HOW TO BEAT THE STIMULUS PACKAGE
By DICK MORRIS
Published on DickMorris.com on January 30, 2009
The same way Republicans beat it when Bill Clinton proposed a modest $35 billion stimulus in the teeth of the 1992-1993 recession. The GOP nitpicked each spending item and highlighted midnight basketball courts and swimming pools that were funded in the package. Clinton, for his part, didn't really care what the money was being spent on, he wanted to be sure it was spent to give the economy a boost before he cut spending and raised taxes to balance the budget. So, the president accommodated all of the pet projects of Democratic lawmakers. The resulting publicity made the package radioactive.
Republicans are ideologically opposed to spending, but they never met a tax cut they didn't like, except a payroll tax cut, which would help the vast majority of the nation's wage earners. Republicans view wage earners with contempt.
Republicans should feature each element of the package -- just as they have highlighted the contraception and global warming research -- to show it for the boondoggle that it is.
Time to engage the Hollywood and Madison Avenue imagemakers, who are the natural allies of Democrats, to counter Republican propaganda on this.
The package is losing support almost daily. According to Rasmussen, only 42% of Americans now support it. The key is for the Republicans to attack its specific line items to show how overblown it really is.
And it is terribly important to beat, or at least cut back the stimulus legislation. What we allocate in deficit spending and "refundable" tax cuts (i.e. welfare) today we will pay for in inflation tomorrow.
Not true. Inflation would only be a cause for concern if the economy is running at full capacity, where all of its resources and capital--including human capital--are being used. We are far from that. Inflation has nothing to do with the nominal level of bank reserves in the system and is not, as we often hear, a monetary phenomenon.
In the seven years between 2000 and 2007, the money supply rose from $600 billion to $800 billion. In 2008, alone, it more than doubled from $800 billion to $1.7 trillion! We cannot sustain this level of increase in the money supply without having way too much money chasing way too few goods and services, sending prices up into double digit inflation.
He seems to be confusing the monetary base (Federal Reserve notes, coins and bank reserves) with money supply (M1, M2). Bank reserves, which represent the largest component in the monetary base, are not part of the money supply. Morris doesn't understand this. Furthermore, he doesn't understand that the Fed targets interest rates and it does this by manipulating reserves. To achieve a 0% Fed funds rate, reserves have to be increased significantly and kept high for as long as the Fed wants the 0% rate.
While the economy is in shell shock, at the moment, we face deflation. But once it begins to come back and the dollars come out of hiding, we will find the resulting inflation intractable and very difficult to cure.
This is his opinion and not a fact. It also fails to realize that the sale of Treasuries will bring the level of reserves down. It's already happening. And it fails to understand that the current tax structure automatically produces rising levels of fiscal drag as the economy grows faster, just as it automatically acts as a stabilizer when the economy contracts.