Although America’s recovery from recession is disappointingly slow, policymakers doubt the merits of another monetary or budgetary push

Spending money on infrastructure maintenance and repair to create jobs is essentially free, since the work has to be done eventually. Add in the return of such investment compared to current low interest rates, and it seems a no-brainer.

Put people back to work by fixing our roads and bridges. Start two years ago and keep it up until the economy shows solid growth. Then, dispose of all the Bush tax cuts.

At that point, we can have a sane and serious discussion about dealing with long-term funding and delivery of health care.

"About $1.2 trillion in fiscal stimulus has been injected"

In my opinion, injected in ways that had little long term affect on the economy and only hid weakness in the short. But that money is now gone and has helped push federal debt to a point where it has made it politically impractable to employ further stimulas in a meaningful way. a lost oppertunity due to politics as usual.

A Greek default will demand more stumilus don't you think ?

And a Greek default is a matter of time. I bet it will happen in 2011. And by Greek default, I means PIIGS default. Imagine the economic slack... Its Greekman Brothers...

So this article is somewhat with lost bearings in my opinion.

This is not a V or W or L recovery.

I said it a year ago (Just check my comments) this is a VTV recovery. The T is a platou reached after the FED print all this money. Since this is no solution, it will be useless. It migh even be a VTL recovery...

Are those 30s bankers so dum as history books paint them ? Maybe not.

@Ed (Brazil): Good call. I think you're too pessimistic, but perhaps not.

I'd disagree about the original idea of stimulus; but, as in the 1930's, there's only so much the government can do. This time, it wasn't enough. At this point, it's really up to us non-governmental types to muddle through, if we can. Radical changes in policy -- in any direction -- aren't going to accomplish anything, except to make most of us even more frustrated, uncertain, and polarized. Assuming neither miracles nor meltdowns by August, the politicians become irrelevant.

There will be no miracle cures. The patient just needs a long convalescence, self-discipline, more exercise, and a sensible diet. Our job, if they'll let us do it.

This pill has to be swallowed. Western society broke the traditional balance in savings/spendings in favour of sepnding (stimulated by both right and left politicians). For some time the unbalance was covered by Asians, but this can't last forever. Now we have to dismatle phony investments, repay our credit cards, and buy a new car some years later than usually. As a Canadian I say 'we', because despite our low government debt, household debt is one of the highest in OECD. GDP falls, but it means we are consuming less and saving more. That should be good for some time.

Lorne
http://lsminsurance.ca/

Lorne:

First, stimulus investment should generate long term public assets. Roads, bridges, tunnels, railroad infrastructure, wind farms, and so on, all qualify. Some of them (wind farms, toll roads, bridges, tunnels, etc.) also create offsetting revenue streams.

But governments have a tendency to favour cash transfers to individuals. Generally speaking, the effects tend to evaporate quickly, leaving nothing but a big hole of debt, with no counterbalancing assets to show for it.

Second, household debt is too high because our tax system is set up to favour (indeed, subsidize) debt over savings.

US unemployment is about 9%, interest rates are essentially zero, there is a pile of savings sitting on the sidelines, and there is debate about whether the US should inject yet more stimulus. Yet the roads are packed with expensive new cars, and the malls are jammed with consumers spending their brains out on credit. The US is still running something close to $500B/year trade deficit.

Does that make any sense?

That's where all the stimulus is ending up: buying imported consumer goods and spurring a boom in East Asia and South Asia.

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One solution is to shift a fair portion of taxation from income to consumption. This would tend to reduce both the deficit and the consumer goods trade imbalance.

Raising gasoline tax by $1.50/gal. - $2.00/gal, is particularly attractive: it would address a revenue shortfall issue; an infrastructure issue; a trade imbalance issue; a perverse taxation cross-subsidy issue (whereby people who don't own cars subsidize those who do); a perverse energy policy issue; an environmental issue, a health care issue; and an internalization of negative externalities issue.

Almost any increase in taxes on consumption would be beneficial. Yet one North American government, incredibly foolishly, cut the national sales tax by 2%, thereby increasing national debt by well over $50B (equivalent to $500B in US-speak) without any measurable counter-balancing benefit to the economy.

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Americans (and Canadians, and lots of others) need to realize that the age of retirement is going to have to rise toward 70 years; benefits in both pensions and health care are going to have to be smaller; a lot less (35% - 40%?) is going to be spent on defense.

And, just as Warren Buffet said, taxes in America (less so in Canada) have to rise fairly substantially. Even if the retirement age is 70, my guess is that overall US tax revenue needs to rise by about 20%. American taxes simply are not covering the cost of the services Americans expect from government. On any plausible arithmetic, no matter what popular belief may be, the truth is that American are substantially under-taxed.

The unfunded liabilities are huge. Discretionary spending can be cut to zero, yet there is still no way to climb out of the debt hole without raising taxes a lot. The idea that America is going magically to "grow" its way out of trouble while still running a $500B trade deficit is pie-in-the-sky nonsense: yet more Peter Pan, Never-Never Land denial. Dream on.

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One measure that might be tried would be to issue the equivalent of "War Bonds" linked to investment in public assets that pay for themselves over time. I.e., rather than raising taxes, the government should apportion a duty to buy bonds, which will be repaid with interest, for the purpose in public revenue generating investments (wind farms, hydro dams, toll roads, etc.)

The projects identified are ones that generate employment here, as opposed to in the far east, in the sectors hardest hit be the recession. E.g., each wind turbine pylon has over 200 tons of steel, and a lot of concrete. That construction has to be done locally. The jobs cannot be shipped off-shore. The same applies to building bridges, tunnels, and rail lines.

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In any case, America's Congress shows no signs of growing up any time soon.

What exactly does "recovery" mean? If it means re-igniting the bubble-driven speculative economy that prevailed from the mid 1990s until 2008 (dot-com bubble followed by housing bubble), I hope that it never happens in our lifetimes.

"Since recession ended in June 2009, GDP growth has averaged 2.8%, roughly its long-term trend."

What fraction, if any, of this nominal growth has been real, as opposed to being the inevitable result of inflation caused by the Fed's endless money printing?

I'm quite curious how the general/federal debt accounting works in this stimulus. Essentially, it ended up being mostly the Fed footing the bills that local governments were supposed to pay in the first place.

QE or not QE, that is the question.

Excerpt Reuters:
The IMF, in its regular assessment of global economic prospects, said that bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies.
The global lender forecast that U.S. gross domestic product would grow an anemic 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent and 2.9 percent growth, respectively.
The IMF said it was slightly more optimistic about the euro area’s growth prospects this year, but a lack of political leadership in dealing with that crisis and the budget showdown in the United States could create major financial volatility in coming months.

Gee, ya think? The Democrats have not passed a budget in over two years. The stimulus was a bust and there is precious little appetite for running up even greater debt, even among the Washington elites. Cash for clunkers and mortgage bailouts sound like horrific and grotesque jokes at this point. So, yes, the Fed will almost be forced into taking further QE measures (just to make it seem as if the government is doing SOMETHING). This may prop up markets and asset values for a while longer, but like so much deficit spending will not materially improve the fundamentals of the free market economy. The big wild card here is inflation, of course, but there seems to be more concern these days about double-dips than commodity supply.

US government lacks the political courage to dramatically decrease low- skilled unemployment without adding to the debt. Federal, state, and local agencies should require employment verification (eVerify) of all current jobs. Unemployed Americans can fill a high percentage of the estimated 8 million jobs, which are currently possessed by illegal aliens. This will not fix all issues but it will help avoid the formation of chronic unemployment.

We're f**ked. Welcome to the United States of Japan.

One good thing I can say for QE (1 and 2) is that we did the experiment that many smart people advocated and we now have empirical results to look at. It's very easy for a bunch of academics to sit around and talk about economic theory (and cite each other's papers), but it's rare to actually do the experiment and see what works. I think it's fair to say at this point that QE "may" have prevented a deeper recession in the form of a credit squeeze, but it clearly was no panacea. I'm no economist or accountant, but it seems to me that when you have a lot of bad debt in the system, that bad debt has to get written off at some point, and no amount of gimmickry will make bad debt into good. The whole securitization of mortgages was based on cleverly turning high-risk home loans into ostensibly low-risk bonds.

Surely we can at least see that we need to look at solutions other than more quantitative easing. To the extent that QE wasn't as inflationary as might be expected, that might have been due to the fact that much of the newly "printed" money was merely replacing wealth that had disappeared out of the economy due to the drop in real estate values. So, it wasn't as bad as some thought. On the other hand, having done the experiment, we can also look and see where that freshly-created money went. Did banks loan it to businessmen to build new factories and hire more workers, or to homeowners to have new houses built? I don't see any evidence of that. Instead the money appears to have gone mostly into short-term speculation in commodities and the stock markets. I would argue that neither of those things was particularly beneficial to the majority of Americans and thus should not have been a goal of government policy. Unless a proposed QE3 included some means to force the money men to invest the money in more widely beneficial investments (in which case the government ought to just make those investments directly and admit that it is taking a socialist tack), history now shows that most new money will end up going into short-term speculative investments that will not have any lasting positive effect on the economy as a whole.

The effects of QE have shown that - common sense ! - you cannot spend your way out of a credit crisis. In my opinion the US has to
(1) repay its debts, government and population alike. Balancing the accounts:
- raise the taxes (taxes in the USA are very low)
- cut defence spending (USA outspends the rest of the world combined)
- limit credit cards and loans to people
(2) Get the economy competitive again. This crisis has shown a lack of competitiveness compared to China and India, but also versus Germany. Actually I fear this will be the most difficult.

the stimulus was never about helping the main street. Shlomo Bernanke knows Econ 101. Printing money does not help an economy with fundamental problems.
Printing money and the so called stimulus was about transfer of wealth from American tax payers to Wall Street. Save the banks by providing free money and ability to leverage at astronomical levels to create big risk free returns from Treasuries which, in turn, were guaranteed by the Fed put.
This is called a ponzi scheme and Shlomo Bernanke knows exactly who benefits. As long as Wall Street bankers can pay record bonuses and donate part of those to lobbies (including AIPAC) in DC, the FED will keep the music going, until it all blows up again.

I agree with bampbs. (remember the New Deal and Civil Works or Hitler making Germans build the Autobahn!).
Printing money is a relatively easy decision (right now it seems to benefit only the likes of Goldman Sachs), but you can't easily print jobs, not even the mighty USA!
Let me repeat what I said a while ago comparing the way many Germans view the economy vs the way most Americans view it:
There are a few basic differences between the teutonic and the American (or even anglo-saxon) views about the economy. Most Germans believe that engine oil (monetary or fiscal policy if you like) is just for lubrication of the economic engine but it is not the fuel that really powers it. The basic resources of a nation are it's people, especially the quality (and happiness) of it's workers and co-operative/cohesive societal values. Firing workers do not, in general, fire up the economic engine. It might cause a short term blip in the stock market, where engine-oil (sic) is traded, but many Germans are wary of this kind of profit-taking. They instinctively think it's cheating. There are more fundamental ways of creating wealth and jobs. There are now so many engine-oil leaks (caused mainly by the banks) that filling up the economy with more engine-oil (Quantitative Engine-oil?) doesn't quite seem to solve the problem. First you have to stop the leaks, fix the engine and then you have to fill it up with real efficient fuel (a well-trained and happy workforce which is not scared of losing their jobs the next day and enjoy health and other societal benefits) to produce high level products to fire-up the economic engine. German society also has a higher respect for skilled technicians and trades people. Most American kids get rather "generic" degrees from "Universities" (very universal eh?) They prefer to become lawyers, accountants or get their MBA's to become "players" in the " engine-oil market", believing that they can exploit cheap Indian and Chinese workers to do the manufacturing jobs. What an illusion! Big time Fata Morgana! Germans trade unions are also modeled very differently from the outdated ways unions operate in the US, UK and Canada. This black and white division of workers/labour against owners/management is a totally obsolete principle from early days of capitalism. Giving it up doesn't mean it's socialism and anyway if people don't like "socialism" why don't they just outlaw unions!
Americans will probably see these things as usual, through their partisan-political-tainted sunglasses, because they are parochial by nature and can only think of the American way of looking at problems. I'm not saying it's bad. It seemed to have worked quite well for a long period in history, and Obama is supposedly a smart guy, probably even getting a second term. More "hopey changey" tweets? We will see how it goes for the jobless.

American political leadership would be well advised to wake up and wake up quickly as to what they need to do.

America needs to make it vastly easier, and safer, for entrepreneurial Americans to start new businesses. Why you ask? It is very simple. In America, as in most developed countries, it is new and small businesses which create jobs, while large businesses do all that they can to reduce jobs per unit revenue.

There is anecdotal evidence of this fact in an adjacent article in the Economist: "Are ATMs Stealing Jobs?" Yes, in the hands of large banks of course they are stealing jobs. Just like self-service checkouts in large American chains are "stealing jobs".

This is the mandate of large public companies: increase returns to shareholders, using capital as economic substitution for labor wherever possible.

Now having said that, the innovative small companies who invent the next labor saving machine do what? Create jobs!

Right now in America there are many talented potential entrepreneurs who are unemployed. What are the American government incentives for them to gamble at starting a new business? America did come up with incentives for "first time home buyers" in the form of a big tax break to sop up excess housing stock. This, one presumes was helpful to banks so beloved to America's congress. What about similar and bigger breaks for peopole who march into the gunfire of starting a new company and employing others? Do these people count as much as empty houses do in the minds of America's politicians? They should, because they hold the key to the escape hatch from America's present problems.

It is quite apparent that America's large businesses are hoarding cash, not investing it, not spending it, just waiting. They are however using this "quiet" period to do process re-engineering such as investing in machines to cut their labor costs.

Who will hire the cut people? Newly formed and growing young enterprises, that's who. Except in America, the president who clearly understood how grass roots processes could be harnessed to get him elected, does not appear to understand how analogous grass-roots processes in the business start-up economy can save his presidency.

Time to wake up America.

You must move swiftly to:

1. Put in place incentives to encourage able Americans to become entrepreneurs;
2. Put in place incentives to encourage large, cash-hoarding companies, and wealthy individuals, to INVEST in new, entrepreneurial companies; and

3. stop misunderstanding the mandates of big business -- big business is supposed to manage for productivity of existing operations, because big business is usually quite poor at major innovations which create new businesses and more jobs.

America should stop it with the silly view that government spending has a strong economic multiplier. It does not. Put those same funds into American entrepreneurs' start-up budgets and you will see vastly more job creation, and improved competitiveness for the American economy.

Do it America and you will recover and thrive. Do it not, and you will enter a not very bright phase of your future.

Household debt actually affects aggregate demand in a negative manner; of this there is no doubt. But government debt is different. I ask: whether you are a person or a business, how does the government's debt affect your personal balance sheet? And the answer is that it doesn't.
But let's say that there are two types of business owners; those who are so afraid of the government debt that they decide to produce at under capacity and delay hiring, and those who decide to push on through the debt. Well then, shouldn't the braver people end up emerging victorious? Won't they produce and out-compete their panic-stricken competitors?

This means that, over the long run, the government should continue to support business. Those with the guts to keep full steam ahead will win; those who are cowed by uncertainty will lose; and most importantly to the political economy, the middle class will not be decimated.

Deficit - we spend more than we earn
Surplus - we earn more than we spend

Put the above in 20 to 30 years perspective, it is easily to see why USA has a debt crisis while China has huge savings. Of course we all know savings earn interest and create a positive cycle while debt pays interest and create a negative cycle.

Where do we spend the money? List list a few possible end points:
(a) Wasted via inefficiencies
(b) social program to increase people's happiness
(c) defence
(d) pork-barrel programs

Lets examine one by one:
(a) Certainly efficiency, fairness, and transparency do not always go hand-in-hand. I don't know any of my business efficient competitor play fair and transparent. Question: should govenment behave like companies (such as Singapore model)

(b)Problem with social program is Darwin. If you care for a layer of population from cradle to grave, why should they learn? why should they work? This "fat" layer will very soon expand (more honest people give up searching for work, exisiting layer having more babies as this will bring more disposable income). Eventually, social structure will collapse and revolution happen.

(c) Defence. Nothing wrong with stay ahead of competitors on R&D. Three issues ... (1) how much farther ahead, as 70% of all these will never ever be used; (2) should we pay for our "friends" defence while they do business with our competitor? (3) can we reduce the volunteer work to help neighbors mow their lawn? (they way we want, not the way they want; once we go, the grass will grow and the neighbors will tend their gardens their way, but complain that we had ruined their garden)

(d) port-barrel program. This goes with the democracy system. From an economist's perspective, I often wonder the systematic costs for dictatorship (corruption) and democracy. Maybe corruption consumes more, but dictatorship make decision faster, which creates an advantage.

I am pro demacracy and pro business and pro human right. However, all things have constraints and all govenments have budgets, and we should spend only what we can afford, meanwhile create a positive cycle for our children.