It's Really Not About Politics

If you're tired of reading about the stimulus package or President Obama, you'll be forgiven if you don't read this post. This is all about the stimulus package and how it really isn't about politics, unless someone makes it so. It's about economics. Or, put another way, It's The Economy, Stupid.

There's been a lot of talk on the airwaves and in offices around the country about the stimulus bill that was recently enacted, and much of it reflects that people just don't get it.

The complaints are that some of the money is going for questionable projects, or that so much money is being spent that inflation will become a problem. While the second issue actually is a reason for concern (more on that momentarily), the first is nonsensical.

Let's understand what we're talking about.

The economy is in shambles. The Gross Domestic Product in the most recent quarter was down over 6%. That means that the total goods and services produced in the economy, when expressed in dollars was 6% less than the prior quarter. That's the first time that's happened in a quarter century. That means we have to do something, and what it is we do is almost less important than that we take some action as a nation to overcome the problem.

The reason for the need for action is that if you take none, the condition spirals downward in a very vicious cycle which leads to fewer products and services purchased which leads to fewer jobs and even less money in the economy to buy anything and on it goes.

So if the government spends a lot of money -- yes even if it's borrowed money -- that puts a lot more money into the economy and that generates jobs. And, if some of the money is used to perform a study on how to reduce the odor of pig waste in Iowa, I'm entirely in favor of that spending, at the moment. That project will pay a salary to the researchers and to the folks who write the report. Is the project useless, otherwise? Probably and it bloody doesn't matter, folks.

The people who get the money for doing that project will spend it on groceries and computers and electronic doo-dads, thus employing people in this and other countries who will spend more money on things we'd all agree are useful.

That gets the economy going without creating a bubble in real estate or dot-coms or stocks. It creates real jobs with real money.

Let's talk about the inflation risk, and then we'll cover the subject of all the crying over the increase in the deficit and the national debt.

Inflation is the increase in prices that's brought about when there are so many dollars in the economy (or drachma or pesos, depending on what country you're in) that no matter how many goods can be produced, there's more demand than can be satisfied, so prices go up. The demand is caused -- in part -- by the number of dollars floating around. It might be hard to believe at the moment, but there are times when everyone's saying "I have a bunch of money and I want to buy the latest greatest Ipod." If enough people are saying that and Apple can't keep up with the demand, the price of the latest-greates will go up.

With all the spending that's contained in the stimulus package, concerns have been expressed about the risk of inflation spreading through the economy. Don't worry about it. Yet.

With all the money being spent, you won't have inflation caused by it in the near term. That's because of what economists call underutlilization of capacity. What it means in English is that factories and other entities which produce goods have plenty of capacity to produce more, because they've been producing so little due to vastly reduced demand.

So if you and I and our neighbors suddenly find ourselves earning more money (or in some cases earning money where we weren't before), we can still spend like drunken Congressmen, and it'll be a long time before manufacturers are at capacity (the point at which prices would start going up). That's just as true of cereal as it is of Chevrolets.

So, so far, it's a case of Don't Worry Be Happy.

But if the stimulus really works really well, inflation will be a risk and may become a reality. If everyone's working and earning to the extent that unemployment is down to about 3%, there really will be too many dollars floating around. One of the good things about inflation, however, as distinguished from recessions, is that it's pretty easy to cure. That's done by increasing interest rates, primarily, but there are other tools available to the Federal Reserve and the government. You can take excess spending out of the economy, as well, by reducing the amount of money banks are allowed to lend (the process is a touch complicated to spell out here), which reduces the amount businesses have to spend on products.

The point is that the tools for inflation fighting and recession fighting are well-known to everyone but the public.

If there's too little employment and spending and lending, add money to the economy. If there's inflation, remove some.

The other day, when discussing this subject with her mother, a bright young woman asked me if it wouldn't be possible for normal free-market forces to overcome the recession we're experiencing now. It's a really good question and a lot of people are asking it. The answer is a qualified yes. In other words, "yes, but."

Recession and inflation along with business increases and decreases are normal. They're referred to as "the business cycle," and economists sometimes joke that no one's repealed the business cycle. The problem is that when you have the occasional extreme recession or extreme bubble, without intervention, things would get a lot worse before they'd get better, just depending on the normal workings of the economy.

If you need an example of that, look at the time between 1929 and 1933. In 1929 things crashed in the economy. It wasn't just the stock market. Because the Hoover Administration didn't do very much (and what they did do was dumb, including high tariffs and increasing taxes), the severe recession turned into the Great Depression.

Although many people (including Your Humble Servant) have compared 1933 to 2009 and FDR to Obama, like most comparisons, they're not completely on the mark. Obama's interventions have taken place at an earlier place in the downward cycle than FDR's did. That's a good thing because that earlier series of actions will eliminate the likelihood of sliding into Depression. FDR couldn't do anything until he was inaugurated, of course, and by that time Hoover had done more damage to the economy than was done to ours by January 2009.

Finally (and I find it hard to believe how long this post is), much has been made by conservatives (though few conservative economists) about how all this borrowing will be paid for by our grandchildren. Oddly, few of these folks were complaining during the Bush Administration (OK, this part IS about politics), when all the spending was being done and deficits were being built up. The national debt, before Obama came into office was in excess of $10 trillion, but they weren't complaining until it got near $11 trillion? That's not about the economy. It's about trying to spin the political atmosphere to their advantage.

Bless the Current Republicans (kind of kidding)

The Obama stimulus package passed in the House of Representatives without a single Republican vote and that's great. I hope it passes the Senate in the same way.

I'm a Democrat.

But I'm a Democrat with a little knowledge of U.S. political history, and after this, you'll have some information you might not have already.

In 1932, Franklin D. Roosevelt defeated Herbert Hoover in the latter man's misguided attempt to be re-elected. The Depression was in full swing and FDR won decisively and carried with him a majority in both houses of Congress.

The Republicans who were left voted against every New Deal program offered by the new administration, but virtually all of them passed (the rules on senatorial filibusters were different then).

The result of the Republican efforts were clearly seen at the next election. Normally, two years after a president wins the White House, his party loses some seats in Congress. Not in 1934. The Democrats increased their majorities in both houses.

The Republicans continued their negative ways and in 1936, FDR won in an election that was at that time, the biggest landslide in U.S. history, beating the governor of Kansas, Alf Landon. The GOP also lost more seats in both houses of Congress. After that election there were only 17 Republican senators.

They were about as well-represented as intellectuals in Salt Lake City.

So, although at this writing it looks like the package might get some Republican votes I'd like it to pass without them.

And I hope the Republicans continue to be obstructionist.


If you're masochistic and would like to read my writing on other subjects, try: http://JeffOnRadio.blogspot.com and/or http://JeffOnHealth.blogspot.com.