The Stimulus Bill

How did we get from there to here? How did we get from the booming economy of the Clinton years to the collapse of the economy in the eighth year of the Bush Administration?

It really all began during the Clinton Administration. Clinton had proved that not all tax cuts are stimulative and not all tax increases dampen economic activity. As the bible says (Ecclesiastes 3) and Pete Seeger made famous, “There is a time for everything, and a season for every activity under heaven:”

That is a lesson that the minions of the Republican Party have not learned or as has often been said about them, “They have never forgotten anything and they have never learned anything.”

They are wed to the proposition that taxes need to be cut all the time, and never, never raised. When Clinton proposed raising some taxes on the rich, the economy that he inherited from Bush pére was in the doldrums but interest rates set by the Fed were high. Clinton reached an agreement with Fed Chairman, Alan Greenspan, that if he reduced the deficit the Fed would lower interest rates. The result was a booming economy and a booming stock market. In fact the stock market entered a period of such an exaggerated boom that it caused Greenspan to coin the now famous phrase, “irrational exuberance", but he did nothing about it despite the fact that it was obvious that the stock market boom was caused by rampant speculation fueled to a large extent by buying on margin, i.e. using borrowed money to speculate in the market, or as it is called “leveraging” ones investments. The Fed has the power to raise or lower this requirement (see here) but Greenspan in keeping with his then philosophy of believing that the markets regulate themselves left the market to its own devices.

I believe that set the tone for the Bush fils eight years of wild speculation by the banks at unheard of levels of leveraging their loan portfolios. At the same time, following the policy that all tax cuts are good, these years brought about some of the largest tax cuts ever, leading to huge deficits, which were defended in the words of V-P Dick Cheney, “Reagan proved deficits don’t matter” and with the enthusiastic support of the Republican party in Congress.

What a change an Administration makes. Now, suddenly running up deficits, say Republicans, is “generational theft.” But are they really concerned with deficits even now. They agree that we need to stimulate the economy, and they agree that reducing the deficit now is the wrong prescription, but they want to do it with more tax cuts for, you guessed it, the wealthy. They don’t want to “redistribute wealth” after having presided over the greatest redistribution of wealth upward, toward the wealthy, in the history of the US. As a matter of fact the wealth redistribution upward began in the Reagan years. In 1980 the top 10% of households accounted for 33% of total household income. By 2000 this group accounted for 44% of total household income. Today the top 1% of households receives more pretax income than the bottom 40% and the distribution of wealth is even more lopsided. The top 1% of households own nearly 40% of total household wealth -- more than the bottom 90% of households combined -- and earns half of all capital income. Income and wealth are more unevenly distributed among Americans than at any time since the Jazz Age of the 1920s.

According to the Economic Policy Institute the rich-poor gap widened with the nation's top one percent now collecting 23 percent of total income, the biggest disparity since 1928. According to the IRS there are now 47,000 Americans worth $20 million or more, an all-time high.

What does this tell us? Not all tax cuts and not all deficits are equal. When wealth is inordinately pushed upwards as in 1928 and now in 2008, it will no longer be invested prudently, but rather it leads to rampant speculation leading to a speculative boom followed by a bust.

Only a reversal of this trend, with a pump priming of the economy and a loosening of credit can reverse the impending disaster. More tax cuts for the wealthy can only compound the disaster and the cry of Republicans that the answer lies in tax cuts for “small business” is not the answer either. First of all, small business does not refer to mom and pop stores. “Small business” according to the Small Business Administration includes all businesses that have fewer than 500 employees and, e.g. in construction $33.5 million average annual receipts, hardly what one would call “mom and pop stores.

While they are the largest creators of jobs in our economy, they produce jobs when there is demand, and consumers produce 70% of demand.

If consumers aren’t buying no amount of tax reduction for the suppliers will cause them to produce that for which there is no market. It is the fallacy of supply side economics, which is really another word for redistribution of income upwards.

What is stimulative? Anything that puts money in the hands of those who need it most and who will spend it immediately out of necessity. Thus supplying money to those who are unemployed is the best stimulus. Even if they are simply given the money it will be stimulative because it will be spent creating demand. But this is not the best stimulus because it has no multiplier effect. It is better to employ that person. If we employ him/her to dig a ditch and fill it, it will be stimulative, but it has no multiplier effect. But if we employ that person, e.g. to seed the Capitol lawn we get a multiplier. Not only when they spend, will they cause businesses who manufacture the goods and who warehouse it and who retail it, etc. to ramp up production, causing them to hire additional people to meet the demand which in turn causes more spending, causing a chain reaction which reverses the cycle of layoffs, but in order to seed the lawn, seeds have to be bought, construction equipment has to be rented, each of which creates jobs leading to more jobs, and in the end we have the benefit of a better lawn. But this small bit of creative spending was ridiculed by Republicans and dropped from the bill. Yet unlike large projects, which give more permanent benefit, nothing could have been more “shovel ready.”

Giving money to the states is another example of a provision in the stimulus bill which could not be improved upon, because if we want quick results what can be better than hiring people, if it is not keeping them from being fired. States, unlike the federal government, have to have balanced budgets and so when as a result of the loss of tax revenues due to the recession, they are faced with deficits, they have no choice but to increase taxes or lay off employees, including police, firemen, teachers, etc. They have to stop repairing roads and they have to stop capital projects already under way or shovel ready. That is not what we need when we are trying to start such programs, not stop them. Yet this was the “pound of flesh” our three “moderate Republicans” demanded as a condition of their supplying the votes needed to stop a filibuster.

For a discussion of the filibuster see the paragraph preceding the antepenultimate one here.

They insisted that the amount allocated for aid to states be cut by $40 billion.

We might well ask why this opposition. Bobby Jindal, the governor of Louisiana, the official Republican spokesman made it clear that Republicans were stills stuck on doing nothing. His main theme was to rely on Bush’s failure in Katrina to show government doesn’t work. How ironic. Republicans, after eight years of blindly supporting Bush are now running against him. Besides they seem unable to tell any story without lying. It appears that Jindal’s story about rescuers being threatened by federal agents because they didn’t have insurance and that he was there, was a total fabrication.

They are now even going so far as to rewrite the history of the Roosevelt New Deal. Now we hear that the New Deal was totally ineffective. As I will demonstrate in my next commentary the facts and figures belie that, but it shows that no distortion, nor any lie that will advance their agenda is off the table.