A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Thursday, March 12, 2009


People - notably the Reactionary Right -- Complain about government borrowing and the stimulus spending in the trillions of dollars, leaving aside the indisputable fact that fully one trillion of the deficit is directly inherited from the last Bush year. Also, as we noted, those who are lending the money do not seem to be persuaded that the government is a bad risk, since the interest rates seem to be as low as one could imagine. That is, the market price of Treasuries is remarkably low.

But let's take another tack and compare the Obama stimulus with the Bush stimulus.

Over eight years, the national debt under George W. Bush rose from about five and three-quarter trillion to over ten trillion dollars. That nearly five trillion was incurred by way of a combination of tax cuts, whose biggest beneficiaries were the wealthy, and spending increases, much on an unpopular and ill-advised invasion of Iraq. The first time tax cuts have been paired with a war in American history.

The Bush economic stimulus had the advantage of expansionary Fed policy. The blame for the housing bubble has been allocated roughly equally between the Administration's antipathy to regulation and ineptness in policy and the Federal Reserve's holding interest rates too low for too long. Thus you have expansion of the money supply, high spending from the government and huge borrowing very much along the lines of the program today. Except in the cowboy capitalism the monetary policy actually generated expanded borrowing. That is debt.

The investment was not in infrastructure and public goods, but passive housing and financial engineering. Forty percent of profits in the period came in the financial sector.

Housing is now in freefall with regard to price. The amounts entered in the National Income and Product Accounts for residential investment during the middle and later Bush years are made a lie by the fall in price.

In reality, during the past four years, the federal government was in a deficit far greater than the official numbers indicated, because the bubble economy was creating tax revenues. The Laffer curve failed to materialize, but economic activity was spurred by the debt bubble and huge private borrowing and financial "leverage" involved in hedge funds, leveraged buyouts, collateralized debt obligations, uncovered swaps, and so on. It created the illusion of wealth among those wealthy enough to play the game. This is the only reason the economy of the Bush years had any life in it.

Absent that juice, the economy would have been stagnant and aimless. With it, we have the toxicity of today's economy, and the crashing revenues. New York, for example, is experiencing immense budget pressures caused by the withdrawal of the illusory gains. These budget gaps are directly caused by the Bush/Greenspan stimulus.

Compare this to the Obama stimulus.

Well, you can't. The deficits, as above, are in place from the Bush years but on the accounts of Obama. Further, there is no market pricing mechanism for public goods, which is the investment of choice in the current Administration. There is no market in roads, no education exchange, no police or fire protection clearing house. You will hear in a moment, on Idiot of the Week, David Frum expressing the market fundamentalist view that the private sector is much more productive. Much of this perception is due to this pricing problem. For example, health care that the private sector produces more money, but is this more efficient. Much of the problem of comparison is right here. Private goods have a market price. The value of public goods is assumed at cost.

The great absurdity that only the private sector creates wealth, which is literally the position of the Right Wing market fundamentalists, is given lie by the simple observation of an automobile. What is the wealth inherent in an automobile without the public road, the traffic organization, the policing, the consumer protection of product? What is the wealth involved in computers absent the intellectual capital developed by those who build and use them? That the contracts between two parties may have enormous inherent value absent the legal structure to enforce those contracts is a proposition that is simply ludicrous.

People who hold to the idea that the private sector creates all wealth ought to examine the difference between wealthy and poor societies. Certainly plenty of companies have moved production to poorer societies and any individual or group is more than welcome to relocate itself to take advantage of the absence of government interference.

There is a reason the wealthier societies have the larger, more stable governments. There is a reason that stability and prosperity in the years of big government after World War II were substantially greater than in the small government years before the War.

But this is getting beyond the comparison. We suspect that the Obama approach will produce something other than a market crash and the Great Recession. We expect recovery, as we've noted before, at a rate determined by the willingness to make the major policy moves in housing, finance and conversion to a public goods economy.

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