Archive for October, 2011

Keynsian View of Stimulus

This is one of the best explanations of the Keynsian view on the Stimulus that I have ever heard. It also tells you why it doesn’t work.
Podcast # 2 – Garret Jones on Stimulus
It is an interview between Russ Roberts (host) and Garret Jones from the Mercatus Center at George Mason University.
Some highlights from the Podcast and the research.
Government spending tends to crowd out private spending. So while the economy may grow as a whole, the private economy actually shrinks. So the % of GDP for government spending rises. This is exactly what we are seeing now.
Also any multiplier for growth for stimulus spending (for the non economists – $1 of spending leads to $1 of GDP would be a multiplier of 1) is less than 1. To justify the last spending bill they used a multiplier of about 1.52.
They also found that the multiplier for tax cuts is much higher than the multiplier for spending. One of the key studies that found this was done by Christina Romer the former chair of Obama’s Council of Economic Advisors.
Lastly and most importantly, they found that it if you are trying to shrink a budget deficit it is much more effective to reduce spending than to increase taxes. When the government spending shrinks, the private economy actually grows.
The podcast is 60 minutes long but the most interesting stuff is in the first 30 minutes and if you listen at double speed like I do it only takes 15 minutes (or so).


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Obama’s Jobs Program

I keep thinking about Obama’s latest jobs program and it really makes me wonder if anyone in the White House knows anything about economics or creating jobs.

First a Recap of Obama’s Plan

Payroll Tax Cut – both the share paid for by the employee and the share paid for by the employer ($240 billion) – This is the biggest element but it is only temporary. So while it gets an additional $12.50 in someone’s paycheck it doesn’t have the desired effect (remember Bush’s $300 checks – people paid off bills). Milton Friedman proved that people make decisions based on permanent incentives not temporary ones. No one is going to hire people based on a small reduction in payroll taxes, it will just add to corporate profits and make the left go crazy.

Extension of Unemployment Benefits ($49 billion) – Although this smacks of compassion, it is exactly the opposite. In general the intensity of someones job search increases when unemployment benefits are about to run out. I actually had lunch with someone this week and that was what they were doing. Benefits were going to run out in December so they were in no hurry. So people purposely stay unemployed longer and the longer they are unemployed the less employable they become. Compassion indeed.
Subsidies for Construction and related projects (highways, airports, school renovation -infrastructure bank) ($90 billion) – didn’t our president say “There is no such thing as shovel ready”. These projects are guaranteed to be tied up in red tape so the spending will happen sometime in the future. There are also buy American provisions and other rules that can add up to 20% of the cost of a project so we won’t get as many of these “essential” projects done.
Aid to State and Local Governments ($35 billion) – we tried this with the last stimulus. It just pushed out the pain and keeps government spending on an unsustainable path. It does nothing to help the private sector which has to support the state and local governments.
Financial Assistance to Homeowners to Refinance their Mortgages ($15 billion) – This is a loser from the get go. Once again trying to bail out people who have made bad choices. Previous efforts have found that they default again within 6 months and in many cases there are legal restrictions on refinancing because they have bad credit.
Tax Credits for Employers who hire persons who have been unemployed for at least six months ($8 billion) – It’s obvious that no one in the White House has ever hired anyone in the private sector. If I have a job opening I interview candidates, find the best person and hire them. If it turns out that they are eligible for a tax credit great – free money – but that is not why I hired them.

The aim would be to spend most of the $450 billion between now and the end of 2012. The cost would be recouped by a combination of unspecified spending cuts and unspecified tax increases for upper-income taxpayers—but not immediately The Wimpy plan – “I’ll gladly pay you Tuesday for a Stimulus today”.

“OK Dave, it’s easy to trash someone’s plan but do you have anything better.”

The Blakelock Job’s Plan – Also known as get the hell out of the way.

Most of these can be done immediately with no cost and very little legislation. Which is why Barak would never do it.

Trade Bills – Immediately pass the three trade bills (Panama, Columbia and South Korea) that Obama has been holding on his desk. The International Trade Commission has estimated that these bills would create 250,000 jobs.

Keystone XL – Have the State Department approve Keystone XL – It has been estimated that this would create 118,000 jobs.

Energy Exploration – Immediately stop opposing Fracking, drilling off the east coast and in the gulf and exploration in Alaska. Not only would this have the benefit of creating jobs but it would also reduce the dollars that we would be sending oversees.

Bush Tax Cuts – Businesses are just waiting for the other shoe to drop. Very few are expanding because all they see on the horizon is bad news. Increased taxes that only appear to be going even higher. Make the Bush tax cuts permanent and that uncertainty will be eliminated. At the same time begin a process for redoing the tax code to make it simpler with lower overall rates.

Obama Care – Immediately repeal Obamacare and replace it with common sense reforms like medical malpractice reform, cross state line purchasing, no tax preference for premiums, reduction in mandates to allow for low cost catastrophic plans. This will remove another big unknown that is hanging over businesses head.

This is my start, it could all be done by November 1. After that I would move onto Sarbanes Oxley, Dodd-Frank and Entitlement Reform. The first 3 Obama could do right now. The other two he could do but would never do in a million years. If you want jobs it really isn’t that hard. The problem comes when the jobs take a back seat to your basic dogma that carbon based fuels and rich people are bad and need to be eliminated at every turn.

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