, we obtain great insight into the founding of the Republic. I was fascinated by his ability to lay bare the imperfections of our founding fathers. These men were gifted, but regular people. Our heritage is that these individuals balanced out the excesses of one another to forge a new government based on citizen participation and freedom.

I was fascinated with the politics of the new American government. Hamilton is peculiar in that today's Left and Right can both find much to love and hate about him. As a "High Federalist" he is known for having expanded the role of government early on. He was hated by the Anti-federalists and the Republicans (not be confused with today's GOP) for creating a national bank and for strengthening the central government. That would seem to make him a "liberal" by today's standards. But Hamilton did not believe that government programs could fix people. He believed in creating a strong financial system which honored contracts and property rights. He also deplored the secularism and the mob rule of the French Revolution. He understood that people are imperfect and always will be. That makes him a conservative.

Chernow's account of Jefferson might surprise contemporary students of politics who are accustomed to putting him on a pedestal. Jefferson was conniving and back stabbing. He was hypocritical. Despite his shortcomings, his idealism was a major contribution to American freedom. Politically, he is a mixed bag. His humanist side makes him a liberal, but his distrust of centralized power makes him a conservative. I think he would turn in the grave to know that liberalism has morphed into a socialism that has brought us the centralized oppressive bureaucracy he so feared.

One thing that really jumped out at me after reading Alexander Hamilton was: why isn't there a movie!? Exotic locales, war, dramatic courtroom scenes, the adulterous affair and subsequent extortion, internecine battles, and of course...the duel. It doesn't get any better than this. When is Hollywood going to figure out that there is a blockbuster here?

If you only read one book about the Founding Fathers, this should be it!
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Random Quotes from the book:
"Tis by introducing order into our finances--by restoring the public credit--not by gaining battles that we are finally to gain our object". -Hamilton on the economic side of national security

"A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement of our union." -Hamilton on the benefits of public debt. (bold type added by me)

"Financial embarrassments led to those steps which led to the overthrow of the government and to all the terrible scenes which have followed." -Hamilton on how excessive debt led to crises in France

"The law is whatever is successfully argued and plausibly maintained" --Aaron Burr

"He was not a politician seeking popularity but a statesman determined to change minds." -Chernow on Hamilton's rigorous defense of an unpopular Tory. (Reminds me of John Adam's defense of the Boston Massacre soldiers)

"The rancor ushered in a golden age of literary assassination in American politics. No etiquette had yet evolved to define the legitimate boundaries of dissent. Poison pen artists on both sides wrote vitriolic essays that were overtly partisan, often paid scant heed to accuracy, and sought a visceral impact. The inflamed rhetoric once directed against Britain was now turned inward against domestic adversaries." -Chernow on the partisan politics of new nation. (Remarkable how little things change)

"The future secretary of state [Jefferson], now sailing home, was to strike Hamilton as just such a 'philosophic politician' ignorant of human nature. Hamilton later explained to a political associate that Jefferson in Paris 'drank deeply of the French philosophy in religion, in science, in politics' " -Chernow on Jefferson's infatuation with the French Revolution

"Owing in part to Hamilton's generous construction of [the general welfare] clause, it was to acquire enormous significance, allowing the government to enact programs to advance social welfare." -Chernow on Hamilton's eventual influence on modern social welfare programs.

"The superstructure of credit is now too vast for the foundation...It must be gradually brought within more reasonable dimensions or it will tumble." -Hamilton on the bank scrip bubble of 1792. (Again, how little times have changed.)

"[Hamilton] learned a lesson about propaganda in politics and mused wearily that 'no character, however upright, is a match for constantly reiterated attacks, however false.' If a charge was made often enough, people assumed in the end 'that a person so often accused cannot be entirely innocent.' " -Hamilton on the effectiveness of negative politics

"The period of John Adam's presidency declined into a time of political savagery with few parallels in American history, a season of paranoia in which the two parties surrendered all trust in each other. Like other Federalists infected with war fever, Hamilton increasingly mistook dissent for treason and engaged in hyperbole" -Chernow on party polarization. (We saw a close repeat during the last decade)

"Hamilton had intuited rightly that Jefferson, once in office, would be reluctant to reject executive powers he had deplored in opposition" --Chernow on Jefferson's flip flop regarding executive power once he was president.

"Hamilton never believed in the perfectibility of human nature and regularly violated what became the first commandment of American politics: thou shalt always be optimistic when addressing the electorate." --Chernow on Hamilton's conservative view of human nature.