Gift-Wrapping the White House for the GOP

by Stephanie Kelton

It looks like Christmas has come early for one of President Obama’s most vocal critics. Rush Limbaugh said he hoped the president would fail, and the GOP is doing everything it can to make sure he does. The party stands united in its opposition to a (much-needed) ramping up of the federal stimulus effort. And, at the moment, the president is playing right into their hands.

Sen. Jon Kyl, R-Ariz., has called the $787 billion stimulus effort a “flop,” adding:

“The reality is, it hasn’t helped yet. . . Only about 6.8 percent of the money has actually been spent. What I propose is, after you complete the contracts that are already committed, the things that are in the pipeline, stop it.”

In other words, he thinks the stimulus isn’t working because the government isn’t spending the money FAST enough. And, with the lion’s share of the spending about to kick in, he wants to scrap the entire effort, just to make sure it won’t work.

The only thing more disappointing than hoping the president – any president – will fail is actively working to keep millions of Americans unemployed in order to score political points in the coming election. But that’s exactly what’s happening, and the president may be painting himself into a losing corner.

President Obama has insisted that: (1) the stimulus is working as planned; (2) a second stimulus is not needed; and (3) he will cut the deficit in half by the end of his first term.

If he sticks to his guns, I believe he will dig his own political grave (not to mention prolonging the agony for millions of Americans). He cannot have it both ways. He cannot reverse the effects of the worst economic downturn since the Great Depression and do it on a shoestring.

That isn’t to imply that $787 billion is chump change, but it pales in comparison to the losses that have already been borne by homeowners, businesses and investors. As Dean Baker recently pointed out, annual consumption is down about $700 billion (due to the loss of roughly $16 trillion in real estate and stock market wealth). Add to that “a reduction in annual rates of construction of about $450 billion” and a decline of “approximately $200 billion” in demand due to losses in the non-residential sector, and Baker says we’re looking at an annual loss of about $1,350 billion. And we’re trying to offset it with $300 billion or so (the annual stimulus) in spending by the federal government! It’s like using an umbrella to stop an avalanche. It won’t work.

But it gets worse, because Baker’s figures don’t account for the void that has been created by state and local governments, where expenditures have fallen by more than $64 billion in the last two quarters alone. And, with virtually every state bracing for even bigger cuts next year, we could easily lose another $100 billion or so in fiscal 2010. Then, of course, there’s the multiplier, which has been hard at work, exacerbating the magnitude of these cuts and costing us untold trillions in lost GDP.

But the president seems convinced that $787 billion will do the trick – at least according to his definition of the trick. You see, the Obama administration has not set the bar very high, and this seems to be why the president believes the stimulus has “worked as intended.” As he explained, it “wasn’t designed to restore the economy to full health on its own, but to provide the boost necessary to stop the free fall.” And this is why even bad news – e.g. 565,000 people filing first time jobless claims – can be interpreted as an indication that the stimulus is working as intended. (Recall that this was the smallest number since January 2009.)

Indeed, the president’s top economic advisors have always been careful to use the words “create or save” when describing the objective of the stimulus plan. And this means that net job creation isn’t the goal. The economy can continue to lose jobs faster than it creates them, and the policy will be described as “working” because the stimulus money helped at least some workers keep their jobs.

So the stimulus may be working “as intended,” but I don’t think the president can rely on semantics to carry him to victory in 2012. If President Obama wants a second term, he must join the growing chorus of voices calling for another stimulus and press forward with an ambitious program to create jobs and halt the foreclosure crisis. I have outlined my twelve-step recovery program, and others on this blog have put forward similar ideas. A payroll tax holiday that cuts FICA contributions to zero will provide immediate relief to millions of working families and their employers, boosting take-home pay as well as business profits. An additional $1,000 per capita will help ease the on-going budget crisis so that states can avoid further cuts to education and social services. A job-guarantee program, modeled on the WPA, will provide useful work and retraining opportunities for the many Americans who will not find jobs even after the economy recovers. Investing in our nation’s infrastructure – roads, bridges, transmission lines, etc. – will address years of neglect and improve the safety and security of all Americans.

These are the kinds of tangibles the American people will think about when they decide for themselves whether the stimulus was a success. At the end of the day, President Obama must cut loose the deficit bogy and abandon any date-specific goal for cutting the deficit in half. It is his Achilles heel. Let the deficit (and the debt) go where it will. With a sufficiently flexible fiscal response, GDP will explode, tax receipts will pour in, and the dreaded debt-to-GDP ratio will drop like a rock.

4 Responses to Gift-Wrapping the White House for the GOP

  1. Karl Smith recommends that the Treasury simply pay each taxpayer's payroll tax one year.

  2. Pay it to whom? The Trust Fund? That would be fine, i guess, since it is just an internal accounting entry; it neither helps nor harms anything. It would probably make a lot of people feel better, though, because they don't understand government finance and think the government needs a positive balance in the Trust Funds in order to pay retirees. My primary interest is in restoring private sector balance sheets. A payroll tax holidy will leave more than $20 billion per week in the private sector.

  3. «The only question is how the trust fund should be invested.»This seems a sensible question but it is instead really dumb. Because we are talking about a colossal mass of money covering *everybody* in the USA. The *onlY possible investement* of this is in GDP growth, in other words in growth in tax receipts, which is what the fictional investment in special Treasury bonds does.Do you really think that one can do stock picking with the amounts of money involved?«In principle, it can get a better return by investing a portion of its assets in the market.»Why? It is a possibility, but it can also earn a *worse* return by "investing" a portion of its assetsin the market.The reference number is again the real growth of GDP, and the really good question is whether retiree benefits can grow faster than the real rate of growth of GDP, and if they are invested in the "market", whether *real*, *net*, *risk adjusted* stock returns can be higher than real GDP growth for decades.The other good question is whether the *real*, *net*, *riskless* returns on the SS special bonds of 3% can be realistically beaten by any other investment over a period of decades. Numbers like 7% for *real*, *net*, *risk adjusted* returns sound to me grossly ridiculous.The very best investment strategies aim to get 3% real net risk adjusted returns, and often don't get that, never mind investing a large chunk of GDP.Look, if people think that 7% real net risk adjusted returns are possible in the stock market over the long term, that is over twice as fast as real GDP growth (which in our dreams averages 3% a year), how comes investment income hasn't become much larger than GDP? :-)The best technique of scammers and conmen in the past 25 years has been to hint to the scared, stupid, greedy jerks in the "middle" classes that they can *all* sail into a luxurious effortless retirement with capital gains and capital income that grow faster than GDP and labor incomes; and the scared, stupid greedy jerks in the middle classes have been enthusiastically voting for those schemes.The only ones getting rich are the professionals, the insiders, who skim off with flips and fees what they can. Every proposal to "invest" SS funds into the stock market makes them salivate with the idea of charging account fees to a lot of suckers and then sell into a massive way of sucker buying and holding stocks in a self-fulfilling Ponzi prophecy of faster-than-GDP rising stock prices, that is until they need to draw down their accounts, and they discover they got a lot less than 3%, never mind 7%.

  4. I know there is the big macroeconomic question of to stimulate or not. On a smaller level, there is a great opportunity for the President to call the balanced budget advocates hand. We need reductions in defense spending, pension reform and reductions in federal government pay levels.