All you know is you throw everything at it and whether it's more effective if you're fighting a fire to be concentrating the water flow on this part or that part. You're going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they've been very, very wrong and most of them in recent years on this. We don't know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don't know how effective in the short run we don't know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.
At least it's honest. And it may well be that merely being seen to be doing something is necessary--that aggregate demand will sag worse if the public perceives that there is no sheriff in town. But I keep coming back to one picture:
Henry Blodget, who originally stole this graph from the inimitable Yves Smith at Naked Capitalism, remarked:
Will "stimulus" restore the economy to perfect health? Not unless you think government stimulus will sustain the massive private debt mountain we built up over the past 25 years.
Crashing asset values and shrinking GDP just make the debt ratios worse, even as households delever.
The idea behind stimulus is basically that the government will step in and take up the responsibility for the borrowing and spending that was being done by consumers, except instead of a Wii we'll get a high-speed rail line between LA and San Francisco, and hopefully the potholes filled in front of my house. At 0% interest rates, proponents argue, plausibly, that this borrowing is hardly going to crush the taxpayer under its onerous weight.
But that 0% is not on 30 year bonds; it's on shorter term debt that will eventually come due. What will our interest rate be when it's time to roll that debt over? It won't be pretty if the government is still having to fill in the output gap with heavy borrowing.
Stimulus is supposed to be, as Conor noted below, a short term and temporary strategy. But while it can ease the pain of a slowdown (at least in theory), as Tyler Cowen has been pointing out, the actual empirical evidence that massive government spending can shock an economy the size of ours into a permanently higher level of output is . . . well, it's sort of hard to find a wittily apt description of something that doesn't really exist.
There's a lot of solid Keynesian theory that says it will be so. But not that long ago we had a lot of pretty good theories from very smart economists about how this sort of financial crisis couldn't really happen again in the first place.
"the actual empirical evidence that massive government spending can shock an economy the size of ours into a permanently higher level of output is . . . well, it's sort of hard to find a wittily apt description of something that doesn't really exist. "
I'm partial to using the phrase "like finding a herd of unicorns" there, from Joe Carter. It perfectly fits this type of situation.
We wished, B.Minich.
Except for Grandpa.
As many of Tyler Cowen's commenters point out, Buffett's view seems colored by the complete myth that Herbert Hoover took a laissez-faire approach to the economy - it's amazing that a financial genius can be so misinformed about macroeconomics.
Looks like something came severely unhitched right around 1971.
What we do know is to stand by and do nothing is a terrible mistake
How the hell do we know that?
The "nothing" they should have done the last ten years was to leave Glass-Steagal alone. Now we have banks that are "too big to fail" but which can't stay afloat on their own due to their bad investments, and instead of the market punishing their stupidity the goernment is rewarding them.
Bailouts are the exact opposite of the economic Darwinism that made us the richest nation on Earth. I know someone who works at a large insurance company and she was livid that AIG is being kept in business when they should be hemorrhaging customers to solvent companies.
We need a lot more nothing.
Out of curiosity, how much of that debt doesn't net out? That is, if A owes B, and B owes C, and C owes A, then the net debt is $0. But even if C doesn't owe A, does that get counted three times in the debt total?
That is, are we seeing a real increase in debt here, or an increase in goofy debt instruments and multiple counting? And if its the former, who the hell has 4 times the GDP of the US's worth of actual goods and services to lend us? Shouldn't the rest of the world be starving, then?
Since the money is going to be spent anyway, the only thing that MUST be done is to insure it isn't completely wasted - at least to the extent government is capable of not wasting money. Here in Seattle, our spending priorities are beyond ludicrous. Replacing three lane roads with two lane roads and tree lined bike paths; replacing three lane elevated highways with two lane tunnels, etc. I can see this on a national scale leaving us with marginally if not at all better infrastructure and massive debt that makes the Reagan / Bush II deficits look like the picture of fiscal responsibility.
Oh well. At least this time the money will be spent here and not in Iraq.
I find this helpful:
There's a lot of solid Keynesian theory that says it will be so. But not that long ago we had a lot of pretty good theories from very smart economists about how this sort of financial crisis couldn't really happen again in the first place.
Smart is not all that helpful. Look at university governance if you can't be convinced.
To some extent, that graph may just represent an increasing ability of a more sophisticated financial suystem to collaterialize assets. De Soto's book argues this is a key to growth.
For instance, Haiti has little personal debt, because it's much more difficult to take out a loan on a house as property rights are poorly defined.
Excuse me, for my area is not economics, but...
Wasn't FDR's stimulus sort of a long-term failure? In other words, we limped along, building dams and roads and bridge, etc., but the economy didn't exactly come roaring back.
Wasn't it World War II and the subsequent rebuilding phase that gave everyone an objective reason to spend money?
If that's true, it may be all well and good to spend money NOW NOW NOW because we need it, but it's not crazy to focus some portion of the stimulus on addressing the needs of a future economy...if you can figure that out.
Solid Keynesian theory - an oxymoron is I've ever heard one. The idea that the government can magically create resources that don't crowd out private capital, that won't be inflationary and that won't be mispent was always a fantasy.
Not only is Buffet wrong on Hoover, he's completely ignoring the example of Japan. The Japanese government has been doing this Keynes thing for almost twenty years now, and there's no indication it's actually had a salutary effect.
All they have to show for it is a public debt to GDP ratio of 1.9 and a bunch of expensive infrastructure that needs to be maintained. Building a new road isn't a one-time expense - you need to keep filling the potholes. If you built the road because you needed to give people something to do as opposed to building it because you needed a road, it's probably going to be a drag on future growth.
Money is debt. Before money was debt, when money was hard, based at least in theory on gold or silver, debt deflation periodically swept economic systems. And it was bad.
Now we are in debt deflation when all money in all places in all ways is based on debt. (If you don't understand this concept go study) The results are going to be horrific to a degree few can imagine.
In old fashioned debt panics, collapses, deflations; the money just went and hid. Now it is disappearing. Poof. Not only is there not enough money to pay off the debt there isn't enough money to pay all the regular bills, by a long shot.
Have a nice day.
FDR's government ran modest deficits during his first term and doubled GNP while reducing unemployment from 25% to 15% (lower if you count WPA and PWA workers as employed). He then slashed spending and raised taxes in 1937, and brought on a recession. World War II came along, and the government engaged in massive military spending for ourselves and our allies. There wasn't much consumer spending during the War because of rationing and because so many products weren't available, but the economy took off like a rocket after the war. If this doesn't prove the effectiveness of fiscal stimulus, what would?
The 1937 recession was caused by the boost in reserve requirements by a highly naive Federal Reserve, not any spending cut by FDR.
Post WWII, federal spending collapsed yet the economy thrived, if anything that refutes fiscal stimulus. It's also important to remember that during WWII measured GDP increased substantially yet we were made materially worse off (things like "rationing" and "getting shot by the Germans" don't show up in GDP figures).
"it's amazing that a financial genius can be so misinformed about macroeconomics."
Buffett's politics sometimes color his economic statements. I wouldn't be surprised if that was the case there.
It's also worth noting that Buffett got caught flat-footed in some ways by the current financial crisis. He owned 20% of Moody's while it was handing out triple-A ratings on CDOs comprised of junk mortgages, he rode the sheet rock company USG all the way down through the housing bust, his stake in BofA has gotten hammered, etc.
It wasn't that hard for the US economny to take off like a rocket in the late 40's and early 50's when the overseas competition had been obliterated and in need of US goods for rebuilding.
Now we are in debt deflation when all money in all places in all ways is based on debt. (If you don't understand this concept go study) The results are going to be horrific to a degree few can imagine.
Which is why the government is increasing the base money supply. And why wouldn't that work? From what I can see the real danger isn't deflation, but the potential inflation after the economy begins to grow again.
My head hurts, but am I right in divining that Freddie is Buffet's blog name.
The "base money supply" should read, the Fed's monetary base. The Feds monetary base is defined by it's System Open Market Account. Note this is about the Fed, not the 'government'.
With all the new alphabet soup of facilities and programs run through the Fed getting a handle on the SOMA is a bit tricky. The measure I use shows SOMA down 50% since a year ago.
Or were you talking about money supply as in M1, M2, MZM? Well those are other matters.
The big picture is this. At an accelerating pace over 25 years or so most of the measured growth in the US economy was simply a monetary phenomenon. Remember we stopped making stuff to sell and were told not to worry about the deficits, national and personal. Not to worry we can borrow to grow and pay off the old debt. That's the chart in the post. We are not going to borrow our way out of this.
I suspect your thinking more in terms of printing money to escape the mess. Well that has started. We will see how much and the result. It should be noted that Nobody, capitalist nor Marxist nor anarchist has ever suggested that printing money was a sound economic action.
This is bizarre. And an example of poor writing. The 'smart economists' with their 'pretty good theories' (I still don't know what that means) were wrong, as even Megan admits. Doesn't it set off a few bells that it is by and large the same set of 'smart economists' and their spear carriers who made epic fails who are now questioning the efficacy of stimulus packages? And doesn't it count for something that the guys who called the 'smart economists' on their shuck and jive, and called it correctly, also tend to support the notion of stimulus?
Iow, you don't get to use the objections of the guys who got it wrong the first time as a club to beat the guys who were right all along. I will be charitable and call this an example of boneheadedness.
Remember we stopped making stuff to sell
We make 75% more stuff than China. We've been consistently producing 20-25% of the world's stuff for like 30 years now.
And somebody still needs to tell me how this nets out, because I can't see how we managed to borrow 4 times our GDP from a world without sucking up close to 100% of the world's production.
Or were you talking about money supply as in M1, M2, MZM? Well those are other matters.
I'm talking about M1 of course. The money banks "multiply" as a result of fractional reserve lending.
I suspect your thinking more in terms of printing money to escape the mess. Well that has started. We will see how much and the result. It should be noted that Nobody, capitalist nor Marxist nor anarchist has ever suggested that printing money was a sound economic action.
It's true, as a general rule, printing money is a bad idea and lots of countries have gotten into trouble doing it. However, no general rule is applicable all the time. We've been in a period of sustained deflation for almost a year now as the credit markets dry up, so I think printing money is the right thing to do at present. The problem comes when deflation reverses and we start to get inflation instead. I suspect the the Treasury dept and the Fed can thread the needle by tweaking reserve requirements and interest rates. But we shall see.
Warren Buffet is a great business man but an economic policy idiot. He has no faith in the market economy though he has great personal success operating within it.
Warren Buffet’s quote is hysterical, a quote from a frighten man, a man with much to lose and clueless as to how to save himself.
We are not standing around doing nothing so why his gratuitous statement? What are the “Hoover like” policies he references: Hoover’s higher taxes, protectionism or denigrating the employer/business man”? And since Obama advocates all three, at least in his campaign why did Buffet support Obama?
“… we don't know how effective in the short run we don't know how effective this will be and how quickly things will right themselves.” An incredibly idiotic statement for advocating policies that will cost $Trillions to heal the ailing economy (think of the economy as your sick child and your doctor making this statement about the surgical procedures he is about to perform); does Buffet make investment decisions in this manner?
Not surprisingly Warren Buffet can afford to be hysterical and idiotic. If the kitchen sink policies he wants us to impliment make the economy worse, he can say “Sorry About That ... Never Mind” and still sip his favorite drink while the rest of us live in tents and eat at soup kitchens.
“We do know over time the American machine works wonderfully and it will work wonderfully again.” Wrong Warren, we can do permanent damage to the economy. Argentina under Juan Peron is the example of a vibrant American type economy destroyed by government leader who had no idea or did not care what he was doing as long as his supporters received benefits.
And with respect to Megan McArdle comment “…that aggregate demand will sag worse if the public perceives that there is no sheriff in town” what does that mean? Who is the sheriff, the government who needs to control the economy? Do you want to nationalize the means of production, and ensure that bad business men (echoes of Hoover & FDR) do not do bad things to the way we produce goods and services? A ridiculous comment.
Keynesian theory has no basis in microeconomics and is why policies based on it have never generated any economic benefits. Why then is the theory so popular among the current political establishment? Keynesian theory is an intellectual cover to justify coercive political power to take wealth from one part of society and give it to another. To a Keynesian, taxes on individuals do not matter, how individuals create goods and services does not matter and given the idea of the multiplier some in society are more worthy to consume the goods and services produced then others. Keynesian theory is a way to justify socialism, the modern form of slavery.
The stimulus package as currently proposed and widely advocated by Buffet will crush the economy; a worse replay of Hoover/FDR’s 1930s. A deficit must be funded by future taxes. Now who receives the current deficit spending benefits? Obama and his Democratic cronies certainly do not want the people who pay 50% if not the people who pay 95% of federal taxes to receive the benefits. So the people who drive the economy, the people who receive income from producing goods and services will today pay taxes, tomorrow pay taxes and tomorrow pay the tax surcharge that pays for today’s deficit spending.
The Obama stimulus policy is a massive tax increase with no offsetting benefits on the incomes of the people who could rebuild the economy (and no trickle down theory nonsense). Microeconomic theory points to the effects of changes in marginal costs. Taxes are a cost in producing goods and services. With a massive increase in future taxes due to today's stimulus deficit spending the marginal cost of producing goods and services in the future is rising by $Trillions. The massive spending today paid by the shifting of tax burdens will reduce the total quantity of goods and services produced today and the future.
There is a simulative measure that could work. Create the deficit by not changing spending and create a tax holiday. At least the taxpayers, the people who produce goods and services do not have their taxes increased but just postponed. They would have an incentive to move production to today and stimulate the today’s economy at the cost of future production. Obama will never follow this policy. Democrats today have a very powerful incentive to recreate the “I am helping you through bad times policy” of FDR, bad times kept FDR in power. What worked once will work again.
“…not that long ago we had a lot of pretty good theories from very smart economists about how this sort of financial crisis couldn't really happen again in the first place.” Responsible economists and politician saw our crisis coming but the crony capitalism that (another implication of Keynesian theory) created FNMA and FHLMC in the 1930s sowed the seeds of the current crisis. And the more recent crony capitalism of Barney Franks, Christopher Dodd and rest of the Democrats prevented the Bush administration from taking crisis preventive measures in 2006. The current economic theories easily predicted what happen, we’ve been waiting for FNMA & FHLMC to fail for years and they set the example for private mortgage lending quality.
Now I will sound hysterical. Obama’s policies are destroying the American economy. We are on the path of becoming a third world country, Argentina the example. Obama’s economic policies are the horror stories of medieval medicine with our living standards the patient. The government must allow the people in this country who make the goods and services keep the value of their efforts in larger quantities now more then ever.
The wealth is gone and we need policies to recreate that wealth; a simple fact. Politically though the wealth creating class is despised, marked for punishment the fruits being an economy worse then 1930s.
Obama policies in this crisis is the end of the American Dream.
Re: the actual empirical evidence that massive government spending can shock an economy the size of ours into a permanently higher level of output is . . . well, it's sort of hard to find a wittily apt description of something that doesn't really exist.
Sorry, but WWII is a little hard to categorize as "non-existent". And despite the weird latter-day revisionism on this subject, once upon a time even hard-core Republicans who cursed the ground FDR walked on knew perfectly well that it was WWII that got the US out of the Depression.
Re: Bailouts are the exact opposite of the economic Darwinism that made us the richest nation on Earth.
What economic Darwinism? All through the 19th century, that supposed age of laissez faire, we protected our industries from competition with high tarrifs.
Re: It wasn't that hard for the US economny to take off like a rocket in the late 40's and early 50's when the overseas competition had been obliterated
In what alternate reality? Germany and Japan were in ruins, and parts of France, the Low Countries, Eastern Europe and Italy were badly damaged. But Canada and Australia were every bit as undamaged as the US. Sweden and Switzerland had no part in WWII and emerged unscathed. Britain had suffered only minor damage fron the Blitz, which was years over with by 1945.
Re: Obama’s policies are destroying the American economy.
Obama has been president for a mere three days, and his policies so far consist of a handful of fairly minor executive orders. Are you claiming that closing Gitmo or rescinding the Mexico City abortion funding ban is ruining the economy? Good grief.
The current ratio of debt to GDP is insurmountable without a writeoff of some kind. Whether it is a formal repudiation of debt or a policy of inflation to reduce the ratio, or some combination of the two is a policy not yet set. It is certain that we cannot go on as we have.
The debt graph does not include the unfunded liabilities of the various public pension systems in this nation. There is room for decent people to reasonably disagree about the size of these unfunded liabilities, but everyone agrees that they are large indeed.
We are in for some damned interesting times, no doubt about it. Most people should not take retirement plans too seriously. That second house is not looking so good either.
Brian Reilly
Why, yes, JonF, I quite agree--but what *about* WWII? It would be nice to believe it was the massive spending--though I don't know where we'd get the extra 40% of GDP--but it might also have been psychological factors unique to Total War, killing/disabling a large portion of the surplus "prime age male" labor force, or coincidence.
SOV--until a year ago, Paul Krugman or any of others would have embraced the same theories--one of Krugman's more famously witty lines is his statement that "I expect the unemployment rate will be whatever Alan Greenspan wants it to be." The almost universally accepted story of what happened in the Great Depression--or at least the interpretation thereof which led us to believe that we could prevent same again--was wrong. But the people now calling for stimulus believed it too. It's not as if the only people who read and admired Friedman's Monetary History of the United States worked in his department.
I want to make it crystal clear that I am not accusing Krugman, et al of some sort of hypocrisy; they were, like the rest of us, Overtaken By Events. But there is no evidence that their theories work. Look at Japan. Fifteen years of stagnation and counting . . . and an awful lot of really enormous bridges and things.
The almost universally accepted story of what happened in the Great Depression ... was wrong
oversimplify much? Back in the real world, people who actually study this kind of thing for a living .... what's the word I'm looking for? ... disagree.
See, e.g., here. Those guys have, like, data and stuff. What do you bring to the table?
Megan, you are being very, very vague. Exactly who embraced exactly what theories that turned out to be wrong? Of the guys who did get it right, are they calling for a stimulus, or pooh-poohing it? You know, guys like Krugman, Roubini, Stiglitz, Taleb, et al?
Yes, conservative supply-side economics, the 'economics' that prescribed lower taxes, less regulation and privatization has turned out to be wrong. The 'economics' that maintained that people like Thune were paid exactly what they were worth as determined by the market, ditto. That doesn't discredit all economic theory, merely conservative economic theory.
Cites? The only people I've heard mouthing such revisionist claptrap are people like Amity Shlaes, Fama, et al. Iow, again, the same tribe that was so wrong on so many other counts.
(Invoking the Guys Who Got It Wrong as a failure of all economists in order to bodycheck the Guys Who Got It Right takes some brass, I'll give you that.)
Oh, since I'm still thinking of her, let me add that the incomparable Tanta, no longer with us, was one of those who Got It Right. I read her religiously over at Calculated Risk, but never commented much; her command of the issues and her general grasp put to shame anything I could have contributed.
Bah. Krugman has been preaching ruin and damnation since the day Clinton left office. He was right in the same way a broken clock is right twice a day.
Setting aside that M1 is not the money measure to consider when talking about the monetary expansion engendered by fractional reserve banking the bigger question is how the worlds money supply approximately doubled since 2000. Fractional reserve banking does not provide that kind of monetary expansion.
So far the deflation has been almost exclusively in the price of assets. Commodity deflation has taken hold yes, after the huge bubble last year ending in July. That deflation is assets is justified and proper, since they were inflated terribly. The inflation of assets, stocks, real estate, rock star memorabilia, became the be all and end of of the economy.
It's crucial to understand that the rise in asset prices was never called inflation. It was always called increasing value. When stocks doubled and doubled again in the 90's Greenspan reliably went before congress and told how inflation was low.
Then when stocks crashed in 01 Greenspan's hair started blazing as he warned deeply of deflation. Funny thing that. He cut interest rates in a rush to 1%. That time it worked. For the last time. The chart above tells the tale.
Every dollar borrowed engendered less and less real growth. Well that's another story.
Every example mentioned above ignores reality.
How long has the US been on a keynesian stimulus? Last year the US government borrowed the interest on it's debt. How long has it been since the US budget was balanced?
A trillion is thrown around, because last year, not including the bailout in october, they borrowed over $400 billion.
The reason that this borrowing is considered is that the personal and corporate credit cards are maxed out, and the US Gov't is the borrower of last resort.
Housing isn't going to come back, there is an oversupply. Automotive is going to be a long while. Right now you can get a 3 year old vehicle, fleet, out of lease for less than 1/4 of the cost of new. And the fleets aren't being renewed. Years. The energy producers are walking around with the same look of disbelief on their faces as the electrical utility people had in the 70's when they saw a dissolution of demand caused by extreme price increases. Throw out another model boys.
The US government is going to be competing tooth and nail for every bit of credit out there. Printing money will decrease the value of foreign investments, and will drive the money out and the dollar down. Who will lend the fools their money then?
Every other example in the past doesn't fit. Japan was borrowing billions when there were billions to be borrowed. Didn't work for them.
Don't we remember, not too long ago, when states and provinces, even countries such as Canada, had their debt ratings dropped because of perception of increasing risk of default? How much money does the US government need to borrow before people start wondering about their solvency? And even if the risk is low, from where will the trillions come from?
Derek
"We've been in a period of sustained deflation for almost a year now"
I'm curious what country you live in.
Prices of food, especially, have been rising slowly but steadily for several years and substantially in the past year. Inflation has been the problem, at least for people in the real world.
I'm curious what country you live in.
Prices of food, especially, have been rising slowly but steadily for several years and substantially in the past year. Inflation has been the problem, at least for people in the real world.
It would help if you understood the meaning of the words you're using. Read this.
Hey, Eric? Weren't you going to come back with some sort of evidence that I was a 'leftist'?
You won't, of course. But the irony of anyone quoting Mises as if they(either the poster or the site) had the slightest shred of credibility . . . No, I'm not a 'leftist', and I'm guessing that's one of the reason I'm right so often. You, however, are definitely on the right (I'd say far right, but that's gilding the lily these days.) That practically guarantees you'll automatically be wrong most of the time.
SoV, I was planning to do it, then I decided it wasn't worth the time. I've seen probably a hundred of your posts on this site and others (wizbang, maybe? I can't remember). You may be a centrist in, say, a newsroom, but compared to the average American you're definitely a leftist. Me, yeah, I'm not afraid to admit I'm conservative.
I tried to follow your link to see what you thought you were talking about, but nothing loaded but the banner ad, and it took several minutes for nothing to download.
Inflation is a general rise in prices - while some things have gone down, computers for example, I don't buy them often. All of my regular purchases - books and food - have gone up in price fairly substantially, some more than 15%, in the past year.
Also please take any comments about "official" levels of inflation with a huge grain of salt. We know how much the numbers are massaged.
Considering that my commuting costs have gone up, my health insurance has gone up, my condo fees have gone up, food prices for things like beans and eggs went up last year in the face of the raging energy prices AND HAVE NOT COME DOWN AGAIN, I couldn't give two hoots about being able to buy a computer "more cheaply" or get 5% cheaper rates on hotel rooms.
"The Japanese government has been doing this Keynes thing for almost twenty years now, and there's no indication it's actually had a salutary effect."
This is such a misinformed statement that I have to wonder where Eric got the information that provided the initial idea.
SoV,
I suppose the argument can be made for more taxes and more regulation.
However, that was applied during the Clinton years, and according to the graph provided at the head of this post, did not seem to have a material affect on the rise in private sector debt levels.
So one would have to throw out any thoughts of 'consevative' or 'liberal' orthodoxies, and begin to try to understand from where the core components involved in such an unsustainable rise in private debt originated.
Being able to point to the chart and say 'This is bad' as some economists have done is not the same as offering corrective actions to prevent it's occurance. And assuming that taxing the productive classes will resolve the issue of private debt (public debt is at a much lower multiple of GDP, hard as that is to believe) would run contrary to common sense.
The prescription from the 'wise' economists then seems to be that we should spend like drunks in the public sector, and worry about the bill later. Because, somehow, that will save the private sector economy (which needs to reduce it's debt load, if you remember). The bill that comes due will come due in the form of higher taxes down the road, reducing the private sectors ability to pay down it's debt load.
The public spending stimulus is designed to keep the private sector spending money into the economy, thereby preventing job losses (that would lead to increased pressure on the financial system in the form of increasing defaults of all sorts of debt instruments). Logically, any household looking at the current situation in the will be attempting to pay off as much debt as possible, and not buy LCD TV's or new cars. The net effect of any public spending, therefore, will be a negative drain on resources and ultimately futile in addressing the real problem inherent in this crisis, which is debt.
The only current plan that seems to make any sense is a tax holiday. While it will not make any dent in the loss of jobs, it will provide a means for increased savings (in the form of a reduction in debt), and as those debt levels decline, and only then, will people in the private sector begin to feel confident enough to begin to spend money into the economy. Never againl like they had, at least in this generation, but perhaps enough to make the economy work again.
Billswift,
The site is Mish's global economic trends.
You should go back and revisit the site until it loads. His views provide excellent counterpoint to the current Keynsian arguments being advanced.
Also, some 6 trillion in assest values have been eliminated in the last year (maybe more, some numbers are beginning to run together).
That, more then the price of eggs, is deflation.
"The idea behind stimulus is basically that the government will step in and take up the responsibility for the borrowing and spending that was being done by consumers, except...."
-----------------------------------------------
No. This is NOT the idea behind the stimulus.
Attributing your own reason for stimulus to the mythical "they" and then attacking them for it is pretty weak. The idea behind fighting the fire is to keep it from getting worse. 2M jobs lost in 2009 is better than 3.5M. Neither is optimal. But if you agree than you're for stimulus.
k1
ryanculver.blogspot.com
Inflation is the increase in the amount of money vs economic output. World money supply possibly doubled from 2000 to 2008.
CPI inflation was moderate during most of the period except for the huge spike last year in commodities. What inflated was the price of financial assets, particularly newly minted debt paper and their derivatives, and real estate.
As I mentioned above it is verbotten to say price increases of assets are inflation. Home "values" rose. Stock "values" rose. Absolutely crummy securitizations were priced for perfection.
It is the price of assets which is deflating now. Without question the largest bout of deflation since the Great Depression. Deflation is the name for our current predicament. Truth be told the financial and monetary system cannot exist with deflation. Inflation is our friend. It is the grease which makes it move smoothly. Absent inflation the system seizes.
Bernanke and all the worlds central bankers and governments are madly attempting to reflate. A trillion here a trillion there. Yet the banks continue to collapse. Friedman, and Bernanke agreed, theorized that the Great Depression was caused by the Fed not flooding the system with liquidity and credit after the crash. Handily they ignore the cause of the crash. An unsound expansion of credit. They just propose papering it over with more money and credit. (Milt is headed for histories dust bin)
The cure here has amounted to the Treasury borrowing money and pouring it into the banks, which is a net wash. Not increasing systematic new credit or money. The Treasury has also issued guarantees on old debt which actually has no real backing. To make good on the guarantees they will have to ask congress to appropriate it and then borrow it. The entire exercise is a con game meant to restore "confidence".
The next step is to print money. The Fed has started doing this to the tune of $500 billion, this year it says, to buy up private not GSE mortgage backed securities. Some other printing may be going on as well in the alphabet soup of new Fed programs and facilities. It's possible this printing will stem the deflation in the financial sector but the amounts needed run to the trillions. None of which flows to the day to day real economy. (an imprecise label but valid I believe) I think this printing will fail. Others hope otherwise.
The dust up over the StimPak is driven by two things. First, libertarians and Austrian Schoolers think such things are simply evil and often think they won't work. Conservatives cannot accept giving money to people. Giving it to banks is bad enough, for some semi honest ones, but giving money to people is the last straw. Unacceptable. Give money to people and they will just buy beer and sit on the porch all day drinking it. They won't 'invest' it. Like our elites did with the $3 trillion Bush tax cut, into hedge funds. Which worked out so well.
Politics will surely demand money printing on vast scale. Probably some things will inflate to a degree of for a period as a result. When and what are unknowable. Will it be stocks or oil or CDO's or corn or houses. This cannot be predicted.
Spurious-
Really? Failure? I'm not sure where this meme has its origins, but I would argue 6 plus percent off of unemployment over 4 years in the worst macroeconomic envion ever isn't necessarily a failure.
k1
ryanculver.blogspot.com
k1,
The idea behind the 'stimulus' is merely window dressing.
rapier is correct, the central banks are desperately trying to re-inflate the economy. My guess is that this ultimately will not work, as there is simply too much debt to account for in the system.
The stimulus is a political slight of hand to paper over the massive efforts of the Fed and Treasury to save the financial system. 850billion over two years isn't a drop in the bucket to what is going to be thrown at the worlds banks.
I believe we are screwed, but we have the consolation of knowing that we did most of this to ourselves.
"Post WWII, federal spending collapsed yet the economy thrived, if anything that refutes fiscal stimulus."
-----------------------------------------------
Noah-
Why did the economy thrive? You're argument is based on the US having been in a normal macro environment during the period after the war. That assumption is erroneous. The reason we thrived is because we rebuilt the world.
k1
ryanculver.blogspot.com
The only current plan that seems to make any sense is a tax holiday. While it will not make any dent in the loss of jobs, it will provide a means for increased savings (in the form of a reduction in debt), and as those debt levels decline, and only then, will people in the private sector begin to feel confident enough to begin to spend money into the economy.
All that does is transfer private debt into public hands. The government has to have money to operate. If it doesn't collect taxes, it will run larger deficits. (And no, the government is not going to simply reduce its spending, regardless of what libertarians may want.)
The consumer isn't in savings mode. The consumer is retracting because his lines of credit have been cut off. Consumers are paying down debt because they are frightful of the future and have no choice, given the lack of credit and the demands of their creditors.
In the short run, a government stimulus is meant to bottom things out and encourage the other actors to act. Nobody who knows the numbers believes that the stimulus is expected to make up for the entire quantity of lost consumption and investment. The ultimate goal is to drive consumption, which will follow if there are restorations of confidence and credit. The stimulus would have to be of WWII proportions for it to carry the entire load, and that isn't going to happen.
There is no one magic bullet solution, but one thing that would help would be a cramdown of some of this private debt so that it is marked to market. If the lenders lent too much, then they should be the primary recipients of the pain. The original TARP plan would have facilitated this process, but sadly, it turned into a grand equity scheme which the banks predictably hoarded.
Literally. Blinded. By. Ideology. The slope of the graph during the Clinton years is less than the slope of the graph before and after those years.
And of course, this little graph with one variable doesn't begin to tell the whole story. Cactus over at Angry Bear has compiled a bunch of graphs covering a range of economic indicators; by any rational accounting the policies followed by (recent) Republican administrations just don't do that well. Here's a good entry point to an ongoing series of posts:
http://angrybear.blogspot.com/2007/06/comparing-presidents-real-gdp-per.html
None of these discussions have much to do with analysis. They're simply compilations of data from sources like NBER. Looking at the raw data, Republican administrations following conservative economic advice do rather poorly in comparison to Clinton, who was guided by - shall we say - people who were a bit more reality based.
That seems to be the consensus of a lot of serious economists, unfortunately. Not to be a pessimist, but I can easily see a generation of depression/recession. For there is one valid point raised by some of the anti-stimulus crowd: while the current economic climes are in some respects very similar to the beginning of the Depression, they are by no means exactly alike, even in kind.
Since I've already made one plug for her, so thought Tanta. I italicize one part here as an actual prescriptive measure instead of analysis. Unfortunately, this is one of those topics that needs to be addressed by an appointed 'cramdown czar'. The problem of who should get their terms rewritten and who shouldn't is way too complex be dictated by mere legislation. There is also the question of timeliness.
RW,
The transfer of debt into public hands will occur regardless of whether a tax holiday is declared. The government has embarked on a plan of guarenteeing debts of all the principal lending institutions already.
A tax holiday, as opposed to building wind mills, allows the private sector to clean up it's balance sheet. At the same approximate cost to the government in lost revenues.
SoV,
Debating tax and spending policies over the course of the last 50 years might be fun, however it's not instructive for the current situation. Kennedy was probably more conservative then Bush 43 in the public area, and would have been aghast at the proposals that Clinton advocated. Unless you believe that the man who faced down the USSR over the Cuban Missle crisis after authorizing the invasion of that same country had much in common with Clinton, then your and AB anaysis makes little sense.
More instructive then economic growth would be the creeping securitazation of debt that began to occur under Johnson. Some good ideas ultimately result in very bad outcomes, as we are beginning to understand. And some systemic problems (lack of real output in the economy) can be papered over for years by fantastamagorical appreciations in, say, internet stocks of financial instruments which ultimately have zero value.
If that is a conservative or liberal issue, I'm at a loss to see the difference.
SoV,
I may be wrong on the math, but I believe there are approximately 60 trillion dollars in bets placed against some 6 trillion dollars of real assets. Some of which might be going into default even as we speak.
While it seems logical that bad debts be cleared through either a bk or a cramdown system of some sort, the cascading effect of that reduction in debt would more then likely wipe out what is left of the financial system.
Throw in the fact that a lot of homes were purchased with zero down, or were HELOC'ed to the hilt, and you have a hard time convincing those with good credit that they should absorb the irresponsible behavior of others onto their own balance sheet.
Then there's the CC issue, car loans, CRE (which is going into the tank in a big way) and all the other debt which was taken on because we thought there was so much 'demand'.....demand that was as chimeric as the accounting practices that brought us the financial instruments that lead to this crisis.
I'd like to make the same observation yet again: while there is definitely such a beast as 'conservative' economics, the notion of 'liberal' economics is a mythical creation in any realistic sense of the word. The most one can say is that there is 'conservative' economics, and (via Carroll) non-'conservative' economics. Which it pleases some to label 'liberal'.
This applies to a whole range of issues, of course (though economics seems inextricably intertwined with a great many of them.) Opposing vouchers for schooling is a mainstream position. Opposing privatization of the USPS is a mainstream position. Raising taxes to cover debts? That's a mainstream position as well. Think those high chieftans, the CEOS and boardroom officers were paid too much for what they delivered? Yet another mainstream position.
To get back to the notional point, this motion to dismiss 'liberal' economics as well as 'conservative' economics seems to be nothing more than a denial weapon wielded against the perceived enemy.
I blame the boomers.
1971. They turned 21 started spending and never stopped. 'til now. Because they have to.
To the contrary, the assertion that was made was that 'liberal' as well as 'conservative' orthodoxy needs to be dismissed - even though 'liberal' is really just a stand-in for 'non-conservative'. Megan averred that neither have good track records, and so this is precisely the time to be instructed by history. To, you know, actually examine the record of economic performances under the various administrations. Here's another post from the same series:
http://angrybear.blogspot.com/2007/05/comparing-presidents-comparing-parties.html
For economic issues I’ve looked at, it seems to be a slam dunk. Republicans simply performed worse. On every measure. Period. End of story.
For social issues… Republicans did better on teen cigarette, alcohol, and drug use. GHW also managed to do well on containing gonorrhea, though not much else. (And by “not much else”, I mean not only at not containing other STDs, but really, truly, not much else, whether in the social or economic sphere.) Otherwise… whether reducing the incidence of abortion, decreasing teen motherhood, encouraging marriage, reducing the incidence of most STDs, or cutting teen violent crimes, Democrats did better.
I include the social issues both to be fair, and because, imho, a lot of social issues have a strong economic component as well.
To the contrary, the assertion that was made was that 'liberal' as well as 'conservative' orthodoxy needs to be dismissed - even though 'liberal' is really just a stand-in for 'non-conservative'. Megan averred that neither have good track records, and so this is precisely the time to be instructed by history. To, you know, actually examine the record of economic performances under the various administrations. Here's another post from the same series:
http://angrybear.blogspot.com/2007/05/comparing-presidents-comparing-parties.html
I include the social issues both to be fair, and because, imho, a lot of social issues have a strong economic component as well.
Iow, you're just throwing something out there with no idea whether you're right or not. All you know is that I disagree with you. So of course, I'm a 'leftist'. It's people like you that need to be purged from the ranks of conservatives before they're taken seriously again. But then again, purging people like you might make their policies a bit more mainstream, which you would no doubt consider a move towards 'liberalism'.
AAAAAAAAAAAAAAAAAAARRRRRRRRRRRRGGGGGGGGGHHHHH!
That chart has nothing to do with anything! Who's talking about debt?
Also, debt and GDP both vacillate hugely! The debt was larger compared to GDP during the Great Depression BECAUSE THE GDP DECREASED DURING THE GREAT DEPRESSION. THAT'S WHY WE CALL IT A DEPRESSION.
McArdle needs to pack it motherfucking in. She's a spoiled ignoramus whose past decade of opining has proven to be definitively destructive. She needs to cut out the blogging cover and just suck cock directly for her profession.
Graph's Y axis starts at 130, not 0. Was that necessary?
Post WWII, federal spending collapsed yet the economy thrived, if anything that refutes fiscal stimulus.
Something else happened too -- the resumption of global trade.
That's one reason why this recession won't be anything like the mess in the 1930s: for the most part, even the most blinkered politicians understand that protectionism is a dead-end road. There won't be another Smoot-Hawley Tariff coming from either party.
And they probably won't pass CAFTA, but at least we're not hearing anyone talk about "renegotiating" NAFTA anymmore.
SoV,
Only puerile partisans try to play gotcha that way. Not only do Presidents often have to work with opposition Congresses and courts that are actually more powerful than they are (have we forgotten the budget fights of 1990s? The gov't shutdown? The attempt to pass a Blanaced Budget Amendment?), parties' positions have evolved over time. If you want to play "my party is better than yours" a legion of like minds await at places like DKos.
And somebody still needs to tell me how this nets out, because I can't see how we managed to borrow 4 times our GDP from a world without sucking up close to 100% of the world's production.
Another question one might ask would be: why would would anyone load us money that they didn't think we could repay?
The answer is, of course, they didn't. We just collateralized assets that weren't collateralized before. That makes the economy larger.
I'll go back to DeSoto's Mystery of Capital again. The ability to free up capital through collateralization is the primary difference betwen Third World and First World economies. The fact we are now seeing a relatively small decline in GDP per capita doesn't invalidate the model that made us ten times wealthier.
Uh huh. Trying to look at actual data is playing gotcha. If you'd bother to look at the series, you'd see that various assumptions for why Republican administrations performed so poorly were considered. Including oppositional Congressional bodies:
Dave, you define puerile partisanship. Looking at the actual facts of the matter is something you actively discourage.
Me, I think that if one wants to see what sort of policies actually work, one should look at the data. Not expound an ignorant opinion, engage in name-calling, etc. Data. Now, if you've got actual data that says otherwise, post it. Don't even accuse me of being a partisan meanie - that facts have a 'liberal bias'.
I'd like to make the same observation yet again: while there is definitely such a beast as 'conservative' economics, the notion of 'liberal' economics is a mythical creation in any realistic sense of the word. The most one can say is that there is 'conservative' economics, and (via Carroll) non-'conservative' economics."
Riiiiight, define your ideology as "mainstream" and your opponents as scary "conservatives."
Seriously, who do you think you're fooling with this retarded crap?
Eric,
Well, I think we've proven talking to SoV is a waste of time.
Sigh. I don't 'define' anything to be mainstream. I look at mainstream opinion to define mainstream. Have voters rejected school vouchers when put to a public referendum? Why, yes, yes they have. Every single time:
And here's a few polls right here:
http://www.pollingreport.com/budget.htm
Over and over again, the public prefers raising taxes to cutting programs, getting out of Iraq vs a continued presence, etc. Don't tell me these aren't mainstream views.
Note the trend on these polls btw; it seems that the public is growing more 'liberal' all the time.
The only economists that actually got this correct as far as timing and cause are the Austrians- same as they did for GD I. Of course, no one wants to listen to them since their explanations of the cause invalidate all the proposed "cures".
Megan's graph is an important one. Almost all of our assets are promises of someone else to pay- this is the nature of debt/currency today. That ability to actually pay on those promises is proportional to the real output of the economy per unit time. The only real way you can justify an expansion of debt to output of this magnitude is if you believe these people promising to pay are going to live and produce 2 to 3 times as long as previously, but the trend is actually in the other direction. The debt must deflate, one way or another. You cannot get blood from a stone.
SoV,
Please....proving social programs worked?
I did a rather lengthy review of data on social ills associated with communities and the folks whose politics ran said communities. It will come as no surprise that Dem controlled areas tend, on average, to have more issues in these regards then Rep controlled areas.
By your and AB's logic, Dem controlled areas should be gardens of eden compared to R's.
So there must be quite a lot of other factors which play into the issue of whether or not someones 'economic' or 'social' programs work better.
Which is why I used conservative and liberal as labels. Conservative economics, broadly speaking, keep government small. Liberal economics, broadly speaking, expand government.
Neither ideology is mated to either D's or R's.
R's can be and have been complete morons on the economy (Nixon and price controls). D's can be and have been excellent on economic issues (Kennedy reducing the top marginal rates). Both have shown a propensity for believing the government can or should solve any and all social problems, which when extended to it's logical conclusion turns adults into children.
Since both parties have engaged in this mindset over generations, this county now believes that after spending much more money than it has, it is logical that it should spend twice as much as it already has spent and doesnt' have to keep ourselves from having to drive used cars and live in smaller houses.
In other words, we are all thinking like a bunch of children.
Rapier is the smartest guy on this website with typed sentences on this blog. Megan should let him guest post.
I'd like to see you answer Yglesias' response, Megan. What, in short, is your alternative?
Not doing the stimulus?
So, is there something else we should do, or should we just pull up a chair and watch the carnage?
Would that be a genuinely responsible political act, by the way? I don't think so.
Iow, you're just throwing something out there with no idea whether you're right or not.
Not at all. I'm simply not willing to go back through all your posts and do the work to support my observation. I don't mind doing a bit of research in an argument about taxes or which country holds the most American debt. But I'm not gonna waste my time proving that which is obvious and doesn't matter anyway.
Besides, more and more I'm thinking "liberal troll" is an even more appropriate description.
Uh-huh. Without reviewing your data, let's assume you are correct. What did cactus over at AB conclude? You know, from the part I actually quoted above?
Notice the bolded part. So no, this isn't by 'AB's logic'. (though I wonder how your 'study' came to it's conclusions.) However, I don't think anyone is talking about social programs right now; we're talking about economic issues, and what works. For that we have some rather unambiguous measures, and let me quote again:
Most of the articles in the series can be found here.
The data are taken from quite pedestrian sources and there is very little manipulation; just a straight up presentation of any of a number of economic indicators.
You were saying?
We do know over time the American machine works wonderfully and it will work wonderfully again.
Does this not mean that the economy will recover whatever we do? So why is it a mistake to do nothing?
The idea behind stimulus is basically that the government will step in and take up the responsibility for the borrowing and spending that was being done by consumers
How much money are we talking about? Increasing government spending by 10%? 100%? 200%? If the idea is just that the government should spend a lot of money on something, it seems to me that it has been doing that for quite a while...
Eric, I could care less what you think. You're a nasty little partisan spambot.
I do, however, confess to a certain zeal in helpfully pointing out that you're quite lazy, don't perform even cursory due diligence, and wouldn't know genuine scholarship from a cartoon.
Shoot, you can't even be specific about why you think I'm a 'leftist' (note that in contrast, I - wait for it - provide cites and data to show my moderate mainstream cred.) No doubt it taxes you to state anything other than it is 'obvious'.
SOV is the sort of disingenuous dolt who asserts that Fannie Mae and Freddie Mac were private entities prior to September 2008, because the word "privatized" appears on a Wikipedia entry and Fannie Mae's website. It is akin to saying that Al Capone was an olive oil importer, because that is what Ol' Scarface said he was.
It is pointless to engage with such people.
Seriously, SmellyViolence, your rambling self-contradictory delusions give new meaning to the term "f*cktard."
If you're not some brilliant parody of a blithering idiot, just shoot yourself and save the rest of the world some grief.
"Re: Re: Obama’s policies are destroying the American economy.
Obama has been president for a mere three days, and his policies so far consist of a handful of fairly minor executive orders. Are you claiming that closing Gitmo or rescinding the Mexico City abortion funding ban is ruining the economy? Good grief.
Posted by JonF | January 23, 2009 8:22 PM"
Good Grief? How can you claim only Gitmo and abortion funding is all Obama has discussed? And you are right Gitmo and abortion have nothing to do with Obama intent to destroy the American dream. They are trivial issues compared a government's policy to amass power by taking from successful workers and giving to those who do not work or who are failures at work. What else is a stimulus policy? If something else explain how it works. Medieval medicine was not effective just because the patient recovered. The advocate has to explain why the medicine worked.
So everyone is fully informed Obama wants $850 billion stimulus spending in addition to the remaining 350 billion of TARP that will now be added to the stimulus. This stimulus will harm the economy the way FDR's stimulus and the guns and butter stimulus of LBJ in the 60s hurt America.
By the way the reason WWII spending "helped" the economy is due to the refocus to producing goods and services for wartime replacing the focus of FDR's social engineering (the alphabet soup, high progressive tax rates, destroy the bad Utility companies, price floors, etc.). Sadly Obama's team wants to reimplement those failed FDR policies. I take Obama and his team at their word from what they said in the campaign. And his policies will be worse the can be imagined, as the great Democratic leader FDR said "Get elected on the right and govern from the left". We know from the campaign what is Obama from the right. He will only move leftward (if you like Jimmy Carter the worst American President in history, Obama will not disappoint)
By the way closing Gitmo will either 1) Release prisoners to return and again lead Al Queda to kill more Americans or 2) Place the prisoners somewhere in the USA say near your kids school who will then be killed in the suicide breakout attempt. Both for Obama must be desirable outcome he wants to close the best place in the world to hold avowed killers of Americans. For the advocates of closing Gitmo, American lives are cheaper then terrorist or "world" opinion.
"The Japanese government has been doing this Keynes thing for almost twenty years now, and there's no indication it's actually had a salutary effect."
This is such a misinformed statement that I have to wonder where Eric got the information that provided the initial idea.
Sigh. I'll never understand whether it's stupidity or just ignorance. Here. This should be obvious to the most casual observer.
Not sure what happened to my link there.
SoV, I take it all back. You're not a lefty. You're just a troll.
SoV,
As I had said, if economic policy under D's was the better choice, areas of the country like which 'enjoyed' the fruits of Democratic leadership would be flourishing, while those poor soles in R country would be floundering.
In fact this is not the case.
Social policy is simply clearer and much more definable. D controlled areas suck.
So again, there isn't an easy answer to whose policies, either economic or social are better. There is clear evidence that Schumpeter was correct, and that Capitalist systems devolve into socialist systems.
At least, until the money runs out. Which should be about 6 months from now.
At least, until the money runs out. Which should be about 6 months from now.
But Obama's gonna give everyone money. He's gonna raise the EITC to $13,000. So that way we'll have given the banks money, the corporations money, and now the "little guy". So everyone will have money, right?
RW
I don't think it makes too much difference whether thet are paying down their debts or saving, the results are close enough - they are freeing up the money for new lending. Which is what most economists advocate savings for (those that advocate saving at all).
Really? Where did you say this? In fact, it tends to be the red states that receive more than they give in tax revenue. And just the other way around for the blue states. And actually, of the top ten states who get back more than they send out, all of them are those Republican-controlled red states. Doesn't exactly go along with your (completely unsupported) thesis, does it?
Again, you're a) being vague, and b) not supporting your statements with any evidence.
Not to mention the fact that you've not devoted one iota of effort to explain why just about every econ metric shows the country better off under Democratic administrations as opposed to Republican ones. I guess that just doesn't count, and you don't even need to explain why, right?
Re: Good Grief? How can you claim only Gitmo and abortion funding is all Obama has discussed?
You said "policies", not "items of discusson". A policy is something that has been put into actual effect, not just discussed. As of this date, Obama has done very little: even closing Gitmo and reversing course on the Mexico City rule will not really happen for a while yet. As for what Obama may or may not do in the future, I would resctfiully suggest we wait and see. Saying that future policies have some effect on the present is counter to the laws of nature which require causatuion to flow from the past to the future, not from the future to the past. Better rightwing ideologues please!
Re: Place the prisoners somewhere in the USA say near your kids school who will then be killed in the suicide breakout attempt.
Oh good grief, please see a psychiatrist! You are suffering from clinical paranoia and neurotic phobia! This country had managed to imprison all manner of evil and dangerous folks: various Mafia dons, Al Capone and assorted other Prohibition-era gangsters, Nazi POWs, Soviet spies, Jeffrey Dahmer, John Wayne Gacy, Timothy McVeigh, Ted Kaczynski, Manuel Noreiega, etc, etc. I have no fears that our penal system cannot safely handle a couple hundred more. Definitely need better rightwing ideologues!
SoV: "Not to mention the fact that you've not devoted one iota of effort to explain why just about every econ metric shows the country better off under Democratic administrations as opposed to Republican ones. I guess that just doesn't count, and you don't even need to explain why, right? "
A really simple exlanation is random chance. With 6 dems (counting Obama) and 6 reps since WWII, this result is highly unlikely to be statistically significant.
Similarly, flipping a coin 6 times and getting 4 heads is not evidence of a loaded coin.
JonF: "Saying that future policies have some effect on the present is counter to the laws of nature which require causatuion to flow from the past to the future, not from the future to the past."
You seriously don't believe that anticipation of future policies might affect people's behavior now? You consider business people making plans based on educated guesses about the future to be a violation of the law of causality?
FAIL.
(Note: I have no opinion on the original claim, but your rebuttal to it is ridiculous.)
I don't think it makes too much difference whether thet are paying down their debts or saving, the results are close enough - they are freeing up the money for new lending. Which is what most economists advocate savings for (those that advocate saving at all).
Paying down debt primarily benefits the banking industry and investors in MBS's. If the banks don't relend the money to put the multiplier to work, then from a macro standpoint, that's as good as flushing it down the drain.
Savings is fine for the long run, but in the short run, consumers need to be encouraged to spend, not save. The Japanese lost decade was prolonged because Japan's consumers didn't consume, which in turn prompted businesses to avoid investment. The government stimulus in a vacuum was not enough. Japan ended the recession in 2002 by literally printing a lot of money, but as their wage levels make their exports increasingly uncompetitive, even this had limited impact.
American consumers like to spend money, and that's what the current administration needs to stimulate. Savings is the last thing that we need at this moment. Once the crisis has abated, savings should be actively encouraged and debt levels rationalized, but for now, that would lead to disaster.
In the macro, we should not endeavor to repay all of that debt. Loans that are being paid but that are inadequately collateralized should be crammed down so that the overhang problem is resolved and the loans become marketable again. Permitting the degrees of leverage tolerated in recent years was a huge mistake, and those who thought that they could hedge their way around the basic principles of Finance 101 need to pay a price for their mistakes.
Savings is fine for the long run, but in the short run, consumers need to be encouraged to spend, not save.
I'm curious what you mean by this. I don't necessarily disagree with the premise, but exactly how do you encourage people to spend like that, especially as a rise in unemployment is bound to be making them nervous?
Ricardo Caballero of MIT has a great suggestion. Mankiw offers that we shouldn't think the last thing learned in Economics was published in Keynes General Theory.
Jobs jobs jobs jobs.
It's pretty clear that the huge falloff in jobs is what needs to be countered - and for those embracing a Keynesian stimulus, no one is claiming it will be a panacea - but you get a two birds with one stone effect if you create SMART infrastructure - 3 birds with one stone, if you use stimulus to create jobs that also retrofit our infrastructure to have greater efficiency.
The bottom line is, a smart infrastructure for the 21st century will only be funded by the national government. Otherwise, it's a piecemeal, haphazard affair, rife with inefficiencies.
By the way, I'm assuming that most of that money will follow the Halliburton model for Iraq. There's an argument to be made that all of those workers be actually employed by the government - that this is more efficient, and has greater oversight.
But as long as there IS a lot more oversight than Halliburton got - I'm fine on funding private companies to do this work. As long as it is focused on, again, smart infrastructure. (Which probably doesn't building NEW roads).
Retrofitting existing buildings for maximum power efficiency. Areas improved - jobs, global warming, oil dependency, energy use.
Creating a dependable, 21st centurty transparent electrical grid. Areas improved - jobs, opening up multiple options to create new energy IN the United States (massive wind farms, massive solar farms - but you have to have the ability to RUN that energy efficiently across large distances - which the current grid can't do), increased regular guy independence - requires less energy from the grid, for example, with solar power in the home. Global warming (much smaller of an impact), national energy independence.)
Funding things like, yes, rail projects from LA to San Francisco, which will create value for 50 years.
As has been said above - this isn't a panacea. It looks like there will be a debt overhang for YEARS, and all the investment will simply cushion the retraction from private spending from that debt overhang. But again, that's better than nothing, and if we need to cushion the blow of the GDP output gap, we should do it smartly.
Also, longterm - we had a huge IT investment rampup in productivity, economic activity in the 90's, and then a huge ramp-up in economic activity in building homes.
Right now at least, it isn't certain where the next round of a ramp up in economic activity will take place in. I can't see one. And if there is not one, then we are looking at an 'output gap', that will hang on, like Japan, for 10 years.
But what are the other options? Go to 15% unemployment?
That's the thing - people keep saying 'tax cuts', and targeted tax cuts, that will go back into the economy immediately, that's great.
But mostly critics don't have other solutions - they just recommend various versions of bad medicine/Hooverism.
Sigh. I'll never understand whether it's stupidity or just ignorance. Here. This should be obvious to the most casual observer.
Trust me, it is. Some people just don't want to observe.
I remember reading in the mid-1990s about the desperate measures in stimulus spending. They included a $200M golf course that had 3 three members, and a billion-dollar bridge used by about a dozen people per day.
You can't just conjure demand out of seized wealth.
Also, wanna bet some politically connected people did really well at taxpayer expense on those projects? We're already finding sticky fingers on the TARP, with politicians getting favors for friends. The stimulus will be even worse. Blagoyevich-style Illinois politics is coming to Washington. The only question is how many people will get caught.
Michael, can you post that link again? Doesn't work for some reason.
Eric,
From Michael's site, this appears to be the link he meant to include in his previous comment.
Well, I read it. I have to say I'm not convinced. He seems to be saying pre-crash risk premiums were priced reasonably. Maybe I'm not grasping his argument.
How much double counting of "debt" are we looking at here?
Consider - a bank finances a mortgage for $200K; the mortgage goes into a MBS for $199k; the MBS goes into a CDO for $150k
VOILA we have $549k of "debt" IF you count all three items
How are the numbers in the chart counted?
Also, contrary to some posts here, GDP does not flit about a lot (a 1% down or 3% up are notably off trend). So the line is not based on shrinkage relative to GDP _ I have to think we are looking at statistics oddly (double counting) or that more GDP is represented by financial debt.
The right wing spin machine, axles and gears greased by Heritage/Hudson/Manhattan/AEI/CEI/Hoover, have done their work well!
Megan, you have a loony infestation.
Has Obama mentioned the debt picture to people?
"Savings is fine for the long run, but in the short run, consumers need to be encouraged to spend, not save."
Or as Walter Wriston former chairman of then Citi Bank and the founding father of the modern megabank said sometime in the 70's.
“Our job is not to teach our customers how to save, but how to spend more.” (It cannot be overstated how important this idea was. It was a revolution. It was a total success, for bankers. For the rest of us not so much. Well not them either, now)
and so it came to pass. For 30 years at least every hint of an economic slowdown has brought demands for more spending and less savings. To aid in the process Greenspan with the support of everyone kept slashing interest rates, which punished savers and discouraged savings.
We must spend again one more time, to save the system. We must serve the system. Bernanke is trying it again, but it isn't working.
Like it or not households and businesses are now going about the task of repairing their balance sheets and that means trimming their debt, cutting back spending and hopefully saving. This is ongoing and is the only bright spot in grim picture. Traditional analysis says that when asset prices fall far enough to make sense then recovery can start.
Personally I think the probability is that the forces of deflation are too strong but we will see. At any rate the spend now and save never ideology, and it was an ideology, is now dead. Even if people don't know it yet.
SoV,
Regarding your contention that D states pay more in taxes...they also pay more in benefits to their own employees, have bigger governments, higher taxes all around.
Do they have robust industries in the private sector? IE is Toyota looking to mfg cars in Massachusettes?
Um..no. And if you break down the costs in each state, you'll find the blue areas of red states have disproportionately higher costs to the state and federal government then the red areas.
The data I had collected was for personal reasons, and I have not save it sad to say. It was rather difficult to gather, given the lack of direct links based on D or R control, and my lack of understanding of the government web sites I had to navigate to gather the information. However, it was fascinating, and well worth your time to examine yourself if you are as middle of the road as you claim.
My original point, all the way back there, was that D or R policy is inconsequential (note the graph. Factor in recessions and stagflations from the 60's on, and it's clear everyone wanted more debt). What I am arguing in broad terms is that conservative economic models based on more access to capital in the private sector and smaller government are inherently more desirable then liberal economic models which claim the opposite. Especially in light of what we see taking place in the graph above. What is needed is creative destruction on a massive scale (yes, it will hurt and hurt alot). Banks need to fail, GM and Chrysler need to fail, AIG needs to fail and any and all people who overextended on their mortgages credit cards and sundry debt vehicles.
There are no more inflationary bubbles left to inflate.
There are plenty of companies in the US who are well capitalized and who will survive this crash. They and the employees who leave the failing companies and start new companies will be the seeds of the new economy. One which hopefully remembers that debt sucks, making real goods is preferable to shuffling paper, and saving money is a virtue.
None of that comes to pass under either the current Dem plan or any Rep plan that I have seen.
Like it or not households and businesses are now going about the task of repairing their balance sheets and that means trimming their debt, cutting back spending and hopefully saving.
I'm not sure where this belief that Americans are experiencing some sort of financial renaissance is coming from. They haven't become prodigious savers. They've lost their credit lines, which has cut their spending capacity. They have responded by lamenting the loss of their HELOC's, juggling their credit cards, losing their houses, and filing BK. Their balance sheets are bad as they've always been, and now their income statements are in jeopardy.
Savings has a place in the system, but right now is not the time. There are times when fire is best fought with fire, and this is one of them, despite the apparent irony.
The Japanese lost decade makes it clear that savings don't necessarily fix anything. To clean up the collective balance sheet, income is ultimately required. An effective policy will create the foundations for generating income, which means moving money around the economy in ways that can create income, which ultimately goes back to consumption.
Given the constraints, the US has no choice but to reignite another growth bubble. The challenge will be to keep that next bubble from popping dramatically when that time comes. Given our addictions to easy prosperity and low tax rates, I have my doubts that we'll do well with that one, either, but we have no alternative.
SoV,
But since you insist on making this RvsD....consider...
The D's gave us SS. A massive ponzi scheme, which by itself could BK the US. However, SS worked out so well we got FNMA...Then Freddie...
I can't say with certainty, but I'll bet they gave us Pension Guarantees..
I can't say with certainty, but I'll bet they had a lot to do with setting up S&L's, then deregulating them, then bailing them out when they all failed...
Medicare...
Medicaid...
WWII, Korea, Vietnam (just in case you want to go the 'war' route)....
It's easy to paper over the problems with the programs that the D's initiated as long as the economy grows. But pretty soon, the D's don't want to live next to the Mfg plants that make the things that keep the economy on a sound footing. Or, conversely, they want to support the unions which will increase costs and benefits to a level that makes the plant un profitable.
As we've noted, the problem is debt. The government gives that to us in spades, so it's no coincidence that a nation of savers has turned into a nation of spendthrifts.
Remember when people were upset that the CC bk laws would be changed? Folks actually believed it was the banks fault for giving them credit, and that after making a few perfunctory minimum payments they should be able to walk away from their debt.
We've been told that's how the economy works, and that attitude is going to be writ large across the country in just a few months.
First principle- there is no consumption without production first. Second principle-income is production, not consumption- in other words, you produce to consume, not consume to produce. "Moving money around the economy" is completely meaningless unless the pool of real savings is large enough to support the expansion and maintenance of the physical capital of the country. This crisis is a crisis of that pool of real savings, and people instinctively understand this, even if they are unaware of the mechanisms of wealth generation and the increase of wealth generation. For nearly 40 years, we have had a misbalance of consumption vs savings/investment, and this imbalance shows up as an increased ratio of debt vs GDP.
Government is very good at moving money around the economy, but it isn't very good at strengthening the pool of real savings. Strengthening of the pool of real savings occurs at the individual level first, and at the enterprise level second. And remember, the pool of real savings is not money, money is only the measuring stick, not the thing itself.
Only the delusional or the corrupt believe more debt is the solution to a problem of too much debt. Almost every politician is one or the other these days, and for a very simple reason- a rebalancing of consumption vs investment means that government itself must either shrink or raise taxes to maintain itself and continue to grow.
Transferring the debt load onto the government balance sheet will only buy a little bit of time, and I mean that literally. The off-balance sheet liabilities of the US government begin to be net drains on the Treasury within 5-10 years. We don't have a lot of time to repair our balance sheets as individuals or as a country. It can be done, but we must abandon our path of ever increasing debt burden. Individuals and companies have begun this process of balance sheet repair, but they are being opposed at every single step by Washington. I honestly don't know who wins this battle, but all of us can certainly lose.
First principle- there is no consumption without production first.
That's a bad principle. Without demand, production is unsustainable. Build a housing tract in the middle of nowhere, and you've just squandered resources and set yourself up for bankruptcy. Go ahead and ask General Motors whether "build it and they will come" is an effective strategy. (Actually, don't ask them; they apparently agree with you, and they're losing money hand over fist because of it.)
Only the delusional or the corrupt believe more debt is the solution to a problem of too much debt.
Then call me delusional. But the Austrians are in no position to accuse anyone of delusionary thinking.
There are five basic ways to repay debt: drain one's cash to pay it, sell off other assets to create the cash to pay it, generate income to retire it, discharge it through bankruptcy and borrow other funds to pay the current obligations. Of the four, income is the most desirable because income creates prosperity. The first two only work if one has enough cash on hand and/or assets to sell, and the last only works if one has debt capacity.
Because you've conveniently overlooked income, you've just left us with bankruptcy, something that we're already getting quite good at.
Obviously, the long-run idea is to create income now that can be used to repay debt later. Your suggestions lead to slower bleeding but the patient is still going to die on the gurney.
Government stimuli have limited value, so we need to take care and use them selectively. Some work better than others. There tends to be a kneejerk reactionary response amongst libertarians and leftists alike to the suggestion that programs can actually vary in effectiveness, but if saner heads prevail, we should be able to prioritize.
Government is very good at moving money around the economy, but it isn't very good at strengthening the pool of real savings.
That does a poor job of explaining all of the money that has gone into IRA's and 401k's.
Clearly, tax policies coupled with low inflation rates can motivate people to save. However, US government policy has encouraged Americans to use their savings to buy equities, rather than loan their money to banks. They kept pitching the long-term growth rates and selling them on the notion of a comfortable retirement managed by the private sector, but forgot to advise them about the emotional swings that occur during the inevitable cyclical downturns and that all investments are not created equal.
So what? I'd rather be making $80 K/yr and paying 20% on that than paying 10%, 5%, or even 0.005% on $30 K/yr. To say otherwise is letting your ideology lead you around by the nose.
And the simple fact is that by this measure, non-conservative economics outperforms 'conservative' economics. This is really not up for discussion unless you want to dispute the basic fact itself.
Do you have anything to back this up other than your unsupported word? Any cites? Studies you can link to? Anything? Because a few seconds with google brings up all sorts of pages like this:
Sure looks to me like per-capita income is higher in those detestable Blue States. Btw, I'm not sure, but you seem to have a misconception about the taxes we're discussing. My facts are about taxes flowing out of the state, i.e., federal taxes. In-state taxes are presumably spent in-state, and so the net in that respect is zero. And it is those federal taxes flowing out of the blue states that are being used to subsidize the red states.
I'm middle of the road all right (can you point to anything I've posted that shows otherwise?), and I believe in facts and data. I've given plenty of cites and quotes to back up my position (though actually, it's the other way around - the facts led to my position.)
You've given precisely none. And made assertions that are contrary to what I can look up for myself. And given an ideological argument as to why one shouldn't go buy an observable metric.
You want to convince me? You want to make a persuasive case? Show me the money. Don't just flatly say something as if it were beyond dispute and expect to coast(Red states richer than Blue, good God!) If you say something, back it up with data - tables, quotes, cites, etc. Nothing from the propaganda mills of course, no CATO, Heritage, AEI, et al. If you want, you can also try to show why my sources and data are inaccurate. I'm certainly willing to admit to the possibility.
RW,
You are still putting the cart before the horse. There is no increased income without increased investment. There is no increased investment without increased real savings. All you are prescribing to consume our way out of a hole we consumed our way into.
If you had a friend who had more debt than he could ever pay off without lowering his consumption vs income, would you advise him to increase his spending on consumption? If you had ten friends in such a state, would you encourage all or some of them to increase their spending on consumption? How about if you knew of a million such people?
Seriously, you are deluded, but you certainly have a lot of company, so don't worry about it. But I have to ask- have you done your part and increased your debt load the last 3 months?
You are still putting the cart before the horse.
Quite the opposite. You seem to believe that horses push carts, when they pull them.
Investors aspire to earn returns. With no market, there are no returns, which means no reason to invest.
Markets are demand driven. Businesses that don't have customers go out of business very quickly (or if they are in the auto industry, get government bailouts.) A consumer is indifferent to a supplier who doesn't meet his needs -- he will simply give his custom to someone else who does -- but the supplier in the business of selling white elephants is going to go broke.
At the very least, investors have to believe that there is some sort of pentup demand that isn't being served. They may ultimately be wrong, but they should nonetheless require a sound business case before proceeding. (You know that an asset bubble is underway when there is so much money chasing deals that the need for the business case is ignored.)
This is Finance 101 that we're talking about here, and I frankly find it astounding that anyone could possibly believe in an economic theory that gets the fundamentals so wrong. That's just more evidence that libertarianism is more of a religion built on faith than a viable framework based upon facts.
If you had a friend who had more debt than he could ever pay off without lowering his consumption vs income, would you advise him to increase his spending on consumption?
Argh. What you fail to understand is that individual interests and social interests conflict at times like this. The individual would be wise to save and pay down debt, yet when that is done en masse, the resulting lack of growth drags the economy, which makes the situation worse even for the average saver who ultimately relies upon growth for whatever he does to earn his income.
That's why a bit of economic management is in order here. In effect, we have to create conditions that will encourage consumers to take some risks. The micro conflicts with the macro, although the macro should ultimately serve the micro if properly executed. I realize that nuance like this doesn't work well with the libertarian faith, but that lack of ability to see shades of gray is what prompts most of us to avoid that worldview.
SoV,
Alrighty, I revisted the site that I had originally posted this information:
http://www.disastercenter.com/crime/
That's the main site for crime statistics, which I broke down across voting patterns and murder rates. One assumes that other crimes follow with murder, so I did not do a great deal of exploration into the various other social ills associated with those areas.
I coupled the crime stats with demographic breakdowns of states, county by county, and how they voted. I do not have the link to that on this computer, however it is available on line. I also attached the religiosity of each state to it's murder rate.
The original discussion took place in this thread:
http://www.bimmerfest.com/forums/showthread.php?t=175362&highlight=demographics
You may have to register to read the Poly Sci forums on that site. My bias and reason for doing the research are explained in the first post ;) so it will be clear why I was doing the research.
If you persist, my other computer (I believe) still contains the links in the favorites section for dragging out all the other associated websites I visited to compile some of the information. I'll grudgingly dig them out if these two sites prove unproductive to our discussion.
And the post you included from Carlson sort of proves my point. A 'Dem' state will vote Rep in certain areas, and the poor in the country overwhelmingly vote Dem. Most of the social ills we are troubled with don't originate in the Hamptons, or need Federal intervention if they do. The present financial meltdown would be a case where this hypothesis does not seem to apply.
The fact is, the data is pretty clear and well understoog to anyone who's been paying attention over the last few years. The problem is that today we all seem to want to turn to the Federal government to solve the issue, instead of allowing the states and localities to handle it.
But that is a whole different discussion.
Sigh. You are pointing to social issues, not economic ones. We are talking about the viability of certain economic policies, are we not? There is no need to even dispute your conclusions, because these facts are irrelevant.
This is a misreading, based, I believe on a binary fallacy you are committing (though I could be wrong.) In fact we find that the median incomes of the red states are below the median incomes of the blue states:
http://www.census.gov/hhes/www/income/statemedfaminc.html
Click on the link for the spreadsheet of median income by number of earners in the family if you don't believe me.
The problem, I am guessing, is that you are dividing up each state into just two earning classes - rich and poor. The reality is that the graduation is much finer than that, at least on the level of rich, poor, and middle-class(I suppose one could also go by quintiles or something else.) But as you can plainly see, median incomes - we choose median because it is relatively insensitive to outliers - tend to be higher in the blue states.
Iow, no, the states that are supposedly following 'non-conservative' economic policies really are richer on a person by person basis. Or, to be more precise, their income is greater on a person by person basis. One could, I suppose, make various cost of living adjustments if one were so inclined. I haven't looked, but feel free to make that argument. With numbers, sources, and cites, of course.
Shades of the USPS discussion!
That has been my feeling for some time. In fact, behaving like a hard-headed pragmatic businessman doesn't win you any kudos with this crowd. Instead, it gets you labeled as a 'socialist'. Uh, no. Really. My default setting, the same as most people's, I would imagine, is to basically let private enterprise tackle the job first, be it in the distribution of shoes or vaccinations. It's only when the private sector has manifestly failed or is clearly recognized as unable to perform to expectations that the government should step in. Imho, of course.
And this just happens to be one of those times for a macro intervention by government. On the demand side, as you say; clearly supply side as failed, and failed incandescently. That anyone still believes in these sorts of policies - without modifying them in the slightest, with due regard for recent experiences mind you - is a sign of ideology triumphing over reason.
The graph originally posted can be deceptive. The amount of debt at present seems to be about 10 times the amount in the 1970s. The tiny numbers on the vertical axis, however, show that debt went from ~150 in the 1970s to ~350 now, which is a little more than double.
Eric and Dave in Hackensack (and your link at 1:02 Jan 25 is correct), to quote from Caballero:
I think Caballero is getting at the crucial function that has to be performed in a way that does it most cheaply, directly and fairly. Take as an example Lehman Brothers. Were there insurance for their real estate assets then they wouldn't have been forced to fold immediately as mark to market ratios brought them to instability, and they wouldn't have lost assets owed to them by counterparties. As it was the bank lost on both ends. And all other banks are now faced with the same problem. I guess my question would be, would the insurance be for the holding bank only at liquidation as for a depositer at an FDIC insured bank (and thus really for counterparties)?
SoV,
Using your median family income data and adjusting for COL my top ten goes from
1 Maryland
2 New Jersey
3 Connecticut
4 Massachusetts
5 New Hampshire
6 Hawaii
7 Alaska
8 Virginia
9 Rhode Island
10 Minnesota
To:
1 Virginia
2 Illinois
3 Massachusetts
4 Delaware
5 Wisconsin
6 Minnesota
7 Kansas
8 Connecticut
9 Nebraska
10 Utah
And my Bottom 10 go from:
41 South Carolina
42 Tennessee
43 Oklahoma
44 Alabama
45 Louisiana
46 Kentucky
47 New Mexico
48 Arkansas
49 West Virginia
50 Mississippi
to:
41 Vermont
42 Oregon
43 Montana
44 New York
45 California
46 West Virginia
47 New Mexico
48 District of Columbia
49 Mississippi
50 Hawaii
One caveat is that the list i used didn't have a COLA for Maine, so it is left out.
The top 10 looks a lot more red (Add - KS, NE, UT; Subtract - MD, NJ, NH, HI, RI) and the bottom 10 looks a lot more blue - (Add - VT, OR, NY, CA, DC, HI; Subtract - SC, TN, OK, AL, LA, KY, AR, MS)
Skullberg,
Where are you getting the data for cost of living adjustments?
As usual, JordanB, we see a far-right person asserting something with no facts given. I see three things wrong with this immediately (which, as I implied, is why these sorts of things are so hard to do.) Aside from the lack of any sort of corroborative cites, quotes, or links.
The first point is that you've got to compare rural to rural and urban to urban; a mere state-by-state comparison without this sort of weighting figured in is not going to tell you anything significant. Second, do these cost of living adjustments include housing? Yes, I'm pretty sure they do. You can't include those in a cost of living adjustment unless you specifically acknowledge and correct for the housing bubble. Finally - and perhaps most fundamental over the long run - you've got to show those cost of living differences are the result of economic policy.
Has any of this been done? Knowing this particular poster and his history, I would say probably (in fact, definitely) not.
All that debt results from:
1. far too many needing to borrow; and
2. not nearly so many with excess wealth needing to lend,
in order to keep the merry-go-round revolving.
Put the catastrophe down to:
1. inequality run riot; and
2. reality-defying expectations of what the merry-go-round can be.
Let the debt deflate as it must.
Don't virtuously abhor government acting to cushion the blow to livelihoods, but not to stashes.
Disdain government and private notions that conditions can be created for the emergence of a replacement merry-go-round as gaudy as the one that just inevitably blew its gasket.
Mike,
I'm still not sure how that would be applied in practice. He seems pretty vague about what exactly would get insured, and by whom. Who is the "lender of last resort"? The taxpayer? So would the taxpayer insure all those CDS contracts? Based on bubble-inflated prices?
k1 -
By "failure" -- and I said "long-term failure" -- I meant that the economy of the 1930's couldn't live without government spending. Sure, everything is hunky-dory while you've got it. But something like the New Deal set of programs is a success if it's a temporary boost. If has to be permanent, it's just deficit spending.
World War II, on the other hand, increased US industrial production and kept it at high levels until the 1960's. At that point, the rest of the world had sufficiently recovered, and industrial competition from abroad began anew.
We didn't realize that the benefits of winning World War II were temporary, which is why we slumped in the 70's, and then from 1980 until now paid for our standard of living on credit.
Of course, a war is a terrible way to start the economy. But spending on stuff that has no reason for existing -- and hence no multiplier effect -- is stupid and short-sighted. See, for example, Megan's golf course proposal.
Here's a little something from the Krug Man:
Going along with the meme that 'nobody knows anything', I suggest we consider the policy prescriptions of those who Got It Right, and disregard those who Got It Wrong.
In fact, I would think it obvious that those who Got It Wrong should be penalized. We shouldn't be listening to the Boehner's, the Gramms, the Gingrich's, the Mankiw's, the Summers, etc. Here's a bit from way back by JKG on this phenomenon:
Let me put it this way: Roubini Got It Right, in fact, is celebrated for it. So why isn't more attention being paid to Nouriel's policy prescriptions? Mankiw Got It Wrong(in fact, Got It Wrong many, many times.) So why is anyone bothering to listen to him?
Megan:
Have you read Hazlitt's "The Failure of the 'New Economics'"? If not, why? If so, you still think a lot of Keynesian theory is "sound"?
Just curious.
SoV and Jordan B,
The COL is from www.missourieconomy.org/indicators/cost_of_living/index.stm which uses the ACCRA (now C2ER) data.
SoV,
So why did you propose a non-weighted, even less valid set of data?
Do the incomes adjust for income from housing sales? Real estate trusts? So why did you propose a non-weighted, even less valid set of data?
Have you shown the incomes are a result of economic policy? If not, why not? I assume both are related to a number of factors, but economic policy is one of them. I think, and while I don't have any papers in front of me at the moment, the causality probably runs from higgh COL -> high income, not the other way around.
I'm waiting for your apology.... And when have I shown a history of not citing? I remember that being your habit and not mine.
Can you further define how I am far-right? What policy positions have I taken them place me there? What have I done to distinguish myself from center-right to far-right?
So, partisan pissing matches aside, two people now have asked (in slightly different ways) if this big jump in debt involves a bunch of double counting.
Does anybody know the answer, and if not, what is the point of discussing a chart whose significance and methodology nobody can actually explain?
Next, write off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.
Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.
This is so stupid it's mind-boggling Krugman is still considered an economist. OBVIOUSLY, air traffic control is an external good like police or an army. OBVIOUSLY, people are better at government than figuring out how to buy nonexternals, or we would have lost the Cold War and Cuba and North Korea would be paradise.
In fact, I would think it obvious that those who Got It Wrong should be penalized.
Great, let's get those Democrats out of there. We can start with the ones who insisted Fanne Mae and Freddie Mac were just fine and didn't need more stringent oversight, like Chris Dodd and Barney Frank.
This is so stupid it's mind-boggling Krugman is still considered an economist.
Only people who are predisposed to agree with Krugman still consider him an economist. He crossed the line into "partisan hack" years ago. Otherwise he might be inclined to consider modern examples of Keynesian abject failure, like Japan's twenty-year "lost decade".
Rob Lyman,
If I understood your first comment asking this question, then I would argue that the answer is meaningless. Every debt is someone else's asset, but that has always been the case, now and prior to the most recent expansion in the multiple of debt to income (GDP). What is missing in the discussion is that of net wealth- a measure that until recently looked good for Americans, but the problem is that assets can fall in value, as Americans are learning every day now.
One or two of the commenters seem to think it possible to double count a debt, but I don't see how- one can't lend money and create a debt for himself and for someone else at the same time.
Every debt is someone else's asset,
So the question is, how is that netted out? Is the sale of an MBS counted as a new debt, or is only the original mortgage counted? Or are mortgages not counted because they're secured by property, but T-bills and credit cards are counted because they're secured only by a promise?
I guess what I'm getting at is, I don't understand what is meant by "debt" here. Is it debt Americans owe to non-Americans? I don't see how that is possible; we'd be borrowing a whopping fraction of the world's production. But if it's "internal" debt, what does it even mean to have an increase in debt given that all debt is, as you say, also an asset? Or is this chart somehow linked to asset values (which is far from obvious given that it purports to measure debt against production, not wealth)?
Perhaps everyone else here understands the answers to these questions. I don't.
Rob,
Take a mortgage, for example. I borrow $100K. I have $100K in debt, the bank has $100K asset. The bank pools my mortgage with others and creates an MBS and sells it for cash. The bank is out of the picture, it holds neither assets or debt for this transaction. The MBS buyer holds the asset created by my mortgage, so there is still the correspondence of debt for asset, but the mortgage is not counted twice.
You can't read it at the bottom of Megan's reproduction, but the graph is from data from the Bureau of Economic Analysis, the Federal Reserve, and the Census Bureau. I trust they know how to collect debt data, but I will dig a bit to find the methodology for you when I get home this evening.
As for the netting question, it might not matter if every person's debt service was returned as income earned by someone else's debt service, but this is clearly not the case. Some people are net debtors and others are net creditors. Has the explosion in debt/income occured because net creditors are taking on more debt than before? It would seem to me that this cannot be true by definition.
What are the consequences? Personally, I think the realization that the ratio has to come down has begun to set in, and the ratio will come down as people repay some of the debt by saving more and spending less, and some of it gets written off over time as unpayable. The ratio can't expand forever- it either adjusts now or later from an even more unbalanced point.
The bank is out of the picture, it holds neither assets or debt for this transaction.
Well, suppose the LocalBank doesn't sell the mortgage outright. Suppose it creates an SPE which holds the mortgages and issues bonds timed to mature as mortgages payments become due (this is in fact one of the structures used for MBSs, or so I'm told). Now the SPE is in principle in a zero-net-worth situation (owns a mortgage, owes on a bond) but there are still two negotiable notes out there, one from the mortgage and one from the SPE. One debt or two debts?
Suppose I buy the bonds issued by the SPE with the proceeds of my HELOC, such that now the debt is circular. No debts or two debts? Or one really small debt, equal to the difference in interests costs on the notes and the mortgage?
Or more realistically, suppose I buy corporate bonds issued by MegaBank, which holds a portfolio of MBS's including the bonds issued by the SPE which holds my mortgage. No debt or three debts, because three notes?
I certainly don't mean to ask you to be my personal research source, but it seems to me if we don't know the answers to these questions, we don't know what we are arguing about (assuming that's what all the posts are about; I can't read them all because I have to shampoo my leg hair today). But I suppose that's not a usually barrier to certainty on the Internet.
Yancy,
I think Rob is right. You need to include the fact that the bank didn't sell the mortgage for cash. Rather, in many instances, it lent the money to a hedge fund that bought the MBS.
assuming that's what all the posts are about; I can't read them all because I have to shampoo my leg hair today
If it improves your convenience, I got a freshly-sharpened electric hedge trimmer I can lend you. I'll need it back by the end of the week, though, as I have an appointment with the undergrowth that has been sheltered below SoV's sense of self satisfaction, and that's a lot of real estate to tackle.
Rob,
Your Local Bank has it's cash back from the SPE's bond sale- it is still out of the picture.
I owe $100 K, Local Bank is a lender nor borrower now, the SPE has my $10OK mortgage as an asset and a debt of $100K to the buyers of the SPE's bond (I am ignoring profits here which are important to be aware of, but I want to keep this as simple as possible). I service debt only, I am a debtor, the SPE services debt and receives debt service, the lenders to the SPE receive debt service and they are creditors.
I would say there are two debts here and one piece of collateral. I would guess the Federal Reserve would count this the same way. This would show up as an increase of debt vs income over what it had been before I bought my house. Sure, the income of my interest payments serve to pay the interest on the debt of the SPE, but the ratio of debt to GDP accounts for this, I think, since both income streams (me to the SPE, and the SPE to it's lenders) will show up in the denominator, too.
Anyone have an opinion or actual, first-hand knowledge?
Eric, the value of the insured instruments could be on a cash flow basis, which would be lowered by the cramdown Megan discusses next, or in some other way. Though the valuation is important, the essential elment is that counterparties and perhaps not the bank is insured for the assets. Thus counterparties can more reasonably trust that the bank is good for its apparent assets.
Such an arrangement would be a corrollary to what Megan has called 'the best change of FDR' the institution of the FDIC. In this situation when you put money in a bank or FDIC insured institution, though the typical managing counterparty is that insitution, if liquidation of the bank occurs, the counterparty is the FDIC. Thus you can deal with the bank without fear of the 'one tailed risk' that Cabellero talks about.
So Keynes is wrong just because everyone you think is right is wrong? Erm no.