I have such conflicting thoughts on the stimulus plan I have no idea how to characterize them. The Republicans are so right, and completely wrong. The Democrats are feckless as usual. President Obama comes out by far the best, but is being disingenuous in his marketing and is thus open to very valid criticisms. I really hope he changes his pitch or otherwise a very good program may be derailed (or at least judged a failure) because it doesn’t meet its aims.

The Republicans are absolutely right that not enough money will be spent fast enough to help drastically (although their evidence doesn’t actually exist) and isn’t the right type of spending to stimulate the economy in its current form. Since most of our economy is a service economy, it is a far better idea to give lots of money to consumers…in theory. In actuality, consumers have way too much debt and are retrenching. This is why the past rebates were ineffectual, and consumers have a looooong way to go when it comes to increasing the savings rate. Here is a graph of the personal savings rate that shows we are very likely to double or even triple the current savings rate. This means that most tax cuts won’t actually stimulate the economy (especially with the decrease in available loans) and the Republican solution is a bad one.

As an aside, the Republicans idea of proper budgeting is asinine.

“Our plan is rooted in the philosophy that we cannot borrow and spend our way back to prosperity,” Mr. Boehner said. “Unfortunately, the trillion-dollar spending plan authored by Congressional Democrats is chock-full of government programs and projects, most of which won’t provide immediate relief to our ailing economy.”

Um, where does he think that tax cuts come from when we’re running a deficit? Since tax cuts will have a much lesser impact on GDP growth, which will result in decreasing taxable revenue, their “plan” is just going to make our deficits way worse. I’m really confused about what is going through the GOP leadership’s heads. I mean I can’t just claim that they are stupid because they had a pretty incisive critique of the plan that showed a deep understanding, but then their proposals have absolutely no grounding in reality. If it weren’t for the critique I could just think they were dumb or blind, but I’m kind of forced to think that they are just cynical and ideological at all costs because they don’t know what else to do. It really bothers me.

I really have no comment on the Democratic leadership.

Pelosi said she has “no apologies” for the spending.

“We have to deal with the consequences of the downturn in our economy,” she said. “What the economists have told us from right to left. There is more bang for the buck, a term they use, by investing in food stamps and in unemployment insurance than in any tax cut. Nonetheless, we are committed to the tax cuts because they do have a positive impact on the economy, even though not as big as the investments.”

On to Obama who has the right idea.

The fact is, that there is no realistic stimulus plan that can get us back to a healthy economy in the near term. The United States would have to run structural deficits that are so large that either they saddle us with a terrible amount of long term liabilities at best, or can’t even be floated and lead to collapse at worse.

So to get where we need to get (if you buy the logic of this sort of exercise) is an additional 6.3% PER ANNUM deficit as a % of GDP. Remember, Obama’s plan is roughly 2.5% per year. 6.3/2.5= 2.5 times.

Read that again, If you believe the math, Obama’s program would need to be 2.5 times bigger to live up to its billing. And that is before you get into details like “tax cuts are likely to be less effective than other measures”.

And that assumes that the math works like its supposed to. In reality this is unlikely.

What was unsustainable about the current global balance, in my opinion, was not the fact of a US trade deficit (although by 2006 and 2007 it had gotten too high to last very long), but rather the level of household borrowing needed to sustain it…This is why I have argued that a program of massive fiscal spending to replace household demand is not going to solve the current problem. It simply replaces one kind of unsustainable behavior with another, and still has to be resolved at some point with massive deleveraging.

To get back to China and current issues, the problem with the US trade deficit now is sort of a “Keynesian” problem. US demand has the impact of generating both US production (and employment) as well as foreign production (and employment), and in a world of contracting demand, it is natural that countries that export demand – i.e. trade deficit countries – are going to be a lot less eager to do so…That is why trade disputes are likely to be very attractive to trade deficit countries who have – I will continue to insist but it seems recently that this has become a much less “surprising” claim – the upper hand in any dispute with the “virtuous” countries with high savings rates and trade surpluses.

The “Keynesian” problem refers to the fact that most stimulus will flow out of the country due to our trade deficits and exacerbate the problem. Thus, we need more production and less imports, but it takes years to develop that. In the meantime, the drop off in consumption is hitting all the exporters (Japan, China, Germany, etc.) very hard and leading to mass unemployment. The result is a global decrease in trade that is a far harder problem to correct than our domestic spending will fix.

This is why I love reading about Obama’s actual long term goals. While Congress is busy debating how best to blame each other for things falling apart, Obama is paying attention to things that will help us in the coming decades: increasing energy, reducing the trade deficit and rebuilding an educational base for future workers. I’m not even sure he is that worried about ending the recession quickly, because he understands that long term structural problems that can’t be fixed through stimulus will determine how bad it ends up. To me the entire thing sounds looks like a giant feint.

I have a problem with that though. Since he is billing it as a recovery plan, then when the economy doesn’t recover he is going to be attacked on both sides. The Krugmans of the world will berate him for not spending enough (even as they ignore the structural problems) and the Republicans will attack government efficacy. I really hope that the President reframes the issue completely and explains that there is little that can be done to stop our current downslide other than to increase unemployment insurance, food stamps and other safety nets…and that we need to use this time to make vast long term changes to our economy. The benefits might not pay off for 5-10 years, but I fear that the current pitch will lead people to get off that long term path and push for something rash.