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February 09, 2009

Comments

Schmierkegaard. Brewster's Millions is much more apt:

http://www.imdb.com/title/tt0088850/plotsummary

things haven't reached the point where journalists themselves are affected. until that happens, they will treat this like a typical political game.

why should any millionaire journalist came if 600,000 abstract "jobs" disappear? how does that affect him?

Hilzoy, what hasn't been demonstrated is that the stimulus will actually stimulate the economy. It is simply assumed that it will do so without regard to the fact that government spending has gone up every year since 1960 during which time we've had recessions come and go despite that spending. Economic growth can only occur in the private sector. I am waiting for a proponent of the stimulus to put a name to some appreciable portion of it and demonstrate how that portion stimulates some aspect of the private sector.

If the idea--as Publius and Eric suggest--is that any dollar spent by the Feds by definition stimulates because at some point that dollar will get spent on something in the US, which in turn will drive up demand for more of whatever was purchased, then the real argument for the stimulus is "government spending = stimulus for economy and no further questions on the subject will be entertained."

mckinney:

Have you ever heard of John Maynard Keynes?

How about Milton Friedman? Paul Samuelson? James Tobin? Paul Krugman?

The idea that you spend more in a recession to provide stimulus is not new, radical or untested.

I am waiting for a proponent of the stimulus to put a name to some appreciable portion of it and demonstrate how that portion stimulates some aspect of the private sector

Infrastructure projects stimulate the construction sector.

I find this post depressing.

The whole "we need to spend money to close the output gap" is just wrong. Period. When there is a debt crisis like we're having and everyone is tapped out it won't work. Spending money inefficiently and building a bunch of stuff we don't need is completely illogical.

"But according to all the models it will!" you might say. The models all are crap and completely unrealistic. Like this says, there needs to be a revolution in economic thought because it is completely wrong.

The people that actually do look at it from a systems perspective were about the only ones that saw the crisis coming...and they are the ones saying that spending money unwisely will just make things way worse (well the only ones that have good reasons). I feel depressed because it's like the Iraq War all over again where people like Hilzoy and publius rightly kept asking why all the people that warned of the challenges were marginalized no matter how accurate they were. But now the shoe is on the other foot.

I'm also depressed because the primary argument against trying to prop up the system is by insane Republicans/libertarians that have absolutely no idea what they are talking about. That makes the valid concerns get drowned out.

Look, I'm all for spending as much money as is needed to keep people warm, fed and healthy. For the last two years I was concerned that we'd get so caught up in trying to avoid pain that we'd misspend all our money and then things would collapse anyway without those safety nets in place. This is exactly what is going on. We are spending way too little on that stuff and way too much on stupid things.

I'm also for spending $2-$3 trillion over the next 5 years on infrastructure. But it has to be done right, it has to be a part of a national strategy and something that we can all see representing the future. An ad hoc increase to various pet projects or departments that will do who knows what is not going to do that, and just undermine confidence in the government.

And we should all expect GDP to decline 10-20%, there is no way around it. The only ways to goose the number will involve a very long period of standard of living anyway, and make less resources go to the lower classes. The smarter and more efficient that we build a new economy, the faster we'll have a turn around and the more prosperous we'll be 20 years from now. Spending for spending's sake is stupid and I wish people would stop saying it because it hurts the credibility for spending a lot of money wisely.

government spending has gone up every year since 1960 during which time we've had recessions come and go despite that spending

But we had monetary leeway to play with. Now, interest rates are at near zero and have been for some time. There's no more left in that primer.

Also, this is not like other recessions. Job losses are steeper, and the duration will be longer. Coupled with a banking meltdown, this is more like a depression than a recession, so we need efforts to combat depression.

We need something else.

Bottom line: there is an estimated $2.3 trillion whole expected on the demand side. We're trying to have the govt. patch up some of that loss in demand in order to keep the private sector alive - if in a coma - until the patient can regain consciousness.

mckinneytexas-

To catch up, you might start here. (Particularly here, though I'd read the rest of it too if I were you.)

Hilzoy, what hasn't been demonstrated is that the stimulus will actually stimulate the economy.

Agreed. Just "spending money" is not enough because the money gets taken from somewhere. In order government spending to be stimulative, the government has to spend money on something that is more stimulative than its alternative use.

Every action has consequences, and the most basic lesson any student should take from Macroeconomics 101 is that there is no free lunch. Everything has a cost .... so beware those who speak only of benefits.

Eric:

Keynes theories were primarily about rebalancing global trade. The argument was that since the US was a massive creditor nation then it should spend a lot of its reserves to make up for the fact it had been consuming way less than it should. The corollary was that the debtor nations should stop consuming so much and instead focus primarily on production for export.

As Yves Smith at Naked Capitalism keeps pointing out, the current situation is different, with China, Japan and Germany as the main creditor nations. They are the ones that should be having massive government stimulus (so far they have been very hesitant) and we are the ones that should accept a massive decrease in consumption. She says Keynes would be rolling in his grave that his name is used to support our domestic spending.

Krugman must know this and it's depressing he doesn't bring it up more. He has made token gestures to how trade imbalance is the #1 threat, but hasn't addressed at all that his proposals will make it worse.

Friedman's ideas are being increasingly discredited and there are very convincing arguments they are completely wrong.

demonstrate how that portion stimulates some aspect of the private sector.

They are shutting down Oncology Wards

Now I supposed I could go get the charts showing the multiplier effects of the varied forms of federal intiatives, from tax cuts to military spending to infrastructure projects, but I would actually rather not talk to you or about you at all.

Harry Hopkins did not have to do a cost benefit analysis when he started the WPA, and I really don't think Obama has to defend keeping Oncology wards open. In fact I have nothing but contempt for Obama for joining in this evil argument that gov't spending in a catastrophe has to be justified on efficiency grounds. I personally think that is the Chicago School mindset of Obama, but I hope I am wrong or that he changes.

In any case, I don't think it is necessary. Obama, with his attractiveness and gift for oratory, should be able to tell the American people that he will keep the oncology wards open, and the walruses in their jobs, and effing demand that 3 Blue Dogs and 2 Republicans come along, "no further questions on the subject entertained."

If it is not possible under our current political alignment, then it should not be the cancer patients and zoo animals that should be sacrificed for the intransigence of the non-empathetic. The better solution is obvious.

Agreed. Just "spending money" is not enough because the money gets taken from somewhere. In order government spending to be stimulative, the government has to spend money on something that is more stimulative than its alternative use.

So, pop quiz, what's the next best alternative use for the money someone is using to buy a treasury bill at 0% interest?

I mean, yeah, obviously we should do stuff with the stimulus that is going to pay for itself over and above the cost of the load, but at the moment, that's a lot of stuff.

Every action has consequences, and the most basic lesson any student should take from Macroeconomics 101 is that there is no free lunch. Everything has a cost .... so beware those who speak only of benefits.

Frankly, I'm not really sure that should be the takeaway lesson from macroeconomics. Certainly not that every action has an equal and opposite reaction, which is what you're invoking with that phrase.

On the contrary, pulling the right lever CAN make things much better. (Nobody's talking about a free lunch - just a tasty lunch that has much more utility to us than the purchase price - and much better than the ashes that are the alternative.)

"Now, interest rates are at near zero and have been for some time."

That's only on the short end of the curve. The 10 and 30 are back over 3% and 3.8% respectively. It is not surprising that by the government and Fed saying that they are going to do whatever they have to do to break deflation that central banks are dumping the long bonds en masse and moving towards the shorter end. Of course all this does is cause yields to rise on everything (mortgages back up to 5.5%ish which is where they were before the crisis, they haven't moved despite 5.25% in the target rate) which causes more deflationary pressure.

We can either have low yields and deflation or high yields and (depending on the size of the intervention) deflation or very high inflation. And if China et. al decide to stop rolling over their shorter treasuries then we are in big trouble. There is no way to have your cake and eat it too.


Just "spending money" is not enough because the money gets taken from somewhere.

In our current situation it gets taken, effectively, out of mattresses.

Look, mikkel, there is a lot in this bill that I don't like, and I'd be more than willing to listen to viable alternatives for crafting spending priorities.

In fact, for a while, the ungainliness of the bill was driving me crazy.

But I'm left with three choices, in essence:

1. The House bill.
2. The GOP proposal of tax cuts only.
3. The Senate "compromise" that cuts out some of the smartest stimulus aspects of the House bill, and adds on terrible tax cuts/credits.

Offer an alternative, and if it seems better to me, I'll do my best to advertise it.

"Every action has consequences, and the most basic lesson any student should take from Macroeconomics 101 is that there is no free lunch. Everything has a cost .... so beware those who speak only of benefits."

Including tax cuts, Von?

Hilzoy, I've been feeling the same way.

I think we're suffering from postpartum depression. The heroic effort required to birth this administration was bound to be followed by a letdown--particulary when you consider that the economic situation is what we all got to turn to next.

There's no reason to expect that people who have consistently behaved poorly through every other crisis will suddenly improve in the face of this one just because it's even bigger. Keep reminding yourself that the real difference is that they are not running things now--their occasional delusions and our anxieties notwithstanding.

Hey, you know you have your work cut out for you as a new President when the big feel-good story between your election and your inauguration is a plane crash.

Folk, multipliers and Keynesianism is not how progressives, liberals, Democrats, decent human beings should approach this argument.

We are in a (near-) depression and it will get worse. We have traditionally not been the "green eye-shades & calculators" party. It is our greatest strength that when they are shutting down hospitals, schools, and parks Democrats do not first ask:"How much will keeping them open cost?" ...

...as if Democrats think basic human necessities and common goods are optional or trade-offs for private goods.

We feed the hungry child, heal the sick, comfort the afflicted first, and look at the price tag later. Or at least we used to.

Besides the, ya know compassion stuff, that rhetorical stance, that particular moral intransigence was one of the great strengths of the Party. Was.

Hey, that wasn't a plane crash, that was an emergency landing.

A good landing is one you walk away from.

I only half agree. You shouldn't cut pork out of the spending bill for the normal purpose of saving money so the government doesn't do its regular spend-money-like-a-drunken-sailor bit.

You should however cut things that aren't stimulus *and then use that money on stuff that is*.

So in a stimulus bill ideally you should decide on how much stimulus you need, and then you should spend that only on stimulus-like stuff.

This particular package seems to be

A: "we have no idea what we need" and

B: "we'll pack it with stuff that isn't stimulus so that the number will be big even though we haven't decided on A".

Which seems really dumb but whatever.

Really smart stimulus: payroll tax cut for workers hired during whatever the period of the stimulus bill is (i.e. if you think infrastructure 3 years from now should count you should DEFINITELY think that this would).

Good stimulus: spending now on anything the government was already going to buy in the next X years where X is the period of the stimulus bill.

Non awful stimulus: spending now on stuff that is probably a good idea but not being as cost conscious as you usually would.

Bad stimulus: spending on stuff that would have been paid for by the private sector already (i.e. merely replacing it). This last one make actually shape the health care debate--spending on uninsured is stimulus, spending on the already insured most definitely isn't.

Of course not everything has to be justified under the stimulus rubric, but it if it is, that is pretty much how it should work.

"Look, mikkel, there is a lot in this bill that I don't like, and I'd be more than willing to listen to viable alternatives for crafting spending priorities.

In fact, for a while, the ungainliness of the bill was driving me crazy.

But I'm left with three choices, in essence:

1. The House bill.
2. The GOP proposal of tax cuts only.
3. The Senate "compromise" that cuts out some of the smartest stimulus aspects of the House bill, and adds on terrible tax cuts/credits."

Eric, how have we gotten to the place already where you don't even consider "The Democrats offer a good bill the House" as one of the options? Is that really just not an option?

I am waiting for a proponent of the stimulus to put a name to some appreciable portion of it and demonstrate how that portion stimulates some aspect of the private sector

Take school renovation. I think this was removed in the Senate, but I hope it can come back.

When you renovate you hire all sorts of workers - plumbers, electricians, carpenters, painters, etc. They have more money. You buy supplies, maybe soaking up some excess inventory at Home Depot and keeping them from laying off a clerk or two. Maybe a worker buys a new tool. Home Depot places orders with it suppliers, and so on.

In other words, it's no different than renovating an office building, say.

There is a fourth choice, which is the expected conference compromise, which will probably restore some of the spending with the acceptance of the NE4 (Specter, Snowe, Collins from the rump NE GOP and NElson) who pushed for such a deep cut in the Senate bill probably as a negotiating position for conference. As for those who doubt the stimulus will work, almost every economist, whatever their other differences, will tell you that it will help because the additional govt spending will increase the GDP from what it would otherwise be by making up for the private spending that would normally be occurring, but is not now occurring.

I have a question for the conservatives arguing the stimulus won't work fast enough.

Did you support or oppose the stimulus proposals back before the election, while George W. Bush was still President? Those would have had months more to start kicking in, compared to this now.

The problem, assuming Obama is not some slightly kindler, gentler Ronald Reagan is that Obama promised a middle-class tax cut and refuses to change his mind as circumstances have changed. Since the tax cut must be somehow justified on "stimulus" grounds, everything else can now be analyzed or attacked on the same grounds.

Yes, it is all Obama's fault. Yes it is. He set the frame.

A payroll tax holiday or small tax cut will not save a family in Las Vegas if the oncology ward is shut down. It will not be enough to school their children if the teachers are laid off. It will not shelter them if they are foreclosed, not feed them if they are jobless.

If Obama demands that the most needy be helped, whatever price necessary to make that happen, I will fight for him. If he wants to give $5000 to a family making $200k, or a 15k house credit for the few who can already afford a house, or help the secure buy a new car...while throwing the most desperate under the bus of his ambitions, then to hell with him.

And to hell with his defenders.

Eric: The obvious choice of the three realistic choices is the House bill since it the least crazy. I wouldn't mind people saying they were in support of that choice over the others and explain why, but my criticism is about people making arguments that I disagree with their fundamental premises.

If this was my dream world and my opinion actually mattered, I'd have this alternative.

Obama makes a grand speech detailing the challenges ahead, how we (as a country) have lived unsustainably too long and that it is impossible to get out of this without a severe reduction in lifestyle. Our goals should be to make sure that there isn't a humanitarian crisis, that the people that got us into this mess do not benefit, that we revamp our financial system and that we build towards a new economy by focusing on infrastructure and research, even if it means letting consumption fall.

My proposal would then be to have three bills each with a different aim.

The first priority is an emergency to be honest. Many states are close to being bankrupt completely and even more are going to run out of unemployment insurance funds within the next few months. The shortfall across all states will be about $80-$100 billion this year. The first bill would primarily be to make sure that the states can continue to function. They need to be able to finish their existing construction projects, keep civil workers on, medicare/medicaid/hospitals open and pay unemployment.

Also, I think in the first bill unemployment should be extended at least another 6 months, and the Federal government will make up the difference between that and what the insurance funds can currently afford. I also believe that it should be raised marginally (like 10-20%), and that programs need to be set up to coordinate food and shelter distribution if things get to a dire level.

Between the states and the unemployment increases, that should be about $160-$200 billion.

The second bill would focus on "shovel ready projects" and it would be about maximizing the number of jobs for the dollar. I would see this bill being created and debated over the next 3-4 months. Projects like remodeling schools, fixing roads/bridges that have been on a repair list already, etc. could be in that bill. This would be the "wise stimulus" part where the government just does little things that it would have done anyway at some point, but compresses the time it's done in. That's probably another $150-$200 billion based on what I've read.

The third bill would be to create an agency that will implement the "America Renewal Act" or whatever propagandistic name they give it. This would be the long term vision about revamping the nation's infrastructure and moving towards a new economic model over the next 10-15 years. It would draw up and coordinate large projects to redo our energy/information/transportation infrastructure and have liasons to scientific oversight offices that would see their funding double or tripled and be able to communicate to private/public R&D what challenges the infrastructure office has run across. In my fantasy this office would be created in the next month or two, and then spend the next 9 months or so developing the first list of proposals to get funding from Congress. This would have nothing to do with "stimulus" but just long term needs.

I imagine that they would need $2-$4 trillion over the next 5 years.

Since this is my fantasy I'd also have them cut corporate subsidies a ton and implement a plan to reduce military spending by 25% over the next 5 years.

The government would make it clear that it will not try to get out of paying its debt or inflate our way out of the problem, which would make bonds rise and cause very low yields. The dollar would rise which would hurt exports, but there would be wage deflation which would reduce imports a ton, so the overall effect would be to make the balance of trade better. The wage deflation would make it harder for people in debt, but if we just stopped trying to prop up the banks and either "Swedish Modeled" them or created a new parallel banking system (in either case most of the existing banking system would be destroyed), then there would still be credit available for good uses, and it'd free up resources to have some sort of debt forgiveness program.

Anyway none of this will ever happen because it would be a massive rebalancing of wealth back to the lower ends, but also a lot of middle class people would have their lifestyle seriously crimped and anyone relying on asset values to fund their dreams would watch them disappear. But the current values are just based on extreme leverage amounts and aren't sustainable anyway...so we're going to have massive pain either way. This is why I don't think we should "stimulate" thinking we can make everything better in a couple of years, but should instead put the bulk of money towards short term basic needs programs and long term rebuilding.

Sorry for the long comment.

Bad stimulus: spending on stuff that would have been paid for by the private sector already (i.e. merely replacing it). This last one make actually shape the health care debate--spending on uninsured is stimulus, spending on the already insured most definitely isn't.

Leaving aside the dubious merits of this criteria, what actual components of the bills do you see, specifically, as being in this category?

And of those, which would you concede might be reasonably viewed by others with a more liberal outlook as belonging in the "good" or at least "non-awful" categories above it?

mikkel - I don't really know what you're saying. Are you saying it's too big or too small? Are you opposed to fiscal policy or not? You say we're spending money on unnecessary stuff -- I disagree with that completely. Compared by any historical appropriations bill, it's remarkably pork free. What do you propose then?

Also - this is wrong:

Keynes would be rolling in his grave that his name is used to support our domestic spending.

huh?

Shouldn't this be a time for the government to take advantage of low rates and do long-term infrastructure that our children will benefit from, as well as pay for?

Things like the Hoover Dam and interstate highway system continue to be hugely beneficial, and it is reasonable that we borrowed long term money for that.

However, borrowing long-term money for short term stimulus or daily operations does not make sense to me: we will still have daily operations to pay for when the bill comes due. Stimulus spending should be paid for by those who will benefit from it, maybe over 10 years, rather than 30. Wars, for example, should be paid off in 10 years, since we can reasonably expect to have another one to pay for a decade or so later, and shouldn't still be paying for the last one.

30 year mortgages on a house make sense: the value should still be there. 30 year car loans don't, because you are still paying for it long after the value is gone.

For me, at least, connecting the dots on the method and length of time for borrowing the money to the particular project would go a long way toward quelling doubts. Long term infrastructure gets long loans, help to the needy gets short ones, the stuff in between have financing commensurate with their utility.

We would still have stimulus now, but we won't be paying for things long after they no longer provide value.

publius: You probably cross posted, but if you see my long comment it's close to the same size and I'm opposed to fiscal policy if it means trying to fill the "output gap" (which is a concept based on an economic model I reject considering that I'm a network systems person and I've looked at most of their work and think it's complete crap) but obviously I'm not opposed to government spending.

And the Keynes thing is not wrong.

"Yet what is being advocated as a Keynesian remedy is in fact the opposite of what Keynes called for in his day. Keynes' prescription then would lead to a global rebalancing, with the US depending more on internally generated demand and less on its foreign partners (who were defaulting on their government debt). But if it were successfully deployed in the US now, it wold lead to a continuation, of our excessive consumption and China's underdevelopment of its internal demand."

European writers and economists -- including ones that would be "liberal" here -- don't mince words.

"Martin Wolf Says Big Stimulus Programs by Big Debtor Countries Will End in Tears"

"Can the US economy afford a Keynesian stimulus?"

The difference between what I'm saying and what they are warning about is that while I'm calling for a similar amount of spending, it wouldn't be spent in a way to "stimulate." In fact we'd still have deflation and our debt load would still temporarily rise and there would be large write offs and the banking sector wouldn't be saved. But it would also make trade rebalance (although through decreased world trade) and put in the steps for reversal.


Agreed. Just "spending money" is not enough because the money gets taken from somewhere. In order government spending to be stimulative, the government has to spend money on something that is more stimulative than its alternative use.

This is correct but comepletely ignores the element of time. The "place" where this money comes from is the future US economy, at some indeterminate point in the mid- to long-term future when private sector growth reinflates the economy and we can afford to raise taxes again. That is the whole point of finanacing a Keynesian stimulus with deficit spending - you borrow money from tomorrow's booming economy to deal with deflation/depression today.

This whole economic debate between left and right is depressing because it is so polarized that both sides are expending most of their efforts on strawmen, and fighting yesterday's rhetorical battles. Here's my handy guide / rant to redirect a debate which has become increasingly sterile over the last several days and talk about something different and hopefully useful for a change.


To the right - We are in a depression, not a recession; the private sector economy is a cooked goose. Deal with it. Your old arguments about taxation levels don't apply in a liquidity trap combined with a deflationary spiral. Right now you sound like people complaining about how inefficiently the boilers in the engine room of the Titanic convert thermal into mechanical energy, while more practical minded people are trying to launch the lifeboats and get as many folks into them as we can.


To the left - Enough with this mantra: "tax cuts are not stimulus". They are too; tax cuts are functionally little different from just sending people checks in the mail, to spend or save as they see fit. The resulting multiplier is almost certainly not nearly as large as it is for direct infrastructure spending, but speed counts here too, not just multiplier. Also, if households do use this money for debt reduction, that is also a public good - it reduces their mid-term cost of debt service which will be stimulative later on. Money which goes to debt reduction is not completely wasted, it just takes longer to produce an effect.

Everyone who says "tax cuts are not stimulus" in an unqualified way comes across sounding like an economic illiterate. Stop doing that, it doesn't do anything to convince anyone who isn’t already on your side anyway. It seems to me that the question of "to whom are the tax cuts flowing" is a rather crucial one here, which the left would be better advised to expend energy on rather than fighting tooth and nail against any tax cuts, just because the GOP likes tax cuts; even a stopped clock is right once a day.


To both sides - The crux of our policy dilemma is in the area that mikkel just outlined in two excellent comments above (at 2:16 and 2:23).

Right now we can still borrow at what are by historical standards very low interest rates, both on the short and the long ends of the yield curve (this is why the Austrian school is wrong to suggest we should just take our lumps, i.e. let the economy spiral down the drain). We should borrow as much as we can to stimulate today’s economy using tomorrow’s money, up to a point where we are in danger of seriously disturbing the yield curve, and no farther than that.

We are walking a tightrope between a short term disaster (deflation and global depression) and a medium-term disaster (the rate curve blows up and the ongoing cost of debt service consumes our public as well as our household budgets to the virtual exclusion of all other discretionary spending). The latter point is where the Keynesians have it wrong - we are on a shorter leash than the US was in the 30s because we started this crisis with a large and growing debt, and the political credibility of future tax increases and reduced consumption is on shaky grounds until such time as our leadership and the voters demonstrate that they understand that in the long run deficits do matter.

The single most important issue facing policy makers is to figure out where the boundaries lie between Scylla and Charybdis and then steer between them as best we can.

As a back of the napkin estimate I’d guess this is somewhere in the vicinity of 15 percent of GDP. In other words I think we can run a public deficit of up to about 2 trillion per year, and squeak by. Beyond that, I think we may be swimming in perilous waters. But nobody knows for sure, and I suspect the only way to find out is by incrementally wading into the deep end of the borrowing pool step by step, and all the while remaining ready to step back quickly (i.e. raise taxes to get the deficit under control) if it starts to look bad.

end rant.

oh don't be so bold.

Amazing. It's like the advocates of spending are all drunk. The car is in the mud and now they're going stand on the accelerator and churn it in so deep that they'll never get it out. "You're out of money? The solution is to spend more faster. Then you'll have more money!"

Here's how it will end. Huge inflation. Then we'll all have more money. It will have ten times more zeros on it and be worth 1/10th of what it is now but we'll have lots of it. The poor will be poorer, the middle class will be wiped out and the rich will be reduced. The gap between the rich and the poor will be greater. Capital will seek a more stable home somewhere else.

mikkel - i won't pretend to be an expert in this stuff. but are you basically saying that we're just transferring money abroad?

if so (and if that's true, it seems like a legit concern), isn't the obvious answer to get rid of basically all the tax cuts and do things like infrastructure investment, food stamps, STATE AID, and other things that are most likely to increase money circulation here?



Keynes would be rolling in his grave that his name is used to support our domestic spending.

huh?

The really large (relative to GDP) Keynesian stimulation of aggregate demand should be occurring in China (keeping in mind that "China" is actually a synecdoche for a number of other net export economies, mostly but not exclusively in South/East Asia ) right now, not the USA.

If you are going to use analogies with the Great Depression, it is important to remember that we are not in the same structural position as the 1930s USA, instead we are in the position of 1930s Great Britain/France/Central Europe (net debtor, too much consumption in ratio to our level of domestic production). The place where there is a very large excess of productive capacity to domestic consumption is on the other side of the Pacific.

Having said that, in the absence of trade barriers, fiscal stimulus in the US is likely to leak over into those export economies to a considerable extent (e.g., if US consumers go back to buying stuff at Walmart then both the US retail sector and manufacturing in Asia are stimulated). Which is probably why foreign central banks are still willing to finanace our deficit.

LeftTurn I was waiting for you to get here so I had a bit of support.

"As a back of the napkin estimate I’d guess this is somewhere in the vicinity of 15 percent of GDP. In other words I think we can run a public deficit of up to about 2 trillion per year, and squeak by."

Amazingly enough this is pretty much exactly the level I suggested considering we have $1-$1.2 trillion in structural (i.e. just status quo) deficit and I think we should add another $800 billion to $1 trillion. The part I feel you left out in your comment is that deflationary pressure is stronger than that. If we go back to the high end of historical leverage, we're still looking at another 20-30% decrease in asset valuation which I believe will lead (roughly) to about twice as many losses as experienced so far and around 10-20% GDP decrease. Spread out over 3 years, that would still be more than we can safely spend to keep spreads from blowing out.

That's why I don't think that avoiding deflation should be the end goal in itself.

publius: In my opinion, yes. I agree with LeftTurn's point that tax cuts will also lead to paying down of more debt -- which although not stimulative could be considered a "public good" -- is a good point, but in my opinion is outweighed by the leakage effect. I would rather see direct debt forbearance once the financial system is wrangled in.

That's why in my long post I included no tax cuts.

About trade barriers, they are blamed by economists on all sides for making the Depression worse, but that's because the US threw them up to try to keep exports up. In reality trade barriers for the debtor nations is rational and (technically) helpful. The unhelpful part is that the export nations have their own depressions to deal with and they realize on the exports to keep things up so trade becomes politicized and global trade is reduced massively.

As talked about in this post trade barriers would make government stimulus here more efficient. However I'm not sure they are feasible politically and also his idea of massive coordinated global stimulus would probably not work because there aren't enough resources available to do that. (This gets to another pet peeve of mine which is that none of the models pay attention to resource constraints).

(Comment cross-posted at WaMo. Maybe Hilzoy reads and answers comments here.)

I studied a lot of Kierkegaard back in my undergrad days, and I want to know the source of that indirect quote.

As I recall, Kierkegaard's writing was more like this: "The self is a relation which relates itself to its own self." (From Sickness Unto Death)

oops. Closed link.

Eric, how have we gotten to the place already where you don't even consider "The Democrats offer a good bill the House" as one of the options? Is that really just not an option?

Well, I think the House bill is pretty good. But, I mean, we are dealing with politicians and they're not the smartest, most thoughtful lot.

Again: I'm all for proposals on making the House bill better, but the only viable alternatives presented thus far are:

The GOP's tax cut chicanery. And a worse Senate bill.

I'm not saying we can't push for a better House bill - in reconciliation - but that's the basic lay of the land.

mikkel, you and TLTIA are my favorite commenters on this stuff, which is about all the support I can muster, FWIW.

I pretty much agree with ThatLeftTurnInABQ's 3:23. The only reason I sound like more of the right side of it than the left is because the left side of it seems to be adequately represented, and utterly dismissive to the balancing act we're in. And I'm really not looking forward to the day that all you followers of Keynes abandon him when the suggestion is to cut back on the government spending in good times.

Actually I am, because that will mean good times.

And I'm really not looking forward to the day that all you followers of Keynes abandon him when the suggestion is to cut back on the government spending in good times.

Actually I am, because that will mean good times.

But you know where I'm going to be looking for those cuts, right? DOD baby.

Seb,
Thanks for the support - nice to see that we agree on some things :-)


And I'm really not looking forward to the day that all you followers of Keynes abandon him when the suggestion is to cut back on the government spending in good times.

There is IMHO a lot not to like about Obama's economic team (you've seem my past comments regarding the "bad bank" plan), but one thing positive to be said about them is that since they are for the most part fiscal conservatives by Democratic party standards, the implicit promise to raise taxes and cut back spending when the economy recovers is at least mildly plausible. If it weren't for that, I think our envelope of safe borrowing (i.e. not blowing up the rate curve) would be even smaller than it is now.

But you know where I'm going to be looking for those cuts, right? DOD baby.

Ditto that.

DOD baby.

i'll second that.

Great. I absolutely agree. Now, as soon as you can tell me how citizens of the United States can pressure China or Japan or Germany into passing a stimulus package, I'm climbing aboard. Until then, we are left with the two options of a US stimulus or no stimulus.* Which of those two choices do you prefer?

*Not quite. There are countries besides the US, China, Japan, and Germany, and a number of them are passing stimulus packages. You are correct, though, about the ones that the global system needs on board, though I'd throw South Korea onto the list.

"But you know where I'm going to be looking for those cuts, right? DOD baby. "

That's fine. But don't think for a minute that it will be enough unless you were thinking Dutch sized defense budgets. :)

Fine, but I'll tell you my other areas to free up money:

Decriminalize marijuana, reform drug laws for non-violent offenders and free up scads of law enforcement/prison dollars.

Seb, I think you're still with me, right?

That's fine. But don't think for a minute that it will be enough unless you were thinking Dutch sized defense budgets. :)

Last time I checked, we could maintain a 3-power standard (Plllthpppt! Take that you Edwardian era British Navy with your wimpy 2-Power standard - now go away or I will taunt you a 2nd time) for all service branches combined and still cut the Pentagon budget by more than 50 percent.

Seems to me like alliance diplomacy to prevent the next largest 4 or more great powers from ganging up on us all at once (with no allies on our side of any consequence) would be a pretty good bargain for the money spent/saved, but then some people think that soft power has no value.

That's fine. But don't think for a minute that it will be enough unless you were thinking Dutch sized defense budgets.

Really? The stimulus bill, either the House or the Senate version, has spending/tax cuts equal to less than 1.5 years of DOD spending. Recouping that by 2019, assuming we start in 2011, would require that the defense budget get cut by about 6%.

That's fine. But don't think for a minute that it will be enough unless you were thinking Dutch sized defense budgets. :)

If DOD has been right-sized, and there's still a gap, much of the rest should probably come from tax increases.

(There are specific bad programs here and there that need to be cut, of course, but the aggregate level of social and infrastructure spending should, if anything, be quite a bit higher than the baseline of the last decade or two.)

mikkel -- are all these economists wrong? they seem to come to different conclusions than you have.

"Decriminalize marijuana, reform drug laws for non-violent offenders and free up scads of law enforcement/prison dollars."

I'm still with you, but I'm afraid to report that would mostly be state spending cuts (which would be great) with not a large impact on the federal budget.

"Last time I checked, we could maintain a 3-power standard (Plllthpppt! Take that you Edwardian era British Navy with your wimpy 2-Power standard - now go away or I will taunt you a 2nd time) for all service branches combined and still cut the Pentagon budget by more than 50 percent."

Yes, but have you seen the Medicare projections? We were going to have to do that anyway. :)

publius: yes.

They don't have radically different conclusions, they just don't know what to do. And they admit it. If you read their blogs day in and day out you'll see that they are all sniping at each other and pointing out the same flaws the arguments that I am mentioning. They just throw up their hands and say "well I don't know what to do" because they have decided that accepting deflation is the ONLY thing that isn't acceptable. There are many of them arguing that we should risk hyper inflationary collapse than suffer the indignity of a deflation again.

You know what the irony is? The people that actually lived through the Depression and lost their shirts would completely disagree with modern economists.

Even worse, the boom/bust cycle was well described by classical economists who understood how when there is too much debt and too much income inequality then depressions result. Its not like my arguments are magically new and I've thought of all this in my spare time, they are actually very close to the thinking that existed before neoclassical economics. We were assured that the old way was no longer valid because we had a central bank and fiat money system, but all that is just assumption. There are many reasons to think that assumption was wrong.

Those people (with the exception of Stiglitz who I greatly respect and has a good hand on the core problems, but I feel isn't worried enough about bonds. He pays attention to resource constraints so he's the #1 economist in my book just based on that and the best he can muster is "unlikely to be wasted as badly as the private financial market has wasted resources in last five years") are just grasping at straws and feel that they cannot just admit that they don't know and everything is messed up.

I'm not some anti-expert zealot. I have very sound reasoning (both based on the math and historical views) that I think based on reading critiques that have been around for decades if not centuries and my own expertise in applying similar concepts to other fields that suffered from the same faulty assumptions but are slowly reevaulating and finding success. Part of the reasoning and data was developed from reading economic blogs that have been talking about this happening over the last couple years, and also finding people that have a systems background and independently came to similar conclusions.

Decriminalize marijuana, reform drug laws for non-violent offenders and free up scads of law enforcement/prison dollars.

Seb's right. This is great policy on its own merits, but won't make a big dent in the federal budget.

The federal budget for 2009 is $3.1 trillion.

Mandatory items -- Social Security, Medicare, Medicaid and SCHIP, welfare, and debt service -- are $1.89 trillion of that. Just about 60% of the total budget.

DoD and the GWOT are another $660.6 billion.

Everything else is about $550 billion.

If we want to cut the federal budget, it's gonna be entitlements and/or the DoD. Together with debt service, they make up over 80% of the budget.

We could cut defense in half and it wouldn't even amount to 10%.

Then again, we could cut defense in half and increase all other discretionary spending by 50%.

I feel isn't worried enough about bonds

mikkel, if you don't mind, can you provide a back-of-the-envelope explanation of what the issue is with bonds?

Or, provide a link to one?

Many thanks

Now, as soon as you can tell me how citizens of the United States can pressure China or Japan or Germany into passing a stimulus package, I'm climbing aboard.

Here, we've had a lot of talk about the stimulus proposed by the government, here's info on the Japan stimulus package. Also, here is a CSM article on worldwide stimulus. which points to one of the controversial features of the plan, a $135 payout to every household. This harkens back to $200 'merchandise coupons' sent out to the parents of every child under 15 and to the elderly in 1998 at the behest of Komeito, a minority party that held some key votes to passing the stimulus last time. A paper about that program is here (pdf link)

3 links and out...

Sorry, that should be $135 payout for every resident. I've been interested because there was some question whether permanent residents were to receive it or not.

russell, I meant bonds as in Treasury bonds (although it would make yields rise across the spectrum and affect all debt) due to debt. It's what LeftTurn and I were talking about on the previous page.

OK, but how about the stimulus effect of legalizing marijuana? Huh, huh?

Here's how it will end. Huge inflation. Then we'll all have more money.

As opposed to huge deflation. Right now.

As I see it, it'll be easier to handle the inflation as opposed to the deflation.

OK, but how about the stimulus effect of legalizing marijuana?

Clearly, the biggest, uhm, stimulative effect comes from giving money to financial people.

Wouldn't the better way to deal with things like the spiraling costs of Medicare be to deal with the fundamental problem of massively increasing health care costs (due to redundant paperwork for X health care companies, perverse incentives for everyone involved, lack of preventive care, and profit being extracted at the expense of service) rather than saying "Well, now we need to cut Medicare!" Because if all you do is cut Medicare, the problems due to health care expenses are still there.

Single payer, baby.

Wouldn't the better way to deal with things like the spiraling costs of Medicare be to deal with the fundamental problem of massively increasing health care costs (due to redundant paperwork for X health care companies, perverse incentives for everyone involved, lack of preventive care, and profit being extracted at the expense of service) rather than saying "Well, now we need to cut Medicare!" Because if all you do is cut Medicare, the problems due to health care expenses are still there.

Single payer, baby.

I have no idea how that double posted, since I only hit post once. Sorry about that.

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