Well, one argument forwarded by economic conservatives, market absolutists and others is that the proposed fiscal stimulus package will be 'inflationary' and that it 'won't stimulate the economy.'
Arguing to the contrary...
Economist Peter Dawson took up the above argument, but only because BloggingStocks required him to do so (Ah, the power of the press!).
"A stimulus package that's both inflationary and that won't stimulate the economy," Dawson said. "Hmm? The logic is a little curious here, because inflation implies that there's demand and economic growth, and a failure to stimulate the economy implies there's very little demand and hence very little or no economic growth. The conclusions contradict, so what do the economic conservatives say the stimulus is going create, demand or no demand? I'll leave it for them to clarify their argument."
However, Dawson said there is one case in which the fiscal stimulus package could lead to both rising inflation and no growth: a period where commodity, particularly oil, and raw material prices are galloping ahead. "But have you seen the trend in commodity prices and corresponding materials, lately?" Dawson said. Indeed, the commodity trend is not bullish.
What does 'giddy growth' look like?
But let's suppose, Dawson says, for the sake of argument, the fiscal stimulus package is passed, and the U.S. economy suddenly enters a period of 'giddy growth.' What happens then? U.S. GDP increases by 6% or more a quarter. Demand for goods and services soars. Factories and firms ramp-up production to keep up with demand. Business formation and investment increases. Demand for labor leaps ahead, and the nation starts creating 300,000 then 350,000 new jobs per month. Some people even start buying homes again. Corporate revenue and earnings rise at double-digit rates. The stock market actually rises without retreating in a few days. And yes, inflation increases to historically high levels, running at a 5-7% annualized rate by mid-2010, he said.
"At that point, inflation becomes a concern and Congress would either have to cut spending or increase taxes to reduce demand and take pressure off prices. The Fed would likely increase interest rates, as well," Dawson said. "But given the U.S. economy's current growth track, we won't have to worry about rising inflation any time soon."
Fiscal Policy/Economic Analysis: With all due respect to the monetarists, giddy growth looks like a 'problem' the U.S. would like to have.
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Reader Comments (Page 1 of 1)
1-23-2009 @ 5:54PM
Mike said...
I should have expected this to be Lazzaro.
Here's the common sense counter-example to his latest Obamagasm:
Too much of our economy is consumer spending. Way too much, 70%. And that consumer spending was fueled by debt. Now since credit is hard to obtain, we're going to be stuck with a GDP contraction for some time now.
1-23-2009 @ 9:41PM
John Dupuis said...
The economy has contracted by four hundred and fifteen trillon dollars. We are to believe, short term, that a stimulus package of one trillion is going to fix things. I don't think additional credit will fix the consumer credit problem. People are "tapped out," they as a group are out of money! They bought huge homes on credit, over bought because of low rates. More credit will make the problem worse on a consumer level.
1-23-2009 @ 9:43PM
Iridium said...
The silent bull run of oil has begun again. Is there anyone that can seriously give a real economic answer as to why oil went up nearly $3 today?
Oil traders want $60 a barrel nomatter what regardless of the trends or the economy.
Economists have no clue what is going on. What is going on is the complete destruction of the free market system in order to implement the world bank as the chief financial institution and a central world government.
Corporations are so out of control that they can't be run properly nomatter who is at the healm. There isn't an engine big enough to right the ship. The government tried to stick a bigger engine on the ship but it just made it sink faster due to the weight.
The stimulus package will not stimulate the economy because it does not address the principal problem, the wholsale redistribution of wealth from the middle class to the top 5%. You can't create over 1000 billionares in 15 years without destroying the working class.
Traders will also force higher prices on every working American by manipulating the commodity market in order to generate profit. That is how we get massive inflation.
1-24-2009 @ 2:40AM
Navivest said...
We at http://www.navivest.com, are also of the opinion that Microsoft was a bit too hasty in its decision to lay of 5,000 of its employees, considering the company's cash position.
Is this something they did simply to provide a "positive" because their earnings results were so shockingly disappointing?
That being said, we did a quick back of the envelope, non-scientific calculation and considering how much we figure they'll save, it might not be the unnecessary decision that we think it is.
They are laying off 5,000 people. We know techie types at a company like Microsoft, are making good money, we figured 150,000, including benefits etc. 5,000 multiplied by $150,000 per year, works out to $750,000,000 a year!
Obviously, this is not a pittance, so maybe we need to cut them a break.
1-24-2009 @ 5:49AM
everet said...
you can`t spend what you don`t have. cut up your 'plastic'& live within your means &you will be ok, its SO simple& drive the speed limit especially when kids are on board WOMEN!!