Deficit hawks would make terrible businessmen: a simple explanation of how the stimulus package works to boost the economy

For anyone running a business, living within your means is overrated. Sometimes you have to spend money to make money—even when the money’s not there. The metaphor of a family balancing its budget around the kitchen table simply doesn’t apply to a business, because businesses (1) can borrow money at low cost, and (2) can use that borrowed money to make more money.

Think about it this way. If a family borrows money to buy a flat screen TV or granite countertops, it will eventually have to curtail consumption elsewhere to pay back the loan (as long as its income remains constant). After all, the money has to come from somewhere. There are a few exceptions—for example, borrowing money to pay for education, or borrowing money to insulate your house and cut your utility bills, both will provide a future cash flow with which to pay back the loan. But those are investments, not costs. And unless you’re using borrowed money to make more money, you’ll eventually have to cut back. (This is why home equity loans are a scam, as mortgage industry veterans I’ve spoken with readily admit—unless you sell your house, you won’t actually have the cash to pay back the loan.)

Unlike a family at the kitchen table, businesses—especially large ones—do not operate under these constraints, because businesses have access to credit. When a business wants to expand, it can borrow money from a bank or issue debt on the capital markets (e.g. sell bonds). Unlike granite countertops, business debt generates future cash flows (either by increasing revenues or reducing costs) out of which to pay off the debt—and hopefully leave some leftover for the business. For example, a business might issue bonds to finance new plant equipment that will produce more products, or to buy automation software that will reduce its operating costs. Even though the business's debt increases, both investments generate cash that can be used to pay back the debt. A CEO who looked out at his market and said, “well, there are a ton of customers out there waiting to buy our product, but I can’t hire salespeople to reach them because I don’t have the money” would be justly fired for failing to take advantage of his credit access (assuming he did indeed have access to credit).

In other words, if everyone lived within their means, the economy would never grow.

The federal government is more like a business than a family around the kitchen table, because the federal government can borrow money at exceptionally low interest rates, and use it to make investments that grow the economy—or at least prevent it from shrinking—and pay back the loans out of the increased tax revenue.

That’s the logic behind stimulus. In the days following Lehman, the economy was in danger of entering a self-fulfilling death spiral. Banks stopped lending, meaning that businesses couldn’t borrow cash to pay their workers or keep the lights on. Laid off workers—or workers in fear of future layoffs—stopped spending money, reducing businesses’ revenues and forcing them to lay off more workers, further reducing business’ revenues: a positive feedback loop. As incomes fell, the federal government would have taken in less in tax revenue, increasing the deficit. And if the recession turned into a multi-year depression, trillions of dollars in expected government revenues would have simply vanished—meaning that as high as the deficit is now, it would have been even bigger without stimulus.

So like any good businessman, Presidents Bush and Obama borrowed money to stop the economy from collapsing. They injected capital into banks to ensure lending could continue and companies could meet payroll. They bought products from companies who would have otherwise had to lay off workers. They sent unemployment checks to workers so they could continue buying food and basic necessities. And in doing so, they preserved government revenues which otherwise would not have been available to pay off debt. In other words, stimulus is not government spending—it is government investment.

Don’t believe me? Ask the market: 10-year Treasury bond yields are down below 2.75%, which means that the market believes there is a very low risk that the federal government will not pay them back. So free marketers are left in a very tight double bind: either government stimulus works, or the Market is wrong. Either way, the orthodoxy dies.

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Mike Huckabee inadvertently makes the case for health care reform

Mike Huckabee makes the case that health care reform is bad because covering people with pre-existing conditions is expensive for insurance companies:

"And a lot of this, it sounds so good, and it's such a warm message to say we're not gonna deny anyone from a preexisting condition. Look, I think that sounds terrific, but I want to ask you something from a common sense perspective. Suppose we applied that principle that you can just come along with whatever condition you have and we're gonna cover you at the same cost we're covering everybody else 'cause we wanna be fair. Okay, fine. Then let's do that with our property insurance. And you can call your insurance agent and say, 'I'd like to buy some insurance for my house.' He'd say, 'Tell me about your house.' 'Well sir, it burned down yesterday, but I'd like to insure it today.' And he'll say 'I'm sorry, but we can't insure it after it's already burned.' Well, no preexisting conditions.

"How would you like to be able to call your insurance agent for your car and say 'I want you to insure my car.' 'Well tell me about your car.' 'Well it was a pretty nice vehicle until my sixteen year-old boy wrecked it yesterday. [He] totaled the thing out but I'd like to get it insurance so we can get it replaced.' Now how much would a policy cost if it covered everything? About as much as it's gonna cost for health care in this country."

Actually, these analogies prove the case FOR health care reform. In the first place, this is exactly the reason the health reform bill contains the unpopular “individual mandate,” which requires every American to buy health insurance: if people are allowed to wait until after they get sick to buy insurance, of course everyone will do so, and the insurance industry will collapse. In other words, the health care reform bill already solves exactly the problem that Huckabee brings up.

But more fundamentally, Huckabee’s examples show why private insurance is not necessarily the best way to pay for health care in the first place. Just like home insurances companies don’t want to insure hurricane-prone houses in Florida because they are likely money losers, health insurance companies don’t like to insure people who are likely to need health care—because the insurer will have to pay for it. And do you really want to trust your health care to someone who has a profit motive to not give it to you?

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Mike Castle's loss: When what's good for the Democrats is bad for the country

By now you’ve heard that Mike Castle, the moderate Republican running in his party’s Senate primary in Delaware, was shockingly defeated by Tea Party radical Christine O’Donnell. The consensus in the Beltway is that this is great news for Democrats, as they now get to face off against a tax-evading lunatic instead of a two-time governor. Even Karl Rove was disappointed.

As a Democrat, you’d think I’d be thrilled. But I’m not. Because in this case, what’s good for Democrats is bad for the country. What this country needs isn’t more liberal Democrats—we need more moderate Republicans.

The problem is that as a smaller Republican Party becomes dominated by an increasing percentage of right-wing zealots, those zealots gain increasing power to pressure the few remaining moderates to toe the line on orthodoxy. Just look at John McCain, who as recently as 2008 supported cap-and-trade in his official campaign platform, and now calls it “cap-and-tax.” No Republican can work with Democrats in this climate, even on issues they AGREE on, because they’re afraid of being singled out for extermination.

As the Republican leadership pulls further rightward, it pulls rank-and-file voters with it, as voters change their views on the issues to align with the dominant views of the party they want to vote for. Decades of political science research shows that party identification is by far the number one driver of voting behavior — not issue positions or even liberal-conservative ideology. So as the party becomes more radical, some voters do indeed abandon ship, but the vast majority find themselves voting for more radical candidates, hence radicalizing their own views ex post facto to align with the choices they’ve found themselves making. (Which, incidentally, is why it’s absurd for politicians to change their views willy-nilly to match whatever they think voters want).

The media is no watchdog either, because it too views politics through the lens of party horserace and not ideology. If Republicans don’t support the President’s policies, the media automatically interprets this as a lack of bipartisanship on his part instead of his opponents’ radicalism. So when the Republican leadership opposes bread and butter measures like improvements to roads and bridges, these become “controversial government spending” instead of “common sense investments.” Heck, in this climate, if the President proposed giving little American flags to war widows, it would quickly become controversial.

But if just a few more moderate Republicans could slip in the door, they could form a critical mass that would give others the political cover to work with Democrats on common sense measures to move the country forward. If ten Republicans got together on cap-and-trade, it would no longer be a Democratic proposal—it would be a bipartisan one. But that’s just not possible with so few lonely moderates left.

Who knows, if the chance arose, I might vote for a moderate Republican over a liberal Democrat… if DC residents had a vote, that is.

Strict constructionist ref denies Detroit Lions a victory, makes case for referee activism on Calvin Johnson call

I’m a big believer that rules should be allowed to bend as common sense dictates. Case in point: in Sunday’s Bears-Lions game, receiver Calvin Johnson’s would-be game-winning touchdown catch that was ruled a drop by the ref.



Of course, the catch (pun intended) is that technically, the call was correct. The NFL rule states:

If a player goes to the ground in the act of catching a pass (with or without contact by an opponent), he must maintain control of the ball after he touches the ground, whether in the field of play or the end zone. If he loses control of the ball, and the ball touches the ground before he regains control, the pass is incomplete. If he regains control prior to the ball touching the ground, the pass is complete.

But even if the call was correct, it still wasn’t right. Anybody who watched the play knew that Calvin Johnson caught that ball. Even if the letter of the law said it was a drop, common sense tells us it was a catch. We just know it.

I wonder what Antonin Scalia would have thought? Should the refs be strict constructionists and call the game by the letter of the law? Should the NFL add even more caveats and conditions to specify exactly what a catch looks like? Or should the rules be simplified and refs given the freedom to make judgment calls when common sense dictates?

I think we need a little referee activism.

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