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02/08/2009

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He is saying spending doesn't work, not that stimulus doesn't work. There is a difference, and if you weren't so gung ho to play partisan games, you'd realize that a huge portion of this bill is spending on hobby horse social policy programs. The same can be said for bad tax cuts too by the way.

Interestingly, the reason it took WWII to get us out of the depression was due, in large part, to FDR's disasterous social policies disguised as "stimulus". Specifically, FDR believed that the depression was caused by "excessive competition" and so he allowed businesses to collude across industries and charge higher prices, and workers to to demand wages that were higher than what the market otherwise would have paid. Good deal if you stay employed, but it priced the unemployed out of the market and thereby extended the depression by a decade.

We need to remember that recessions are the result of markets driving back to equilibrium. This is a painful, yet healthy process and I'm deeply skeptical that the government can due much to prevent this adjustment. To the extent the government can do anything it must enact policies that promote growth, not try to employ workers or force a favored social policy. This can be done through both fiscal and monetary policy.

So far monetary policy actions have outpaced fiscal policy actions and the hope is that congress can catch up. Unfortunately, O'Bama has not kept his party in check here and a huge amount of the spending in this bill is not pro growth and even if it were, it will likely come too late to do any good. The president got rolled by his own party, and it is a real shame because he does have some good economic people.

So I suppose this bill will pass in some form, and it will do some good, but not as much as a better bill could have produced. If O'Bama is smart he'll try to do some other things that make up for the failures of his first significant piece of legislation. These would include:

1. Stop talking down the economy. Things are tough, but telling a populace that is deeply skeptical on government programs to begin with that a "catastrophe" will occur without this program scares people and keeps them from allocating capital anywhere beyond the mattress.

2. Suspend mark to market accounting rules for investors with credit instruments for which no market exists. This well intended by product of the Enron scandal has done more to lock up the credit market than most have realized.

3. Get the illiquid stuff off of bank balance sheets. We need some sort of resolution trust organization as was put in place in the early '90's to buy the illiquid stuff and hold to maturity. This will serve to provide support for the market and we'll see that the government doesn't have to buy everything (or maybe anything at all!), but just by setting some confidence in the market we'll see the credit freeze begin to thaw.

Pursuit: why do you call Obama "O'Bama"? I don't see it printed that way in newspapers, so I'm assuming it's an implication of some sort, but I don't get the reference.

In so far as this argument goes, I refer to my comment in the last post, but with an addendum: there was a ton of stuff in the New Deal that did indeed really screw with the economy - price floors and ceilings, for instance. We focus on the public works projecs, but stuff like the government keeping food prices artificially high in order to keep farmers in business helped nothing.

I am unaware that anyone is proposing to reinstate the stupid things that were done during the New Deal. Why are you talking about them?

Just celebrating his Irish heritage Adam

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