Macroeconomics
I've been shocked by the number of bizarre and dubious-to-completely false comments I've heard people making about the bailout plan over the past week. I guess if the media repeat "$700 billion" enough times it's bound to get everyone's attention. It would be nice if a few elementary macroeconomics lessons were included as well.
Today on the bus I heard two people spewing out alternate schemes, each of which seemed off by factors of 10, 100, or more. Getting the arithmetic right is pretty important at this scale. The underlying assumption seemed to be that $700 billion of taxpayer money would be going down a black hole while we hoped for the best. This same assumption is also what I think causes people to wonder what it would be like if we spent the same amount on worthwhile stuff like education, etc. In reality this is more of a risky financial move that won't likely earn a lot of money but won't probably lose it all either.
What this really suggests to me is that most people don't spend a lot of time thinking about where the government spends money in the first place. The widening income gap and continually skyrocketing CEO compensation have been reported for years, if rarely on the front page in screaming type. Fiscal irresponsibility should not be shocking to anyone at this point, although at the least it ought to still be somewhere from frustrating to outrageous.
Then there's the simple fact that generally half of the discretionary portion of the federal budget is spent on defense each year, for FY 2009 about $650 billion total. From GlobalIssues.org via Wikipedia: "The 2005 U.S. military budget is almost as much as the rest of the world's defense spending combined [6] and is over eight times larger than the official military budget of China."
If you are able to contemplate the scale of this factoid, and then recall precisely what the US military has done for us and the world in recent years (ie making the world rather less safe and US citizens much less welcome around the globe), and that the wars in Iraq and Afghanistan are paid for with other money (around a trillion dollars for those two with more spending to come), with that money frequently paid out via exorbitant no-bid contracts to completely ineffective and ruthless companies, I honestly don't understand how you can even be fazed by recent financial news. Compared to where we normally spend our money, I'll be delighted to throw a few hundred billion dollars at the credit market for a change.
From Paul Krugman: "I’d rather see Dodd-Frank-Paulson, which is much better than the original plan, pass than not. The true cost to taxpayers will probably be close to zero, and it would buy some time. But I’m not passionate about this. The real financial rescue still lies in the future, probably under the Obama administration."
Today on the bus I heard two people spewing out alternate schemes, each of which seemed off by factors of 10, 100, or more. Getting the arithmetic right is pretty important at this scale. The underlying assumption seemed to be that $700 billion of taxpayer money would be going down a black hole while we hoped for the best. This same assumption is also what I think causes people to wonder what it would be like if we spent the same amount on worthwhile stuff like education, etc. In reality this is more of a risky financial move that won't likely earn a lot of money but won't probably lose it all either.
What this really suggests to me is that most people don't spend a lot of time thinking about where the government spends money in the first place. The widening income gap and continually skyrocketing CEO compensation have been reported for years, if rarely on the front page in screaming type. Fiscal irresponsibility should not be shocking to anyone at this point, although at the least it ought to still be somewhere from frustrating to outrageous.
Then there's the simple fact that generally half of the discretionary portion of the federal budget is spent on defense each year, for FY 2009 about $650 billion total. From GlobalIssues.org via Wikipedia: "The 2005 U.S. military budget is almost as much as the rest of the world's defense spending combined [6] and is over eight times larger than the official military budget of China."
If you are able to contemplate the scale of this factoid, and then recall precisely what the US military has done for us and the world in recent years (ie making the world rather less safe and US citizens much less welcome around the globe), and that the wars in Iraq and Afghanistan are paid for with other money (around a trillion dollars for those two with more spending to come), with that money frequently paid out via exorbitant no-bid contracts to completely ineffective and ruthless companies, I honestly don't understand how you can even be fazed by recent financial news. Compared to where we normally spend our money, I'll be delighted to throw a few hundred billion dollars at the credit market for a change.
From Paul Krugman: "I’d rather see Dodd-Frank-Paulson, which is much better than the original plan, pass than not. The true cost to taxpayers will probably be close to zero, and it would buy some time. But I’m not passionate about this. The real financial rescue still lies in the future, probably under the Obama administration."
Posted on Wednesday, October 01, 2008
2 Comment(s):
I think you are onto something with your observation that people don't really understand exactly what the proposed bailout will do. I include myself in that number. While I generally consider myself fairly well informed, I'd have to pull a McCain and admit that economics is not my strong suit. What I (and presumably many others) don't really understand is what effect the market collapse will have on me, and how much the bailout will change that. I think that many people don't know whether this is just a parachute for reckless millionaire investors, a needed intervention to avert a financial crisis that would severely affect people like you and me, or somewhere in the middle.
My general impression is that we're kind of at a point where no one wants to lend anyone any money. If this were limited to individual consumers, it might just leave the housing market depressed and decrease auto sales, but when a credit crunch starts to affect businesses, which can no longer find capital for maintenance or expansion (assuming some firms will fail as well), the economy starts to shrink. Well, worse than it is now.
Ideally, by buying up a lot of bad debt, which no one else wants, the federal government will encourage lending and keep the economy running.
Given my job (health insurance paid for by union dues) and the fact that I'm a renter, I don't think a recession or depression would affect me that negatively, but it would be hard on a lot of poor and working class people who might stand to lose jobs or government benefits.
I certainly wouldn't want to see the government handing money to (frequently unethical) business executives with no strings attached, but the bill passed by the senate includes at least some restrictions, and there may not be any real short-term alternative.
Long-term, of course, there's an incredibly long list of things the government should do in the way of eliminating tax loopholes, increased regulation, etc., but immediate intervention is probably required. Or there's always socialism.
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