Just wanted to give everyone a heads up that there will be plenty more posts coming up over the next several weeks so keep your eyes open. I’m finally through my mid-block round of finals and I’ve got 6 weeks or so until the next one. And we’re now getting into some semblance of a schedule with Jonah so I’ll finally be able to write some of the articles I’ve been building up here. And to start things off here’s a quick one.  You may have heard something about the G20 summit coming up this week and like many people you may have wondered, “What in the world is the G20?”.  Well that bastion of trivia, MentalFloss, put up an article about it today so just click “continue reading” for a quick definition.

From Mental Floss:

“The G20, more officially known as the Group of Twenty Finance Ministers and Central Bank Governors, includes banking ministers from 19 of the world’s wealthiest economies, plus the European Union. The group’s inaugural meeting was held in 1999 in Berlin, to strengthen international financial architecture and to foster economic development on a global scale. The member countries represent 80% of the world’s trade, two-thirds of the world’s population, and roughly 90% of the global gross national product. A few of the countries include the US, Japan, Mexico, Russia, South Korea and Saudi Arabia. Basically, the G20 summit gets all of the people who control economy in one room at least once (or in 2008’s case, twice) a year, and asks them to make decisions about things. Whether or not that actually accomplishes anything isn’t immediately evident. The existence of the meeting, however, provides a wonderful physical focal point for the masses of people angry at the current direction of the global economy.”

The full article can be found here.

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Well I’ve had several questions lately about a statement I made in my post CA Obstructionism and Political Games in which I was pretty dismissive of tax cuts in the stimulus bill.  All the questions came via email of course (this is what the commenting system is for guys!  You can comment anonymously if you want!).  Anyway, while I’m planning on writing a much larger treatise on tax policy at some later date, I thought I’d address why I think tax cuts provide for relatively little stimulus.  I’m going to try to keep it as non-technical and conversational as possible.  And I should note before I begin that the principles I’ll present in this post are not universally agreed upon in the field of economics, but they are reflective of the economic philosophies that seem most reasonable to me given my educational experiences, and the views that are most widely held among economists today.  So with that, lets just jump right in, this is the trouble with tax cuts as far as I can tell…

So while I’m going to try to minimize jargon here I’ll have to define one term right at the start, and that’s the “Spending multiplier”.  When you spend a dollar, it actually adds more than a dollar to the economy.  Because that dollar ends up in the pocket of an employee who uses it to pay his rent, whose landlord uses it to buy some groceries, etc etc.  The longer this cycle goes, the more impactful that dollar has been.  And money spent in different ways will multiply at different rates depending on the propensity for that spending method to lead to a cycle like the one described above.  So the spending multiplier is a number that essentially tells us the real GDP increase that one dollar of injected cash will create when spent in a particular way.  So in a stimulus plan, you want to inject as much money as is feasible at the highest spending multiplier possible, so as to increase GDP as much as you can, counteracting our current recession.

So when money is returned to an average person via tax cuts, where does it go?  Well a lot of it is saved.  In fact Nobel Prize winning economist Joseph Stiglitz calculated that less than half of the tax rebates of 2008 were spent in the first 9 months, the rest being saved.  And several things affect this savings rate.  For example when the populace is in an unusual amount of debt, they save a larger percentage of their tax cut.  When there is a lot of uncertainty about the future of the economy or if its expected to decline, they save a larger percentage of their tax cut.  Its also important to note that the rich save a much larger percentage of their tax cuts than the poor, since they require a smaller percentage of their income to pay for basic necessities.

So if we give a dollar in tax cuts, lets say 40 cents right off the bat is put into savings and not sent out to be part of the “cycle of spending” (this is probably a low estimate in today’s economic climate.  Also note that this number would be much higher for the rich and much lower for the poor).  Then of that money spent, a fair portion of it will be spent on foreign products (lets say 40 percent of that – again probably a low estimate) which will go to stimulate that country’s economy and not our own.  So that leaves us with 1*.6*.6 or 36 cents of each dollar of tax cuts that actually goes out into the American economy and is subject to the normal cycle of spending.  This leaves tax cuts with a pretty miniscule spending multiplier.

And of that 36 cents spent, most of it will likely go to credit card companies, grocery stores, and the consumer electronics industries.  Not exactly the industries that most need stimulating right now, and not the industries which are most likely to create more valuable jobs as a result of their income growth.  If only there was a way we could have a tax cut in which all of the returned money was spent, all of the money went to American companies, and most of the money was spent in industries that need it the most.  Well we have something like that, its called government spending.

When the government spends a dollar, none of it is saved, all of it goes to American companies, and we the people (through our elected leaders) can send it to the industries that need it most.  For these reasons, it seems to me that when economic stimulus is your goal, government spending works far better and more efficiently than tax cuts.  Mark Zandi, chief economist for Moody’s Economy.com testified before congress last summer in favor of a stimulus bill and cited these numbers as the calculated spending multiplier for various stimulus options:

Fiscal Bang for the Buck

Source: Moody’s Economy.com

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I think this video does a fantastic job of explaining the credit crisis in simple terms.  It doesn’t really discuss some of the newer developments, and it certainly over-simplifies some of the issues at points along the line.  But it explains the events that initially got us into this mess about as clearly and succinctly as they can be explained.  If you’re new to the economics of the credit crisis, you may still be a little shaky after a single viewing, but you’ll certainly understand things much better.  And even if you consider yourself a financial pro, you’ll likely have a clearer understanding of how the various problems facing banks, lenders, investors, and homeowners are connected after watching this.  It’s 11 minutes long but its definitely worth it.  And don’t forget to share your thoughts about it in the comments!

From Vimeo via MentalFloss

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One last stimulus post and then I promise I’ll take a break.  I have been utterly amazed at the creative reading skills of stimulus opponents over the last few weeks.  As they say a lie can travel halfway around the world before the truth has finished putting its shoes on.  And the four outrageous claims discussed here have been passed around virtually unchallenged for a while now.

ACORN Nuttiness

The idea that there was money for ACORN in the stimulus was first invented by Fox news in the run up to the stimulus debate and its since been parroted by republican legislators including John Boehner and David Vitter.  In reality, of course, ACORN is not mentioned at all in the bill but what worries republicans is that 4.2 billion is set aside for local governments and (gasp) non-profit organizations to help them buy up foreclosed homes, fix them up, and sell them or rent them out.  So the logic goes 1.There is money in the bill for non-profits to buy up homes,   2. ACORN is a non-profit organization that does things vaguely housing related   3. The democrats are trying to sneak money to their buddies at ACORN!!!!!

Lest you think I’m exaggerating here is a quote from Louisiana Republican David Vitter on the subject: ”$4.2 billion dollars would be available to organizations like ACRON for so-called neighborhood revitalization. That’s just political payoff, quite frankly, not in spite of their voter registration fraud activity, really because of it, in my opinion, in terms of support from some of the liberals in Congress.”  … Wow.   That’s quite a conspiracy theory he’s put together there.  Never mind the fact that “ACORN Housing” is an entirely different organization than the ACORN that committed voter fraud, never mind that ACORN housing has never purchased a foreclosed home in its history and has no plans to do so, and never mind that…no liberal politicians benefitted in any way from the poorly conceived voter fraud committed by low-level ACORN employees.  Of course David Vitter and John Boehner know all that, but providing that kind of context would hurt their case.

Field Mouse Fiasco

This one originated with Rep Steve King of Iowa but was also picked up by the illustrious John Boehner, and has been featured on the Drudge report.  It all started with this memo from the house, brought to you via Politifact.com:

“Appropriations Republicans, concerned with this irresponsible process and possible abuse of taxpayer funds, have asked various federal agencies how they intend to spend the windfall of cash that Congress may approve in the ‘stimulus’ bill,” said a memo posted to the site. “One peek behind the bureaucratic curtain has yielded the following examples of hidden program information that isnot included in the language of the bill or report. These are programs which various federal agencies have privately indicated they will fund with ‘stimulus’ money.”

The memo lists a number of projects, including up to $37.5 million for “wetland restoration in the San Francisco Bay Area – including work to protect the Salt Marsh Harvest Mouse.”

Basically, unable to find pork in the bill, House republicans decided to ask states and federal agencies what they were planning on using their money for.  On a list of possible projects put forward by CA was this wetland restoration project, a small portion of which focused on protecting this marshy rodent.  Of course with Ms Pelosi being the rep from San Francisco her name was quickly attached to this project as the originator of this trumped up “pork”.  An article yesterday in the Washington Times was headlined ”Pelosi’s mouse slated for $30M slice of cheese.”  and included the blatant falsehood that the stimulus bill, ”includes $30 million for wetlands restoration that the Obama administration intends to spend in the San Francisco Bay Area to protect, among other things, the endangered salt marsh harvest mouse.”

This is really a good example of how many of the “pork” rumors about the stimulus have been invented.  Once again, the creativity evident here is impressive.

Banning Prayer

And of course a great way to get Americans frothing at the mouth is to push the old “democrats are silencing religion” button.  This myth seems to be sole property of South Carolina Senator Jim DeMint, perhaps because its so ill-conceived that no one else wants to be associated with it.  Basically the stimulus contains standard boilerplate prohibiting federal funds going to colleges from being used to refurbish “buildings used for religious worship”.  Sen DeMint has (willfully?) misinterpreted this to mean that students would be barred from praying in their dorm rooms.  Of course there’s oodles of Supreme Court precedent that says otherwise and phrases exactly like this one have been included in hundreds of spending bills gone by without the world crashing down.  I think that’s all that needs to be said about that one.

The Stimulus will Override Your Doctors and Kill Your Parents!

Of all the myths surrounding the stimulus bill this one is perhaps most widespread right now, and simultaneously most insane.  The stimulus smartly establishes a “Health Technology Czar” to oversee the much-needed and long-overdue national transition to electronic health records.  There was a bloomberg article posted a few days back (found here) in which the author used a combination of astonishingly poor reading skills and skillful alarmism to claim that the Health Tech Czar would be empowered to review the decisions of all doctors in America, overrule their diagnosis, and enforce efficiency.  I’m not kidding.  Conservative pundits immediately ran with the story, before checking to see if her claims were correct.

Ann Coulter said Health and Human Services “bureaucrats will soon be empowered to overrule your doctor” and “cut off treatments that merely prolong life.” She also claimed, “Doctors who don’t comply with the government’s treatment protocols will be fined.”  Lousiana Republican John Fleming went on Glenn Beck’s show and said the ”health technology czar” will “oversee what procedures doctors are doing and help decide at what point in life they will receive certain treatments and perhaps what treatments are acceptable and not acceptable for payment.”  Beck, disappointingly, didn’t challenge those claims but made this “outrage” the focus of the remainder of his show.  This culminated in an article in the Washington Times two days ago that ran a story about how the stimulus was leading us towards Nazi-Era Eugenics and it featured a large picture of Hitler.   The story has since been picked up by The Drudge Report, Lou Dobbs, Fox News Anchor Bill Hemmer, and Rush Limbaugh.  All this from one little poorly-researched article that nobody bothered to double check.

But the author’s one mistake was that she provided references to the page numbers in the stimulus that “supported” her claims.  While all those pundits were apparently too busy to glance over them, I found five minutes to look them up.  And I would invite you too as well.  I read the indicated pages with curiosity and found them to be very clear in saying nothing of the sort.  All of the Health Tech Czar’s powers related to enforcing adoption of electronic medical records and nothing more.  But I wasn’t the only one.  One of CNN’s medical correspondents had a similar experience:

When challenged the bloomberg author’s reaction was essentially that the wording of the bill may not actually say anything like that but it leaves that possibility open because it doesn’t specifically rule it out.  All the talk of the elderly and sick being euthanized is just extrapolation from the author’s apocalyptic fantasy.  Believe me, if anything like this was going to be happening, the AMA would be going nuts.  Nobody, democrat, republican, or canadian wants to see government dictating healthcare decisions.  Besides, that role is already filled by your friendly neighborhood insurance company.

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To continue the themes of my post earlier today, if you want to read the stimulus bill for yourself, the Senate compromise version can be found here: Senate Stimulus Bill.  If you right click on the link you can choose to download it to your computer for easier reading.  Its 778 pages.  But its 778 pages of double spaced, 16 point text that only takes up the middle third of the page.  So it reads much more quickly than one would expect.  Its brought to you via Readthestimulus.org.  And you can go there to find previous versions of the bill.  The new house and senate compromise version should be available soon.

Once again, if you can find some kind of pet project hidden in it then by all means notify news agencies because you’ll have some pretty exclusive information.  For all the talk of the “bloated, pork-filled stimulus”  I haven’t been able to find anything yet.

UPDATE:  See the way that the spending in the final bill breaks down through this intuitive little tool: CNN Stimulus Spending Chart

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Well I might as well get started.  On this blog I’m planning on spending a fair amount of time covering principles rather than current events, but with all that’s happening now with the stimulus, and with us being at the beginning of one of the greatest economic crisis in American history, I thought it would be appropriate to talk about it a bit.  Just in case you missed it, these are the prepared remarks from President Obama’s news conference a few days ago.  Its via Hulu so you may have to watch a commercial before it starts.  If you haven’t watched it yet I suggest you do so.  In fact its probably a good idea to watch the rest of his remarks as well.  Which can also be found on Hulu.

I thought he did a good job explaining some of the rationale behind the plan and driving home some of the most important points.  Overall I just thought it was great to have a president who was willing to admit that the plan wasn’t perfect and that things may not turn out the way they hope.  His candor was really refreshing.  And he took the time to explain things to the American people.  He didn’t just say “trust me”, he didn’t just spew slogans and talking points, he tried to explain the plan the way a friend would try to explain it to you.  Once again, very refreshing.

Still the stimulus plan is complex, and he was only able to address a few of the issues surrounding the bill.  Hopefully I’ll be able to delve into some of them a little more deeply tomorrow.

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