Ireland: Leaving it to the Magical Markets

More bad news for Ireland this morning, as they are forced to bailout two banks at a cost of 40billions (with a B) euros to try and ensure investor confidence. You will recall Ireland was lauded for it's austerity measures in the face of a swelling deficit, but now it seems like it's all pain and no gain.

Current 10-year bond rates for Irish bonds stand at 6.8%, while the US 10-year bond rate closed at 2.5%. Let's not forget how Obama was assailed for suggesting austerity would stifle recovery.

And I'll preemptively reiterate something: I think the free markets are wonderful things, and they are, by and large efficient. But markets fail. That failure destroys people's livelihoods and that's when the government has to step in and ease the inevitable market correction.

Clearly for Ireland, something has gone awry and because of professed belt-tightening there is little the government can do to help people out. They're stuck waiting for the market correction.

Blinder & Zandi: Methodology & Impact

As promised, I took the time to review Blinder and Zandi's full report, paying particular attention to methodology outlined in Appendix B. It's all pretty straight forward and nothing jumped out at me as particularly specious.

One reaction to my post yesterday and the report was that government spending (G) doesn't result in increased demand. This is a patently false statement because the aggregate demand equation in the short-run is essentially the GDP equation restated.

If G becomes larger, then AD becomes larger. I would also restate I have not seen any evidence of government spending crowding-out private investment.

On a slightly divergent note, the stimulus bill has been criticized because it has not created jobs, but if you look at where the stimulus bill put money, the largest part that has currently paid is in tax cuts ($188 billion). I would argue that President Obama was wrong to seek some sort of commen ground with Republicans in the Senate that had him approving a bill that didn't put enough people back to work. Instead, the bill was meant to entice private industry to hire workers with a payroll tax holiday. This is an indirect process that has paid very limited dividends.

Finally, I'll close on this point. In the New York Times article John B. Taylor of the Hoover Institution is quoted as saying that the stimulus program had, "very little impact." Little impact, as he observes it, is still an impact. In this situation, when private investment had dried up and the gears of the economy had threatened to halt entirely policy measures were taken that averted a crisis.

It's fine to discuss the levels of impact of these measures, but I haven't heard any serious economist say they had absolutely zero positive impact on our economic situation.

Stimulus != War in Iraq

Today, in an article discussing Pres. Obama's legislative success yet "unpopularity," Sheryl Gay Stolberg of the New York Times compares the passage of the stimulus package, comprehensive healthcare reform, and financial regulation to Pres. Bush's taking the United States into an unnecessary war. No, really:

It is an argument that sounds eerily similar to the one Mr. Obama's predecessor, George W. Bush, made to justify an unpopular war in Iraq as he watched his own poll numbers sink lower.

Just because two presidents claim that their unpopular actions are in the best interest of the country does not make the actions themselves equivalent. The war in Iraq was predicated on nonsense. The stimulus package, financial reform, and comprehensive healthcare reform--what ever you think of the policy choices themselves--were reactions to actual problems, actually doing harm to the United States.

Stimulus and Unemployment

Federal Reserve Working Paper on the effect of the Stimulus Package: 800,000 jobs saved or created by May 2010, down from approximately 2 million in March 2010.

NPR reporting on a Moody's Analytics study demonstrating the economic impact of unemployment benefits versus tax cuts. Mark Zandi, Chief Analyst for Moody's and a former advisor to Sen. McCain's 2008 campaign, testified similarly before Congress.

Do you have an alternative?

On Fox News Sunday Governor of Mississippi, Haley Barbour was on with Governor of Michigan, Jennifer Granholm and topic one was the now year old stimulus bill. Here's what Barbour had to say with regard the the stimulus bill he originally contested:

"State government has benefited by the stimulus package, because it's poured in billions of dollars. The problem is we need private sector jobs...The first stimulus package was twice as much money as was needed. Then they could have created twice as many jobs with half as much money. If they're going to have a stimulus package, let's do something like have a holiday on the payroll tax. Let's do something that helps small business."

Here's my issue with the statements Governor Barbour made. Who is saying we could have created twice as many jobs with half as much money? Also, let's consider the payroll tax holiday, the only solution Gov. Barbour puts forward. His intimation I guess is that if you have a payroll tax holiday it will entice business to hire more workers since they will be freed from the burden of payroll taxes. The problem here is that the tax holiday would free up money, but only temporarily making this as about as effective a policy as the gas tax holiday that was bandied about in the summer of 2008. It sounds good, but doesn't make much economic sense.

Of course the larger hypocrisy here is the advocacy for a payroll tax holiday, further cutting revenue, further driving up the deficit less than a year after decrying a budget deficit so that our "children and grandchildren will be saddled with trillions more in debt." You want to talk common sense, how is it a good idea to get a deficit under control by not collecting revenue? What business thinks they can make a profit by not charging for its products? And don't believe the supply-side argument that lower taxes means more growth means more revenue. It's nothing more then economic voodoo.

Where's a real alternative?

Is More Stimulus Needed?

Not an original thought this morning, but this is from the Council on Foreign Relations and a solid aggregator of opinions as it relates to the stimulus bill one year on:

In February, President Obama proposed a $100 billion jobs bill that would include tax cuts for small businesses, social-safety-net programs, and aid to state and local governments. Republicans criticized the proposal for being a new and unnecessary round (NPR) of stimulus spending that would stifle private sector growth. But IMF Managing Director Dominique Strauss Kahn in January 2010 urged advanced economies not to relax stimulus measures too early and to focus stimulus on creating jobs. At a January 2010 briefing at the Council on Foreign Relations, Chief Economist of the World Bank Justin Yifu Lin explained the U.S. and global dilemma as follows: "If you exit from fiscal stimulus, you are going to have a dip. If you maintain the stability of a fiscal stimulus, the intensity may not be enough."

When you've got the World Bank and the IMF telling you more stimulus is a good idea, maybe you should listen. For the full article click here.

A Nice Curve

The Council on Foreign Relations has put out a Stimulus Package Report Card (h/t Kennedy). And you can see how the Recovery Act (Stimulus) money has been distributed near you here.

Stimulating

John Cassidy of the New Yorker has a post detailing the role of the Stimulus Package in yesterday's numbers revealing 3.5% annualized GDP growth in the 3rd quarter:

The three most striking figures in the G.D.P. report were that consumer spending on durable goods, such as cars and refrigerators, rose at an annualized rate of 22.3 per cent; residential investment (spending on housing) rose at an annualized rate of 23.4 per cent; and exports of goods made in the United States rose at an annualized rate of 21.4 per cent. All of these things can be traced directly to official efforts to stimulate the economy

[emphasis added]. You can read the GDP report here.