StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Deficit Reduction Or More Stimulus?

29 Jun 2010
Posted by Pete Davis

I have been asked a lot recently by Wall Street economists about where Washington fiscal policy is headed.  In short, I don't expect much change.  We'll stay stuck at around $1 trillion of annual deficits in FY10, FY11, and probably FY12.  

I say that because Congress has so far been unable to pass the extenders bill without fully paying for it.  Although I expect unemployment insurance, another federal contribution to state Medicaid, and expiring tax provisions to pass eventually, it has taken far longer than I expected.  Similarly, large deficit reduction is off the table as evidenced by Congress' failure to pass a budget resolution with the reconciliation instructions necessary to take a bite out of the deficit.  If the Republicans take the House in November and gain 5 or 6 seats in the Senate, Congress will be even more polarized next year.  I see offsetting demands for spending cuts and tax cuts that leave the deficit essentially unchanged.  The largest source of deficit reduction this year and next may well be whatever President Obama can do on his own administratively.  Yesterday, Defense Secretary Robert Gates pledged to shed $100 billion from the Pentagon budget over the next five years.  That's a start, but it's not much in the face of trillion dollar deficits and a weak economy.

Today's 3% market decline reflects a lot of forces, led by fears over lower world growth resulting from a potential string of European defaults, but I believe it also reflects new thinking that our economy will hit another rough patch late this year and early next year.  The American Recovery and Reconstruction Act stimulus will wear off quickly from now on.  State budget deficits will force substantial new layoffs.  Home foreclosures will hit with ever increasing force -- 7 million are in process, and another 5 million are on the way out of a total of 56 million mortgages overall.  GDP growth has been too weak to create many jobs, and it will get weaker.  At some point, probably next year, even a modest rise in interest rates will put another large burden on the economy.  Today's sharp drop in the Conference Board's consumer confidence index seems to be the coup de grace.

What more can Washington do?  We've already done about everything anyone can think of to stimulate the economy.  It's had some beneficial effect, but it may not be enough.  I am still haunted by Robert Schiller's statement to the National Economists Club on May 5, 2010, "The real worry is that we'll grow slowly until we run into the next recession."

"We've already done about

"We've already done about everything anyone can think of to stimulate the economy"

I read this while watching " Last Comic Standing " and it occured to me that you may have missed your calling.

Everything ??

Anyone ??

Ever do any reading about FDR and the New Deal ?

Endless, endless frustration.

I am incredibly frustrated. As a man making less than $50k per year, I shouldn't care very much as my tax burden is negligible - this isn't really my money. That having been said, as an existentialist my tendency is to surmise that because it is happening at the same time that I am happening, it is my problem.

Among my (lower class, I suppose) friends, I know a dozen people collecting unemployment, on salaries varying from 25k/yr to 125k/yr. None of them are really looking for work. Why can't we properly think about the incentives provided by unemployment insurance? If you had a choice between a wage paid by unemployment and the same wage paid by a new employer, what would you do? The rational actor would not work, because that's just stupid - why bother when you can collect this free money? I work in a printshop, and the owner's wife's old business folded some time ago. She was making around $125k/yr, and collected unemployment for full term. When it ran out, she started up a business and everything is going fine, but the crux here is that she didn't start doing anything until unemployment ran out. My question is: why in the world should unemployment insurance be provided for 18 months?

Granted unemployment is a relatively small drop in the bucket of debt, but our debt seems to be the result of myriad government programs being at 200% of where they should be, so the fix is going to have to be myriad reforms of these programs, which seems politically impossible.

Also, the Federal homebuyer tax credit seems of highly questionable value to extend; wouldn't this be an awesome sacrificial lamb for somebody to use to pay for other extenders? I suspect that the vast majority people who could legitimately take advantage of this tax credit would have done so by now, meaning that primarily fraudsters and other gamers would be the people using this credit.

As an Arizona resident, naturally I have a fairly strong opinion about illegal immigration, and that is exactly what we have done with all of our immigrants in the past: invest them in America. The common scenario that I see here is that the immigrants are here *solely* for work; their money is wired back home as soon as it is in hand, less what the worker needs to live. A successful approach would be to provide amnesty to all of these people with a set of conditions: (1) get on the books as a taxpayer and an immigrant, (2) get your family here so we aren't just leaking money back to Mexico, and we have a stronger consumer base as a secondary result, (3) learn English, and teach your family. There is NO SHORTAGE of influential Latinos in America and Arizona, and they aren't encouraging any of these actions.

One of my biggest frustrations in this debate is the numbers - how many illegals are there? Nobody knows, and any provided number is a complete stab in the dark. There's just no way to know as long as we don't have these people on the books somehow, so step zero-point-one to ANY reform with a chance of success MUST begin with counting. Without that, we can't calculate cost, effectiveness, or even really formulate a meaningful plan.

In closing, thanks for your post. There are a lot of reasons for voter frustration with Congress right now on both sides of the aisle; it seems that the Democratic heavy-majority has been a curse - Dems just aren't as good at whipping their legislators into line as Republicans are, it seems. Meanwhile, Republicans seem to be just stonewalling almost everything Democrats put forward without any meaningful consideration or presenting realistic alternatives or compromises. Our political discourse is in a terribly sad state and given the peculiar nature of career politicians and the companies that love them, I don't understand how the situation can be improved, especially given the recent SCOTUS decision regarding corporate funding of political candidates.


While I appreciate the sentiment that some people collect UE because, well, because they can (and I know several people that are doing just that) I also know people who are actively looking for work and can't find it for the first time in their lives. They tend to be a bit older, btw. Also you should consider the not anecdotal...there are vast numbers of unemployed who are skills mis-matched and re-employing them will take time (think auto workers or those directly in the supply chain). These are the people that desperately need the UE check, and will also spend it which is, after all, what the economy needs. You know it's the classic question - do you save a few undeserving people to save a larger majority? I think so.

I don't understand the current state of politics at all, frankly. We seem to be mean-spirited and obstructionist. Those who have don't care about those who don't and will go to any lengths to just be mean about it. Especially on health care. Hey senators, I have an idea! Why don't you buy health insurance the same way we all do instead of having your cushy federal one? If you're that concerned about the deficit senators and congressmen, give up all of your perks and pay and return it all to the treasury! Do your job as a "public service".

That will happen when pigs fly. It's all very sad that we've come to this.

Endless Frustration

Thanks for your comment.  

Unemployment insurance is meant to be temporary for precisely the reasons you cite, but Congress makes a habit of extending it.  One of the distinguishing characteristics of this recession is that almost half of the unemployed are long-term unemployed, more than 6 months.  To the extent they can't easily move or retrain, a case can be made to support them temporarily.

Political discourse will only improve, in my opinion, when voters demand it.

I share your concern about the corrosive effects of the Supreme Court's Citizens United decision as I wrote on January 21.

>>We've already done about

>>We've already done about everything anyone can think of to stimulate the economy>>

Federal stimulus has been offset by state cuts. There's zero net stimulus. That's everything anyone can think of?

How about extending unemployment benefits, aid to states, actual stimulus spending, etc., etc.?

"about everything anyone can think of"??

You're kidding, right?

I mean, I can think of LOTS of things the government could do to stimulate the economy beyond what it's already done, and I'm nobody of any particular importance or expertise.

I've especially been thinking of countercyclical infrastructure investments. There are many projects that we really should undertake *sometime* in the next few decades, if we're going to have a vibrant economy to mid-century and beyond. Some of these things are pretty basic stuff, like modernizing water and sewer systems in cities whose pipes haven't been upgraded since before WWI, or getting some of the more absurd bottlenecks out of our freight rail system, and making sure the freight rails go along the routes where a lot of stuff is currently hauled by truck, e.g. the I-81 corridor.

Then there's somewhat sexier stuff like building or improving mass transit in our major cities (heavy rail, light rail, buses with GPS systems - whatever makes sense in a given situation), and building high-speed rail lines in between major cities that are really too close together to be worth the hassle of flying from one to the other. Even if global warming were a hoax, peak oil is going to hit before too long, and the best way to be prepared for it is to maximize the availability of transportation alternatives that involve less energy consumed per passenger or unit of freight.

And then there's even sexier stuff than that, like the 'smart grid,' building out high-speed broadband networks, and building urban Wi-Fi networks.

Then there's non-infrastructure stuff that might be treated as if it were infrastructure-related: hiring crews to paint people's roofs white or silver, weatherizing their homes, and so forth. Then doing energy audits on businesses and office buildings to let them know how much energy they're wasting because nobody's gotten around to seeing where the waste might be.

And that's all *useful* stuff - and frankly, paying people to dig holes and fill them back up again would be better than doing nothing.

False dichotomy

If we do not have enough stimulus to bring the unemployment rate down, no amount of spending cuts will bring the deficit under control. Spending cuts increase unemployment and decrease revenue. It is a downward spiral. We need to grow our way out of our deficit. We grow out of the deficit by putting our labor back to work so they contribute to GDP.

Deficit reduction needs a long term focus. If we do not reduce the rate of rise health care costs, the deficit cannot be controlled. Long term deficit reduction requires:

1. Controlling health care costs.
2. Returning rapidly to full employment.

Everything else is chump change.

False dichotomy

As much as we economic policymakers and politicians like to say we can create jobs, we aren't really that good at it.  The government can create economic conditions which improve the prospects for job creation, but that doesn't count for much when the financial system has seized up and when 7 million homes are in foreclosure.

Controlling health costs could have major beneficial effects on the economy, but its going to take decades, not years, to break up the health monopolies, to restructure the health payment system so it rewards better health outcomes, to use technology better to deliver appropriate care, and to train people to eat better, exercise more, and to lead healthier lives.

One of deficiencies of major legislation is that it gets loaded down with too many discrete solutions in a scatter shot approach. We would be much better off to focus on a few important factors as you suggest, but that's just not how Congress works.

Everything? How about a full

Everything? How about a full payroll tax holiday and a per capita transfer to the states of $1000? How about an employer of last resort program that offered a minimum wage job to anyone willing and able to work?

We've done barely anything - mostly because of phantom fears about deficits that are completely inapplicable for a currency sovereign in a floating exchange rate regime.

Payroll tax holiday

Even the currency sovereign can impair its creditworthiness if the public debt reaches 90% or more of GDP.  CBO just released its long-term forecast with an estimate that we'll be at 87% in 2020.

Payroll tax holidays have lots of problems as described by the Center for Budget and Policy Priorities and by the Heritage Foundation.

Employer of last resort programs are difficult to run.  Long-term unemployed usually need retraining and often suffer from health problems that prevent them from becoming reliable workers.  There are no simple fixes.

my reaction was the same as

my reaction was the same as the previous commenter.

one might make an argument one way or the other as to the desirability of more stimulus but to argue that we've done all that 'anyone can think of' is pure mendacity. Mr. Davis has an agenda that he apparently assumes his readers are too stupid to pick up on.

What about state aid? For

What about state aid?

For example, the federal government could take over medicare spending.

For example, the federal government could loan or give money to states so that they don't lay off people or delay spending on public infrastructure (when economic theory suggests that state spending now will not crowd out private investment or upset labour costs).

Were going to have a cohort of undereducated, underemployed, disillusioned and fearful young people. (All qualities that fit the profile of a Republican voter, I think ...)

Today's democrats would stamp on the grave of Roosevelt. I am not kidding. What are they going for, the misanthrope vote?

state aid

The federal government already pays for Medicare in excess of some co-payments by beneficiaries as described in this Congressional Research Service report.

40% of state budgets go to Medicaid for the poor.  A strong argument can be made for the federal government to take over that expense instead of pushing it back onto the states.  This CRS report describes Medicaid.

Recent comments


Order from Amazon


Creative Commons LicenseThe content of is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License. Need permissions beyond the scope of this license? Please submit a request here.