It’s the Capacity, Stupid

Beneath the fold in Paul Krugman’s column today, was this little tidbit, “The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.” Last your our GNP was about $14.3T, so it represents about 20.2%.

Having aced Economics 101, this sounds like the perfect capitalist storm. But before we go there, consider what it means to society and in people terms. Society will lose the benefit $2.9T of good and of wealth that could be produced. A loss to be written off and will not happen. In people terms, it will be a decrease of $2.T in our standard of living that could have been. These things are tragic results and should be mourned.

From a Capitalism 101 point of view, its impact can be devastating and difficult to turn around. Unit costs of manufacturing will go up. Low demand will mean prices will be down. Which will mean profits will be down. Which will mean employment will go down. Which will mean consumption will go down. Which will mean capacity will go down. And it repeats. Until we turn turn it around or become third world.

So what is the right stimulus amount and is $800B not enough? Good question. Second things, first. The $800B is actually spread out over many years (source: CBO) – including tax cuts and outlays, it works out like this:

Stimulus Spending

That works out to our government buying $718B of the $2.9T or roughly 25%. Sounds like a good middle (2010: $399.4B), but hardly sounds like enough now (2009: $184.9B). And least we forget that $286B is in tax cuts – teensy tiny little incremental tax cuts, much of which will be used to pay finance charges (I seem to remember a few trillion we’ve already committed to help the banks), not buy capacity. My answer, no, $800B is not nearly enough.

First thing, last. I really, really believe that we need to spend (not tax cuts*, but to buy capacity) another $Few Hundred B or so in 2009. And just how do you spend another $400B this year? Won’t be easy and won’t be right, but it needs to be done. We could and should buy into more infrastructure projects, but by now, we all know they’ll be spread out over years before the shovels are ready or paid for. We could, just buy anything and give it away, but that would that decrease consumption further making things worse. We could just burn it, but that doesn’t seem rationale. We could and should give one-year grants to municipal and state government to buy stuff they need: furniture, computers, cars, trucks, pencils and the like – remember, we are just trying to increase consumption. Ditto healthcare providers, schools and job re-trainers. We could and might should, create a loan pool for small business to do the same if we could police it – say, interest free for a couple of years. And we should, get some really smart people to come up with a better list than I have.

The bottom line is we must front load this stimulus: turning it around this year will be easier and cheaper than turning it around later. That, and why wait? Unless you just want people to suffer longer.

* According to Mark Zandi, chief economist of Moody’s Economy.com (and hundreds of other economists and studies), investments by government in infrastructure programs that create jobs would generate an increase in one-year GNP of $1.59 for every $1 spent whereas tax rebates generate $1.02 for $1.00 spent. All to say, we can’t cut taxes our way out of this problem (the wealthy will have enough losses from Wall Street this year).

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