From this day forth, I hope I never hear a pro-stimulus advocate say another word about the dollar cost of the Iraq War. We can talk about the human cost but that would be a different blog.
This week's stimulus plan is coming in around 900 billion. That's about 1 trillion dollars, or about 7% of our entire GDP (and this on top of the trillions of stimulus and bank aid already doled out). The entire projected ten year cost of our involvement in Iraq is 1 trillion dollars, or 100 billion a year (See this analysis ). When President Obama signs this bill, it will have about the same financial consequences as the 2003 Invasion of Iraq.
I realize that money spent in Iraq is not the same as money spent in the U.S. But it is no worse than "stimulative" expenditures that create no long term infrastructure. (5% or less of the current stimulus plan actually goes to infrastructure.) Every Humvee, tank, or tomahawk missile purchased sent income to American firms, engineers, workers, and local economies. Every soldier who receives a paycheck saves it in largely American banks and spends it on products imported from the U.S. and sends money home to families in the U.S. Need we forget that WWII is what finally got us out of the great depression? (Not a fun way to get out of a depression).
Patronage by another name: The political usefulness of stimulus
In my last post, I talked about the nature of stimulus and why, at best, it adds only a few percent to the GDP. But at worst, it puts productive labor into less productive uses. People who are driven by market price signals work really hard to find efficiencies that improve our standard of living. Government often picks projects based on political usefulness, not efficiency.
The 1930 Great Recession was triggered by the missteps of a Republican administration (just as the 2008 recession was). But it took a Democratic administration, coupled with continued poor monetary policy by the Fed, to extend the recession into a 10 year depression. But worst of all, Roosevelt used the depression to permanently institute widespread dependence on federal government patronage. The depression was a political tool. And so it is with Obama today. Recently at the Elkhart town hall meeting he admitted the usefulness of the "crisis": "if we don’t use this crisis as an opportunity to start retooling..." And Obama's chief of staff has said, "Never let a serious crisis go to waste."
Roosevelt used his fiscal power to control elections. WPA workers were reminded who their benefactors were. Greater federal funding was promised to voters...if they voted correctly. Patronage went to the party faithful and was denied those who dare cross the President. Roosevelt attempted to take over the courts (through court packing) and he tried to buy influence over the legislative branch.
President Obama will not go to these extremes. But does anyone doubt that the stimulus will find its way into the pockets of Democrats to a larger degree than Republicans? Who will stimulus recipients feel obligated to vote for in the next election? That said, I do hope we can make lemonade out of this lemon. We owe it to the President to keep him honest and accountable.
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Howdy, back from my vacation. There's a big difference between war spending and spending on infrastructure. When war spending is done, all you have is lots of holes in people and lots of holes in the ground. When infrastructure spending is done, you have lots of shiny new highways and bridges and subways and high speed trains and stuff that will be used for the next fifty years, just as we are today using all of President Dwight D. Eisenhower's stimulus highways (the Interstate highway system) fifty years after he built them.
In short, war spending literally disappears into holes, either in the ground or holes in other people. Infrastructure spending goes into stuff we'll use for decades and decades and decades in the future. All that moving infrastructure spending into the present does is shift it to the present from the future -- these bridges and roads and such would need to be built anyhow as the current ones wear out, but now they're built a little sooner, meaning we don't have to spend money in the future to build them.
In short, I have no problem with the infrastructure parts of the stimulus bill, they're just shifting future expenses to the present. Some of the other parts are dubious -- tax cuts right now will just become mattress money (see my blog for an explanation of why tax cuts during a deflationary cycle simply disappear under mattresses as useless pieces of green-colored toilet paper rather than doing anything for increasing the flow of goods and services in the economy), and really, I can't see what spending on birth control has to do with the economy, but you must admit that bridges and roads are useful, right?
- Badtux the Economics Penguin
I totally agree with you that infrastructure spending can have a pay off. The problem is that there has been very little discussion of the ROI for these projects. The figure I heard was less than 5% for infrastructure. So it isn't about having an ROI...it is about patronage, shifting more of the economy into government control, and pumping up an economy that was overheated and needed to cool down.
If you pay people to work on low ROI projects, it is exactly the same as war. Whether paying people dig holes with a shovel or create them with bombs, it is the same outcome, except in the latter you at least invest in technology which eventually benefits the private sector.
I don't want to return to 2007 levels of consumption. We need to deflate home prices a little. We need people to increase their savings and live a little less on borrowed money.
A positive side effect of a recession is to correct people's spending habits, realign markets for sustainability. Less consumption also helps the environment. We need people flying and driving less, buying smaller homes, thinking twice about throwing away things that work fine. I know statists believe the government should tell people how to conserve, but the market sends those same signals with much less infringement on freedom.
Let me get this straight. Roads, bridges, long distance electrical wires, etc. have no "ROI", whatever the heck that means? What'd you do to get to work today, flap your wings and fly? What are you powering your computer with, a hand-cranked generator?
Infrastructure is necessary for a modern economy. Period. People who say it has no "ROI" should move to Mexico if they think infrastructure is so unnecessary. Do you *seriously* believe that we'd have today's modern economy if not for President Eisenhower's Interstate Highway System? You *do* remember when the average speed on clogged two-lane long-distance highways was 45mph, when it took all day to get from one side of the state to the other, when towns were at the mercy of the single monopoly railroad company that brought freight to their town and had to pay whatever that single monopoly railroad company forced them to pay just to get basic food and clothing to town, right? By basically being impossible to monopolize, the Interstate Highway System transformed our economy and led to the situation where I can order a new computer over the Internet and it arrives on my doorstep three days later, deposited there by the helpful dude in the cool brown truck for cheap. We literally could not have the Internet without infrastructure.
Regarding the current situation, the most pressing thing to do is avoid a deflationary spiral, where debt defaults cause a deflation of the money supply, which inflates debts, which causes further debt defaults, which cause a further deflation of the money supply, etc. Unfortunately inflationary-deflationary cycles are inherent in any economic system that includes fractional reserve lending, whether said economic system is on the gold standard or not, so we need some mechanism -- let's call it "government" -- for re-inflating the money supply (to avoid debt inflation) when the economy meets a down cycle. I've explained this in a series of five long and detailed postings on my own blog, so I'll just direct you there for gory details.
As for the question of reducing consumption, there's no real way for the market to do this in a way that retains near-full employment. And from a social point of view, if we have an economic system that does not include near-full employment, then the people as a whole will reject it, possibly to the point of 1789 (i.e., a violent revolution with the heads of the rich being cut off and thrown into the local rivers and the bodies thrown out for the buzzards and coyotes to eat). The Europeans have significantly lower consumption than we have here in the US, and near-full employment, but they also have significant laws decreasing the efficiency of their economies. For example, in Germany a contractor cannot go out and hire a bunch of illegal Mexicans err Turks to build his houses. He must hire Certified Craftsmen, who are then allowed to use only certified inefficient construction methods, in order to maximize employment in the construction industry. And so on and so forth. The Europeans seem to be happy with this tradeoff -- a lower standard of living in order to maintain full employment at a lower resource usage level than the United States -- but it requires significant government intervention in their economies. Somehow I doubt you'd be happy with the amount of government intervention that the Europeans use in order to maintain near-full employment at lower consumption levels than in the USA.
The basic problem is that we're just too darned efficient nowdays. We can produce too much stuff too easily with fewer people than ever in human history. We tried getting around this by turning the US economy into a "service economy" where we basically sell each other used cars and real estate in order to maintain full employment after we no longer needed so many people to build cars and electronic gizmos and so forth, but that still requires having sufficient "stuff" moving around in the economy to employ all these real estate salesmen and used car salesmen and so forth. If you reduce consumption of, say, cars, then you don't need as many car salesmen. Those people become unemployed. No big deal if it's *just* the car industry going down, but if it's the entire economy going down, service sector jobs go down across the board and unemployment or underemployment rises. Past a certain point, there is a significant risk of revolution as people will not willingly accept a massive decline in their living standards without overthrowing and killing the people they hold responsible for that decline. Frankly, I would prefer to live in a free nation *not* controlled by the sort of fascist or Communist dictatorship that always arises from violent revolutions, thank you very much...
So you've put your hands on a hard problem, the need to reduce consumption to match resources available, but unfortunately, the only solution we've seen that actually works without causing massive unemployment and violent unrest and revolution is massive government intervention in the economy to basically cause the economy to be less productive in order to maintain full employment. Any other ideas? And don't talk about the invisible hand. Invisible hands are, well, imaginary. Don't exist. No such thing. They're religion, not science, and religion is a crappy way to run an economy (just ask the entire Middle East, which is a hellhole of misery because they allow religion to rule their economies).
-- Badtux the Economics Penguin
The first half of your latest comment argues against a position I did not take. I think I categorically stated that sometimes government investment can have a big pay off, such as the interstate highway. ROI is a term we often throw around in business. It means "Return on Investment" I shouldn't have assumed that jargon was widely used.
I think a simple example can show that the ROI of spending on infrastructure is not necessarily greater than 1.0 Take for example a bridge project. You could build a bridge in the middle of nowhere and it would not pay for itself in future efficiency. Even replacing an old bridge that could be reasonably made safe with proper maintenance isn't necessarily an efficiency improver. From an efficiency point of view, it makes more sense to extend the life of capital improvements where possible. Let's take weatherization as another example. If large buildings have similar energy efficiencies as my house, then the cost of energy is about 1% of the capital cost of the building per year. Let's say it costs only 10% of original cost of the building to weatherize it to save 20% in energy costs. Let's see how long it takes to have a positive return on investment. After the improvements, we save 0.2% of the cost of the building per year in energy. 10/.2 = 50 years. That is long time to break even. Perhaps my assumptions are pessimistic, but I don't see a big ROI. And now consider that only 15% of the stimulus package is slated for infrastructure the ROI in terms of future efficiencies is very low. With the current stimulus package, I think you are better off doing what Krugman is doing... emphasizing the comparison to war time spending.
I agree that deflationary spirals are a threat. But I'm not ready to concede that we need to socialize the economy as the solution. And though it is only anecdotal, in my neck of the woods, I haven't seen a downward "spiral" in prices.
I thought you had some insightful comments about efficiency versus full employment trade-off. I personally do not like the idea of full employment. I think at least 5% unemployment is healthy. Having 1 in 20 people looking for work is a about what should be expected in a dynamic economy that allows less efficient businesses to die while new ones are created.
Considering the extent that we are already a socialist country with plenty of safety nets, I think your worries about 1789 are unfounded. I can't see people becoming murderous because they had to move from 5,000 square feet down to 3,0000. It is the increasing incivility and political polarization that looks more like 1789, and 1860.
On the other hand, that old bridge is going to need to be replaced at some point in the future. All we are doing by moving its replacement to *today* is moving its replacement to *now*, rather than to some point in the future. We're time-shifting the cost, we're not creating some new cost out of thin air.
If you do not believe that our roads and bridges need help, you have not driven long distances recently. I've driven across most of the Southwest. Our roads are terrible and getting worse. Our bridges are woefully obsolete, our mass transit systems incapable of handling the load being placed upon them.
As for people having to downsize, no. People who lose their jobs don't end up downsizing. They end up on the street. You can't rent an apartment or keep your house if you don't have a job. Six months, and then you're on the street.
5% is what I, and most economists, would consider "full employment". That is, the sort of economy where the only unemployment is temporary unemployment of a few months in duration as people move between jobs as the neural network that is the normal job market functions to shift people to where they are needed.
I don't share your fetishism for capitalism as a religious end in and of itself, BTW. Capitalism works better than the alternatives because it exploits the network effect of resource allocation using tokens to denote lesser and greater value for how resources should be allocated. In computer science terms, a working market is a neural network that is "trained" by money to move resources to where they are most useful. The problem is that a working market requires several things in order to, well, work. It requires a stable currency (the token system used by capitalism to "train" the market as to where resources should be best used), it requires government regulation to make sure that various operators in the market are not rigging the rules in order to move resources into inefficient locations such as Bernie Madoff's clutches or Enron stocks (if the rules have been rigged, the neural network no longer allocates resources as to where they are most efficiently used, instead it allocates resources according to the rigged rules, therefore reducing the efficiency of the market's allocation of resources), and it requires a suitable governmental infrastructure to protect property rights, ensure that common services not provided by the market for some reason remain up and going, and provide for a stable society for the market to operate in. Note the "stable society" part. A free market system cannot efficiently operate in an unstable society.
However: Capitalism is a means to an end -- a good life for the majority of people. Where it does not achieve that end, We The People (because we live in a democracy) can, do, and have gathered together to do for ourselves what the market has not done for us. You can call this "socialism" if you wish. But I call it democracy, We The People gathered to do the right thing for ourselves. Government is *US*, not some outside dictatorship imposed upon us by force. We voted for the people who run this country. They weren't imposed on us by some evil dictator in some foreign land. Funny, how some folks love democracy... except when democracy conflicts with their favorite religious beliefs by, well, deciding to promote the general welfare of the people who comprise the government, rather than deciding to promote their favorite religious belief (whether said religious belief is "Christianity" or "capitalism").
Regarding deflation and deflationary expectations, note that deflationary expectations do not mean price deflation. They mean wage deflation and the expectation that your wages will go down in the near future either because you become unemployed or because you must accept a wage cut to keep your job. Wage deflation is the same thing as debt inflation, since it makes your debts harder to pay. Across the country people are being forced to take wage cuts in order to keep their jobs. For example, the State of Nevada just imposed a 10% wage cut on all its workers, GM just imposed a 10% wage cut on all its workers, etc. The problem is, this makes debts less payable. Eventually this *will* cause price deflation too as lower wages result in lower costs of goods sold and thus lower prices, but the current inventories, created with resources purchased at the higher prices, will have to work their way through the economy first. And given that current inventories are at their highest in recent history, and demand is the lowest that it's been in forty years, that's going to take some time. But anyhow, the main issue right now is wage deflation which is causing debt inflation which in turn is going to further decrease demand as money that was going to consumption instead goes towards paying debts that have suddenly inflated as a percentage of family income. Which is going to cause further job losses or wage cuts, which in turn will cause further debt inflation, rinse, repeat, dry. The only thing that will break this cycle is government intervention -- specifically, easier access to bankruptcy to deal with debt inflation, government bailouts of the banks who suddenly see their debt portfolios turn into pumpkins, and more money pumped into job-creating things like building infrastructure in order to both provide employment directly and to get consumption back up and going at reasonable levels to sustain full employment (and note I'm using the economist's view of full employment, not some theoretical "every single person is employed at all times" view).
Note one thing that *nobody* has proposed: the U.S. government actually creating a socialized economy, i.e., one that is state controlled from top to bottom. Even the most daring of people look more at the Norwegian mixed economy model rather than a full socialized economy, because frankly, fully socialized economies have generally sucked at creating a good life for most of the people, because they're horribly inefficient at resource allocation. We should have exactly the amount of socialism we need to handle problems that the market hasn't handled well or at all -- and no more. And everybody currently in charge of the country is an adult and recognizes that, which is why President Obama has been so reluctant to socialize the banking industry despite the fact that all the lefties are saying it's the only way to solve the crisis. Cries of "socialism! socialism!" given evidence that the current leadership has nothing of the sort in mind are sheer alarmism, just scare tactics by bitter demagogues disappointed that they lost an election, no different from the cries of "facism! facism!" that came from left-wingers after Bush won in 2000. Get over it. You lost. (Same thing I said to the leftists in 2000, BTW).
- Badtux the Economics Penguin
I think your stereotyping me. I'm a conservative and a capitalist, but I can see the benefits of government and of socialist measures. The original message of this blog was to warn of the downside of massive spending and paternalism...perhaps so we can prevent some of it. I would hope that you'd want an army of critics forcing accountability. I would also hope that you'd acknowledge that there is a downside and consider that it is within the realm of possibility that the cure is worse than the disease. And the fact is, we'll never know. Everyone can play this thing as if they were right. Say the stimulus doesn't work...Krugman can immediately blame the fact that it wasn't enough. Conservatives can blame the stimulus itself.
I don't share your fetishism for central planning. I am a computer engineer. I have trained a few neural networks in my day. I think the analogy is biased in two ways: it presupposes that there is one common goal (the good life) and it's structure can be manipulated to get the desired answer.
I think a better analogy for the market in computer science terms is this: it is a distributed network of automatons each of which has both individual goals and shared goals. Some automatons have a very different view of what "the good life" means. The automatons have to vie with each other for shared resources. Money, as you said, is just a token that represents the willingness and ability of these automatons to perform services for others. Someday I'll need to refine this analogy.
Penguin, I appreciate your thoughts on socialism and your attempt to remove the stigma associated with it. You did well. I'm glad you're willing to have a mixed economy. If someday I try to remove the stigma associated with conservatism, I hope you'll remember my magnanimity here today.
This doesn't count the secret Pentagon budget, double the amount easily for the cost of the Iraq War. It bankrupted the USA along with the shady housing market under Bush and we'll all pay the price.
I suppose you are talking about this.
The amount of the secret part of this budget increased by 16 billion a year under Bush. Even if every dollar of this increase went solely Iraq, this would only add 100 billion at most to the cost of the war. With the many demands on the DoD, it is unlikely that all of this went to Iraq. Notice as well that the increases in this budget are simply a recovery from Clinton's draw down.
Hey nate, Im not that smart, but to me the difference between the Iraq war and the stimulas package is that the Iraq war is a waste of time and money and that the stimulus is meant to help..............? hope your not mad i commented on your blog :)
I'm just providing some perspective. Whether or not the goals of the war are as lofty as the goals of the stimulus (the opposite can be argued), the stimulus is more expensive. This blog was about financial impacts, not about rehashing the pro/cons of either the war or the stimulus. I do argue in a separate blog that the stimulus will harm more than it helps, regardless of the good intentions.
Based on anything regarding ROI and Afghan or Iraq War, I really see no reason why we are in either country. I believe if there is one threat anywhere it should only require one man and one bullet to resolve the problem. Are we worse than the former Soviet Union that was in an economic pissing contest with the U.S. ? I still cannot believe that Ronald Reagan got credit for ending the Cold War.
nathan2209 at least with the stimulus the money is going to improve our own country. check out the cost of the concrete bunker (a.k.a. US embassy in Iraq). Funny thing is the US government is going to spend more for a concrete box in th U.K. (thought the U.K. somewhat liked us). Also kind of interesting that the one person we want to shoot is from Saudi Arabia and not Iraq or Afghanistan. I think the Afghans are tired of this b.s. from the west after Russia dropped billions of dollars (current time value of money).
We have seen free elections in both Iraq and Afghanistan. That is worth something, though I agree it isn't worth much monetarily. I'm about ready to call it quits on American imperialism until we get our own house in order. My worst fears about the stimulus have come to pass: 1. it didn't work, and 2. it is being used for political favors to the ruling class. Half the stimulus money is being held in reserve in order to be spent just in time for elections. This is 3rd world politics right in the U.S.
It's 2011 and my fears have been realized. The stimulus did not work, it was spent on patronage (Solyndra, etc.), unspent stimulus will be rolled out this year to influence elections, and our recession has been prolonged.
Keep in mind, not only did we spend the 1 trillion, but deficits rose at a record rate, and the FED pumped more trillions. I'd say the Keynesians had plenty to play with. I concede that a more precipitous fall may have been prevented. But the total "pain" under the curve has not been averted, and now we just have untold amounts of debt to repay or inflate away to the detriment of every saver and consumer.
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