Idea for a tax extension compromise

[Beet]

angus makes some very valid points. I generally support fiscal stimulus, but Keynesian AD / AS analysis as it's generally applied assumes a single closed macroeconomy. The effect of stimulus money "leaking" out to other countries I have not seen explicitly included. Money spent on fiscal stimulus should be strictly required to be made here in the USA. Let other countries bring a WTO case if they want; WTO cases take years to resolve anyway, and by then the stimulus may have expired anyway.

Monetary stimulus, on the other hand, I think should be more aggressive and unconventional. The argument against 'printing money' from age old has always been inflation. The people who argue against this say that they have thousands of years of history behind them, and they do. But the new economy we have today is one in which, unlike all ancient economies and most developing countries in recent years, is heavily based on leverage. The broader monetary aggregates are huge compared to the actual monetary base. As a result, during a debt destruction, one can print large quantities of money without significant inflation. The reason is that as debt is destroyed, the money supply is actually contracting, ceteris paribus.

Our problems include a weak economy due to weak final demand, a trade deficit due to an overvalued currency, and the threat of deflation. All of these things can be helped by a more aggressive Federal Reserve.

I also agree that allowing the Bush tax cuts for 250 to expire but keeping them for under 250 is Obama's appropriate position, given what he campaigned on. I also agree that the corporate tax rate should be cut (in both the US and Japan, but we're talking US here), although I don't understand corporate taxes as well as I'd like. Here is what CBO has to say about corporate tax rates:

"Corporate
investments are financed by either shareholders or
lenders (which include corporate bondholders). Compared
with the average effective marginal corporate tax
rates for shareholder-financed investment in machinery
among all other OECD countries, the United
States’ rate is slightly higher; compared with the average
among other G7 countries, the United States’ rate
is about the same. Compared with the average rate for
shareholder-financed investment in industrial structures
among all other OECD countries, the United
States’ rate is significantly higher; however, the United
States’ rate is close to the average among other G7
countries. In contrast to rates for shareholder-financed
investment, the United States’ effective marginal corporate
tax rate for lender-financed investment in machinery
is low by comparison with the average for
other OECD countries and for other G7 countries.
From an international perspective, although the
United States’ effective marginal corporate rates for
shareholder-financed investments are higher than the
average, such rates for investments financed by a combination
of shareholders and lenders may be lower
than the average if a sufficient fraction of the marginal
investment is financed by lenders."

And not surprisingly:

"The history of corporate tax rates between 1982
and 2003 suggests that countries do not change
their corporate tax rates independent of one another.
After large reductions in statutory corporate tax
rates by Ireland, the United Kingdom, and the United
States in the mid-1980s, other OECD countries also
cut their rates, perhaps out of concern that they would
lose investments or part of their tax base—for example,
when corporations moved their operations to a
lower-tax country. Hence, the corporate tax rates that
the United States establishes may affect the choices
that other countries make about rates. Thus, how the
United States’ corporate tax rate ranks in relation to
the rates in other countries is not determined by U.S.
policy choices alone."

Total US deficit however is about 10% of GDP, not 90%. Total US debt held by the public (aka real debt) is 60% of GDP as of July 28, 2010. This is lower than the OECD average.

The recent health care bill is deficit neutral, so it can't be blamed for the debt or deficit.

[Beet]

Money spent on fiscal stimulus should be strictly required to be made here in the USA.

Some inherent problems in that as well.  It may be that the specific gene sequencing device you need to buy is manufactured only in France.  Or that the lithium you need is mined only in China.  You can encourage US-made goods, and in the 1930s that would have been great, because there were many US made goods.  Back then, all you really needed to go outside the US for was tequila and silk.  And I don't mind a few dollars going to Jalisco and Oaxaca if it makes for a good party, or a few dollars going to China if it means the softest sheets and pajamas.  But I don't want boatloads of money going redistributed, by fiat, from the US taxpayer to the rest of the globe.  It's really a dilemma.  Let me buy anywhere and I'll buy from the cheapest supplier.  Let me only buy from US manufacturers and I'll limit myself to sub-standard equipment in certain cases, and not even be able to find it in other cases. 

Of course there is a trade off between quality and choice, angus, but without pain there is no gain. That is, without the government willing to take a slightly inferior good (to the best of its knowledge... for some goods you really cannot tell which is superior and which is inferior) that is made in this country, we will never benefit from our own stimulus. And 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. In the case that said good or substitutes absolutely cannot be found in the US is an extreme case, IMO; in this case there is little to be lost by importing, but if such purchases are to be the bulk of any project, then stimulus money should be spent elsewhere unless what is being bought nonetheless will benefit the US long term. Capital goods that will ultimately return a greater profit than their cost might be one example.

[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.

[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.