Moreover, the Treasury of late has been sterilizing the money supply substantially. Nearly 500B is being held on account from recent auctions. This is very unusual. (100x unusual). This amounts to a significant contraction of high-powered money.

Take a look at:
http://lostdollars.org/static/deflation.png

You can see that despite the best efforts of the Fed, high-powered money has declined substantially. This is due both to the Treasury’s cash hoard and because Fed policy has been draining liquidity from the broader market and boosting bank reserves, but bank lending is flat so most of the money is sterilized.

So what is the best way to boost investment and create jobs? I suppose you’ll say tax cuts to business, but haven’t studies shown that these don’t work?
The one bad thing about the stimulus bill is that it was such a mix of things, I almost prefer that we could have let Republicans(and some Democrats) have their way, that is, do a bill completely made up of tax cuts. In my opinion, it would not have worked, tens of millions of Americans would have been thrown into poverty and destitution, BUT at least we would know that tax cuts are useless. The way things are now, because the bill is half tax cuts, half government spending each side will be able to blame the other for its failure.
And, in conclusion, haha, for any and all still reading this thread, why is the European Social-Democratic so bad? Their poverty rates are much lower than ours, their populations aren’t illiterate like ours, they make pretty good decisions about energy, i.e. France relying on nuclear power for example. So, what’s not to like?

Sincerely,
Ed Beaugard

1) There was a Republican proposal to make the state aid a loan.
2) State aid is neither the most immediate nor the most effective way of boosting investment.

If the Republicans were worried about timing(that the spending won’t happen for another year), then why did they cut the aid to states which would have had immediate effects in maintaining economic demand?
By the way, I’m a supporter of the Working Families Party and would like to point out that the Clinton Democrats, who finished deregulating finance ten years ago, are just as responsible for this economic catastrophe as the Republicans are.

Sincerely,
Ed Beaugard

When you cannot pose the opposition’s position in a reasonable fashion, that’s a red flag that you’re thinking with your partisan-cap.

The core Republican objections are:
1) Not all spending works as stimulus. This point was made pithily by Senator DeMint, and uncharitably ridiculed by Obama. You might disagree, but this is a valid point of intellectual dispute.
2) Most of the spending (~80%) happens a year or more from now, and is thus very mistimed.
3) The cost of the stimulus package is very large–with very substantial crowding-out effects in the debt markets–and there are substantial uncertainties about whether it will be helpful or harmful. In short, its size makes it a risky gamble.

Also, on whether states are reducing workforce expenditures: at least 28 states have announced plans to lay people off, hire less, or reduce wages.

According to first-year economics, you should not let government expenditures fall proportionally with tax revenues in a recession, because this has a procyclical effect. Instead, you should adopt countercyclical policies (and yes, you should also adopt countercyclical policies during booms), which requires deficit spending. In our unusual government structure, a large proportion of total government spending is done by state and local governments. However, they do not have the ability to borrow money that a national sovereign government has. If we don’t provide federal aid to states, we are letting a quirk of our political system (federalism) prevent us from taking an appropriate response to the recession. (Again, if your goal is to reduce government spending of any kind under any circumstances, then you are happy about all this.)

However, I do not think this is the venue to provide States with funding. The states need funding, but it should be separated from this bill.

States operating at a deficit need to figure something out, but providing the states with more money does not seem like a viable solution (while it may marginally stimulate the economy). If we are saying the banks essentially need to fail, why is this approach (or a similar) not taken with the states. Obviously we do not want the states to fail, but a major overhaul and reconstruction may be required. If we are going to ask for the bankers to be held accountable with taxpayer (federal) dollars, why aren’t we asking the state for the same level of accountability?

We are all calling for bankers to be accountable with these funds, but if we are providing the states with funding, shouldn’t we call for the same action?

My concern with providing the states with money is the ARRA has too many cooks in the kitchen, with their own political agenda, and the bill has been diverted away from what it needs to be: bring confidence and lending to the banks, reducing foreclosures and reviving our economy back to positive GDP.

Unfortunately, other (political) agendas come into play and the focus is diluted.

If states needs funding, it should be separate to this to properly assess, and be able to discern corrective action. How much is needed? What steps are going to be taken? How are the states being held accountable?

And some Republican politicians may believe that the federal government shouldn’t bail out states with spending problems due to the moral hazard, the precedent it sets, and the unfairness to the other states that made the hard choices.

You’re free to disagree with this decision by those elected Republican politicians, but I think it’s highly inappropriate to say that this is beyond the boundaries of debate.

P.S. I really like the economics analysis of this blog, but sometimes the liberal political bent can get annoying. There are plenty of liberal opinion blogs out there, so please stick to the economics, which you guys do better than just about anybody!

Now, if you think government spending is a bad thing in and of itself, then you are happy about the recession-driven fall in tax revenues, because it forces a decline in public spending you were unhappy about to begin with. But otherwise the question is where government money should be spent, and I would start with things that state legislatures have already decided they need, but are cutting because of a fiscal emergency.

Having said that, I think you could roll back education spending to whatever it was in the year 2000 and not see a difference in the outcomes. That should be about a 40% cut. We’ve been spending way past the point of price elasticity of performance for quite some time.

The reason you don’t want more aid to the states is that doing so will keep them from having to make the tough decisions they need to make. Cut the transfer payments and fire some education department staffers.