The Inconsistency and Fallacy of Liberal Stimulus

Robert Kuttner penned a piece that I will use as the boilerplate liberal economic stimulus idea. (Kuttner is a pre eminent liberal thinker and thus this isn't without reasoning) Kuttner blames the current economic malaise on structural economic problems that he traces back decades though he of course puts the blame squarely on Bush. That is only one of many inconsistencies throughout the piece. He starts like this...

In fact, the entire concept and language of "stimulus" misses the point—and misses a huge opportunity. A stimulus is a macro-economic concept. It is sensible medicine when the economy is in an ordinary business-cycle downturn. Government deficit spending or tax cuts can pump more money into the economy, as can lower interest rates mandated by the Fed.

But this is no ordinary cyclical recession. Rather, it is a sharp and needless economic contraction, caused by a serious blow to the financial system, which was in turn the result of deregulation. Banks' balance sheets have taken a huge hit from the spillover
of the sub-prime disaster, and credit remains scarce and expensive even after several rate cuts by the Federal Reserve.

Worse, this downturn comes on top of three decades of stagnant or declining real living standards for about two thirds of Americans, and increasing insecurity of employment, health insurance, and retirement, as well as rising costs of housing, education, and energy. So instead of a modest stimulus package, we need a major recovery program, in four parts:

This whole line of thinking is nothing more than intelligent sounding mumb jumbo. The economic downturn is squarely due to a speculative market. Real estate became way too speculative and all speculative markets end up in disaster. The speculative market had absolutely nothing to do with any structural economic deficiencies. It had to the with simple human psychology. Real estate got hot. Everyone wanted in and then more and more people got in. It fed on itself and at some point it became speculative. This speculative market ended like all speculative markets, disaster. None of them started from anything but flawed human psychology.

Worse than that, he makes the last paragraph a fact, when it is more like an opinion. Nothing in it is sourced. Given that we have a technological revolution, home ownership is at all time highs, and unemployment is below 5%, the doom and gloom sounds more like rhetoric unless he backs it up with facts.

Kuttner gives four different fixes. Let's examine the first one...

We should begin with better-targeted aid to people who need help, starting with greater help to low- and middle-income people in the Senate leadership package. In addition, major reform of the unemployment insurance system is also needed both to extend the duration of benefits, raise the percentage of lost income that is covered, and reach people who currently do not qualify for benefits because they are classified as part-time, temporary, or contract workers. Such legislation has already passed the House. According to the U.S. Department of Labor, every additional dollar of unemployment benefits increases the GDP by $2.20.

This fix is ludicrous. Most of the so called middle and lower class is deep in debt according to most thinkers like him. An economic stimulus that targets them targets folks unlikely to use that money to spend but rather to pay down debt. That sort of stimulus is bound to fail. The reason this fails is because Kuttner plays class warfare with nice sounding populist rhetoric that in reality has no chance of succeeding in the real world. If you really want stimulus to work, you target it at those that are likely to use it to spend and invest. Those folks are those with financial situations that allow it. The lower and middle class don't create jobs. The upper middle class and the upper class do, and they need to be included in any stimulus because they are the ones that drive the economy. While targeting only the middle and lower class makes for good rhetoric, it isn't good policy.

Here is Kuttner's second fix...

The fallout from the sub-prime mess is harming both the balance sheets of banks and the nation's homeowners. At risk are not just the roughly 2 million homeowners at immediate risk of early foreclosure, but their neighbors who face declines in the value of their own homes, and America's homeowners generally. Since August, the administration has tried three different voluntary approaches to get credit markets flowing again in bonds backed by sub-prime mortgages. But these markets remain about as liquid as molasses. Meanwhile, the voluntary process of renegotiating high rates on sub-prime mortgages is bearing little fruit, since most of these mortgage loans are no longer held by lenders but have been repackaged into bonds.

I have already discussed the fantasy of this fix. Kuttner works under the incorrect assumption that folks were put into inappropriate loans. That is just not the whole story. They bought homes that they simply couldn't afford. No government program is going to fix that. Moving these loans from banks to the government merely transfers the risk from private companies to the government. These bonds are doomed to as much failure as the current mortgages because these bonds would be tied to borrowers that simply owe more mortgage than they can afford. The only way to fix the mortgage mess is to get as many of these folks foreclosed on as soon as possible. That may not be politically correct but it is the most effective fix.

The third part of the fix looks like this...

Merely passing a stimulus program, even at a much larger scale, will do little to alter America's deeper economic distress. For three decades, most Americans have faced stagnant incomes, increasing economic insecurity, and rising costs of the things that make it possible to join the middle class – health care, homeownership, college tuition.

We need to reclaim the managed form of capitalism that produced an economy of shared prosperity during the long postwar boom. That will require progressive taxation, re-regulation, and public outlay on a much larger scale. It will require a trade policy that serves the national interest rather than the corporate interest. The Democratic presidential candidates have begun using this rhetoric. Now, they need to get more serious about the program.

This whole thing is nonsense. First, home owner ship is at all time highs, and thus the facts don't match the rhetoric. Americans haven't faced stagnant incomes but rather stagnant wages. That's because most people get paid in things other than wages: commission, bonus, stock options, etc. Furthermore, it was exactly a lack of regulation that allowed the poor and the middle class to get involved in home ownership when sub prime expanded as it did. Now, he claims that regulation is needed to include them. Regulation only makes it more difficult for the poor and middle class to get involved in prosperity not less difficult.

The reason he thinks this is because he has socialistic tendencies not because it makes any sense. That's why he wants progressive taxation. Of course, in the real world progressive taxation punishes the one group that drives the economy, the successful. The reality is that most of this plan is nothing more than populist class warfare. He claims our trade policy favors the corporations over the national interest, but that is rhetoric. He doesn't explain himself and likely because he can't. He blames the evil, evil tax cuts for the malaise of the middle class and the poor, even though the tax cuts expanded the economy and opened those same folks to opportunities they never had before. They then turned around and used those opportunities irresponsibly and now we have a mortgage crisis. In other words, not only does he blame Bush for the result, but he won't even give him credit for its roots.

This softening economy like any softening economy needs stimulus. The reason that we got out of the recession that followed the crash of the internets is because the tax cuts stimulated the economy. That stimulus must be across the board so that the right people enjoy the stimulus. This requires an end to class warfare and populist rhetoric, and real reasoned solutions. That's why I suggest that the tax cuts be made permanent. That may not fit with some sort of class warfare, but it may in fact bring the economy out of its softening.