Fiscal Imprudence and Fiscal Stimulus-Becker

The government's preliminary estimate of the growth in American GDP during the third quarter of 2009 is an impressive annual rate of 3.5%. This figure may be revised downward (or upward) as more data on the third quarter become available, but it surely definitely signals that the US recession is over. In my post on August 9th of this year I already expressed my belief that the recession in the US and the world would end during the third quarter. The end of a recession does not mean that an economy is back to where it would have been without the recession-the US economy is certainly not anywhere near that point yet- nor that the recovery from the recession will be rapid. The rapidity of the recovery in the US or the world is not yet clear, although many economists who follow short term movements of the economy more closely than I do are predicting a slow and drawn out recovery period in the EU, Japan, and the US. I am not convinced by their forecasts because of the rapid recoveries in Asia, Brazil, and some other countries, and as long as American productivity continues to grow at a rapid rate. To be sure, unemployment is likely to continue to increase for a while since it is what is called a "lagging indicator". However, it almost surely will peak below the 10.8% reached at the end of 1982. During the past couple of years the world went through a severe recession, but it was not appreciably worse in the United States, as measured by the effects on GDP and unemployment, than during some other recession in the past 40 years. Of course, without some of the proactive policies of the Fed and the Treasury, this recession probably would have been deeper and longer. Not surprisingly, these comments lead me to join Posner in taking a negative view of the plan to pay every social security annuitant a $250 bonus in 2010. The reason given to justify this payment is that the elderly will get no cost of living increase in their social security payments since prices fell rather than rose during the past year. As Posner indicates, this is an illogical and basically nonsensical justification for this bonus to social security recipients. Taxpayers already heavily subsidize the elderly through Medicare and to some extent social security payments, and there is little reason to use spurious arguments to add to that subsidy as part of the stimulus package. More generally, the $787 billion stimulus-spending package of the Obama administration has made little sense since its inception, as I have argued in several blog posts and elsewhere. Business cycle analysts have long known and documented that fiscal spending programs are not very good at helping to fight recessions since they take a long time to implement. By the time fiscal spending actually occurs. the recessions they were supposed to be combating are usually over. Only about one third of the present stimulus package has yet been spent-and much of it not very well spent. Yet, the recession is already over, although to be sure, the recovery is still at the beginning stages. I do not believe that inflation due to the Fed's rapid increase in bank reserves is yet a major worry, although it will be in a few years as banks spent these reserves by making additional loans and other investments. Nor do I believe that the huge increase in federal government spending, on the stimulus programs and to help the banks, will be a major cause for concern, as long as American GDP will grow at a much more rapid rate during the next decade than will government spending. However, the much higher interest payments on the much larger government debt will have to be met either by raising taxes, cutting other government spending, rising tax collections from increased output, or inflation that deflates the real value of these interest payments. I am very much worried that it will be impossible to stop the growth of government spending, so that there will be an enormous, and probably irresistible, temptation to inflate to reduce the real value of the debt, and to raise taxes on higher income persons. Both of these will have negative effects on the growth rate of the American economy.

Comments

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Nor do I believe that the huge increase in federal government spending, on the stimulus programs and to help the banks, will be a major cause for concern, as long as American GDP will grow at a much more rapid rate during the next decade than will government spending.

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Nor do I believe that the surge in administration investing, on the incitement applications and to help the financial institutions, will be a significant cause for issue, provided that United states GDP will develop at a much more fast amount during the next several years than will govt investing.

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