Government stimulus impossible?

I usually try to stay away from The Corner, but this (via Yglesias) strikes me as pretty egregious:

The idea that government spending creates jobs makes sense only if you never ask where the government got the money. It didn’t fall from the sky. The only way Congress can inject spending into the economy is by first taxing or borrowing it out of the economy. No new demand is created; it’s a zero-sum transfer of existing demand.

This, in a word, is bullshit. The concept of "borrowing money out of the economy" is a non-sequitor--if anything, money is borrowed into the economy, in the sense that every dollar borrowed is a dollar spent (in other words, people don't borrow money just to stuff it under a mattress--they borrow money with something to buy in mind, like a house, car, etc.).

In fact, normally the main mechanism by which the economy is regulated is by manipulating the amount of borrowing going on. This is accomplished by the Federal Reserve, which has its finger on the interest rate--lowering the rate makes borrowing cheaper, and so more borrowing--and therefore more spending--takes place. And more spending==increased demand==stimulus (these are just semantically equivalent terms).

The problem these days is that the Federal Reserve can no longer increase demand amongst the private sector by lowering the interest rate because the interest rate is already at zero (or near zero--I think it's like 0.25% or something). And so the federal government has stepped in to shoulder the burden, borrowing--and spending--hundreds of billions of dollars on its own. I have a feeling Riedl wants to say something like, "yes, but this demand is canceled out by the fact that the money will have to be repaid later via taxes", but this is no different in principle than the fact that the car or house-buying private citizen needs to eventually repay the loan that was taken out. Obligation to pay down debt later doesn't negate the fact of money being spent now, whether you're talking about a private individual, a company, the government, or whatever.

Congress created the unpersons

Paul Krugman wonders why those who were in favor of a bigger stimulus package were considered "out of the mainstream" and left on the fringes of the debate:

One of the mysteries of the way issues are covered in much of the news media is how certain views get ruled “out of the mainstream” and just don’t get covered — even when many well-informed people hold those views.

...

...[T]he voices calling for stronger stimulus are, may I say, sorta kinda respectable — several Nobelists in the bunch, plus a large fraction of the prominent economists who predicted the housing crash before it happened.

But somehow, the pro-stimulus people are unpersons. Who makes these decisions?

I think this can pretty easily be explained by the fact that Democrats didn't do a good job of framing the debate.

The thing is, the mainstream media is not only very worried about keeping a nonpartisan reputation, but also very intellectually lazy. Thus, when an issue like the simulus package comes up, they wait and see what the Republicans propose and what the Democrats propose, and use those proposals as the right and left goalposts for the debate. Anything outside the goalposts counts as "fringe".

If the Democrats had boldly demanded say $1.8 trillion in stimulus, then this would have been seen as a "legitimate" (albeit very liberal) position, and Krugman and his ilk would be welcomed into the fold as representatives of the "respectable left". But as it happened, the Democrats misjudged and decided to lowball the figure (expecting it to go up), proposing under a trillion dollars of stimulus. The debate thus ended up being framed between those who wanted just under a trillion in stimulus versus those who wanted less (or none).

And, as others have pointed out, this same thing happened with healthcare reform: the Democrats didn't seriously propose a single-payer plan. Although obviously this never would have passed, it still would have set the left goalpost further out, giving Obama's public option plan some centrist cover. As it is, the public option is now framed as the most liberal plan on the table, which the mainstream media is unlikely to embrace.

(Photo "Goalposts-2" by huvisian)

Through the looking glass

David Brooks touches, I think, on a lot of the same things I was getting at in my earlier post about personal responsibility going out the window during a depression:

Our moral and economic system is based on individual responsibility. It’s based on the idea that people have to live with the consequences of their decisions. This makes them more careful deciders. This means that society tends toward justice — people get what they deserve as much as possible.

...

...Individual responsibility doesn’t mean much in an economy like this one. We all know people who have been laid off through no fault of their own. The responsible have been punished along with the profligate.

...It makes sense for government to try to restore some communal order. And the sad reality is that in these circumstances government has to spend money on precisely those sectors that have been swinging most wildly — housing, finance, etc. It has to help stabilize people who have been idiots.

As Krugman would say, we're "through the looking glass"--virtuous behavior on an individual level is sinking the economy, and the only way to bring it back up is to give money to those who behaved the worst.

Liberal Lieberman

Looks like I had it right all those months ago about the much-maligned Joe Lieberman. From Joe Klein:

It seems Lieberman played a crucial role in talking several Republicans off the ledge, thereby vindicating President Obama's refusal to be vindictive toward the Connecticut Senator, who had some nasty things to say about Obama and Democrats in general during the presidential campaign. Lieberman has always been a moderate-progressive on economic issues so his vote should not be a surprise--but his active lobbying for the bill has to be considered directly attributable to the grace with which Obama treated him. Those who wonder about the President's efforts to be nice to Republicans--a singularly ungracious lot, cult-like in their devotion to failed economic policies past--should bear this particular example in mind as we go forward.

Lieberman is as liberal as the next Senator when it comes to the economy, health care, and energy.

A time to spend

Says Krugman:

It’s now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help.

And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold.

It's somewhat counterintuitive but true: federal deficit spending is good in a recession, because it gets money flowing in the economy. Moreover, since lenders have lost confidence in the private banks, they all want to lend to the federal government--even if it means lending at an interest rate of a fraction of a percent. So the government essentially has a credit card with a hyper-low interest rate of, like, 0.15% that it can use to get money flowing in the economy in various ways: by increasing unemployment benefits, by cutting taxes, and by investing in infrastructure improvements. The idea is that you keep spending until the economy recovers, at which point tax revenues also recover and you can balance the budget and pay down the debt.