Blogs » Politcs Plus » Austerity methods or another stimulus?


Now that my headache is starting to subside from trying to make sense of the constant battle between Supply Siders and Demand Siders, I'm beginning to try to understand both sides of the argument. The supply siders want to cut drastically government spending and cut corporate rates to get our stagnant economy moving again. On the other side, the Demand Siders are admitting that the initial stimulus package was too small, not well targeted, and the 30% tax cuts in the stimulus to acquire three GOP votes was a mistake and should've been used on a large scale project like light rail. After watching Nobel Laureate Paul Krugman and Harvard historian Niall Ferguson passionately defend their side of the argument, I came away thinking that they were just repeating the arguments of old, so I came away unconvinced that my Demand Side theory is totally wrong.

It is true that only a low percentage of people think that the stimulus package actually worked but I think there's a reason for that. On rare occasions, Chris Matthews will come up with something that I feel is worth repeating. The host of Hardball said the government should have placed gigantic signs in front of all the stimulus projects, strategically placed for maximum viewing, by the general public. Hardhats, jack hammers breaking up concrete, and traffic barricades are great signs of recovery, stimulus or private investment. That's water under the bridge since most of the stimulus money has now been spent and we will see the coming months just how well it did. Before the stimulus, we were losing 700,000 jobs a month and now we have a small net gain. Jobs that were either retained or gained because of the stimulus is hard to prove but a subjective person would have to ask the question" where would we be, without the stimulus?" The opposition will say that if we would have invested half of that money into tax cuts, the job numbers would be down, and we would have had a greater recovery. We will never know because we didn't do that.

I think the administration wants another small stimulus but they know the votes are not there because it's an election year and they really don't know how to frame it. From what I hear, they want to target the states so they will not have to lay off teachers, police officers, and firemen. Congress can't even pass an extension to unemployment benefits. The opposition party says they are not against extending unemployment benefits but they want to take the money out of the remaining stimulus funds, which would cripple the democrat’s effort to stimulate the economy.

The Supply Siders are pointing to the G-20 nations using austerity methods to get their economy back in line, more less abandoning their old Keynesian principals. They point out that Great Britain and Japan have finally adopted austerity methods to balance their budget. We are in much better shape (right now) than they are but, unless we do something in the next two years, I can see us taking drastic measures to maintain our bond rating. We are still able to borrow at a very low interest rate.

JPMorgan Research came out with a report that stated that since 2002 American corporations on average ran a net financial surplus of 1.7% of GDP. What does that mean? That means they have been obsessed with quarterly earnings reports instead of developing new products, buying new equipment, or expanding across the United States. Their interest was to show short term profits to entice investors, continue paying exorbitant bonus to their executives, paying large dividends to their shareholders and to engage in speculative financial transactions. This morning I heard that the companies that make up the Fortune 500, are showing a $1.8 trillion cash surplus that is not being spent on hiring. The Supply Siders will tell you it's because of fears of regulation and taxation but the JPMorgan Research tells a different story. Instead of arguing about who side is right, or engaging in reckless new borrowing or slashing, why not come out with a tax incentive for corporations to spend that $1.8 trillion on hiring?

I saw where one republican legislator wanted to cut the minimum wage on restaurant workers, (it's barely anything now) without giving consideration that the employee needs still needs to pay his rent, car note, etc. California's governor Arnold Schwarzenegger and the public employee labor unions are making concessions to cut back public employees to minimum wage. That is a case where it makes sense, because the public employees in California have been living high for a long time and they need to start paying into their pension plans. In these extraordinary times .concessions have to made by all, because there will be a tomorrow when the economic times are better to negotiate a new deal. New Jersey's Governor Christie proposed a similar proposition that the teachers union should take.

I am now convinced we are a hybrid nation because we're not totally Kensayian or laissez-faire, not conservative or liberal but a little bit of everything, which makes the argument an ongoing process. I still think that if the consumers and businesses are not spending; that only leaves the government and exports to sustain our economy.

*A little economic realism ** 1.......July 5,2010 NYT by David Brooks 2......CNN's GPS......Fareed Zakaria..July 4,2010 3......Are profits hurting capitalism? July 2,2010 NYT by Yves Smith & Rob Parenteu 4.....MSNBC's ."Good Morning Joe".....July 6,2010