Jan. 22, 2008 -- With overseas markets tumbling and the U.S. economy in the midst of a downturn, possibly headed into a recession, wading through the econ jargon on Capitol Hill is a daunting task.
As lawmakers considered how best to create an "economic stimulus package," the Senate Finance Committee got off to a real-life, applied economics start this morning at the onset of a hearing.
Sen. Charles Grassley, R-Iowa, who speaks slowly with folksy jargon, wears ties with dizzying patterns and prides himself on being, as he puts it, a "family farmer," tried to apply some barnyard economics to the U.S. economy.
He wondered what a chicken farmer ought to do if people stopped buying eggs (read: economic downturn).
Grassley, who ultimately supports a stimulus package, thinks recovery is going to take a long time no matter what Congress and the president do. He said economists suggest, "When workers are fully employed and factories are fully utilized, they say we need to save more and increase supply. But when workers are unemployed and factories are idled, they say we need to spend more and increase demand."
And by that rationale, the government should inject some capital into the economy to spark a recovery.
Employing Barnyard Economics
Arguing that the explanation didn't withstand "careful scrutiny," Grassley illustrated his economic point with simple mathematics and "the proverbial chicken and egg."
Using two examples of basic supply and demand, Grassley said if "we have five chickens that each lay five eggs a week, but people want more eggs. The solution is to save some eggs, let them hatch and then you have more chickens to lay more eggs."
"In the second example, you have five chickens that lay five eggs a week, but people want fewer eggs. The solution cannot possibly be to buy more eggs, because that is the problem: There is a surplus of unwanted eggs."
"Now, when economists talk about stimulating consumer demand, they give the impression that we can grow our economy by getting people to go shopping, and it doesn't matter what they buy. But such talk obscures the fact that at any given point in time, our economy is comprised of a specific set of goods, a specific set of services, each with its own unique factors of supply and demand."
"If consumers decided they want more milk and fewer eggs, no amount of consumer demand is going to magically turn eggs into milk. Farmers are going to have to raise fewer chickens and get more cows and that, of course, takes time," Grassley later added, implying that an economic stimulus is more of a painkiller as the economy changes than a solution in and of itself.
Grassley admitted "it's only natural to want to help" in times of economic downturn, asking Peter Orszag, director of the nonpartisan Congressional Budget Office, which releases its annual economic outlook, if Congress should also be working to simplify the tax system and help Americans save.
While the Congressional Budget Office does not release its annual forecast of the U.S. economic outlook until Wednesday, Orszag testified today, talking about the threat of recession (or, god willing, just several quarters of slow growth) and the need of an economic stimulus package, which he said should be targeted at lower-income Americans — "the more you target lower-income people, the more bang you get."
He also pointed to the calendar explaining that even if Congress acts quickly to enact an economic stimulus package, tax rebates going out to consumers could run headlong into tax filing season.
"A major administrative problem is how quickly checks could be administered when the IRS is busy with tax filing season. It will be a major challenge to disburse checks before May or June at the earliest," Orszag said.
From the Barnyard to the London School of Economics
Orszag, the economist, for his part, answered Grassley's analogy — "I didn't grow up on a farm, so I'm not sure whether it makes me a chicken or an egg" — before launching into an explanation of economic stimulus that lent very little to barnyard economics or folksy jargon, rather might sound more like what Orszag learned at the London School of Economics than the chicken farmer in Iowa:
"But I would note that the type of policies appropriate to address this type of unusual situation are not necessarily appropriate to more normal economic conditions. In particular, when the economy is weak, the key constraint on short-term economic growth is demand for the goods and services that firms could produce with existing resources. In most circumstances, by contrast, and certainly over the long term, the key constraint on economic growth is the rate at which that capacity to produce is expanded through forces like increases in capital and labor, and improvements in productivity. When the constraint on short-term growth is aggregate demand, as appears to be the case today, both monetary and fiscal policy can help by boosting spending."
That might mean Orszag thinks the farmer should get a tax rebate.