Economic Illiteracy in Congress

Earlier today, Kyle wrote, in a post about the agreement reached in the Senate today:

The funny thing is, if ever there was a time in which I would want to see the bill killed, now would be it. I’m not an economist, but the basis behind the stimulus package is not to save the government money, it’s to spend lots of money to jump start the economy.

Economists who are monitoring the Keynesian approach have already expressed worry that the original price tag of the package wasn’t big enough, now it’s even smaller.

Well, Kyle is spot on, and I’m very much hoping that at least some of the cuts to spending provisions that were made by “centrist” Republicans will be restored when the bill goes into conference with the House. And, by the way, all the measures stripped out of the bill were on the spending side. None were on the tax cut side. And the Senate version of the bill as it stands now is 42% tax cuts.  At a time when the country is in a deep recession caused by plummeting demand for goods and services. Tax cuts don’t stimulate demand. Actually, tax cuts don’t stimulate anything. Tax cuts are exactly the opposite of what we need in this economy. So that means that well over a third of the stimulus package is given over to anti-stimulus measures.

But of course Kyle already pointed this out. What I wanted to add here is what Paul Krugman had to say in his column today about where we are right now — because his comments underscore a lot of what Kyle said:

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.

It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.

Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.

Those bolds are mine. Now, I’m going to repeat each of those bolded sentences, and follow each one with the conclusion to which it points:

Consumers have cut back their spending and sharply increased their saving. …”– which means that demand for products and services has gone down. Supply has not gone down. Demand has gone down, because consumers are not spending. Now, if the economy is in crisis because demand for products and services — SPENDING — has plummeted and is continuing to go down every day, then what has to happen, boys and girls, for the economy to get better? That’s right! Spending has to increase! But wait– spending can’t increase because 3.6 million people lost their jobs since December 2007 and hundreds of thousands more are losing their jobs every month. Last month it was 600,000 jobs lost. And guess what happens when people lose their jobs? They cut spending. Ooops! That means even less demand, doesn’t it? Republicans grandstanding in the Senate about a stimulus package that has too much spending, instead of passing the stimulus package? Oooops! That means more companies shedding more jobs, which means more unemployed Americans, which means — you guessed it — LESS SPENDING.

Developers of commercial real estate … are slashing their investment plans.” Why? Because demand is way down. People are not spending. There is no one to buy the developers’ commercial real estate, so the developers stop putting money into new projects.

Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have.” Okay, answer me everyone: Why aren’t they selling enough to use the capacity they have? Because demand is way down; because people are not spending!

And once more, if the economy is in crisis because consumers and businesses are not spending, then what has to happen for the economy to begin to recover? You guys are so smart. That’s right! Spending has to increase!

But now we’re back to those 3.6 million unemployed people. They can’t spend. Aren’t going to spend. Don’t have the money to spend. Oh no. Where is the spending going to come from? Who has the capacity to spend, in the amounts needed to get the economy going again? My god, nobody has that much spending power, right? No, wait, wait a minute… maybe… just maybe… I KNOW! I know who has the money! The federal government!

That’s the solution! The government has to spend. Spend BIG. The government has to pump money into the economy. And how does the government pump money into the economy? Well, as Rachel Maddow said tonight, if the government could actually give suitcases full of cash to low-income and working-class people — the ones who are most likely to spend that cash — that would be totally the ideal way. But… the logistics of that are a bit daunting. So the next best way is for the government to literally make jobs and put people into those jobs, so the government can pay them and they can….   drum roll, please…. SPEND!

That ends the first class of Econ 101, boys and girls. I hope you have all learned something. And I most especially hope that the people who most need to learn something about basic economics — and hint: that probably would not be any of the people who put up posts here — learn. Something.

Hat tip to Rachel Maddow, who inspired this rant with her own, much more eloquent, rant tonight about the economic dunderheads in Congress.

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