Economics Refresher Course for Republicans from a Dkos diary
I just wrote a lengthy response to some of the ill-informed wingnuts on Politico.com and thought I'd share it here as well. I usually don't bother trying to straighten them out but after watching such an excellent speech by President Obama tonight I just couldn't let them get away with their lies.
I'm not saying anything that hasn't been said before, and probably better, by others here and elsewhere. But you never know how people will respond when the same information is explained a different way. So in hopes that what I say below may connect with some of you or maybe help you make your point to somebody else, I give you my explanation for why the Obama administration's approach to economic stimulus is the only one that really makes any sense at all. There's some snarky comments about Bobby Jindal as a bonus.
I have to get some sleep now. I have to be at the trainer in just over 4 hours.
Economics 101: GDP = C+ I + G + (X-M)
C = Consumer Spending
I = Business Investment
G = Government Spending
X - M = Trade Balance (Exports - Imports)
The problem the Obama Administration has to solve, to keep the economy (as measured by GDP) from collapsing, is to stabilize and eventually increase C, I or G (trade balance is more of a side-effect than a causality). Now you may have heard that C and I are way down. Conservatives would tell you the solution is easy, cut taxes and give consumers and businesses more money to spend. There are a couple of problems with this. One is that, with the exception of very low-income people who are desperately trying to feed, clothe and shelter their families, consumers don’t spend this money during times of recession. They are scared they are going to lose their jobs, so instead they save it or use it to pay off debt (neither of which directly contribute to GDP). That is why Bush’s 2008 tax rebate was widely considered an expensive failure. Economists (and the data) agree that it would have been much more effective if it had been targeted at low-income families. That is why Obama is, smartly, targeting tax cuts (which make up 40% of the stimulus package) to families earning less than $75k. And yes there are many families out there who earn so little that they don’t have to pay income tax but they still pay payroll taxes so don’t give me that crap about giving money away to people who don’t pay taxes. The second problem with consumer tax cuts is that people have to have income (aka jobs) to benefit. And this economy is losing jobs at a faster pace than anybody can remember.
So now the argument changes to tax cuts for the businesses to keep people employed and build new factories, etc. This argument too falls flat on its face. With consumers not buying, inventories are growing and it doesn’t make good business sense to produce more when you can’t even sell what you already have sitting on the shelves. Plus, even if this weren’t true, factories require long planning periods, etc. Studies have shown that each $1 cut in business taxes only injects 30 cents into the economy. Compare that to the $1.63 bang you get for each additional buck in unemployment benefits.
By the way, remember how John McCain always talked about the corporate tax rate in the United States scaring away employers (which isn’t really true since two-thirds of U.S. Corporations paid no income tax between 1998 and 2005)? Remember how he spoke in glowing terms about Ireland and promised he would make our economy look more like theirs? You might want to check up on how they are doing these days.
So since there isn’t much we can do about C or I, that leaves us with G. In times of crisis, the government is the only entity with enough resources to make up for the drop in C and I. There are lots of ways for the government to spend money but Obama is focused on the smart ways. Instead of just spending a lot of money and not having anything to show for it, they are going to spend the money in ways that will not only shore up GDP in the short-term but also leave us a more sound infrastructure, a better educated workforce, less dependent on foreign sources of energy, a better climate and a safer and more cost effective health care system (which will save us lots of money on Medicare especially as baby boomers start retiring).
The money that goes to the unemployed will help them buy groceries, which is not only the right thing to do but will also mean jobs for the people who make and ship the food and work at the grocery store. And then those people can go out and spend their paychecks too.
The money that goes to the states to help them with their budgets will mean they don’t have to layoff first responders, teachers, nurses, etc. And yes, you guessed it, those people all have to buy food and clothes and maybe splurge on a meal out (prepared and served by, you know, more job-having people).
What's that? You're okay with that type of spending? Not just the wasteful spending? Like the money for volcano monitoring that Bobby Jindal attacked in his response? Think about this for a second. Won't that money give jobs to not only scientists but also the people who design, manufacture and deliver the monitoring instruments? And the people who work in the offices that provide those services? And don't all those people buy groceries and clothes and go out to eat? Not so wasteful after all, is it? There is also, you know, the added benefit of potentially saving thousands of lives and millions of dollars of property (h/t Nate Silver and FiveThirtyEight.com). Maybe you don't care because like Bobby Jindal you don't live anywhere close to a volcano. Louisiana may not have volcanoes but they do have hurricanes (the name Katrina ring a bell?). But if you insist this is wasteful spending, fine, let's do it your way and cut spending for N.O.A.A. and the National Weather Service. That way we won’t have to worry about those pesky warnings about tornadoes, earthquakes, or blizzards either. Don’t you just hate when they interrupt your favorite television show? Besides nothing makes for better reality television than video of places like Greensburg, Kansas after a tornado wipes it off the map.
Now of course we could do nothing and not spend any money. Of course that will put even more on the shoulders of our children and really would be an act of generational theft. Doing nothing would mean big drops in GDP. Tax revenues are directly correlated to GDP so now governments (federal, state, local) are taking in even less money. So not only will they have to start laying off workers (police, fire, nurses, etc) but there will also be an increased demand for unemployment, food stamps, etc. I guess we could let those people starve or turn to crime (there won't be any police to stop them) but even the most cynical conservatives say they support a basic social safety net. So what happens when revenues decrease and expenditures increase? Oh yeah, your deficit gets bigger! So under this scenario do we not only do nothing in the short-term to stop the economic decline or make any kind of long-term investment in our future but we also end up with even larger deficits that our children will have to pay off. And good luck to them doing that because the governments won't be able to do things like maintain roads, so people won't be able to get to work and trucks won't be able to make deliveries.
Finally, and quickly because I do need to get some sleep tonight, as far as Ben Bernanke’s testimony today, all he really said was things will go well in 2010 if things go well. In other words, in true Fed Chairman fashion, he didn’t say much of anything. The underlying theme of his testimony though, as President Obama said tonight, is that the economy is doomed unless we get credit flowing again. Because if the stimulus works and consumers regain confidence and businesses are willing to invest in increased production capacity, they will still need access to loans to finance buying a car, building that factory, or to cover the gap between when a product is built (and the employees paid) and when the revenue comes back. That is why President Obama spent so much time talking about making sure the banks that accept taxpayer money actually use it in ways that benefit taxpayers instead of the Bush/Paulson approach of just giving them a bunch of money without any concern about how it was used.
