The Republicans are to pay a big price for refusing to support Obama's stimulus program.

Obama came into office with the expressed intent to work with the Republicans to get important legislation passed. The first real test of Republican cooperation in return to Obama's outreach was the stimulus package. So Obama and the Democrats crafted a bill that included much that was intended to get Republican Senators to vote for it.

As Steve Benen points out, Obama has not forgotten being stiffed by the Republicans after he and the Democratic Congressional leadership watered the stimulus bill down badly so that Republican Senators could vote for it and explain their vote to their constituencies at home. Instead of working with Obama, they then followed Limbaugh and provided zero Senate Republican votes for the stimulus bill.

They are going to pay for that. That's what the reconciliation plan is all about. The Republicans can still work with Obama and get some of what they want in Health care, and pass a universal healthcare bill within the next six months. If they don't cooperate, then the Democrats go the reconciliation route and pass an all-Democrat plan.

My bet is that the Republicans are so crazed that they will follow Rush Limbaugh instead of work for the good of the American people and work with Obama.

There is a reason why the National Republican Senatorial Committee (NRSC) chair Senator John Cornyn has said he did not think that the Republicans were going to keep a 40 Senator minority in 2010. Their radical conservative base won't let them compromise conservative principles even if that is politically suicidal. The marginal Senators who are up for reelection have a choice, much as does Senator Arlen Spector. They can run to win the general election but lose the primary and never get there, or they can cater to their conservative base, get the nomination, and be defeated by the Democrats supported by the Independent voters.

In my example, Senator Spector's other choice is to turn Democrat and see if he can win the nomination there. If he could win that, he can probably win reelection in the general election, but the Republicans still lose the Senate seat.

The NY Times needs an economics text

The NY Times gets the analysis of Obam's stimulus wrong. What did they get wrong? All of it.

There's nothing wrong with stimulus projects that don't start immediately.

The Wall street Journal today has a breathless article bemoaning the fact that the stimulus bill may not stimulate jobs right away.

So What? The fact that it may take a while for the highway projects and such to kick in is a feature, not a bug. That's not to say that shovel-ready projects that can start very quickly are not needed, but they mustn't be the only projects considered, and even those will have some delay as they get ramped up to start.

This recession is going to last a while, at least two more years and I am betting even longer. The stimulus won't prevent the recession and bring us back to the status quo ante. It can't. There is too much damage that has already been done to the economy. But a lot of the stimulus is already targeted at social safety net projects through existing agencies anyway and other short term expenditures. Perhaps not enough, but those will hit the economy quickly. The thing is, the stimulus has to also keep on providing stimulus over time because the market is not going to be back - no matter what the government does - to where it supports itself for quite a while. Two years from now would be a highly optimistic projection.

That means that there has to be long term stimulus built in, and not just for individuals. Jobs have to be created and maintained. That's what the highway and infrastructure investments will do. By the way, the problem for businesses is demand for what they produce, not money to meet that demand. Any tax cuts given to businesses that aren't making a profit anyway are wasted. They won't get anything. Similarly, tax cuts and grants to businesses that are making a profit will not help them. They still need increased demand. That demand will largely be government contracts. The assistance to business has to be provided by creating a demand for their products. And for it to start in the future gives them time to ramp up, arrange financing and capital and get contracts.

Remember, no business is going to see that there is a one-time stimulus hitting the economy and ramp up to hire employees and go to work on that basis. They know that the one-time stimulus like last May hits, has a short term effect, and then dies out. If nothing else, no sensible bank will loan money for a business that cannot assure a long term stream of revenue. That's what the infrastructure expenditures will do.

The fact that they will not kick in soon means they can be planned for and businesses can be built based on those plans. Fast, short-term stimulus by itself is close to useless.

Krugman tells how large the stimulus should be

There is now little doubt that the federal government has to conduct a stimulus program. But how large should it be?

Krugman thinks Obama should act boldly and think big. He should take lessons from FDR, both what FDR did that succeeded and what he did that did not succeed. Consider the successes.

Imagine how much worse the financial crisis would be if the New Deal hadn’t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security. [Snip]

Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.

But not everything FDR tried succeeded.

F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”

The problem was not that Keynesian economics failed as some argue. It's that it wasn't tried. Krugman points out that in fact Keynes' book was not published until 1936. And FDR himself was not a strong proponent of government stimulus.

F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.

Late Monday Krugman made his point even more strongly on his NY Times blog.

Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future. In normal times, that would be a reason to cut interest rates. But interest rates can’t be cut in any meaningful sense. Fiscal policy is the only game in town.

But while the Federal Reserve cannot contribute to the expansion of the economy because lowering the interest rates no longer have an effect, the Fed can still prevent inflation if any stimulus is too effective. So the risks of stimulus are all on the side of not having enough of it. Here are the numbers Krugman published.

GDP next year will be about $15 trillion, so 1% of GDP is $150 billion. The natural rate of unemployment is, say, 5% — maybe lower. Given Okun’s law, every excess point of unemployment above 5 means a 2% output gap.

Right now, we’re at 6.5% unemployment and a 3% output gap – but those numbers are heading higher fast. Goldman predicts 8.5% unemployment, meaning a 7% output gap. That sounds reasonable to me.

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

So Paul Krugman recommends that the federal government conduct a very strong stimulus to try to hold off the worst of the recession.

This view begins to look like the common wisdom of the inside the beltway pundits and experts, E. J. Dionne and Fareed Zacharia for example. The wisdom of smart economists is beginning to leak into the political realm. That means it has a possibility of actually being acted on. Now Krugman has put some numbers onto the "Act Boldly" idea. politically it will have two hurdles. First, will the incoming Obama administration buy it? Second, how much will the conservative troglodytes in Congress be able to do to prevent it?

We will all be watching to see how this plays out.

Why is economic stimulus only now being enacted? The problem has existed for nearly a year.

David Sirota points to the fraud of economic stimulus and explains what it really means:

Why are we talking about “stimulus” only now? After all, most people have been hurting for quite a while. Paychecks have been stagnating, foreclosures have become commonplace, health care premiums continue their double-digit increases—and up until recently, conservatives greeted such hardships with saccharine fantasy.

Following government reports showing a surge in income inequality, Treasury Secretary Hank Paulson last year gushed that the economy is “as strong as I have seen it in any time.” In the summer, as the housing crisis exploded, President Bush said the economy was “thriving.” This month, as the Labor Department reported another drop in wages, Republican Rep. Michele Bachmann of Minnesota said not to worry, her state is doing just great because “we have more people that are working longer hours, we have people that are working two jobs.” And with word that there are now 195,000 homeless veterans nationwide, Bill O’Reilly insisted on Fox News that really, “there’s not many [homeless veterans] out there.”

Message: Nothing to see here. The economy is fabulous. Move along.

Lately, though, the rhetoric has switched. Paulson now says there is an “urgent need” for action, and President Bush is demanding a “stimulus” package from Congress.

And that gets us back to the critical question: Why the sudden shift? Because the group demanding help has changed.

Before, it was just commoners complaining—regular homeowners, wage earners, troops coming home from Iraq, you know, the 99 percent of us who can’t afford the thousand-dollar-a-plate political fundraisers.

But now Wall Street is panicking. In the last month, the financial industry’s profit margins dropped, thanks to mortgage defaults brought on by irresponsible lending. And when the corporate executives who underwrite campaigns start whining, politicians develop “stimulus” schemes using the blight of layoffs, foreclosures and wage cuts to justify tax cuts for those doing the laying off, foreclosing and wage cutting.

Specifically, most GOP presidential candidates are demanding corporate tax cuts as the “stimulus” to improve American competitiveness, ignoring a recent Treasury Department report noting that the United States already has among the lowest effective corporate tax rates in the developed world. Republicans like John McCain, fresh off a Merrill Lynch fundraiser, say we need not expand unemployment benefits and food stamps to help workers and give the economy a reliable Keynesian boost. No, they say we must hand over more cash to the same financial industry that just gave its executives $39 billion worth of year-end bonuses.

Leading figures of both parties seem eager to help limit the debate over “stimulus” and make the final package a corporate goodie bag. According to the Washington Post, Democratic Sen. Max Baucus of Montana asked economists affiliated with the Hamilton Project—a Citigroup-backed think tank—to testify to Congress at its initial hearings on a stimulus package. Labor economists, by contrast, were not invited.

Think the stimulus is not a fraud? The banking industry is hemorrhaging money so badly they don't dare lend to most customers, yet the still give their executives $39 billion in year-end bonuses?

Compare that the to Congressional stimulus package of $150 billion, $70 billion of which is going to be given directly to businesses that are paying these year-end bonuses to their failed leaders. Those $39 billion in bonuses to banks who are now to afraid to lend money to get economic projects working amount to 26% of the $70 billion the government is going to give businesses as "stimulus." The taxpayers are paying for the bonuses that the failed financial industry just gave its failed executives.

That's fraud. Pure and simple. It is also the Reagan Revolution at work.