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How do we know when the economy is back on solid ground?

I was interviewing economist Bruce Bartlett today about state and local finances and threw in a question about when we'd know the economy didn't need more stimulus. Bartlett, who previously worked for Ronald Reagan, George H.W. Bush and Jack Kemp, gave a usefully clear answer: "When we start to see interest rates rise," he said, "we can start to think about stopping. But not before. The rise in interest rates to me will be the grass starting to grow after the winter." And just so you have it, here's a graph of monthly interest rates on 10-year treasuries:

monthly_interest_rates_on_10-year_treasuries_5_06-5_10.png

That said, the fact that the economy desperately needs more stimulus spending does not mean that it's going to get substantially more in stimulus spending. So maybe none of this matters: Congress has decided to stop bailing out the boat even though we're still taking on water.

By Ezra Klein  |  June 16, 2010; 2:00 PM ET
Categories:  Stimulus  
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Comments

Congress has left the building. I suspect they won't be back, in any substantive way, till 2011. If then.

The mid-term paralysis seems a bit early, but Dems are afraid of their shadow and Reps have no incentive at all to contribute to America's successful weathering of any storms.

When Rush said "I hope Obama fails" he really meant the entire Democratic agenda. And since the Democrats control (hah!) the House and Senate, and the WH, what Rush really meant was "I hope America fails."

And we just might. What a patriot we have at the mic!

Posted by: RalfW | June 16, 2010 3:12 PM | Report abuse

Given that the Fed is setting short term rates at zero, which is pushing all rates downward and is *very* valid form of stimulus, that is what is driving down the Treasury rates (as well as the over-valued stock market). PIMCO has begun to suggest that bonds are a bubble, and that's your clue to low rates. Rates are low and bonds are a sort of bubble (of course, not a terrible bubble, as you continue to get your coupon, but the price will fall.) At some point, the only people left to lend are the printing presses.

Denmark's recent *successful* stimulus was a combo of tax cuts and interest rate cuts. Bush didn't know how to turn it off, and we're still considering keeping his tax cuts for an abusive majority of voters, as we recovered from the 2001 bubble- we blew up again. If we raise spending, we have to know how to turn that off as well- and we have a poor history.

And of course, the real estate gamblers are back in force in the new stimulus bill- their part isn't getting cut. Let's please consider crowding out when we talk about the government borrowing money to spend on "stimulus". Where else would that money have gone?

"Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board. . . . Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market."
—Ron Paul, 2003

Posted by: staticvars | June 17, 2010 10:04 AM | Report abuse

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