What Happens Post Stimulus?

[Conan71]

I've been reading lately that everything from research to construction to state and local budgets (including everything from road building to law enforcement to universities and common ed) will be impacted with budget and/or revenue short-falls this coming fiscal year due to the loss of temporary funds which were made available by the Feds to avoid a total cataclysm in the economy.

What this indicates to me is: The idea behind the stimulus was to help privately-owned companies by the government contracting at the federal, state, and local levels by creating projects to keep companies busy until other private sector companies needed their services again.  If the stimulus theory (and Keynesian economics) were really infallible, then there should not be a revenue gap looming.  IOW, there should have been enough new tax revenue generated at the local and state levels that there would not be such dire revenue shortfalls predicted.

Would it have been better to simply have done nothing two years ago before much of the stimulus spending was being devised after the '08 election or to have done what we did: Mitigate as much damage from the recession as possible but to have made people even more dependent on government spending from a sudden spending spree then to yank the rug out from under the recipients?

At least based on accounts I'm reading about projected shortfalls in various budgets, the outlook for the next year looks seriously bleak especially for companies who do business with the government on local and state levels.  We've taken away housing incentives, much of the "shovel-ready" initiatives states competed for are playing out, research grants and things of that nature have paid out.  Now what?

I'm rarely Negative Nancy, but I'm not seeing a robust forecast for 2011.  I think we did basically what was done in 2002: put off the inevitable pain until a later date by using unrealistic and unsustainable government spending to stand in the gap for failures in the free market.

[Breadburner]

I think things are going to pop after the first of the year........

[nathanm]

Well, there were two main problems with the stimulus. Firstly, it wasn't big enough to offset the reduction in state & local spending, since a large part of it was in the form of tax cuts. Some states, like Oklahoma, managed to convince the feds to let them save some of the funds for later. Secondly, the private sector has refused to move in the least and now has more cash on hand than at any time in history, despite having significantly reduced their debt load over the past couple of years. Also, the velocity of money is down significantly even from the early 2000s recession, which has the effect of shrinking the money supply. (which is the reasoning behind QE2)

Going forward, the problem that we face is that with demand (and tax receipts) as low as they are, we've got deficits out the donkey as far as the eye can see thanks to the reduced tax receipts. We've painted ourself into a corner and now look too much like Japan in the 90s for my comfort.

Some folks are claiming that our problem is our lack of a coherent policy response to the financial crisis, thanks to our completely broken political system, similar to what happened to the UK after WWII. Brad DeLong thinks the problem is one of perceived uncertainty, and wants us to raise taxes in some areas, cut taxes elsewhere, have a second stimulus, and commit loudly to things like HCR.

It took several years after (relatively larger) stimulative policy was implemented for the long term in the 1930s to get the economy back on track, so it's expecting a lot for what amounts to $400 billion of stimulus to have made a lot of difference. It's not helping that the extended unemployment will be expiring at the end of the month.

[TheArtist]

 "If the stimulus theory (and Keynesian economics) were really infallible, then there should not be a revenue gap looming.  IOW, there should have been enough new tax revenue generated at the local and state levels that there would not be such dire revenue shortfalls predicted."

 From what I have heard, the stimulus wasnt enough and over a long enough period to create "positive tax revenue", it was just enough to slow down the downward plummet and hopefully get things to a steady state.  Wasnt going to be a pretty picture no matter what you did.  We are essentially buying ourselves some time to work things out,,, but the interest is building and there are still a lot of losses that need to be worked out of the system (faux money from the housing/construction booms).  I feel that things will be getting better, but its going to be very slow going.

In the next year or two your likely to see spots of decent growth in the US and World, large areas in the developed world that are going to see ups and downs and slog along, spots that are going to get worse, and a developing world that will still grow well short term, but will be losing steam in this next decade.  

We are going to have to start getting used to wrapping our minds around a world that looks and operates differently than the one pre recession.  Whether your in North America, South America, Europe or Asia, its not going to matter what particular country your in, or even what state, what will matter will be your Metro.  Its the metro your in and how well its doing in the global economy that will govern how well your doing.  As the world has gotten flatter, lines dividing countries are fading away and we are turning into a world of "Metro-States".  

Interestingly enough, I think Oklahoma and Tulsa will be doing about as well as it was before lol.  Not robust growth but not terribly bad either.    

[Conan71]

"If the stimulus theory (and Keynesian economics) were really infallible, then there should not be a revenue gap looming.  IOW, there should have been enough new tax revenue generated at the local and state levels that there would not be such dire revenue shortfalls predicted."

 From what I have heard, the stimulus wasnt enough and over a long enough period to create "positive tax revenue", it was just enough to slow down the downward plummet and hopefully get things to a steady state.  Wasnt going to be a pretty picture no matter what you did.  We are essentially buying ourselves some time to work things out,,, but the interest is building and there are still a lot of losses that need to be worked out of the system (faux money from the housing/construction booms).  I feel that things will be getting better, but its going to be very slow going.

In the next year or two your likely to see spots of decent growth in the US and World, large areas in the developed world that are going to see ups and downs and slog along, spots that are going to get worse, and a developing world that will still grow well short term, but will be losing steam in this next decade.  

We are going to have to start getting used to wrapping our minds around a world that looks and operates differently than the one pre recession.  Whether your in North America, South America, Europe or Asia, its not going to matter what particular country your in, or even what state, what will matter will be your Metro.  Its the metro your in and how well its doing in the global economy that will govern how well your doing.  As the world has gotten flatter, lines dividing countries are fading away and we are turning into a world of "Metro-States".  

Interestingly enough, I think Oklahoma and Tulsa will be doing about as well as it was before lol.  Not robust growth but not terribly bad either.    

Private sector Oklahoma, because of it's involvement in the energy industry should fare pretty well. 

The Tulsa Whirled was reporting this morning that the City of Tulsa faces an $18mm shortfall in the coming years as things like the JAG grant expires and federal money for projects like waste treatment plant improvements dries up. 

As far as the nature of tax cuts and credits from the stimulus, those were supposed to help drive the economy directly because it would put money in the hands of people who could and would spend it.  It was assumed that the great first time homebuyer credits would end up trickling through the economy as people did improvements and bought furniture and electronics for their new homes.  I'm curious what the overall pattern was for those who got the big credits: If they put the money in savings or did what the gov't hoped they would do with it: spend it.

[nathanm]

I'm curious what the overall pattern was for those who got the big credits: If they put the money in savings or did what the gov't hoped they would do with it: spend it.

Based on the growth in personal savings, I'd say it's pretty much all been saved. I don't have the data at hand to say whether the income tax cuts, the homebuyer credit, or both were saved or spent. I can say that personal savings is up by about $400 billion since the the pre-recession low.

[Conan71]

Based on the growth in personal savings, I'd say it's pretty much all been saved. I don't have the data at hand to say whether the income tax cuts, the homebuyer credit, or both were saved or spent. I can say that personal savings is up by about $400 billion since the the pre-recession low.

That would make sense.  Take the risk of purchasing a home during an economic downturn while thousands of people are losing their homes and one reaction would very likely be to save back a cushion in case someone were to lose their job.  Without commenting on the merits either way, one friend of mine paid her car off with the funds after she bought her new home.

[Gaspar]

Re: What Happens Post Stimulus?

As long at the tinkering continues, the burden of market manipulation will increase until the self correction is unavoidable and far more intense. . . Unless we wake up (as it seems we may be doing) and realize that easing restrictions that prevent growth in the private sector represent salvation. 

At this point many have begun to understand how we have prolonged the process.  We could have prevented this whole mess long ago.  Even the hint of the application of reason has started to effect business in a positive way.  I am hopeful that this represents the last res-erection of the Keynesian model, but I fear that sooner or later we will forget again.

Economies like ours cannot be controlled, we have the ability through restriction and regulation to limit growth, and through stimulation and subsidy to create temporary expansion (bubbles).  Eventually they must balance themselves. 

[YoungTulsan]

Can't we worry about this tomorrow?

[Gaspar]

No, tomorrow is Saturday and my office is closed.

[guido911]

Can't we worry about this tomorrow?

Good one.

[we vs us]

I think it's interesting that, underlying a lot of the popular thinking about the recession is the surety that sometime somewhere there's a piper to be paid.  That we're putting off a major reblancing of the system or something similar and that at some point -- now, soon, or in the distant future -- we're due for an apocalypse.  Conan, you said it in your first post, but you're definitely not the first person I've heard say it:  "putting off the inevitable pain," as if there's much more and much worse in our future and the only option is to work through it but that our government is somehow doing us a disservice by trying to lessen it.  

It's this weird religious certainty, that after all of our decades of luck, we're due for a major, maybe mortal blow to our economy. I think too, that it crosses party lines; granted, us libs see the apocalypse coming in the form of climate change or peak oil, but it seems like everybody's expecting the end of the world, and pretty soon, too.  

[Conan71]

I think it's interesting that, underlying a lot of the popular thinking about the recession is the surety that sometime somewhere there's a piper to be paid.  That we're putting off a major reblancing of the system or something similar and that at some point -- now, soon, or in the distant future -- we're due for an apocalypse.  Conan, you said it in your first post, but you're definitely not the first person I've heard say it:  "putting off the inevitable pain," as if there's much more and much worse in our future and the only option is to work through it but that our government is somehow doing us a disservice by trying to lessen it.  

It's this weird religious certainty, that after all of our decades of luck, we're due for a major, maybe mortal blow to our economy. I think too, that it crosses party lines; granted, us libs see the apocalypse coming in the form of climate change or peak oil, but it seems like everybody's expecting the end of the world, and pretty soon, too.  

But hasn't that been one of the liberal meme's all along?  That Bush intervened improperly and merely put off the inevitable in digging out of the 2001 economic slow down and that's why the crash of '08 was so much worse?

[we vs us]

But hasn't that been one of the liberal meme's all along?  That Bush intervened improperly and merely put off the inevitable in digging out of the 2001 economic slow down and that's why the crash of '08 was so much worse?

Well . . . sorta but not really.  I think it was a criticism of Greenspan who never properly reigned in his loose money policies after the recession corrected itself.  Which in turn inflated the credit bubble which popped last year.

From what I've heard (and hear) the criticism of Bush is more about his encouraging the continuation of consumer culture (which in turn encourages debt); he gets dinged for asking people to go back to the malls after 9-11 and start shopping again.  Personally, I don't think that was a misguided statement (especially when everything was so frozen right after 9-11), but folks on the left have taken it as emblematic of his economic policies, which weren't particularly about reinventing the American workforce for the next generation so much as they were recovering and preserving as much of the pre-9-11 status quo as possible.   

[nathanm]

But hasn't that been one of the liberal meme's all along?  That Bush intervened improperly and merely put off the inevitable in digging out of the 2001 economic slow down and that's why the crash of '08 was so much worse?

No. The liberal meme is that Clinton and the Congressional Democrats relaxed the rules and Bush failed to enforce even the new, more lax rules, thus allowing the banks to get themselves in more trouble than they might have otherwise. The only meme we have related to Bush's economic intervention is that his tax cuts are a large part of why we have such a gigantic deficit.

I can't speak for the whole cabal, but I blame the investment banks who securitized piles of smile and fraudulently sold it off to investors, the mortgage brokers who had a bad habit of drawing up the paperwork for an interest only or regular ARM when the customer asked for a 30 year fixed, the idiots who decided that derivatives shouldn't be regulated by the CFTC, and the idiots who decided CDS contracts shouldn't be regulated as the insurance contracts they are.

We may be about to see the biggest federal intervention in banking yet. If you haven't been following the fraudulent foreclosure situation, you'll be appalled. There seems to be enough wrong with the original securitizations that it could literally take out every major bank in the country and wipe out MBS holders entirely when the REMICs they're made from turn out to owe billions of dollars in taxes since they weren't set up correctly. Calling it fraudulent foreclosure is actually a significant understatement. If that were the only problem, it would just be a matter of fixing the documentation and the assignments of the notes and mortgages.

I think the feds are going to be forced to step in and change the law so that the banks don't get sued into oblivion by the investors who they blatantly lied to.