Why the Size of the Stimulus May Not Matter

All those G20 countries that appeared to "disagree" with Obama had stimulus programs of their own that amounted to a greater share of their GDP than did that of the US which was only about 6% of US GDP at the time of passage. All a deficit really amounts to is private sector loans to the government at a rate of interest when there is no other low risk investment opportunities with a higher rate of return. This is what is happening now both in the US and in other countries like China and also within the EU. Idle wealth which can't find profitable investment outlets due to low effective consumer demand for goods and services go to low risk government bonds. These loans should be used by the federal government to stimulate the economy and restore jobs, income and tax base.

Japan never seriously tried fiscal stimulus. What Japan did was monetary expansion, mostly through negative real interest rates. This led to capital flight through interest rate arbitrage as money was borrowed at low rates and reinvested abroad for higher rates of return. There was also much capital flight through Japanese direct investment in other countries like the US. Capital flight from Japan since the crash in 1990, itself the result of financial deregulation of Japan's capital markets which caused an unsustainable real estate bubble, persists mostly due to low and declining profit rates. Capital seeks higher returns elsewhere. Randall Wray, an economist with the Levy Institute gave this analysis twelve years ago;

"Americans know that Japan's growth rate in the 1980s was the envy of the world, but they are generally unaware that the government deficits as a percent of GDP rivaled those in the United States. The enormous growth of the 1980s caused government tax revenue to rise faster than spending so that by 1990 the budget moved to surplus. The Japanese economy moved into a recession-cum depression from which it has not been able to recover. Government deficits have been restored, but as a result of the sluggish economy, not as a result of discretionary, expansive, fiscal policy. While there have been some small initiatives to cut taxes and increase government spending, Japan has relied on monetary policy. For the second time in a year, Japan is pushing interest rates essentially to zero in an attempt to stimulate the economy. To this point, the most expansive monetary policy the world has seen since World War II still has not succeeded in jump-starting Japan's economy."

http://www.levyinstitute.org/pubs/pn99_3.pdf

By 2002, stagnation abated until 2007 when the global financial crisis occurred. But the expansion came along side deflation and deficits created by capital flight and a slow economy. Japan's experiment with fiscal stimulus did lead to a 5 year expansion but it was still plagued by deflation and low job creation. Tax cuts for business also failed to end the long stagnation.

http://www.brookings.edu/opinions/2010/0212_japan_economy_abe.aspx

steve of IL 3:56PM August 29, 2010

Much of the difference between China's stimulus and America's was in the spending of those dollars and yuans. A much larger portion of the Chinese stimulus went to infrastructure projects which put people to work. The larger portion of the American stimulus went to preserve local and state jobs, but not to create new opportunities for the construction workers who lost their jobs building homes. Construction workers have a particular skill set which can be used for infrastructure improvements. Provide those types of jobs and the economy will boom.

Nick Vendetti of WA 1:28AM August 29, 2010

Do you guys really mean to suggest that the government can't simply continue to expand until everyone is employed by the state, and then just print money to pay everybody? Didn't that Chinese guy, Morrie, Mack, Murph, Moe - well something like that, and that Russian fella, Joe something or other, try that 60 years, or more, ago? As I recall it was rough sledding - couple hundred million dead. But hey, this time BHO is gonna get it right - he's soooo smart. An absolute ideolog in politics - but religiously a hermaphrodite. A new age, subjective messiah for the "angry", "now" "me" or"lost" and now perhaps "found" generation - He'll be whatever you perceive him to be. Kinda like we'd like God to be - "with it", relativist and progressive. Cool, huh?

It also seems you guys missed the classes in "New, Progressive Math and Economics"... come on, get with the program.

R.L. Schaefer of CA 2:13PM August 28, 2010

G 20 and Japan want no more of it. Tried it and done with it. G 20 sent puppy dog barry home with tail between his legs with barry's talk of more spending.

Resurfacing a bridge and a frog pond creates/keeps jobs for that project. Temporary secondary job. Does paying into teachers/car union retirement plan help ? Some of this stimulates economy for short while. Some jobs there. Government spending means sooner or later higher taxes.

Having government pass business friendly legislation, tax friendly with small government puts people to work. The multi-trillions not invested in private sector blooms as John F Kennedy said in that atmosphere. Creating jobs and ends up paying more taxes because of activity. Rich pay more in taxes. We are near the top in cooperate taxes in industrialized Countries now.

Bill Hedges of MO 4:28PM August 27, 2010