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Thursday, July 9, 2009

What is Stimulus

Conservatives are working themselves up into a lather over two stories today. The first came from testimony from Ed Rendell's testimony on Capitol Hill.

I would like to see a second stimulus devoted solely to infrastructure," he said. "It's what produces jobs, and produces orders for factories, American factories."


Look, I think the stimulus bill was misnamed," he said. "Part of it was stimulus, part of it was job creation, but a lot of it was relief," such as increased unemployment insurance and food stamps.

Rendell suggested that a second stimulus creating more infrastructure projects can lead more directly to jobs.

The seccond came from the Government Accountability Office's report on the stimulus.

GAO estimates that the Treasury Department has paid out approximately $29 billion to states and cities so far this year, about 60 percent of payments estimated for fiscal year 2009, which ends Sept. 30.

Of that total, most of the funds paid out to states have come from increased Medicare and Education Department grants to state governments.

But the most visible demonstration of stimulus funding is on American roads. As of June 25, the Transportation Department had paid out $15.9 billion for more than 5,000 projects nationwide. Most of that money has been put towards road reconstruction and pavement projects.

Now, anyone that is upset about this NOW shouldn't be. That's because the president always intended to have stimulus dollars for such things as unemployment payments, Medicare, and food stamps. In fact, there are plenty of liberals out there that think we need to do more of this.

The stimulus package the president signed soon after taking office did provide extended benefits, and boosted weekly payments. But even that extension runs out on Dec. 26, and would not apply to all the unemployed. Does anyone really believe that a significant portion of the unemployed will have found new work by then? Hardly. Both private and government economists now predict that unemployment will continue to rise at least through the end of this year.

"We can't ignore this moment when all these folks are running out (of benefits)," says Maurice Emsellem of the National Employment Law Project. "That needs to be a top priority, to help these workers."

Let's stop kidding ourselves. In no contemporary economic crisis -- not even those that unfolded on the Republicans' watch -- has Congress left the unemployed completely in the lurch. So some sort of spending package -- call it stimulus, call it stopgap emergency aid, whatever works -- is going to have to be passed.

The president would argue that putting money into the pockets of the unemployed allows them to pay their rent, buy food, etc. and all of that stimulates the economy. After all, if the unemployed can't pay their rent, the landlord also suffers. The president would argue that if states don't pay their Medicare bills, then hospitals aren't paid their bills and doctors and nurses would have to get laid off. So, in the view of the White House, why isn't fully funding food stamps, unemployment and Medicare stimulus?

In fact, economists will argue till the end of time what exactly will and will NOT stimulate an economy. I believe that it's anything that increases the velocity of money.

The velocity of money is the average frequency with which a unit of money is spent in a specific period of time. Velocity associates the amount of economic activity associated with a given money supply. When the period is understood, the velocity may be present as a pure number; otherwise it should be given as a pure number over time. In the equation of exchange, velocity of money is one of the key variables determining inflation.

During any recession, money isn't filtered through the economy quickly enough. The key to stimulus is to get money to move faster. You need to get those with money to spend and invest it more quickly.

Well, the first thing we know is that government spends money very slowly. After all, the stimulus is nearly six months old and the government has managed not to even spend $100 billion of the $787 billion that was earmarked. Furthermore, poor people already live pay check to pay check, and spend every penny they get their hands on. So, unless you make poor people wealthy, you aren't going to increase the velocity of money.

In fact, increasing the velocity of money is as much a psychological skill as it is an economic one. The people, en masse, need to feel better about the future so they spend and invest more. The best way to do that is to have them keep more of their own money. That includes corporations and small businesses.

Just imagine a $50k a year teacher keeping an extra $150 monthy. Whether it comes from a raise or simply a tax cut, that teacher will feel more comfortable about all their finances. Those are the folks that start a college fund for their kids, finally buy that new car, etc. The same is true only a bigger scale for corporations and small businesses. How much better does a corporation feel when they know that they would keep an extra $100 million this year? Those are the corporations that hire on new people and expand. It's those activities that increase the velocity of money. Put more money into the hands of the productive among us and watch the velocity of money expand.


Anonymous said...

Tax cuts for the less wealthy are ok for they actually spend a higher proportion of their money than the more wealthy.

The more wealthy tend to save a higher proportion of their money or invest it overseas.

They should be taxed more with a more steeply progressive tax system.

mike volpe said...

First of all, tax cuts for everyone are stimulative. There are no tax cuts in the stimulus. Giving someone a one time check of $400 is not a tax cut.

Second of all, I gave an example of someone making $50k. That isn't that wealthy.

third of all, putting money in the bank is stimulative. The bank has more money which they can use to lend to someone that doesn't have as much money. It's always a misnomer by someone like you that giving wealthy "tax cuts" isn't stimulative because they will just "save it". Unless that savings is in their mattress it is stimulative. It goes into the banking system and then lent to others. The idea that the wealthy put a ton of money overseas is nonsense. It isn't a very large amount. Finally, wealthy don't merely save. They much more often invest.