Why This Bear is Angry About the “Stimulus” Proposal

I fancy myself as only slightly left of center and willing to work in a bipartisan way with sensible conservatives. Over at EconoSpeak, however, I suggested that the tax rebate bipartisan compromise might give little bang for the buck. It seems Paul Krugman has the same concerns. Paul earlier had pointed to the Permanent Income Hypothesis championed by Milton Friedman, which is essentially the Life Cycle Model that I mentioned to note the following:

As Milton Friedman pointed out 50 years ago, consumers tend to base their spending on “permanent income” – the income they expect to have over the long run – rather than their income in any given year. So an $800 check from the Treasury tends, other things equal, to be mostly saved rather than spent. How does one get around this? One answer is that not everyone bases spending on permanent income. In particular, people who don’t have a savings cushion and can’t borrow (or can only borrow at high credit-card rates) may be “liquidity constrained,” spending less than they’d like to given their permanent income. For example, a laid-off worker who expects to get another job eventually, but meanwhile is running low on savings, is very likely to spend an extra check. Another answer is for the government to spend the money directly – or simply refrain from spending cuts that would otherwise happen. For example, state and local governments, which aren’t supposed to run deficits, may be forced to slash spending in a recession; aid to these governments can avert these spending cuts, which is a real plus for the economy. All of this suggests that if you want a stimulus plan to actually affect demand, it should focus on people likely to be liquidity constrained and on sustaining government spending.

While the Democrats wanted to give aid directly to state and local governments or give more unemployment compensation to those who are liquidity constrained, the Republicans resisted. So what did the bipartisan compromise do? Toss out those proposals that would have had a large bang for the buck in favor or ones that have little bang for the buck.

Sad to say that Speaker Pelosi was willing to deal not with principled conservatives but with a bunch of partisan GOP hacks. Of course, the GOP is no longer run by principled conservatives as its leadership is nothing but the hacks. Paul is disappointed in this pathetic compromise. The Bear is simply Angry!

Update: Kevin Drum counts this bill as a win. He’s not disagreeing with me and Paul Krugman on the economics, however:

Bottom line: I doubt that this plan is going to provide an awful lot of stimulus. But it might do a bit of good, and certainly won’t do any harm. In today’s world, that counts as a win.

It seems that the incompetence under King George W. Bush has really beaten down Kevin’s expectations of good governance!

Update: Robert Greenstein continues the discussion of how the best ideas were left out.