Well it seems the charlatans at LPSG are just that. Not really surprising really. They've been wrong about everything else. [SIZE=+2]Obama's Recession Fix Fits Economists' Models[/SIZE] [SIZE=-1]By Jane Bryant Quinn Sunday, February 1, 2009; F01[/SIZE] [SIZE=-1] [/SIZE]In the fight over the stimulus plan, Republicans are demanding more tax cuts as the best way of lifting the economy fast. "We can't borrow and spend our way to prosperity," said House Minority Leader John A. Boehner (R-Ohio). Well, maybe we can -- or at least begin. In a crisis, government spending has to be the first responder, with tax cuts coming up behind. Allen Sinai, chief global economist and president of Decision Economics, a New York-based research and forecasting firm, recently ran various types of government actions through his respected macroeconomic model of the United States. He discovered some surprising things. First, even a very large stimulus doesn't help the economy a lot. The negative forces are too strong -- centered on the credit collapse and the collapse in consumer spending. Government will lean against this stunning downturn but can't make up for the massive loss of private demand. Furthermore, the larger the budget deficit, from tax cuts and spending, the bigger the bounce in expected future inflation and long-term interest rates. That will take the edge off future growth. Sinai forecasts a stimulus-based gain in gross domestic product of perhaps 2 percentage points in the first year and 1 point in the following year compared with where we'd be otherwise. A turn could come as early as summer. Without a significant stimulus, he'd expect the recession to last into March 2010. More pessimistic economists expect it to last that long anyway. The ugliest months lie directly ahead. The best way to boost the economy fast, the model shows, is to increase federal spending on goods and services -- things like cars, office space, military equipment and construction. Unemployment drops quickly and GDP jumps. The second-best GDP driver is direct aid to states and cities, to keep current projects going and start new ones. In both cases, though, the impact on economic growth tapers off after a couple of years. To keep the economy rising, the moribund private sector has to ignite. For that, Barack Obama's program is counting on individual tax credits. Temporary tax credits and rebates affect the economy more slowly than government spending. Consumers don't spend the whole check at once and may use part of it to build up savings. But the money gradually helps revive private-sector demand. Permanent tax cuts, for businesses and individuals, take effect even more slowly, Sinai's model shows. On the plus side, they have a longer-lasting, positive impact on GDP and jobs. On the negative side, the long-term deficit grows much larger than it would with temporary cuts. There's a similar result for a permanent increase in transfer payments such as food stamps. So President Obama appears to have it about right: Government spending, including state and local, for a quick fix; temporary tax reductions to help households pay down debt and, eventually, spend the money to strengthen the private sector; and no permanent tax cuts that would stick us with even worse deficits than are projected now. Sen. John McCain (R-Ariz.), an opponent of the Obama plan, raised the deficit issue last week -- although only in the context of spending, not of tax cuts. "We need to have a commitment that, after a couple of quarters of GDP growth, we will embark on a path to reduce spending to get our budget in balance," he said. Shades of 1937. In that year, the economy was improving and Roosevelt -- on the advice of his bankers -- turned conservative. He cut government spending, raised bank reserves and increased interest rates. It was a disaster. The U.S. plunged into a second recession. In February 1938, the economist John Maynard Keynes wrote FDR a reproving letter, saying he'd fallen into an "error of optimism." Cleaning up insolvencies and establishing easy money was a precondition for recovery but not recovery itself, Keynes wrote. Government-aided investments, in "housing, public utilities and transport," should have continued, he wrote, until it was clear that private demand had grown strong enough to carry the recovery up. Currently, we're enduring the worst recession, for depth and duration, since the 1930s and the broadest global recession since 1948. We don't want to repeat FDR's mistake. By embedding longer-term infrastructure programs in the stimulus package, Obama's plan provides continuing support for GDP and jobs. At the moment, expectations are rising that the aggressive, year-long drop in interest rates, plus the fiscal stimulus, will produce results in 2009 rather than 2010. The weekly leading indicators compiled by the Economic Cycle Research Institute stopped falling in December and rose a bit through early January, although not by enough to call a turn in the economy, says ECRI managing director, Lakshman Achuthan. "My fantasy," Achuthan said, "is that the stimulus coincides with the natural forces that will turn the business cycle up." Such a recovery could be strong enough to create the jobs needed to stabilize housing prices. Nothing in the data, however, predicts this yet. When the cycle does turn, Achuthan would favor investments in commodities, Treasury Inflation-Protected Securities and other inflation hedges. Sinai expects higher corporate earnings by year-end, based on the size of the write-offs and cuts in labor costs he's seeing now. "People in safe financial positions might think about deploying some money in stocks," he said. "There could be a bear market rally, with some chance of starting the next bull market." The next challenge will be the shocking government debt and deficits that are shaping up. But first, the policymakers have to get the economy moving again. Jane Bryant Quinn, author of "Smart and Simple Financial Strategies for Busy People," is a Bloomberg News columnist. Alexis Leondis contributed to this column.