DOES GOVERNMENT SPENDING HAVE A MULTIPLIER?

I keep hearing that government spending has no multiplier effect on the economy, and I have wondered what is behind this so I started Googling around and found the following article from the Heritage Foundation (URL at the bottom). I guess my thought is that the reasoning is partially correct and partially wrong. First I'll start with what I think is at least mostly wrong:

And if the original $1.2 trillion in deficit spending failed to slow the economy's slide, there was no reason to believe that adding $200 billion more in 2009 deficit spending from the stimulus bill would suddenly do the trick. Proponents of yet another stimulus should answer the following questions: (1) If nearly $1.4 trillion budget deficits are not enough stimulus, how much is enough? (2) If Keynesian stimulus repeatedly fails, why still rely on the theory?

The problem with this paragraph is that the $1.2 trillion dollar deficit was not from NEW spending by the government,it was almost entirely because of a decrease in revenues by the government from decrease income and production due to the great recession. In other words, the government kept performing its old programs while the money to implement them decreased. After all, you would have to eliminate the ENTIRE Federal government as we know it (including the DoD) to eliminate the estimated deficit this year. The following paragraph, however, makes some sense:

Congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else. This paragraph would be true if the wealthy, for example, spent the money comparable to what the government does. In other words, if the wealthy increased the number of homes they were building, say, to counteract an increase of government infrastructure spending (most on roads, so far, I believe). Thus a billion dollars spent on new houses by the private sector would probably have a multiplier equivalent to a billion dollars spent by the government on roads. Would that reality be this way. I've explained why it would not more than once on this blog. For a long version: http://stopcontinentaldrift.blogspot.com/2010/05/effectiveness-of-taxes.html.

In brief, much of the wealth of the wealthy is not invested in productive things for this country, and the sums invested in productive things does not increase significantly in a recession. It is not just I who have this reasoning, but Greenspan too worried that too much of the gain from the Bush tax cuts would be invested in bonds by the wealthy and the middle class in paying off debt. Suppose the wealthy increased their purchases of real estate in a recession when it can be purchased at fire sale prices? To what degree would this stimulate the economy. So far as I can tell it would be none or at least very little. After all, the amount of real estate in the country is constant. But I do agree that much of the stimulus money spent so far has been defensive, i.e. spent on preserving existing jobs of teachers, policemen, firemen, etc., and, therefore, preserved jobs rather than create new ones. But if this was not done, there would be considerable purchasing power lost to the economy. Would the wealthy have picked up not only the slack, but increased their spending on productive things? I sincerely doubt it. Thus I think the government spending does have a multiplier, more like Zandi's analysis: Mark Zandi of Economy.com has boiled down the government's influence on America's broad and diverse $14 trillion economy into a simple menu of stimulus policy options, whereby Congress can decide how much economic growth it wants and then pull the appropriate levers. Zandi asserts that for each dollar of new government spending: temporary food stamps adds $1.73 to the economy, extended unemployment benefits adds $1.63, increased infrastructure spending adds $1.59, and aid to state and local governments adds $1.38.[4] Jointly, these figures imply that, in a recession, a typical dollar in new deficit spending expands the economy by roughly $1.50. Others, I am sure feel differently.

http://www.heritage.org/Research/Reports/2010/01/Why-Government-Spending-Does-Not-Stimulate-Economic-Growth-Answering-the-Critics

Slightly modified from Investment Analysis Clubs/Macroeconomic Trends and Risks of Motley Fool

BP DOES IT AGAIN

The reason that things are so messed up in Iran is due to BP's (then the Anglo-Iranian Oil Company) lobbying the British government to get the U.S. to overthrow Prime Minister Mossadeq of a duly elected Iranian parliamentarian government, which the CIA did. (http://en.wikipedia.org/wiki/BP) Relations with Iran and the U.S. have gone downhill ever since.

Now it is alleged that BP lobbied for the exchange of parishioners in the Lockerbee bombing over Scotland (http://www.aolnews.com/politics/article/bp-lobbied-brits-ahead-of-lockerbie-bomber-release/19555218) where the bomber Abdel Baset al-Megrahi of Pan Am Flight 103 was released because he supposedly had terminal cancer. BP is said to have stated that the slowness of the prisoner exchange was endangering an offshore drilling agreement with Libya (http://www.cbsnews.com/video/watch/?id=6698475n).

Isn't it strange how BP keeps hopping up in connection with so many disasters, such as the Texas refinery explosion of 2005 where 15 were killed and 170 injured, and, of course, the mega environmental disaster of the Deepwater Horizon explosion and major oil spill problem which is still ongoing.

President Obama wants a six month moratorium on new deep water drilling. It seems to me only reasonable for the Deepwater Horizon out-of-control well be solved before more deep water drilling is undertaken. Should President Obama allow more drilling at this time and another such oil spill occur, he no doubt would be not only politically damaged but his administration would be over. My understanding is that a group of oil companies have gotten together to make plans for a rapid response to another deep water oil well spill and is setting rules on the types of drill mud and casing to be used. This is exactly what is needed and is to be applauded, and it may not take a full six months to expedite it.

Snip: "Critically, the new system is expected to be deployed within 24 hours of an offshore spill, and to be able to fully contain the oil spilled within weeks, said Sara Ortwein, a vice president of engineering at Exxon, which has taken the lead in setting up the spill plan.
A new nonprofit entity, called the Marine Well Containment Company, will be created and be in charge of operating and maintaining this emergency capability. The entity, modeled in part after the Marine Spill Response Corporation, which was set up after the 1989Exxon Valdez oil spill in Alaska, will also finance research to look into new ways of tackling an underwater spill." (http://www.nytimes.com/2010/07/22/business/energy-environment/22response.html?_r=1)

INVESTORS ACCOUNTABILITY

Also see: http://stopcontinentaldrift.blogspot.com/2010/06/corporations-are-political-entities.html

Corporations are political institutions. One of the big rules in favor of investors is that the owners (i.e. the stock holders) got a law passed that they are not held accountable for the malfeasance or losses of their company. Think about the value of that.

The above is not true about all types of owners. For example, general partners ARE held accountable although limited partners are not.

Stock holders and limited partners can lose their investment*, but they are not held accountable for malfeasance or losses of their company. Whew, what a relief!

Officers, however, can be held accountable for malfeasance in their companies. Think Enron.

*If you buy on the margin, you can lose more than your investment, of course, but we don't do that, do we.

THE TROUBLE WITH INCOME TAX CUTS

Also see: http://stopcontinentaldrift.blogspot.com/2010/05/effectiveness-of-taxes.html earlier from May 2010.


The trouble with income tax cuts are that they are a very inefficient way to stimulate the economy, in spite of what certain people may say. The wealthy buy Treasury bonds and notes and the middle class pay off debt. Although both are admirable, they don't stimulate the economy. The wealthy also buy things that don't stimulate our economy such a purchasing foreign bonds, personal Bombardier jets (Canada), chalets in Switzerland, and islands in the Bahamas (now also islands in Greece) though they may help stimulate the international economy. Yes, there is some investment in new initiatives, but the pay back on those that succeed (and most don't) is rarely immediate and usually takes years. Think of all the years it took Amazon.com to become profitable, for example.

My own suggestion is to let the income taxes expire (just on the wealthy if you prefer) and use some of the revenue to cut corporate income taxes (and let some go for government debt relief). This will make our companies more competitive in exports and, hopefully, cut their prices some domestically. This could lead to more profits stimulating stock prices so that the wealthy could recoup some or all of their income losses.


Slightly modified from post # 63705 in Industry Discussions/ Real Estate Investment Trusts: REITs of Motley Fool

DID THE STIMULUS INCREASE UNEMPLOYMENT?

The general consensus is that the Federal stimulus plan at least preserved employment, at least temporarily, over what it might have been if the stimulus plan had not been passed. There are, however, the contrary views. In a paper by Louis Woodhill (http://www.realclearmarkets.com/articles/2010/07/12/what_if_stimulus_advocates_were_half_right_98569.html:)

he states:

In "The Job Impact of the American Recovery and Reinvestment Plan" dated January 9, 2009, Christina Romer and Jared Bernstein outlined the rationale for, and the expected results from, President Obama's "stimulus" program. Their report included the now-famous graph that warned that without action, unemployment would rise from 7.4% in December 2008 to 9.0% in mid-2010, after which it would begin to decline.

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If Romer and Bernstein were right about the base case, then, rather than creating jobs, stimulus actually destroyed them. By June 2010, stimulus was supposed to have "created or saved" 2.8 million jobs, on its way to a total of 3.7 million by the end of 2010. However, total employment in June 2010 was actually 3.2 million less than what Romer and Bernstein projected it would have been without stimulus.

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It makes sense that stimulus (government borrowing and spending) would destroy jobs. Government bonds are bought with investment dollars. If there is no change in incentives to call forth more output, then if the government sells more bonds, other forms of capital must be liquidated in order to buy them. Without tools (capital), workers can produce nothing and their jobs disappear.

The above is an interesting canard. The reason for the above statements is that Woodhill claims that money borrowed by the Federal government has taken away from money that could have been borrowed by the private sector (e.g. businesses). At least one problem with the hypothesis is that corporations are hoarding cash. Why shouldn't they when their plants are operating far below capacity? Why would they add more capacity in such a situation? In addition banks aren't lending. The banks have the money to lend but they claim demand is not only low but finding credit worthy candidates is difficult. So there is ample money available for funding the government debt. AND we have not taken into account above of the willingness of foreigners to buy our Federal debt (e.g China and Japan). Every graph I have seen shows overall borrowing declining, not staying the same as the article suggests (i.e., borrowing is a zero sum game. If A increases, then B must decrease).

I believe others, including some conservative economists, that the stimulus did save jobs and added some, but they tended to be overwhelmingly saving and creating jobs temporarily, such as highway construction, teachers, police, and firemen. Particularly among teachers, police, and firemen, this year these jobs that were propped up are now being lost; however, my impression is that stumulus construction jobs are increasing now that that there has been time for planning.

(Much of the above appeared as post #63572 (15 June 2010) in the Industry Discussions/Real Estate Investment Trusts: REITs board of Motley Fool.)

THE AMERICAN SOUTH AND WAR

The American South has a tendency to be very war-like. They not only were eager to start the Civil War, but, when the political Solid South was a part of the Democratic party, it was the Democratic Party that was the war party (WW-I, WW-II, Korea, early Vietnam). The Republican Party had an isolationist bent, and there were those who even opposed America’s involvement in WW-II. Then the Republicans adopted their Southern Strategy and lured the Solid South into the Republican Party, after which the Republican Party has become the war party (escalation of Vietnam, Lybia bombing, Panama, Afghanistan, Iraq; I do not count Reagan’s Granada War as it was a joke. At least Reagan found someone we could beat.).


Now it seems there may be the beginnings of a rift in the Republican Party and an isolationist group of mainly northern Republicans seems to be raising their heads: Pat Buchanan has been an isolationist for a long time and George Will has opposed the Afghanistan war beginning with the last presidential election. Some others seemingly against the Afghanistan War are: Michael Steele, Michelle Bachman, Liz Cheney, and Ann Coulter, though one or more may really be in favor of the Afghanistan war (e.g. especially Michael Steele according to some) and are just using public opposition to the war as an election ploy to be used against the Obama regime and congressional Democrats. But they also seem to be adopting a conservative opposition to big government which has been missing for a long, long time in the Republican Party. Reagan never came close to balancing a budget, nor did Bush-41 or Bush 43. In fact if they could get tax cuts, primarily for the wealthy, they seemed to be happy with any resulting Federal deficits. After all Republicans pushed though two wars that they never tried to pay for, massive tax cuts primarily for the wealthy that they never paid for, and an increase in the large drugs benefit package that they never paid for. In fact, Bush-43 urged people to go out an shop after the disaster of 9-11-2001.

Personally, I have no opposition to these Republican’s claim that Afghanistan has become Obama’s war. It is very nice that several Republicans have come out and said that it is America’s war. But the Obama administration’s major escalation of the Afghanistan War shifts the "ownership" of the war to him. There is no sign the Democratic base favors this escalation, quite the contrary. But if the Afghanistan War should be successful and Afghanistan become a stable country that doesn’t harbor terrorists, then Obama also will deserve the credit