Friday, March 13, 2009

Why won't Obama's stimulus plan work?

Joanne Jacobs had a post yesterday that brought to mind a subject I've been meaning to address for a while now. I threw a comment in on her post, but I wanted to address it on my own blog, too.

I teach Economics as an elective for high school juniors and seniors, but the subject is so complicated that I consider myself anything but an expert on it. I also teach American History, and we recently finished up on the Great Depression and started on World War II. We spent $320 billion dollars during the war, which might seem like small potatoes now, but at that time it was twice the amount we had spent during our entire history up to that time. I have always understood that World War II is what got us out of the Great Depression because of the massive government spending that was required. That is what I have always taught, and I believe that is standard across the nation.

When I first heard about President Obama's plan for an $800 billion stimulus package for what is being called the worst economic crisis since the Great Depression, I was very concerned about its effect on our already huge federal deficits and national debt, but the logic made sense to me. If it was massive government spending that got us out of the Great Depression, wouldn't massive government spending be a reasonable thing to do to deal with our situation today?

But when I've watched the talking heads on TV news shows, I've never really seen that discussed. I've seen several analysts say that the stimulus is terrible and that it will never work, but none of them have ever explained why the connection that I see between the way World War II got us out of the Great Depression and our situation today isn't there. I've never heard anyone say, "Look, the spending for World War II got us out of the Depression because....., but the spending Obama is proposing won't get us out of this mess because......"

If any of you are more expert on the subject of economics than I am--and that includes a lot of people--I would love to learn your thoughts on this.

20 Comments:

Blogger mazenko said...

Much of the criticism is ideological, based on a libertarian ideal of limited government - it has little to do with economics. This is why small government conservatives looked rather foolish on the floors of the House and Senate for the last few weeks railing on the "debt that is being forced upon our grandchildren," at the same time that they were responsible for eight years of unrestrained spending and they were calling for more tax cuts that would also increase the debt.

For a rather concise and insightful analysis of the concept of debt and deficit spending, I recommend a piece in the Washington Post by Steven Pearlstein called "Debt Doesn't Have to be a Burden." It can be found at:

http://www.washingtonpost.com/
wp-dyn/content/article/2009/03/
03/AR2009030303321.html

For a pragmatic and rational conservative response that steps outside the naive ideology, I would also recommend Kathleen Parker's "A Cool Look at Those Trillions." It can be found at:

http://www.washingtonpost.com/
wp-dyn/content/article/2009/03/
06/AR2009030602072.html

Paul Krugman of Princeton and the New York Times has argued with small government conservatives that you're right. If the New Deal didn't get us out of the Depression (which it didn't as a result of limits on production and tax increases to balance the budget), but WWII did, then the only logical conclusion is that the New Deal didn't work because it didn't spend enough. However, critics stick to their guns with the "Liar, Liar, Pants-on-Fire" defense because they have no other explanation with verifiable evidence.

Sadly, they are slaves to ideology.

3/13/2009 9:45 AM  
Blogger KDeRosa said...

You might want to check out Japan and their last 18 years of stagnation on the heels of massive government spending in effort to get them out of their recession. Hasn't worked so far.

3/13/2009 10:25 AM  
Anonymous daniel said...

The reduction in government spending and corresponding private entrepreneurial activity AFTER WWII is what got us out of the depression. The people who think we can spend our way out of our economic problems are nuts. The problem is that for a long time we have been spending and borrowing too much and not saving enough. Consumption follows production - not the other way around. The key to increased production is savings and investment. But the politicians don't want to see it that way. Politicians are doing what they do best, which is spend other people's money. It will only dig our hole deeper and deeper. When our government can't borrow any more or print any more money it will all stop. But at a terrible price to our society.

3/13/2009 1:30 PM  
Anonymous Anonymous said...

Hear, hear, Daniel!

Mazenko, I'd like to question you on several matters regarding your response to my last post. However, I'll start from the beginning.

1) Why, instead of simply addressing my questions did you try to dismiss them with your pejorative use of the label "conservative"?

2) Why are my unfavorable opinions of Obama "bias" while your favorable opinions of him are not?

(Yes, I goofed and first added this comment to the 3/11 post.)

3/13/2009 3:22 PM  
Blogger Dennis Fermoyle said...

Daniel, saying private entrepreneurial activity after WWII is what got us out of the Depression implies that we remained in the Depression during WWII. Is that what you're saying? I don't know how anyone could take that position. I know that there was a great deal of fear that we would go back into a depression after the war was over, but I've never heard anyone claim that we didn't get out of the Great Depression until after
the war.

3/13/2009 3:43 PM  
Anonymous daniel said...

Dennis, I'd sure like to hear a rational explanation of how the war got us out of the depression.

3/13/2009 3:59 PM  
Blogger Amerloc said...

Daniel, I'm coming into a conversation here where I feel really uncomfortable: this is not my field of expertise at all.

But you said that consumption follows production, and I don't understand how that can be. If I don't have two nickels to rub together, how can I buy what you're making?

I do understand how if I have a couple extra nickles in my pocket, you might be able to sell me a bottle of snake oil, or a widget, or whatever. But if I have zero disposable income, you can't produce anything I can buy.

3/13/2009 6:12 PM  
Anonymous daniel said...

Amerloc, how can we consume if we haven't produced anything? What would we consume? The only way for someone to consume without producing is to borrow or steal from someone else who has produced something. But someone has to have produced something before we can consume. And production requires savings and investment. One person's borrowing is another person's savings. Our economic well being is based on what we can produce, not on how much money our government can print. I hope that's helpful to you. I'm no expert at this either.

3/13/2009 6:32 PM  
Blogger mazenko said...

Anonymous,

We all have biases - a bias is a preconceived idea that prevents a rationale, pragmatic, objective understanding of the issues. That is why your conservatism is a bias. It is based on a prejudice against even the "potential" for Obama to be great or for someone to see "a lot about him to like." To identify isolated issues - several of which are factually incorrect - and use them as justification that there is "nothing to like" represents an irrational bias. The foundation of effective argument is to disagree while still conceding the validity of the opposition. You have shown no inclination for that, which clearly identifies your conservatism as a bias.

My "favorable opinions," as you call them, are based on a comprehensive analysis of the issues in all their complexity. I am not an Obama pollyanna - however, I concede that there is much logic behind his positions and much potential for success. I'm not ideological - I am not opposed to his plans if they work simply because it goes against my worldview. I don't hope Obama will fail just so it will validate my preconceived notions of how the government or economy should be. I watch it unfold and then develop my position. John Maynard Keynes, when asked about adjusting his opinions said, "When the facts change, I change my mind. What do you do?"

That's why I said "if he is successful." I'm not completely sold. However, as a moderate and unaffiliated voter I understand why he was elected. The conservative in me likes some of Obama's positions, and the liberal in me likes others. I don't use conservatism as a pejorative when it is logical, pragmatic philosophy. I do use it (and liberal) when it is myopic and mindlessly ideological.

KdeRosa, you might consider studying the complexities of the Japanese system before assuming its the same situation as the U.S. It's not. There bank failures, recession, stimulus package, and stagnation differ from our problems in many ways. Paul Krugman, a Nobel prize winning economist from Princeton, has written extensively about this. The two crisis share some common themes, but they are different in a myriad of ways. Thus, to look at Japan and say, "See. There's didn't work," is naive at best.

Daniel, consumption drives production. That's precisely the lesson we learned from the Depression and the myth of supply-side economics. Certainly, someone originally invests in production, but only because they see a need. Simply ramping up production doesn't create more consumption. That's why car lots are filled with excess inventory right now and Crocs has scaled back its production of silly plastic shoes. To argue that production is the driving force ignores the very foundation of capitalism. Additionally, after WWII, the government scaled back spending only after it had single-handedly rebuilt the private sector economies of Europe, America, and Southeast Asia. And, even then, the US government fueled growth through the GI Bill, government supported housing loans for suburbs such as Levittown, and the expansion of the interstate highway system. To argue that the private sector was the leader of any of those legs of the stool is simply wrong. If you can explain how all those servicemen came home from the war and paid for their own college and their own houses, I'd love to hear it.

3/13/2009 10:13 PM  
Anonymous daniel said...

Michael, You're very intelligent and articulate, but you're being blinded by your ideology. The government can print money and hand it out to people, or take from some and give to others, but that doesn't create goods that people need and desire. Those needs and desires are supplied by production (which, remember, requires savings and investment). If we don't produce, then it doesn't matter what people want to consume, the goods they want to consume will not exist and our standard of living will be lower. Car lots are filled with excess inventory right now because carmakers have misjudged what consumers are willing to pay for. And the corrective mechanisms of the market would fix that much better than the government acting on the premise that they are smart enough to solve the problem (they aren't).

3/14/2009 5:10 AM  
Blogger Roger Sweeny said...

Nobody knows what's going to happen with the economy, partly because nobody knows what's going to happen with the government (in particular, how the government is going to handle failing and near-failing financial institutions) and partly because this situation is unique.

This is not Japan in 1990. This is not Sweden in 1992. This is not America in 1929 or 1933.

Arguing whether "consumption" or "production" is more important is kind of like arguing "which came first, the chicken or the egg?" A wealthy economy requires high and balanced levels of both.

The question is how the national government can effectively stimulate the appropriate parts of each. We really don't know, though all economists have ideas--some of which, alas, are contradictory.

All the ideas are based on generalizations of history, seen through the lens of theory and ideology. Because of that, different people generalize differently. But we can all agree on some facts.

American industrial production went back up to pre-depression levels during WW II. Unemployment went down to pre-depression levels. In that sense, WW II ended the depression. However, much of that production was tanks and bombers and machine guns. Many of the potentially unemployed were in the armed forces. And though just about everyone who wanted one had a job, you couldn't buy much with your pay. Lots of basic products were rationed and many others were hardly produced at all. Instead, people made things for the war effort.

Though the depression in consumption and employment was over, the depression in standards of living was not. There was a fear among many economists that once the government throttled back military production and "fired" millions of draftees and volunteers, that the depression in production and employment would come back.

It didn't because civilian production and civilian jobs and civilian spending took its place. Dennis, I think this is what Daniel means when he says the depression wasn't really over until after the war.

Mazenko, I don't think anyone would say that "after WW II, the government ... single-handedly rebuilt the private sector economies of Europe, America, and Southeast Asia." In America, the US government pretty much gave away war plants and got itself out of the business of directly producing things. The Marshall Plan gave significant amounts of money to European governments and did some restructuring of European economies but "single-handedly rebuilt" is way too strong. The US government did almost nothing in SE Asia. Perhaps you mean Japan, where the American occupation changed a number of things to try to make the Japanese more peaceful and more like us.

After the end of the war in 1945, the federal government indirectly subsidized higher education and construction with the GI Bill and FHA loan guarantees. The Interstate Highway System, however, didn't begin until 1956.

3/14/2009 6:37 AM  
Blogger Dennis Fermoyle said...

Roger thanks for your analysis! It fits in to some extent with one of the articles Michael suggested that basically said that we just don't know if what we are doing about this economic crisis will work or not.

Michael, thanks for the articles. The one thing that I question is Pearlstein's assertion that government debt affects our children as much as private debt. If I am in debt, I am the one who will have to take care of it, not my children. When it comes to government debt, however, our children and grandchildren will probably be paying taxes to pay interest for the overspending my generation has been responsible for their entire lives. If I'm wrong in the way I'm looking at this, straighten me out.

I have been doing my part, by the way. My wife and I bought a new Saturn Aura (paid cash out of the "car fund" we had set up ten years ago)last week. Barack Obama should be proud of me!

3/14/2009 7:14 AM  
Anonymous daniel said...

One more thing, Michael, since you mentioned that Paul Krugman was a Nobel prize winner. I know of two other Nobel prize winners in economics (Milton Friedman and F.A. Hayek) who, if they were alive today, would probably say that Krugman is nuts about more government spending being a cure for what ails our economy. After 911 Krugman wrote an article in the New York Times that claimed the terrorist destruction of the twin towers might be good for our economy, since construction companies would now have some office buildings to work on and that would create jobs, which totally ignores an elementary economic concept, namely the broken window fallacy. And this guy is a Nobel prize winner in economics? Many other economists took pleasure in pointing that out after Krugman won.

3/14/2009 8:05 AM  
Blogger mazenko said...

Roger, nicely said.

Granted, the "single-handed" reference was a bit of hypberbole - though the spirit of my position is vaild. The US government war-time production and Marshall plan, as well as the divesting when the private sector picked up the slack, were instrumental in the re-structuring, and I would assert they were the dominant force, as they were the only big gun in the game. Everything else you argue is valid and insightful, though I would say, noting the timing of the Interstate highway construction, it was a timely investment by the government to continue to assist the private sector in taking back control of the economy.

Dennis, I think Pearlstein's idea is the over-riding concept of private debt. Though your debt doesn't get transfered to your grandkids, if the economy is based on extensive debt as opposed to assets, wealth is not "passed on," and that creates a culture which is ultimately a drag on the economy, mainly resulting from a decreased standard of living.

Daniel, thanks for the compliment, but I would argue I am anything but blinded by my ideology. That was my initial point to Dennis. My views are rather moderate, as I hold conservative, libertarian, liberal, and progressive positions on a variety of issues. I seek to avoid rigid adherence to ideology. I would also point out that while many people might take ethical exception to Krugman's positions, that in no way diminishes his economic credentials. That sort of thinking is the problem for far too many people.

3/14/2009 8:20 AM  
Blogger Charley said...

Virtually all of the solutions are based on Keynesian theory. I'm no expert, but this guy is...and we are foolish for not giving some credibility to the Austrian theory of economics as posited by Von Misis and Hayek.

3/15/2009 7:14 PM  
Blogger Luke said...

This is all fascinating stuff, but I still feel like, "I've never heard anyone say, 'Look, the spending for World War II got us out of the Depression because....., but the spending Obama is proposing won't get us out of this mess because......'"

Great observations thus far, but I'm still missing a thorough compare and contrast analysis. And perhaps that's because we're still in the middle of everything and don't have the luxury of 20/20 hindsight yet. It would be nice to "know it all beforehand" though [smile].

Thanks for starting this discussion!

~Luke

3/16/2009 7:56 AM  
Blogger Darren said...

Theory aside, it's two years later and the spending hasn't worked. What more *evidence* do you need?

Besides, it wasn't so much the WWII *spending* that got us out of the Depression as much as it was the loosening of the money supply. Look what the Fed did with interest rates and the like during the 1930s; they *restricted* the money supply instead of loosened it--until they were force to by events.

We don't have a money supply problem these days.

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