Obama’s bribe for seniors

by on October 16, 2009 at 7:57 am in Economics | Permalink

$250 for each senior or $13 billion in total.  It's bad precedent to go around a COLA calculation, even on a one-time basis, but you can construct a partial defense of the policy (here is Matt's semi-defense).  Think of it as a helicopter drop of money, a'la Scott Sumner.  If the helicopter drop substitutes for (part of) a second fiscal stimulus, that's a net gain.  The drop of money stimulates aggregate demand, limits deflationary pressures, and, by the way, you're giving it to a lot of people who are not stuck in a liquidity trap.  They'd love to buy more stuff in The Dollar Store.

How will the expenditure be financed?  Obama was vague on that, but as usual the Fed moves both first and last in the monetary policy game.  All Obama has to do is make the second stimulus $13 billion less than it otherwise would have been, wink and nod to Ben B., and it is all (or mostly) for the better.

1 Speedmaster October 16, 2009 at 8:11 am

Gotta make sure to keep that AARP lobby happy, even if it involves running a Ponzi scheme and stealing from everyone else. And the rule is that increases are pegged to inflation, soooo … wouldn’t logic dictate that they actually get a reduction, rather than an increase?

Up is down, war is peace, freedom is slavery.

2 Bear October 16, 2009 at 8:31 am

ok, where’s the “Bazinga”?

3 Brian J October 16, 2009 at 8:52 am

Maybe this is, as Matt Yglesias suggests at the end, more of a disguised mini-stimulus than anything else. I’m not sure why it would necessarily be a tough sell for people to give a flat rebate check, especially one for such a small amount, but perhaps the administration did some digging and found it’s easier to get something done this way, even if the intended effect isn’t the same. Or perhaps it’s a test to see how receptive people are to stimulative measures that aren’t called that.

Regardless, it seems unnecessarily harsh to call this a bribe. It’s a pretty crappy bribe; who is going to be moved by $250? A couple of thousand would be a different story.

4 Robert Speirs October 16, 2009 at 9:03 am

One has to wonder about the administrative costs of such a giveaway.
How much does each payment cost to make? Wouldn’t a tax cut be
a lot cheaper to implement?

5 Jim October 16, 2009 at 9:26 am

Please don’t tell me you think he’s going to cut $13 billion out of future spending. That is the height of naivete.

Borrowing $13 billion and giving it to people is certainly better than borrowing it and giving it to state governments, as he did with the porkulus bill. But it is still pretty dopey, and “bribe” is indeed the correct word. BHO simply doesn’t want to be the first guy in 35 years to have to tell seniors there is no COLA increase.

6 Bill October 16, 2009 at 9:52 am

This is a way to overcome the objection to a second stimulus. The next idea is to announce a payment to widows and orphans. Hard as a leglislator to stand up and be against payments to the elderly, widows, and orphans.

7 Ryan October 16, 2009 at 10:00 am

Someone want to help me with a bit of a naive question?

Why does anyone think that devaluing everyone’s money will stimulate demand?

I mean, I know this is Keynesian economics 101, but let’s get serious here. Whether it’s a “stimulus” or a “helicopter drop” or a “lower interest rate,” you’re adding to the money supply in the long run. To me the flaw occurs at the very initial stage. I mean, people can (and do) argue until they’re blue in the face about the multiplier or about which kind of monetary increase is optimal according to which technicality, but do we even have to go there? If a theory is logically flawed from the outset, then it doesn’t matter what evidence we find about it later – the theory is flawed. Remember how the stock market was significantly correlated to the length of mini-skirts?

Logically, why does anyone believe that devaluing a currency is good for aggregate demand? It neither makes sense in the short nor the long run, and yet this concept continues to dominate every discussion everyone has about macroeconomics.

Am I the only person who has a problem with this?

8 Chris October 16, 2009 at 10:17 am

All Obama has to do is make the second stimulus $13 billion less than it otherwise would have been

Actually, it would be better not to. If there is a second stimulus at all, Ben Nelson’s pound of flesh will already reduce it below what economic experts think is the right size. Letting the $13 billion offset that stimulus shortfall would be better than pre-cutting the stimulus only to have it cut down further in Congress (like the first one).

9 Bill October 16, 2009 at 10:40 am

Mike S–thanks. good work in explaining national income accounting and its relevance to the “deficit” issue.

10 Bob Murphy October 16, 2009 at 10:47 am

Mike S., I’m not sure if your proof is the same as the one I critiqued a few years ago, but for anyone who is curious I took on an NRO guy (yes, NRO) when he argued that government deficits = private net savings. Here.

11 Bob Murphy October 16, 2009 at 10:54 am

OK I looked at Mike S.’s proof a little more carefully, and I think he is making the same misleading move that the NRO guy did. Here is the crucial part of Mike S.’s demonstration:

(S – I) + SURP – NX = 0

S-I is the PDFB (net saving by the private sector), SURP (government surplus, or
net saving by the government) is GFB and -NX is the RWFB (the net saving of the
rest of the world):

PDFB + GFB + RWFB = 0

This is a national accounting identity.

In a global economy RWFB = 0. There is no rest of the world.

So

Private Sector Savings = Government Deficits.

So no, it’s not “private sector savings” that equal government deficits, it’s “NET private sector savings” which means “private sector savings in excess of private sector investment.”

So what Mike S. is saying is that gross private saving = gross private investment + government borrowing. That is the accounting tautology.

Now, Mike invokes a Keynesian theory as to the causality, and says that if the government borrowing goes up on the right side of the equation, then private saving goes up on the left side.

But it’s also possible that an increase in government borrowing reduces gross private investment. That would also balance the equation.

12 Richard A. October 16, 2009 at 11:20 am

“Think of it as a helicopter drop of money”

The helicopter drop is suppose to be newly created money. This helicopter drop will be borrowed money.

13 holmegm October 16, 2009 at 11:34 am

Which is more reasonable? The assumption that Obama et al. made a partisan political calculation to send a payout to seniors (of the princely sum of 250 dollars) at the height of concerns about government spending or that seniors grew used to compensation increases and would have demanded one otherwise?

Are you actually arguing that the first isn’t plausible?

14 Mike S October 16, 2009 at 11:57 am

Hi Bob,

Great Critique. I always like your stuff. But this statement you make is not supported by anything beyond you think it is absurd:

“Ta da! There you have it, folks: Because of (dubious) accounting, Nugent has reached the conclusion that it is literally impossible for the US private sector to save unless the government runs a budget deficit bigger than the trade deficit.”

We’ve seen exactly what you consider to be absurd happen over the last decade.

Because of the existence of private sector lending, it sometimes can appear that saving is taking place. But once you net all of the private sector accounts, it becomes clear that saving is not taking place. The saving account must to balance in total over the economy, not just in specific savings accounts. So private sector lending can make what appears to be savings show up in the accounts.

I make a distinction between vertical money (net government spending) and horizontal money (private sector lending created money). Horizontal money nets to zero. Government money does not.

During business cycles the horizontally created money can show up as savings for some people while net indebtedness is rising more than savings. Sound familiar? This is what happened in the U.S. and why our real estate market crashed – there wasn’t enough net money to support the lending. Once the real estate lending was forced to begin to net out lending with real money, it became clear that there was not enough net money in the system.

15 Bill October 16, 2009 at 11:59 am

I think it is also fair to ask whether, offsetting the $250, there will be an increase in medicare premiums. A spoon full of sugar helps the medicine go down.

16 Mike S October 16, 2009 at 12:31 pm

Bob,

Also this:

“Nugent’s argument here is roughly akin to saying that bank robbers provide employment in a community, so long as their stealing doesn’t infringe on anyone else’s spending. Among other problems, Nugent suffers from the monetarist belief that the printing press is only bad if it causes prices to rise. On the contrary, whenever the government expands the money supply and uses the new funds to buy things, real goods and services are siphoned out of the private sector. No appeal to accounting identities can change this obvious truth.”

Isn’t really an argument other than you don’t like government. It isn’t an obvious truth.

The government is special. It can imprison you if you don’t pay taxes. It can spend money without ever borrowing. The FED controls price for term money, not quantity of money. There is a natural demand for a government issued currency that doesn’t exist with any other entity (like a family) because of taxation.

You should embrace this accounting identity. The rest of the money supply stuff you mises guys do would be so much easier. You have huge problems identifying the money supply. You go through hoops with M1 and the rest to determine what supply really is at any given moment. This framework does not have that problem.

It also gives a great framework for analysis why consumer savings have been declining for years.

17 Doc Merlin October 16, 2009 at 1:19 pm

Mike S,

Your problem is that the type of “savings” in your equation doesn’t really exist anymore. Nowadays people put savings in banks which the banks reinvest. This is a type of investment. This gives you the opposite effect, when government spends more, private investment goes down.

18 Mike S October 16, 2009 at 1:34 pm

Bob,

Totally enjoying this conversation btw. Nice to sharpen my chops with someone who is both smart and fair.

You must know of Warren Mosler – I recommend you read his blog and papers. He is better at this than I am.

“Your problem is that the type of “savings” in your equation doesn’t really exist anymore. Nowadays people put savings in banks which the banks reinvest. This is a type of investment. This gives you the opposite effect, when government spends more, private investment goes down.”

But this is not entirely true. From the accounting, put it in a bank, you have net money. The bank reinvests (remember this is my horizontal component) and that reinvestment nets to zero. The banks investment = someones savings, and as soon as either the bank calls the loan or someone pays back the loan, the net is zero.

We are talking about the final accounting, not flows.

Question: how did the first U.S. dollar make it into the real world? Did the U.S. government borrow it from someone?

19 Yancey Ward October 16, 2009 at 2:04 pm

Of course it is a bribe. Seniors are turning decisively against the proposed Medicare spending cuts required for “funding” HCF. The Administration needs to do something to buy back some support.

20 Basho October 16, 2009 at 2:22 pm

Everyone knows this is pure politics. The only way I can try to console myself as someone who voted for Obama is that John McCain may have done the exact same thing.

God help us if this is a preview of what will happen when the Medicare trust fund runs out. Borrowing money to give to seniors on a permanent basis will lead to 1 of 2 things. Default on the debt, or lower standards of living for workers.

21 Beefcake the Mighty October 16, 2009 at 3:20 pm

Bob,

Butt-plug say what?

22 Bob Murphy October 16, 2009 at 4:16 pm

Mike S,

I can’t resist. What’s to stop us from doing the same demonstration, but this time with, say, Goldman Sachs? And then we hope that Goldman Sachs borrows a bunch of money, lest the world-minus-Goldman-Sachs can’t accumulate saving?

I’m guessing you will say it has something to do with either fiat money or taxation?

23 doctroprint October 16, 2009 at 10:13 pm

A storm is brewing.
Watch it here. do with it what you will.
http://www.youtube.com/doctroprint#p/a/u/0/bHbC7KliwQA

24 jorod October 17, 2009 at 9:46 pm

Sounds like a bad deal for the taxpayer…..

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