Idea for a tax extension compromise

[Beet]

don't bring in fairness, because it's a joke that other countries don't heavily subsidize their own industries. The US has historically been more committed to free trade than anyone else, which our large trade deficit is a prominent exhibit thereof. We are entitled to a little favoritism when the case is fiscal stimulus.

Inside every moderate Democrat is a Republican struggling to break free.  

Okay, good points all.  I'll surrender specifically on the point of favoritism.  After all, if the stimulus is to bolster the US economy, you have to make some stipulations.

In the broader context, you have to address the huge federal government's budget relative to the aggregate economy.  Regardless of opebo's comment about private and public sectors being arbitrarily defined (assuming he's serious), it's a real concern.  So does the stimulus really help grow the economy, or does it simply delay the inevitable contraction which must necessarily follow the irrational exuberance of the preceding decade and a half?  If it is our time to recognize that we are no longer the biggest bully on the block, we can admit that gracefully and move on.  After all, China's stimulus was only a fraction of what we did, and theirs was more more targeted, and therefore more effective.

China's stimulus was 4 trillion yuan, it was not more targeted, it was just much bigger relative to the size of their economy (about 34 trillion yuan). So the stimulus was about 12% of GDP. A similar sized stimulus for the US would have been about $1.7 trillion. Not to mention the government ordered state-owned banks to extend $1 trillion in additional loans in 2009, more than twice the size of the stimulus. Tim Geithner just can't pick up the phone and order Citigroup, JP Morgan, etc. to make trillions in new loans.

I would also question some other assumptions you have. One is that 'we are no longer the biggest bully on the block'. One look at relative military spending ought to dispel that myth. And that doesn't take into account the US's technological lead.

Those who argue that the stimulus just 'delay(s) the inevitable contraction', I would say : where have you been for the last 2 and a half years? We've been going through a contraction, and it's the worst, most painful contraction since WWII. At some point, you have to say we've had enough pain. The American people have been put through enough pain over the past two and a half years. They didn't need to be put through even more pain. That was part of the rationale for the stimulus. Independent, private sector estimates have said that the stimulus saved 1-2 million jobs. The other part was long term growth. No one can make a judgment about how successful this second part has been yet.

[angus]

Ah.  Yes, I guess if you look at the China stimulus relative to that country's GDP it was big.  I was thinking of the actual amount, in dollars, compared to the US stimulus.  Sure, relatively it was huge then.

Also, yes for the past two years we're going through a contraction, stimulus or no, and we are also delaying the natural contraction, or if you don't like the word "delay" since it implies a forestalling, then let's call it a lengthening of the contraction.  Either way, the magnitude of the contraction will be controlled by market forces, and the stimulus only slows it down, so instead of being out of it in five years, we take ten, or twenty, and in that way perhaps get used to the idea of ten percent unemployment.  Not sure that's an ideal situation.

[Beet]

I wouldn't say we have no control over the magnitude of the contraction either.

But I would agree that long term economic performance is ultimately determined by advances in technology, which in turn control the rate of productivity growth, which in term determines the potential growth rate of the economy. Although investments can be made in R&D, the rate of applicable technological advance is generally outside of government control (of course).

What we can control though is the shape of that growth. In other words, we can't control our productive our tools are, but we can control how we choose to utilize them. Is it down 10% one year and up 10% the next year, and so on and so on? Or do we try to keep it to around 2-3% a year, with a recession here or there, but not depression-levels of unemployment?

In other words, the trade-off is between stability and volatility. Given the wrenching disruptions in peoples' lives and business plans that volatility tends to create, I think we should do our best to control it.

And as I've said before, ten percent unemployment is by no means inevitable, because unemployment implies and underutilization of existing resources. It is entirely within government power to control the level of unemployment, if the political choice was made to do so. WWII is exhibit #1 here. Unemployment can be lowered by a combination of monetary and fiscal stimulus.

[angus]

It is entirely within government power to control the level of unemployment,

...but not without affecting the inflation.  Increased employment means increased demand for goods and services, so that means firms experience a decrease in spare capacity and decrease in volume goods not sold.  Higher unemployment, on the other hand, means greater price competition.  Also because higher unemployment makes it harder for workers to bargain for higher wages, wage inflation will decrease during the period of rising unemployment. 

You can't tweak one variable on the economy and expect to keep all others constant.  I see you already recognize this anyway with your analysis, but that's another thing to consider.

All of this is a little off-topic, by the way. 

[Brittain33]

Well it has been an eventful few days. Speaker Boehner's first screw-up and he's yet four months away from taking the gavel.