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The Stimulus Bombshell
MyGovCost.org ^ | 1/24/12 | Craig Eyermann
FR Posted January 31, 2012 by GSWarrior

Stunning.

That’s really the only word we can use to describe the release of a “sensitive and confidential” 57 page memo, written by then soon-to-be U.S. Treasury Secretary Larry Summers in December 2008, about what became President Obama’s signature economic program in the first year of his presidency: the “stimulus package”.

James Pethokoukis has summarized some of the most significant aspects of the memo, which we’ve excerpted below, and which reveals the Obama administration’s thinking behind what became an over 821 billion dollar boondoggle. The bold text represents Pethokoukis’ summary of that thinking, which is directly followed by a supporting quotation from Larry Summers’ memo:

1. The stimulus was about implementing the Obama agenda. The short-run economic imperative was to identify as many campaign promises or high priority items that would spend out quickly and be inherently temporary.... The stimulus package is a key tool for advancing clean energy goals and fulfilling a number of campaign commitments.

2. Team Obama knows these deficits are dangerous (although it has offered no long-term plan to deal with them). Closing the gap between what the campaign proposed and the estimates of the campaign offsets would require scaling back proposals by about $100 billion annually or adding new offsets totaling the same. Even this, however, would leave an average deficit over the next decade that would be worse than any post-World War II decade. This would be entirely unsustainable and could cause serious economic problems in the both the short run and the long run.

3. Obamanomics was pricier than advertised. Your campaign proposals add about $100 billion per year to the deficit largely because rescoring indicates that some of your revenue raisers do not raise as much as the campaign assumed and some of your proposals cost more than the campaign assumed.... Treasury estimates that repealing the tax cuts above $250,000 would raise about $40 billion less than the campaign assumed.... The health plan is about $10 billion more costly than the campaign estimated and the health savings are about $25 billion lower than the campaign estimated.

4. Even Washington can only spend so much money so fast. Constructing a package of this size, or even in the $500 billion range, is a major challenge. While the most effective stimulus is government investment, it is difficult to identify feasible spending projects on the scale that is needed to stabilize the macroeconomy. Moreover, there is a tension between the need to spend the money quickly and the desire to spend the money wisely. To get the package to the requisite size, and also to address other problems, we recommend combining it with substantial state fiscal relief and tax cuts for individuals and businesses.

5. Liberals can complain about the stimulus having too many tax cuts, but even Team Obama thought more spending was unrealistic. As noted above, it is not possible to spend out much more than $225 billion in the next two years with high-priority investments and protections for the most vulnerable. This total, however, falls well short of what economists believe is needed for the economy, both in total and especially in 2009. As a result, to achieve our macroeconomic objectives—minimally the 2.5 million job goal—will require other sources of stimulus including state fiscal relief, tax cuts for individuals, or tax cuts for businesses.

6. Team Obama thought a stimulus plan of more than $1 trillion would spook financial markets and send interest rates climbing. To accomplish a more significant reduction in the output gap would require stimulus of well over $1 trillion based on purely mechanical assumptions—which would likely not accomplish the goal because of the impact it would have on markets.

Greece had 30 years of socialist ("PASOK") governments, it can destroy the nations (Portugal got to the same point in much shorter time, Spain is getting there fast). One third of the Greeks work for the government, even more are dependent on the government.

See The State of Greek Business - FR post #52, 2010 February 10, (GreekCentral, by Tom Mazarakis)

The U.S. also now has the highest index of dependency on government (Kaslin, you could post the article and enlarged chart on a separate thread, if you like):
Dependency Index Surges 23% Under President Obama - IBD, by John Merline, 2012 February 08

If you look at the chart, it shows only two short dependency slowdowns (dips in percentage terms) - one when Reagan was President and one when Gingrich was a Speaker of the House, and one brief dip during the height of speculative housing bubble.

Combination of economic growth, through a mix of accommodating sane tax regime and removal of stifling laws and regulations, and actual cuts or freeze in government spending has always been a true and tried economic solution to these challenges, the problem, as usual, is not the absence of economic solution but the will, or lack of it, of the political class and the people themselves, who are more than willing to be dependent on the "government," i.e., on Other People's Money.

Going back to the "gold standard" is a phony "solution" to the phony and real problems. There have been recessions, depressions, periods of inflation and, even worse, deflation during the "gold standard" in the U.S. and other parts of the world. "Gold standard" has never prevented governments from overspending and running the deficits and doesn't make them economically and/or fiscally responsible. It's a feel-good, ineffective, wrong mechanism to the wrong problem.

"Gold standard" is not much different from the diamond, silver, art or wine "standard" - almost anything can be considered "unit of exchange" and "store of value." Most of Europe is not on gold standard, it's on Euro (€, a "fiat currency") and the eurozone nations have the same central monetary authority - the European Central Bank (ECB). Yet there is a vast difference between economies and fiscal governance of Germany and that of Greece and other PIIGS. Same currency (Euro), which is not tied to the "gold standard," same central bank, but huge difference in the standard of living and government spending and fiscal accountability and responsibility, even after spending $1 trillion on West-East reunification.

See Germany Resists Austerity in Budget - FR, post #29 / WSJ, 2011 November 12
"..... Berlin is enjoying its lowest unemployment in decades and the government is still finding money to spend on infrastructure and income tax cuts ......" -

Switzerland has its own currency (Swiss Mark, SM) and went off the "gold standard" in 2000. Contrary to all "fiat money always depreciates" (against what?) theorists, the Swiss Mark has appreciated so much and recently so fast against the Euro and most other currencies (because it's bought more, as a "store of value" since it is deemed safer) that Bank of Switzerland decided to peg it to the [potentially "unsafe" and depreciating] Euro, as part of general "competitive devaluation" of their currencies that many countries in the world (including the U.S., Japan, China etc.) have engaged in lately.

Obviously, going off "gold standard" didn't create a "common" problem for Swiss Mark because country is fiscally managed better than other countries. Sound government fiscal policies make for sound money, not feel-good gimmicks like "gold standard" (whether it's a "gold specie standard" or "gold exchange standard" or "gold bullion standard") or abolishing / "auditing" central bank.

As long as one can freely trade gold (physical or "paper") one can be on his/her own "gold standard" or any other standard, for that matter.

Really free economies should not be constrained by artificial dependence on the amount of particular metal or substance that can be available at any given time, but neither they should be constrained by the artificial limitations imposed by the capricious and fiscally irresponsible "vampire" governments that drain resources from private economy to benefit themselves and, marginally, the dependent class at the expense of productive class.