Economy slows; cue the cries for more ’stimulus’

The economy slowed down in the second quarter, growing at an annualized rate of 2.4 percent after hitting 3.7 percent in the first quarter (January to March) and 5 percent in the final three months of 2009.

Feel stimulated yet?

We’ve heard a lot about the vaunted “Keynesian multiplier.” We keep seeing reports telling us the economy is soooooo much better off because of the stimulus spending, based on some economists’ faith in their own modeling of the multiplier.

This is the economic version of the willing suspension of disbelief: Disregard what you see around you in the world, and accept the notion that the Obama-Pelosi-Reid spending binge has been working — because the same models that predicted success for the stimulus beforehand now proclaim the stimulus a success after the fact. And, what’s more, that it’s worked so well we need to do it again.

Here’s the question that ought to be on everyone’s minds in light of today’s economic data: If the multiplier really multiplies, why is its effect petering out instead of growing? Why hasn’t any real — that is, sustainable — growth been stimulated?

100 comments Add your comment

TS

July 30th, 2010
11:23 am

Obama is severly “special olympics” with the economy.

Grand Forks

July 30th, 2010
11:33 am

“Feel stimulated yet?”

Yeah, to vote out democrats in the fall.

Cajun52

July 30th, 2010
11:40 am

Obama-Pelosi-Reid spending binge? Oh you mean the Economic Stimulus Plan signed by George Duhhhhh-Ba-U Bush. And exactly what do you call the spending restraint by the former President?

Don't forget

July 30th, 2010
11:40 am

There’s no demand out there. You’ve got high unemployment, stagnant wages and those that are working are trying to get control of their personal debt. You can’t do business if your customers don’t have any money.

Morrus

July 30th, 2010
11:41 am

K, Shouldn’t that have been the Bush-Obama-Pelosi-Reid spending binge? and where were the nice words from you when we hit 3.7 in the first quarter? come on K, this entry does not sound like you.

Jack

July 30th, 2010
11:47 am

OK, let me guess……..your solution would be more tax cuts and to curb government spending, etc. How well did that work before? We need more stimulus and more SMART government now or we risk rolling back into the ditch. Shared sacrifice trumps unregulated greed every time.

Willie

July 30th, 2010
11:49 am

Democrats want to “stimulate” the economy and jack up our taxes to kind of pay for it. It reflects a basic statist mindset that assumes that government is the source of our help and we are just the source of the government’s funding.
May this foolishness of taxing and spending drive enough Obamacrats from office to restore sanity quickly.

??

July 30th, 2010
11:51 am

The stimulus bill was signed in February of 2009, after Bush left office, so how exactly is Bush tied to this??….the deficit when Bush left was $200B (bilion with a B), 18 months later it’s $1.3T(trillion with a T)…….nice words for 3.7?? that was a drop from 5% in the last qtr of 2009, why would anyone have kind words for that?

Kyle Wingfield

July 30th, 2010
11:53 am

Morrus: You’re right that the first stimulus was Bush-Pelosi-Reid, but it was of a smaller magnitude and was done via tax cuts (albeit ineffective ones) rather than spending, which is what I was talking about here.

CJ

July 30th, 2010
12:03 pm

Here’s the question that ought to be on everyone’s minds in light of today’s economic data: If the multiplier really multiplies, why is its effect petering out instead of growing? Why hasn’t any real — that is, sustainable — growth been stimulated?

So-called conservatives effectively mislead themselves and others by stubbornly insisting on comparing the state of the economy today with what we’d like for it to be as opposed to comparing it with where we would be if TARP and the Recovery Act, among other measures, had not been enacted— millions more out of work, more foreclosures, more bankruptcies, and continuing annual deficits in the trillions (plural).

The fact that the stimulus didn’t do more doesn’t speak to the inadequacy of “Keynesian multipliers”; it speaks to the sheer enormity of the Bush recession. Cries for additional stimulus, anticipated by Kyle, are entirely correct. The mystery is why, despite all the evidence to the contrary, do the deniers continue to stick their heads in the sand.

How the Great Recession Was Brought to an End [PDF]
written by Princeton Economist/Former Fed vice-chair Alan Blinder and a former McCain/Palin economic advisor Mark Zandi

Kyle Wingfield

July 30th, 2010
12:26 pm

And so-called liberals, CJ, effectively mislead themselves and others by stubbornly insisting that we *can know* where the economy would be if those measures had not been enacted. It’s quite the logical leap you’re making: We know the stimulus is a success because we *believe* things would have been worse without it.

It doesn’t take much to believe that $862 billion in spending has *some* effect on the economy. The question is whether it produced results worthy of its cost. There’s no hard evidence that that’s the case.

And on that note, you still haven’t answered my basic critique of your favorite report: Why should we be persuaded that the models have it right about the success of the stimulus, when they’re the same models that forecast success? Do they actually tell us anything about the real economy, or only the theoretical one?

Intown

July 30th, 2010
12:29 pm

Taking my cue: MORE STIMULUS!

Just kidding. What we actually need is for several areas of reform to be completed (climate change and immigration) and then the business community will be able to invest in a predictable regulatory environment. They are the ones that have to open their purse strings.

Of course, Republican obstructionists in Congress are not helping us get there … at all.

Ayn Rant

July 30th, 2010
12:29 pm

What a spoiled lot of brats! Some people are stupid enough to believe that the US economy can recover in a year or two from a $22 trillion meltdown. The deficit-whiners and stimulus-mockers cannot even imagine the economic depression that the borrowing and spending of stimulus money prevented.

The stimulus is much too timid to do more than keep economic activity from sinking into depression. Remember, the borrowing and spending that brought us out of the Great Depression was sufficient to finance a world war!

Don't forget

July 30th, 2010
12:29 pm

Good post CJ
But there are different ways to stimulate and different parts of the economy that can be stimulated. What is needed is a stimulus of consumer spending. That could be done by allowing states to receive money to compensate for a sales tax reduction. That way, if someone wants to reduce their taxes and has some purchases they have been putting off they could do both by spending a little money. I think the stimulus kept us from going off a cliff but it still left us at the edge looking over. Economies have momentum/inertia. When they are shrinkng they tend to continue to shrink because less business leads to more layoffs which leads to less business and on and on. The same is true for growth but in the opposite direction.

Kyle Wingfield

July 30th, 2010
12:31 pm

I left out this by mistake:

Shouldn’t we judge a policy by whether it does what its proponents said it would do? No one is saying the stimulus is a failure because we aren’t back to 4 percent unemployment; comparisons of the economy today to “what we’d like for it to be” are not wildly unrealistic ones.

booger

July 30th, 2010
12:31 pm

Obama is the only leader of a major power in the world who continues to try and spend us out of the recession. All other countries have now decided to make the hard, and necessary, choices to reduce deficits. Englands new Prime Minister is amazing.

I do not think Obama is stupid, I think it is just a lot easier to spend than to cut.

JayLo

July 30th, 2010
12:31 pm

Well Kyle, The project I am working on is a stimulus funded project, without it I would probably be unemployed collecting unemployment so which would you rather me doing something productive for society or unemployed? It’s easy to attack numbers but you have to remember there is real people behind them.

Don't forget

July 30th, 2010
12:33 pm

Intown, while I agree that uncertainty can be a problem for business, I think the greatest uncertainty is whether there will be demand for any new business ventures.

Kyle Wingfield

July 30th, 2010
12:35 pm

Ayn Rant: $22 trillion??

Don’t forget: I find it hard to believe that consumer spending would recover if it weren’t for the sales tax. That kind of short-term policy doesn’t change long-term incentives.

Intown: You’re almost onto something. But there’s a difference between predictable/discouraging and predictable/encouraging.

Kyle Wingfield

July 30th, 2010
12:36 pm

My point, JayLo, is that there aren’t enough real people behind the numbers to justify the spending.

Don't forget

July 30th, 2010
12:44 pm

Kyle, you may be right about the impact of reduced sales taxes. The point I was trying to make is that the lack of consumer demand is the greatest impediment to growth right now. Lord knows business’s have plenty of capital right. But if a drop of a few percent in sales tax won’t due much to stimulate the economy I hope you would agree that a rise of 4% from 35% to 39% in the top marginal tax rate would not have much of an effect either. If you disagree, please explain.

ButtHead

July 30th, 2010
12:45 pm

The dimacrats are the only people on earth that can spend almost a TRILLION dollars and lose over 2 million jobs and call that a success…

JF McNamara

July 30th, 2010
12:46 pm

Mailed it in and catered to the base today, huh Kyle?

There is no way to tell what would have happened if we hadn’t done the stimulus. If you can take me to that parallel universe and show me how much better it is, then I’ll listen to your drivel. Otherwise, this is just more opinion based Republican propaganda. Next time, post a chart. Maybe that’ll convince me.

Richard

July 30th, 2010
12:48 pm

“Here’s the question that ought to be on everyone’s minds in light of today’s economic data: If the multiplier really multiplies, why is its effect petering out instead of growing?”

Most likely because the Kenseyan Multiplier is a function of people’s willingness to consume. As long as people don’t spend a high percentage of their income, the multiplier will work (in theory), but it will be much smaller.

This is also the reason why there is unspent stimulus money (which the republicans wanted to use to pay for unemployment). The point is for the stimulus money to wait unti people’s marginal propensity to consume increases and jacks up the multiplier. At least, that’s the logic behind it.

Bottom line is that our GDP is about 70% consumption. As long as people hold onto money instead of spend on useless stuff, there’s little the government can do to counter it. That’s why Obama should be trying to calm the public so that they will be less afraid of not having cash on hand rather than boost spending. Pleantly of Presidents have had success with that.

StJ

July 30th, 2010
12:50 pm

Our manufacturing base is gone. It’s now in China. You can forget about any real, sustainable growth in anything for the forseeable future. The Chinese economy, on the other hand…

Williebkind

July 30th, 2010
12:57 pm

StJ

July 30th, 2010
12:50 pm
This is says it all. Without manufacturing we will never see real growth. I understand the liberals do not do real work and that is why the information age is their cup of tea. Talk about about jobs and talk about bringing back our manufacturing.

David S

July 30th, 2010
12:58 pm

Kyle – not sure where the 22 trillion came from, but estimates on the credit default swaps and other “creative” financial products are as high at 600 trillion dollars or more. While not all of this is bad debt, much of it is, and must be worked out of the system before the system can recover. Prices must fall, people must save again. Growth results from savings, not consumption. People consume what is first produced. The Keynesians (all the government economists) have it all backwards. Consumption does not drive the economy, savings and production does. It is because we adopted and fell in love with the idea that consumption drives the economy that we are in the mess we are in. We printed worthless money, incurred huge debts, and took ridiculous risks all based on the belief that spending is what makes us productive.

Everyone who hasn’t gotten the message of the Austrian economists (the only ones who have ever been right on this – since the first great depression) needs to go to mises.org and read all their free stuff.

There is much pain that must come before we get back on the right track. More worthless government money that devalues the money we already have will only defer the misery and make the inevitable collapse that much worse.

Ron Paul is the only one in Congress that has been saying this, although many said this all during Hoover and FDR’s antics back in the 30’s and 40’s. They were not listed to then and the depression lasted well over a decade. They are not being listened to now and this one will be far worse.

Our government does not know how to act responsibly. It needs to slash spending, starting with our empire abroad and with the bloated bureaucracy at home. Neither can be ignored or spared.

Thankfully the internet is making the great teachings of Mises and Rothbard and others easily available so the government and media lies can be seen for what they are – a desperate attempt to maintain the status quo and to continue the process of wealth transfer from the productive class to the ruling class.

Don't forget

July 30th, 2010
12:59 pm

StJ,
I think that’s a big part of the problem. In the 90’s we sent a lot of jobs overseas but the IT boom added enough high paying jobs to offset the losses and then some. During the 2000’s we relied on the housing bubble. They weren’t as high paying as the IT jobs but it kept the economy growing. But the housing bubble was based on speculation and after it burst we didn’t just stop growing in that sector, we had a contraction. So now the loss of jobs overseas is really being felt.

No Deal!

July 30th, 2010
1:01 pm

A few thoughts: The real goose that lays the golden egg is the American consumer. They’re tapped out, and economic policy since Reagan has incouraged the shifting of the nation’s wealth to the top. It’s easy to say, as Kyle has, that the stimulus didn’t do what was hoped, when many analysts foremost, Noble laurelate Paul Krugman, advocated from the beginning for a larger stimulus to counter-act the mess we’ve found ourselves in. Also, Kyle would you say that the two wars we’ve been in for near a decade, have “produced results worthy of their costs”?

Kyle Wingfield

July 30th, 2010
1:03 pm

Don’t forget: I think there is a difference. First, most people earn more than they spend (or ought to…) so we’re talking about a change in a bigger amount of money. Second, a lot of consumer sentiment is psychological…and I’m willing to bet that people get a bigger negative feeling from seeing their income taxes go up than the positive feeling they get from seeing the sales tax go away. But then, I’m not much of a shopper…

JF: I don’t think we disagree when you say “There is no way to tell what would have happened if we hadn’t done the stimulus.” My point is that the defenders of the stimulus package are the ones trying to tell us about that parallel universe…opponents are the ones comparing the predicted results to the actual outcome.

Barnacle Bill Bavasi

July 30th, 2010
1:35 pm

I think for honesty’s sake, it has to be called the “Bush-McCain-Obama-Pelosi-Reid spending binge.” Wasn’t this stimulating started under Bush and backed by McCain, too? Yep, pretty sure it was. Thanks.

Barnacle Bill Bavasi

July 30th, 2010
1:38 pm

That said, I agree the stimulus did little stimulating at far too high a cost.

Big D

July 30th, 2010
1:40 pm

We decided in the sixties and seventies to go to a service based economy in lieu of a manufacturing base…this was a mistake and we should be doing what Japan did to us in the seventies”target marketing”. We need only for state and federal governments to give tax deferments and cuts to manufacturing companies. we need to institute the fair tax as this would make it to expensive to live here if you did not get back the cost of living check each year(you only get it if you are citizen)and this would cure the illegal alien problem too.

Churchill's MOM

July 30th, 2010
1:41 pm

Guess where I’ll be the day before the election.. I just hope we elect a honest woman like Karen Handel rather than a crook like Nathan Deal. Kyle please don’t get mad at me.

Former Alaska Gov. Sarah Palin will campaign for Karen Handel the day before the Republican runoff for governor.

Handel’s campaign said the details are still being worked out but that Palin would hold an event from noon to 1 p.m. somewhere in the “north metro area, most likely,” spokesman Dan McLagan said.

Palin’s endorsement on July 12 helped elevate Handel to the top spot in the July 20 runoff. Now, she and former U.S. Rep. Nathan Deal will face off on Aug. 10 for the GOP nomination.

“I’m coming to Georgia to campaign with my friend Karen because it is absolutely critical that Georgians nominate an ethical leader and a true conservative to take the fight to Roy Barnes in November,” Palin said in a statement released by Handel’s campaign. “Karen Handel is a strong, pro-life leader who isn’t afraid to take on the status quo and do the right thing. She will be the 21st century governor Georgia needs to tenaciously address the state’s challenges.”

A Palin visit has always been considered the best chip Handel could play and after weeks of speculation, her campaign confirmed Friday that it will happen.

The timing would appear to be planned for greatest impact. The day before the runoff, Palin’s visit will likely energize an electorate that turned out in low numbers for the primary.

In South Carolina earlier this year, a Palin visit for Republican gubernatorial hopeful Nikki Haley drew 1,000 people with only 24 hours notice.

“I am very excited that Governor Palin is coming to Georgia to help our final get-out-the-vote push,” Handel said in a statement. “The energy and enthusiasm she will bring will make a huge difference in the final push to victory in the run-off election.”

Jeffrey

July 30th, 2010
1:41 pm

The CBO was right on the Bush Tax Cuts getting us $1.2 trillion in the hole. What do they say?

T

July 30th, 2010
1:49 pm

I see you stick to your parties talking points, Wingnut. What ideas do you have? what a tough question! Can you answer it robot?
http://rawstory.com/rs/2010/0716/king-republican-agenda-hidden/

CJ

July 30th, 2010
1:55 pm

Kyle: “I’m willing to bet that people get a bigger negative feeling from seeing their income taxes go up than the positive feeling they get from seeing the sales tax go away.

Correct me if I’m wrong, but I’m pretty sure that about one-third of the stimulus package was made up of tax cuts—including a $400 tax cut for every working American. The only persons who have or will see their taxes increase are those making over $250,000 per year (approximately the top 2 or 3 percent).

The right is desperately, and with a lot of success, attempting to get voters to believe their taxes have gone up under Obama (they haven’t) and/or their tax cuts will not be renewed when the Bush tax cuts expire later this year (they will be). Many will buy into such lies and, sadly, cast their ballots out of ignorance.

Richard

July 30th, 2010
1:55 pm

Jeffrey,

http://www.cbo.gov/ftpdocs/116xx/doc11659/07-27_Debt_FiscalCrisis_Brief.pdf

That should answer your question about the CBO. Supposedly that article crashed their server.

mrs. w.

July 30th, 2010
1:58 pm

No, I’m not feeling it yet – don’t think I’m gonna either.

Kyle: can you find out how much the feds are paying Andy Griffith for his TV add? Seems they have snookered him into trying to pull some more wool over the eyes of our elderly by touting the healthcare bill.

ButtHead

July 30th, 2010
1:59 pm

The CBO has NEVER been correct. Please Jeffrey are you that dumb? The CBO is an average of 600% off, i don’t mean to confuse you with facts, but that is one.

scott

July 30th, 2010
2:00 pm

Easy…republicans kept it from being big enough and forced tax cuts to be a big part of it. Tax cuts in this situation are the least stimulative because you cant know they will be spent. Oh, and Kyle…what would you have done…please elaborate

scott

July 30th, 2010
2:10 pm

Here’s an issue that you so simplistically lay out (its not) that 99% of the people commenting here have no comprehension of what the hell they are talking about (multipliers). macroeconomics is a science that people spend years learning. Its not cut and dry and has no resemblance to our own economic choices and family budgets. To equate the two is wrong…flat out wrong. You wont find many credible economists that will say we should not have had stimulus. A majority will say it wasn’t enough. Austrian economic thought was disproven during the Great Depression (aka Herbert Hover, Mr Mellon tightening money supply), yet people dont learn and use the situation for political gain over what is truly helpful to the people of this country

Grand Forks

July 30th, 2010
2:18 pm

“Correct me if I’m wrong”

Ok, you’re wrong.

hotlanta

July 30th, 2010
2:24 pm

Why aren’t any of you guys calling the white guy who released those classified documents a terrorist and say he should be bought up on treason charges as well.

GHG

July 30th, 2010
2:32 pm

OK, Manning should be brought up on charges of treason and executed if found guilty.

Don't forget

July 30th, 2010
2:32 pm

Kyle Wingfield

July 30th, 2010
1:03 pm
Don’t forget: I think there is a difference. First, most people earn more than they spend (or ought to…) so we’re talking about a change in a bigger amount of money. Second, a lot of consumer sentiment is psychological…and I’m willing to bet that people get a bigger negative feeling from seeing their income taxes go up than the positive feeling they get from seeing the sales tax go away. But then, I’m not much of a shopper…

Kyle,
On your first point I would agree that most people earn more than they spend (at least I hope so too) but there is evidence that, in general, many people are using their disposable income to reduce personal debt right now. While this will have positive long term benefits I believe the short term effect of that on demand is seriously affecting economic growth. It doesn’t have to be a sales tax reduction but I think it’s clear that demand is what needs to be stimulated as evidenced by the fact that inflation is nonexistent and some are concerned we may be headed for deflation. I assume you realize how destructive deflation can be. Well, without adequate demand that is exactly where we are heading.
As for your second point, I really don’t follow you. The highest marginal rate is applied to the highest earners who have the most disposable income. Unless they are living hand to mouth I would not expect a 4% increase to significantly affect their spending habits. If they are making $250,000+ and are still living hand to mouth, they have real problems. Many conservatives make the argument that many of those in the top tax bracket are small business owners and a higher rate will cost jobs. That makes no sense whatsoever. At a higher tax rate, the small business owner has decreased opportunity cost of investing profits back into his business. In other words his effective cost of investing in hiring or purchasing additional equipment for his business is decreased by the increased amount he would have had to pay in taxes if he had taken that money home. In effect, he defers the tax burden by investing in the business and ultimately may reduce the tax burden by converting it to an eventual capital gain, which is taxed at a lower rate. In fact, you could make the argument that small business’s are defering investment in their business’s until next year so they can maximize their income while they are being taxed at the lower rate.

redneckbluedog

July 30th, 2010
2:37 pm

Not really stimulated…but I feel 3000 times better than I did in 2008 when President Bush, Saxby Chambliss, and Johnny Isaakson ran the economy in to the red Georgia clay..

Tray

July 30th, 2010
3:11 pm

People like CJ actually believe that taxes are going up only on people making 250,000 or more…when that has already been proven to be BLANTANTLY WRONG! Everything that has been said that’s bad about these plans is all correct. If not, things wouldnt be hidden in these huge bills they are passing, they would be right out in the open. I still cant believe Obama has passed the first ‘race tax’ and no one has challenged it yet on the basis of discrimination…Oh wait, it’s the left that always cries that out, the right just adapts and moves on without the fuss…

Kyle Wingfield

July 30th, 2010
3:21 pm

Don’t forget: I think you make a lot of assumptions about people in the highest tax bracket. Would you expect there to be more people making $250K a year in Manhattan, N.Y., or Manhattan, Kansas? And does $250K really make someone “rich” in Manhattan, N.Y.?

As for the part about small business owners: I think that’s quite a leap to think that raising the income tax rate (and keep in mind that capital gains taxes are also set to rise) will make people more likely to invest in their companies.

But in any case, you’re also assuming that the government will spend that money better than the taxpayer would (at a time when you also want people to spend more money…) and even implying that government ought to decide how much of that taxpayer’s income it’s going to take.

I reject both counts.

John

July 30th, 2010
3:26 pm

“Shouldn’t we judge a policy by whether it does what its proponents said it would do? ”

Kyle, did Bush’s tax cuts in 2001 and 2003 create more jobs? Where are all the jobs that trickle down economics (or as Bush Sr. calls it “vodoo economics”) are suppose to create?