Tuesday, January 27, 2009

The economic stimulus plan is a gigantic boondoggle

Read all about it here. Paraphrasing the immortal words of P. J. O'Rourke, someone should take this bill out behind the barn and kill it with an axe. (Obama already killed Nancy Pelosi's embarrassing proposal to stimulate the economy by spending more on contraceptives.) It does very little to stimulate new economic activity, and way too much to create new goverment programs (36 new programs costing over $136 billion). Only 3% of the bill is directed to road and highway spending. The CBO estimates that only 25% of infrastructure dollars can be spent in the first year.


Mark Gerber said...

Hi Scott,

I sure agree with you about the current stimulus plan being a boondoggle.

Also, a belated thanks for your excellent explanation last week highlighting the difference between private sector credit that drives the velocity of money versus central bank creation of raw money.

I have another question about money: I heard reports today that some of the commercial paper purchased by the Fed under one of their new programs is about to roll over, but much of the new funding will come from the private sector (money markets) not the Fed. On the surface, this appears to be a good sign of further healing in the credit markets. However, it seems to me that this will also reduce the money supply since the Fed will no longer be carrying the same amount paper in its book. Is that a correct assesment? If so, will the Fed need to purchase some other paper on the market to prevent their "monetary stimulus" from diminishing?

Thanks as always,

Scott Grannis said...

Hi Mark: Thanks, and that's an excellent question. If the private sector wants to buy some CP currently held by the Fed, that's fantastic. I don't see any problem at all. To simplify things: first the Fed bought CP from the private sector using newly printed bank reserves. Most of those reserves, however, are still sitting idle on bank balance sheets--there hasn't been nearly as much expansion of the money supply as there could have been if the reserves were all used by banks to create new money. If the process is reversed, it's because the private sector now feels good about holding the CP and values CP more than bank reserves. Money supply won't really shrink, even though bank reserves will drop.

Looked at another way, the Fed's purchase of CP wasn't so much about expanding the money supply as it was about being the buyer of last resort for those in the private sector that were forced to sell in order to deleverage. The private sector was desperate for safe money, and the Fed provided it. They can reverse that trade easily.

CDLIC said...

From the Rasmussen Reports
Jan 27, 2008

[So why doesn't the Democratic Congress get it?]

Fifty-seven percent (57%) of voters nationwide say that tax cuts generally help the economy. The latest Rasmussen Reports national telephone survey found that only 17% disagree and believe that tax cuts will hurt the economy.

By a 56% to 23% margin, most voters also believe they pay more than their fair share of taxes.

The view that tax cuts are good for the economy is held by 68% of Republicans, 44% of Democrats and 60% of voters not affiliated with either major party.

Voters who earn less than $20,000 a year are fairly evenly divided as to whether tax cuts help or hurt, but a majority of voters in all other income brackets see tax cuts as helpful. Those earning $40,000 to $100,000 a year are most likely to see tax cuts as good for the economy.

Forty-four percent (44%) of voters now say they’d vote for a candidate who opposed all tax increases rather than one who promised to raise taxes only on the rich. Last summer, voters were more supportive of a candidate who would raise taxes on wealthy Americans (see trends).

Interestingly, middle-income Americans are more supportive of a candidate who opposes all tax increases. Those who earn more than $75,000 a year lean towards a candidate who would raise taxes only on the wealthy. So do those who earn less than $20,000 a year. But those who earn between $20,000 and $75,000 a year would opt for the candidate who opposes all tax increases.

Fifty-seven percent (57%) say it’s more important for tax policy to help the economy than to make sure everyone pays their fair share of taxes while 37% hold the opposite view.

[However, how does the public define tax cuts????]

The entire Report is at http://www.rasmussenreports.com/public_content/business/taxes/57_say_tax_cuts_will_help_economy

Scott Grannis said...

CDLIC: Thanks again for your excellent contributions. Reports like this and the Cato ad I recently posted need to get as much exposure as possible. Unfortunately the politicians don't like hearing this sort of thing, because they have loads of fun spending other people's money.