Tuesday, August 24, 2010

Competing views

The economist Dean Baker examines a WaPo piece and concludes that the WaPo is in complete agreement with his liberal Keynesian economic theories, but the WaPo doesn't appear to want to admit that.

The WaPo piece on the slow economy at first agrees with the liberal Keynesians and says: "Many Democrats say the economy needs more stimulus." Yee-hah to that. Very sensible. But then the piece sets up the counter-point: "Business lobbyists and their Republican allies say it needs less regulation and lower taxes." But then they go even further and say: "But here in the heartland of America, senior executives say neither side's assessment fits." So what evidence does the WaPo present to bolster any of the sides?

During the first half of this year, capital expenditures by business have been a bright spot in the economy, growing at more than a 20 percent annual rate. But executives say little of this reflects expanded capacity. They say firms are spending primarily to replace equipment they had held onto longer than usual last year to conserve cash.


Okay, this makes sense given the first two sentences: "Corporate profits are soaring. Companies are sitting on billions of dollars of cash." But hmm, why are business capital expenditures no longer "a bright spot in the economy"?

The piece then runs through the tale of Brook Furniture Rental and how Brooks is reacting to slow consumer demand by investinng much less. Okay, this is in complete accord with what liberal Keynesians are saying. Next, the piece examines attitudes in the "executive class in the Chicago region" and finds them sour and grumpy over the proposed expiration of the Bush tax cuts (That did very little to boost the economy in the first place*) and uncertainty over the Affordable Care Act. Key point?

None of the executives interviewed linked a specific new government initiative with a specific decision to refrain from hiring.


Finally, an interview with the CEO of the Illinois Tool Works concludes

More fiscal stimulus "might help make things a little better for a couple of quarters, but I'm not sure it would get at the underlying economic issue," Speer said.


Soooo, fiscal stimulus is lacking only in that it's not a permanent solution, but in the piece, Speer offers no indication of what the US's long-range financial problems are and thus, no idea is presented as to what the long-range answer might be.

Bottom line of the piece: The liberal Keynesians are absolutely correct and the other two groups "Business lobbyists and their Republican allies" and senior executives in the heartland of America, don't have any ideas to counter those of the liberal Keynesians.

*From a 2002 piece examining the impact of the 2001 tax cut:

...a new study by the President's Council of Economic Advisors, which reportedly shows that the tax cut package passed last year substantially reduced the severity of the recession. It is worth noting that the main stimulative impact of the tax cut that went into effect last year was a $300 per worker income tax rebate. This rebate was put in at the insistence of Congressional Democrats, not the Bush Administration, and was derived from a proposal that came from its Progressive Caucus.


The total cost of the tax cut: $1.35 trillion. Total spent on the $300 and $600 checks: $38 billion. So 2.81% of the 2001 tax cut did the major part of the work in providing the economy with what little stimulus it got. As Paul Krugman points out, the stimulative impact of the Bush tax cuts on employment was awfully minimal. The 2001 tax cut doesn't appear to have affected employment at all and the 2003 tax cut might, possibly, at best, have had a delayed effect.

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