or: Stimulus Here, Stimulus Now!

This post is going to have a ton of charts, so it'll mostly be after the jump, but here's the gist:

1. The overall economy (not just the financial sector) is worse than it looks, and it looks really bad.

2. Given the particulars of how this rec/depression is likely to play out, the federal government is the only actor who has the ability to reverse the spiral of low employment->low retail sales->lower employment->lower sales.

3. Stimulus is the right thing to do, but all stimulus is not created equal.   

The economy is in the toilet

The usual unemployment number (U3 according to the Bureau of Labor Statistics) reached 6.5% in October.  But the more broad number (U6), which includes underemployment reached 11.8%.  The difference is mostly from what they call "Involuntary Part Time" workers.  These are people who are working mostly 20-39 hours a week and are desperate for 40 so as to qualify for fulltime benefits.  This sucks less than being unemployed, but if you're a full time employee who gets laid off and winds up working 30 hours a week at Target, it still sucks a lot and you're contributing noticably less to GDP.  And looking at the ratios for September, this is actually going up faster than straight unemployment.

Twinned with that are retail sales.  Which had abysmal numbers, worst in decades:

A note on reading that chart, the relevent part is the last tiny 2008-2009 segment.

Why do we care?  Well employment and retail sales go together.  In an incredibly simplified scenario, say you're a prosperous IT worker at a large (1500 employee) company in a suburb.  And then that company goes under.  The various pricy restuarants nearby now don't have enough demand to stay open during lunch.  So they halve the hours of the waitstaff/cooks.  Who then buy fewer Christmas presents at Target.  Who then can't support an in-store Deli.  So the meat slicers get laid off.  Thus causing them to spend less, and so on in a horrible spiral

The Federal Government is the only entity who can stop the spiral

My libertarian and federalist readers may be saying, "Wait!  What about state governments?"  This is a fine point, states offer unemployment benefits, health care, and all manner of social spending.  But they can't deficit spend.  And they'll be taking in fewer tax dollars due to the recession right as demand for the services is needed the most!  With no way to make the gap up, they're forced to slash budgets at the worst possible time.

"But wait!" my long-memoried conservative readers may point out, "Clinton inherited a slumping economy and salved it via shrinking the federal deficit!"  He also got a dot-coom boom, but that's beside the point.  At the time, interest rates were quite high, due in part to the large deficit.  The government had a lot of debt, so there was a lot of demand for loans, so interest rates soared.  Trimming the deficit cut rates, helping keep credit flowing to entreprenuers and other people investing in projects/hiring.  Well, rates right now are basically zero.  No room to cut them further, and the low rates mean that loan demand isn't the issue. 

But interest rates being so low makes it an even more ideal time for the Federal government to deficit spend.  As a side note, this is how Keynesian economics is supposed to work.  You deficit spend like crazy in a recession to break it, then when times are good you fucking balance your budget.  Unfortunately Congress decided massive budget breaking tax breaks for rich people were the right thing to do when times were good instead.  This sucks, but it doesn't change the fact that right now we need to dig further down before eventually climbing out.  There's been a lot of talk about the government cutting back spending in bad times, but there's a name for that:  Hooverism.  We've seen that movie before.

What stimulus is right for me?

This is a good question.  Sending everybody a sweet 600 dollar check was not the best idea, especially because it went to people paying income tax.  Here is the basic principle of stimulus:  if you give money to dirt poor people, they will (in the aggregate) buy food, and booze, and maybe tires for their car.  This is good, it flows right into the economy.  If you give it to middle class people, they'll spend some of it on stuff they want (good) and use some of it to pay back credit cart loans/mortgage debt/savings (this is good for them personally, but bad stimulus).  And if you give it to rich people, they'll buy Lehman Brothers stock.

So that is the reason behind some of the numbers in this totally awesome chart about the ratio of return per dollar of stimulus:

The earlier package ($600 checks) were partially refundable tax rebates.  Refundable means that you get the money even if you don't actually pay it.  IIRC, you got a smaller check if you didn't pay income tax, making that halfway between the two.  So not terrible stimulus, but not great.  UI, by the way, is Unemployment Insurance.

So what would I recommend?  Even though it's not the most optimal return, infrastructure spending is the standout choice.  For one, you're creating jobs, so instead of people simply getting money for doing nothing, you're productively employing them.  This is better for roughly a million reasons: it is far more fulfilling for the recipient, it avoids moral hazard, and helps to get bootstraps people on board.

Moreover, the government actually gets something!  There's a reason infrastructure is usually called 'investment'.  Instead of a whole bunch of check stubs and a bleeding deficit, the government wakes up the next morning with some bitchin' new light rail or a supertrain that they can then make money off of in good times.  Ideally you'd combine it with specifically targeted aid to states to help them keep existing programs intact.

Kuttner, Robert. The American Prospect: "A Stimulus Everyone Can Love"

AP (via Yahoo) "Holiday outlook turns grimmer after stores report weakest October since at least 1969"