Everyone's complaining that the problem with the tax component of the stimulus is that it will be saved rather than spent. But what if that's a feature, rather than a bug?
Think of it this way: the government currently borrows money very, very cheap. Why not distribute the entire thing as tax rebates, payroll tax cuts, unemployment insurance, welfare/disability payments, or Social Security "bonuses"? Perhaps throw in an additional tax credit for paying down debt.
It would be interest rate arbitrage on a national scale. It's certainly no stupider than many of the suggestions I've heard for curing this crisis.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
"Why not distribute the entire thing as tax rebates, payroll tax cuts, unemployment insurance, welfare/disability payments, or Social Security "bonuses"?"
Hmm, I don't know...maybe because that doesn't actually create any jobs? You know, the whole point of spending $800 billion in the first place?
Seriously, if you're going to say "maybe everyone saving lots of money is a feature", you might want to offer even a shred of evidence that people paying off debt and hoarding money is going to do anything to affect the unemployment rate. This is, in fact, much stupider than many of the solutions I've heard. Which is probably why it's virtually exactly what the Republicans want to do.
Megan, I'm wondering what you think of this proposal to tax credit up to $15k of a home purchase. This seems like a really bad idea to me.
I'm for saving money, generally, but I don't think I quite understand what you're saying here. People pay their debts and save their money. Okay and then what? If the concern is about when middle-aged people retire I can see the logic, kind-of, but that's not the problem right now is it?
Or do you mean if they save they'll better survive their period of unemployment? Or what are you saying?
Some made that argument following the first stimulus (everyone remember that one?). While that affect may not have been strictly bad, I don't remember the first stimulus being a clear knockout blow to the coming recession.
Adam -
Well, if you believe that what is actually happening is that the world is way, way over leveraged, which is to say way, way too far in debt and that this leverage allowed us to fool ourselves into thinking that we were more productive than we actually were and that we are therefor seeing our true level of productivity and, what's more, the necessary paying down of that debt is a further drag on the economy, then borrowing more money to "create jobs" will just prolong the necessary corrections.
You will, in effect, just be getting further into the hole we're in while wishing away the harsh reality that must eventually be dealt with.
On the other hand, getting a plan together to more effectively and efficiently deleverage the entire world, which is to say having the people who can borrow most cheaply borrow and give the money to people who are drowning in expensive debt that can't be rolled over would facilitate the necessary deleveraging and get us back to the point where we can begin real growth from our new, lower baseline more quickly.
That is, I believe, what Megan is advocating, and perhaps what the Republicans are too and if they are, they are right.
Unrealistic levels of borrowing have gotten us into this mess. We are not going to get out of it by borrowing a lot more. And wishing to keep the unemployment rate down at the expense of not dealing with the fundamental problems in the economy is by far the stupidest thing that I've heard.
(AP) - This just in....Authorities report "feature rather than a bug" has now officially expired. Due to overuse on blogs in the last month it is no longer considered fresh. Reports of readers covering their ears and ripping out hair in mad rage are widespread. Bloggers will have to go back to tried and true even if dull phrases like "it's a good thing not a bad thing". Some blogs who heavily rely on the phrase are considering shuttering operations.
Adam,
You can only say that it doesn't create any jobs if literally none of the money is spent by the recipients, or is spent by those entrusted with investing the money. This is the fundamental problem I have with the stimulus proponents- they make the exact same argument against the stimulus checks that about half the opponents make against additional government spending, and they don't even realize it!
"I'm for saving money, generally, but I don't think I quite understand what you're saying here."
What she is saying is that the government can borrow at 2%, give you the money and you can pay off your 6% auto-loan, 5% mortgage, 7% student loan, etc. The interest rate differential is wealth creation. And if on aggregate you reduce the debt load of households you increase banks willingness to lend to households in the future.
Also, once people pay off their debts and accumulate a cushion they have cash flow they can spend.
Besides, if people are paying down debt and saving more, who really has the right to tell them not to do that?
"We hold that each man is the best judge of his own interest." - John Adams
Jay, are you predicting that the "reduced debt" households will simply borrow more money in the future? Now the government owes more money (to be paid by taxpayers) as well as the taxpayers. Doesn't this just delay the problem?
How do we actually reduce or eliminate our debt?
"Besides, if people are paying down debt and saving more, who really has the right to tell them not to do that?"
I'm sorry what does this concept have to do with job creation again? I mean throwing out fun slogans about "freedom" is so very awesome and all, but how is this on topic?
Is the argument that people using tax rebates and tax cuts to pay down credit card bills is going to create job growth? Seriously?
Focus people. We're trying to create jobs and get this country back on track. More gimmicky finance schemes or empty rhetoric about "I know what's best for me dang knabbit!" are not helping.
So to ask the dumb question. If we carry this process out to the extreme, why not have the Federal gov. buyout 50 or 100% of all privately held debt in the US and then have that debt repaid to the Fed. Gov (and you have to repay or they'll garnish your wages) at an interest rate equal to or even slightly above to account for overhead/bad loans? Basically have all privatized debt refinanced into public debt that private entities are still required to pay.
It would seem there is no free lunch, but Megan's assertion and my extreme example would contradict that, no?
Were this the case you can be certain I'd max out my credit cards and pull out the equity out of my house tomorrow though, so maybe they'll have to have a date range for the debt if my ridiculous proposal is to be offered.
The paradox of thrift is no paradox. Saving is the way in which the economy recapitalizes itself. A saved tax cut is most definitely a feature, not a bug, and not even for the interest rate arbitrage reason given.
The argument that debt rates go higher as income levels fall is a basic error of economists like Krugman who can't recognize people resturturing their own personal balance sheet. This happens because people nominally don't get rid of their liabilities in *anticipation* of losing their job. It's the other way around. Income streams shrink first, and only among some people. Then liabilities are removed, and purchased by those whose balance sheets are sound, and even have surplus assets, and who didn't lose their jobs.
This is a "reset" in action. It is not a deflationary "spiral" it will end on its own when the asset values are lowered to their rightful values. This is an analogous metaphor for what should be taking place in the banking sector and what would happen if the Zingales plan were discussed with any seriousness.
It seems the Keynsians have the day, and it seems that journalists like Megan find it easier to spend time talking about the multitude of stimulus "options" we have rather than seriously considering the best option of all: no stimulus.
BB&T CEO (and Objectivist) John Allison recently discussed a reasonable approach to the crisis and a full plan for resturcturing. How about some thoughts on that plan Megan. It's not Keynsian based. Summary here:
http://fr33agents.com/bbt-chairman-on-bailouts-and-govt-stimulus/
Honestly, I can't believe how obtuse conservatives can be. A "Stimulus" package of targeted spending projects is a budget busting waste of money but tax cuts - which cost the same amount - are a great idea that's good whether the economy is in the toilet or booming. In truth, tax cuts are the only policy proposal Republicans have had for thirty years now. Tax cuts are the reason the country was running 400 billion dollar plus deficits BEFORE the bank bailouts. There is not one shred of evidence to support any claim that tax cuts will improve the economy. And commentators and Ms. McCardle claiming they'll help people save money - that's complete crap. It's a drop in the bucket by most people's debt standards and long term will have NO impact on household debt - so drop that moronic argument. Be consistent. If you're worried about deficits then you SHOULD oppose the stimulus package AND the tax cuts. If you're a rote Republican hack then you're support of tax cuts makes perfect sense.
Megan,
Sometimes you are simply evil.:~)
Maybe Krugman is full of crap, but he says that some things have a greater stimulative affect than others. I think it is reasonable to debate him on this point. What is unreasonable is to argue that running big deficits during economic downturns is good fiscal policy. The stimulus bill needs to be bigger and it would be better if Republicans focused more on increasing proportion of the bill that goes transfer payments and middle class tax cuts rather than on trying to make the bill smaller. And also liberals like Krugman should take that deal, because the large spending heavy version he would prefer just isn't going to happen.
According to Leonhardt's column yesterday the administration considered sending everyone debit cards. But such is an unbalanced approach.
We can't simply reward consumption and debt anymore; it is essential that we reward work, that we create jobs.
Maybe a political party should campaign on the premise that tax cuts are the best thing ever, the only way to create jobs. They would surely be rewarded with a permanent majority! Right...
Why not? Because we're trying to create jobs not a temporary blip in a long economic slide. Obama should be commended for his balanced approach, marrying a quick shot in the arm & public investment.
That is a non-insane proposal, I'll give you that. It would, in effect, be part-stimulus and part-bailout in that it would recapitalize financial institutions. My concern is that it would be way too little stimulus, while the recapitalization, at least by people who don't live in a cave, would go to stronger rather than weaker banks. That isn't necessarily a bad thing, because it would be a final market decision that some banks should live and some should die, but we should at least agree that's what would happen and pre-approve it, to coin a phrase, as what we want.
Nathan:
Perhaps I can untangle the argument and show you the consistency. Please assume, just for one second, that private money is more efficiently spent than public money (since private money is spent by the people who benefit from that spending they have incentive to get the most value for that money, public money is spent by others on others, so the spenders have little incentive to find better value). You don't have to agree with this, but just assume, for argument's sake. If this is the case, than an equal amount of money in tax cuts will be more efficiently spent than stimulus public projects, and we will have more to show for it.
Or...
Tax cuts will not result deficits if they are coupled with spending cuts. More money flows into the private market, where individuals spend it how they see fit. If they happen to save it rather than spend it, they will most likely invest it, rather than stash it under their mattress. So either the tax cuts get spent, which creates demand for product, which creates jobs, or the tax cuts get invested, which grows businesses and creates jobs.
As for the original proposal, I have to go with sam, it creates some very poor incentives.
I believe I have already explained why this is indeed a feature, over at Pejman Yousefzadeh's blog.
Megan,
When the stimulus rabte came in last year, I took that money and bought tickets for my wife and kids to spend the summer with Grandma... overseas.
If me and my fellow residents of North Fulton County had pooled the money and invested in an extension of the Marta rail line to our comunity, or at least on dedicated bus lanes, the money would have been expended in our community,a dn there a lot of jobs to be created in building and operating those things, but even better, we would enjoy for years the economic benefits of less clogged roads and increased worker productivity.
Granted. Infrastructure projects doesn't create jobs immediately, and some other approach could be used for that. But just putting a little more in peoples pocket will only increase the consumption while it lasts.
So Harry, are you telling us that these sorts of investments are a good idea when it's other people's money, but that you have higher priorities for your own? 'Cuz that's what it sounds like from here.
Excellent post by blighter. Personally, our "new, lower baseline" really scares the hell out of me though. I'd prefer we parachute to it than plummet.
I have to say that if we have to have a “stimulus” bill, Megan’s proposal makes more sense than the porkulus bill that’s being debated in Congress right now. Borrowing more money that is going to have to be paid back or at the very least crowds out the ability of businesses to borrow seems like it’s only going to prolong and increase the pain than biting the bullet and letting the economy reorganize. I agree with blighter and Yancey Ward that if it results increased savings and/or deleveraging of private debt, it would be more beneficial than the feeding frenzy we see now. That all being said, my preference would be for no “stimulus” bill.
Wouldn't money saved have the benefit of encouraging banks to lend? If the credit markets haven't thawed out enough, wouldn't billions more invested in savings account spur banks to stop hoarding money (if that is what they are indeed doing, as I've seen them accused of) and actually do something with it?
Also, a tax cut-based approch would definitely avoid the massive inflationary effect that printing hundreds of billions of new money would have down the road.
"There is no free lunch"
Arbitrage is sort of like free lunch. The only people losing are investors that are willing to lend to the government for so much less than they are willing to lend to the private sector, but what they lose in lower interest rates, they gain in having less risk (which in today's market seems quite valuable).
It's a good idea, but I'm not sure how much stimulus it provides. The amount of money going into the economy in the short term would be the amount of money that people choose NOT to save or put into paying off debt.
It does have the added bonus of recapitalizing the banks that have all these private borrowers in so much debt.
The basic shape of the problem is that private sector financial institutions made a vast stupid misallocation of capital over the past 8 years into assets that turn out to be worth much less than they thought. If we hand out cash to everyone, many of whom now owe money to financial institutions who stupidly lent it to them so they could buy things they can't afford, then much of the money we hand out will go to pay off those stupid financial institutions for their dumb bet. Meanwhile lots of people will continue to lose their perfectly good value-generating jobs simply because the cash and credit flow has seized up due to the stupidity of private sector financial institutions.
I don't know how to fix this thing, but I do know this: the economy is complex enough that if you say "Why don't we take all the money and (do x)", you're wrong. The stimulus bill does a number of different things at once. That's how you know it was put together by serious people.
I probably should restate it just so people don't get too confused- I am part of non-stimulus crowd. I think borrowing to spend more by the government or through the agency of the citizens is the wrong reply to this crisis. The problem is there is too much debt to be serviced by the income of the country, and this is true whether or not we transfer some or all the debt to the government's balance sheet. The Treasury can borrow cheaply now, but that would change as soon as it became apparent we were trying to shuffle the debt of the private sector onto the government balance sheet. There are no free lunches.
However, the argument that there is more bang for the buck of borrowing by having the government spend rather than letting the citizens do the deciding collectively through their individual decisions is not supported by any logic whatsoever. Every proponent for having the govnerment spend the money directly always falls back on the argument that government spending raises the GDP by 100% of the spending amount by definition, thus must be better because your multiplier is already 1 or greater, but this simply begs the question in trying to determine the most efficient use of the newly borrowed funds.
It would be interest rate arbitrage on a national scale. It's certainly no stupider than many of the suggestions I've heard for curing this crisis
It is not an arbitrage if the taxpayers are ultimately responsible for paying public debt. I dunno.. sounds kinda stupider..unless, it is part of some nefarious libertarian plan to make it prohibitively expensive for the US govt. to issue debt in the future.
Why not just let private individuals borrow directly from the Federal Reserve at the interest rates the banks get? How is that really any different than what Megan is proposing?
And this has to be the studidest sentence I have read in the last week (and I have read quite few of them):
LOL! That, of course, should have read "stupidest".
Willem Buiters at the FT has a new blog post up as of yesterday. He opposes massive fiscal stimulus plans of any kind (neither public spending nor tax cuts and transfers) and argues that nobody in the world believes anymore that the US and UK governments will ever control their borrowing and spending. That sounds about right to me.
I understand that there is a theory behind the public-spending stimulus that Krugman pushes, but I wonder whether he or anyone else really believes in it. It looks to me like magical thinking, and that the truth is that there is no easy way out of the hole we're in.
Why not distribute the entire thing as tax rebates, payroll tax cuts, unemployment insurance, welfare/disability payments, or Social Security "bonuses"?
That's what I've been saying. Ever since the idea of a massive stimulus has been banded about, I've wondered why we don't just do something like Bush did and start cutting checks for the American people, only on the order of $5000 instead of $600. Sure, it'll cost billions-- but isn't that the idea?
Yancey Ward
"The problem is there is too much debt to be serviced by the income of the country,"
Is that really true? Also, which debt? Credit card debt? The public debt? All debts public and private?
"However, the argument that there is more bang for the buck of borrowing by having the government spend rather than letting the citizens do the deciding collectively through their individual decisions is not supported by any logic whatsoever."
I don't think it is a question of logic, or making a clever argument, or anything like that. Arguments, at least in that sense, are totally meaningless.
It is a question of what is most likely to happen given that the government takes action x or action y. This sort of thing can, to some degree, be known through some process of investigation. The blog post several down, where MM cites what someone else has read about some paper that someone wrote about the tax rebates is actually a significant step in the right direction, because it tells us something about how people actually are known to behave. One of its defects, however, is that it does not supply any information about the multiplier to which you are referring.
So Harry, are you telling us that these sorts of investments are a good idea when it's other people's money, but that you have higher priorities for your own? 'Cuz that's what it sounds like from here.
Posted by Squid | February 5, 2009 11:30 AM
That is exactly my point. And it's not me is human nature. It's a variation of the "tragedy of the commons".
Matt,
By your own reasoning a tax cut is better then. If your bill says "take all the money and do 100 things" a tax cut says "take all the money and let 150 million taxpayers do 50 million different things" (assuming there is some overlap) is a much better plan.
Some will buy a TV. Some will go on vacation. Some will pay down their credit cards. Some will pay back their landlord on their late rent payment. Some will put it towards a car. Some will fly to visit their grand parents and so on.
All of these things flow back into the economy with one overriding principle - CHOICE. You are deciding how to spend your money and you decide what you value it on.
Now this obviously won't happen because like Obama says, he won.
But we disagree as to a combination of bridges, roads, condoms, unemployment is a better alternative to 150million tax payers deciding what to do with their money in a way that brings the most value to them personally.
Of course, large projects that are for the good of society and communities should still be considered. But let's consider them on their own merits instead of suggesting, "Unless we get this railroad and bridges bill through now the economy will crumble and never recover!"
What is consistently left unsaid is that, depending on one's political/ideological preconceptions the authors of the bill (as well as all other bills, really) are (1) applying their expertise in service of the public or (2) pursuing the mercenary interests of their own or their contributors. There, I said that. Different realities.
A bit of criticism.
This whole crisis supposedly occurred because everyone is over leveraged, or has too much debt, or not enough savings, or however you want to phrase it.
People determine the appropriate amount of debt by looking at their income. The believe that a certain debt to income ratio is appropriate. If the treasury cuts everyone a check for $5,000 (or whatever amount), this increases everyone's income by that amount. To the average Joe, this may mean that he can/should borrow more, to maintain that debt/income ratio.
In other words, the danger isn't that Joe will spend his $5k on a big screen TV, but that he will decide to borrow an additional $3k to but a $8,000 jet ski.
We've already seen that free money creates bubbles because people bid up prices.
Yancey - I agree wholeheartedly with your award to Matt Steinglass of stupidest sentence. I actually read his post twice because after that sentence I was sure it was some kind of sly satire that I had missed the first time. But no, somebody actually thinks that massive omnibus bills rushed through and full of laughable pork are the mark of seriousness. I weep for our nation.
To your point about the debt being too high to be serviced by the income of the nation, I agree wholeheartedly. We don't make as much as we thought and we're way over our heads in debt. It needs to be paid down, not run up for "stimulus spending".
I don't think Megan's idea of interest rate arbitrage contradicts that: it would definitely drive up the price of future government borrowing but no more than an equivalent amount of borrowing to spend on "stimulus" would. And if the money were spent paying down debts to facilitate the deleveraging process, it might actually help the problem and give us the "parachute" drop to the realization of our new, lower income that Staash (and I) would prefer.
I think the problem is that lots of people still haven't come to grips with the fact that our economy is just not as productive as we were pretending it was. They think if they can just create the right policy, we'll bounce back immediately to where we were. But that's just not true. The question isn't how can we stimulate ourselves back to last year's economy, it's how do we best deal with the necessary pain of coming to grips with our reduced station.
Actually it seems more a sign that this bill was put together by a group of people who wanted to take advantage of a “crisis” by ramming through funding for their pet projects in the hopes that public panic would win out over sober scrutiny.
Not that that sort of thing has ever happened before.
To Bob Natas, yes, the debt is too high. All of it, public and private, credit cards, mortgages, bonds, everything. It was taken out with the expectation that we were making a killing and going to be making more soon but the killing we thought we were making was illusory and the promised increase has instead been a crash. Now, it's not too high to be serviced but that servicing and the pay-downs of it are an enormous drag on the economy. A necessary and unavoidable drag, but a drag nonetheless. Couple that with the fact that our economy does not produce as much wealth as we were able to pretend it did for years through the magic of leverage and things look pretty dire. But these are just the fundamentals of the economy that we've painted ourselves into. It's reality. You cannot borrow a bunch of money to keep the good times rolling, reality must be faced.
A good analogy is hangovers. In my salad days, I was fond of the "three beer rule". This stated that any hangover could be cured by drinking three beers. And it works. But, of course, you do not escape a hangover that way, you merely put it off until you sober up again. And the hangover is that much worse when it comes. We are hungover now. We've been drunk on debt for years and, like most drunk people, had the belief that we were gods among men so long as we kept drinking. And every time we came close to sobering up, the government would spike the punch bowl even harder to keep the good times rolling.
And, like the three beer rule, it worked. But now we've run out of alcohol and the cumulative hangover is hitting us. There is nothing for it but to suffer through and try to get back to productive, sober living. It's a shame that we won't be able to feel like gods among men for a while, but it is necessary. You cannot stay drunk forever, no matter how much you might like to.
"You cannot stay drunk forever, no matter how much you might like to."
The statement above is demonstrably false.
Laissez les bon temps roulez!
Harry - If you're worried that you won't spend your money appropriately, I am happy to volunteer to spend it on your behalf in ways that provide the most benefit to the most people. Just please send me all of your money and don't worry about a thing, it'll be spent wisely with a level of responsibility that you apparently feel incapable of exercising yourself.
No need to thank me, the pleasure of spending your money for you will be more than adequate recompense.
blighter
I'm under the impression that in the UK, for instance, the ratio of debt to income is higher than ours (of course, this could be wrong). Per the discussion about the opinion of the Japanese "investors," maybe the same thing is true for Japan.
Let me rephrase. The question is: what sort of quotient of debt to income is "dangerous"?
To Bob Natas, yes, the debt is too high. All of it, public and private, credit cards, mortgages, bonds, everything.
Unless most of that debt is owed to foreigners, how is it possible for "all" debt to be too high, or for it to be a "drag" on the economy? Everyone's debt is someone else's asset, so for every idiot in over his head, there's a bondholder somewhere with a claim on the idiot's production. And while that bondholder might get screwed by bankruptcy, there's also a retailer and manufacturer somewhere who got the money selling things to the idiot and can spend it. On the other hand, if the idiot is forced to pay down his debt, he reduces his consumption but the bondholder gets to increase his.
That is, while excessive debt and the coming bankruptcy/deleveraging party may have redistributive consequences, I am confused as to how it can "drag" on the economy unless most of the paying-off is sending free goods to China (which, admittedly, we do need to do).
Can somebody clarify for me?
Bob Natas:
In Japan, public debt is high. Japanese households save, unlike us.
Japanese households save, unlike us.
What are they going to buy with their "saved" yen when there are 16 or 17 Japanese workers in their 20's and 10 million over 65?
What are they going to buy with their "saved" yen when there are 16 or 17 Japanese workers in their 20's and 10 million over 65?
Honolulu, of course.
Megan, I'm wondering what you think of this proposal to tax credit up to $15k of a home purchase.
I'll weigh in on this one: bad idea if it's permanent, but it's perfectly fine as a temporary measure. My understanding is that's it's indeed a temporary (one year) measure.
Hmm, I don't know...maybe because that doesn't actually create any jobs? You know, the whole point of spending $800 billion in the first place?
Adam: The overwhelming bulk of the stimulus package consists of the direct cash/tax measures Megan mentions. So, we had all better hope it ain't true that such spending "doesn't actually create any jobs." Personally, I agree with Megan, with the proviso that such a plan should also include ample direct budgetary aid to the states (I can't see the point in allowing the fifty states to suffer a precipitous drop in their aggregate budgets in times likes these).* I personally would also like to see non-bankable spending vouchers as part of the package, too.
Anyway, now that I think of it, Megan's idea is pretty much what we're getting, I think. My impression is the "jobs creation" part of the stimulus package (ie., so-called shovel ready projects and constituent gifts) is a pretty small proportion of the two plans under consideration.
*I would like to see the government throw money at infrastructure and the like as well, I'd just rather see this kind of spending in a second stimulus bill.
Rob writes: "On the other hand, if the idiot is forced to pay down his debt, he reduces his consumption but the bondholder gets to increase his."
More importantly, the bondholder can choose to keep his consumption relatively static and instead lend money to those who are more likely to engage in productive enterprise. Isn't getting capital into the right hands exactly what we need to beat the liquidity trap?
The "Modest Proposal" schtick is getting a bit old. I think Megan needs a new job....one that doesn't require trotting out the same old references week after week.
That should be "rouler" I think. But what do you expect? I told you I'm drunk.
I say no to the stimulus package as currently constituted. I favor a simple one time excise tax on estates worth more than 1MM. The amount of money collected would be used to pay off the mortgages of all current mortgage holders in the country. It would be a big number. We'd end up with a real ownership society.
Bob Natas asks: "Let me rephrase. The question is: what sort of quotient of debt to income is "dangerous"?"
I'll take a crack at this. If you're looking for an exact figure, then the answer is "it depends".
I'd define "dangerous" as the quotient of debt to income that is a liability to the debtor's ability to generate future net wealth, as opposed to an asset to said ability.
Defined in those terms, it really has more to do with the debtor's ability than some arbitrary threshold. For example, I'd imagine that the threshold is higher in Switzerland than, say, Uzbekistan.
Winky,
An excise tax is a tax on the production of a specific good. But I like the idea. You probably have also figgered out that I'm not the real JP Morgan, who wouldn't have liked your proposal at all.
Rob,
The easiest way to to view the situation is the debt to GDP ratio. Any income streams used to service debt show up in the GDP, so I don't think the netting effect you mentioned the other day can really mean we are not increasing overall indebtedness as much as the ratio indicates.
Where we get fooled, I think, is that we look at debt to assets, and by that value, the private balance sheet, the private sector looks good. However, people forget something important- the assets have felt the price inflation caused by the expanding debt. Banks and individuals are rediscovering the problem with trying to pay off debt by selling assets.
Any income streams used to service debt show up in the GDP
True, but what does it mean that a long-term loan results in "more" indebtedness in the debt/GDP ratio than a short-term loan (because the annual payment stream is smaller)? You can, after all, always pay it off early if you like, so a long-term loan seems like a better deal for the borrower despite looking worse by the debt/income measure.
And again, how can lots of debt drag on the economy generally unless it is owed to foreigners? I have very little personal debt but own the rights to lots of other people's debt via equities; if they retrench to pay off their credit cards, I get higher dividends with which to stimulate the aircraft-carrying-submarine industry. Right?
Finally, how come you're the only one to answer my questions?
Uy vey, why are there so many armchair economists arguing back and forth about things they do not understand? As a PHD in economics, I can assure most of you that you haven't a clue about what you are arguing about. What I think would be more productive is an argument about principals, not a Niagara of back and forths regarding esoteric formulas which most of you knuckle draggers can hardly understand.
What I think would be more productive is an argument about principals
I had thought that repaying the principal on much of the nation's debt was a big part of what we were discussing.
Or are you recommending some kind of help-the-economy-by-rebuilding-schools boondoggle?
Yes and I'm saying that the argument is meaningless because very few of you actually know what you are talking about. I'd rather you argue about whether you think the income tax should be progressive or whether the states should collect their own taxes. For you to argue about a statistic that none of you gets is not worth the brain damage.
Or to put it in another way, if your IQ was 20 points higher you'd be a vegetable.
Rob writes: "And again, how can lots of debt drag on the economy generally unless it is owed to foreigners?"
Risking the derision of a "PhD in economics" (hey, that and a buck can buy you a cup of coffee!), my guess is that debt in itself doesn't drag on the economy, rather it's poorly allocated debt; debt that is unlikely to get paid back or debt that is otherwise in the wrong hands. This (presumably) limits the credit that can be extended to those who would be able to put it to better use.
Wow, looks like Brad DeLong has joined our discussion.
I'd rather you argue about whether you think the income tax should be progressive or whether the states should collect their own taxes.
I'd rather that you be clever enough to understand my comment, but it looks like neither one of us is going to get our way today.
Or to put it in another way, if your IQ was 20 points higher you'd be a vegetable.
I think it more likely I'd be one of those fruits that people like you mistake for vegetables, like cucumbers.
Staash:
First off, that's PHD, and second, what you say makes substantial sense to me but it isn't what most people are saying.
Rob,
You, of course, are assuming you will get paid back. I am arguing that it is impossible that you recover what all you loaned.
You, of course, are assuming you will get paid back. I am arguing that it is impossible that you recover what all you loaned.
In that case, my future consumption is more limited than it "should" be, but Mr. Deadbeat's future consumption will be correspondingly higher. I've basically given him some stuff for free. But the stuff did not appear for free; part of my productivity (such as it is today) went to pay for it.
No one is making a convincing argument in favor of a particular kind of spending. Why is one kind of spending better than another? Why build a road rather than a new commuter rail line? Why do either rather than cut taxes? I'm not seeing a lot of evidence that one option is obviously better. Across the board tax cuts might at least limit the degree to which representatives can parse out parochial spending to their own constituents.
In other words, cancelling all domestic debts tomorrow should affect the economy only 1) by redistribution and 2) in as much as it disrupts expectations and increases uncertainty. There is no reason to expect it to alter total demand for goods and services.
But then, paying off the debt should work roughly the same way unless the debt is external.
Also, part of your future investment is gone. You, today, are allocating funds for consumption and investment, when part of your stream of income disappears due to bad loans being written off, you cut back on consumption and investment to make up the difference. That other guy, we already know how well he invests- he lost your money by buying an overpriced McMansion, vacationing in Aruba every year, or by getting a phD in economics.
Yancey: I think it was a pH after all. Inside his a**...
That other guy, we already know how well he invests...
But in that case, paying down debt should be beneficial to the economy, as the creditors are in many cases smarter about allocation than the debtors (except when they lent it to the deadbeats...) So deleveraging shouldn't harm the economy at all, it should promote a healthier allocation of resources.
I can smell the wood burning here. Jeezus guys, you really need to take a basic economics course. Or better yet, leave it to people who have the capability of understanding such things. Yancey, I've seen you spouting off on this stuff many times. I think you need to get up off your mothers couch and get a job. Rob Lyman, I suggest you get a refund on that lobotomy you had last year.
Others, carry on.
Jeezus guys, you really need to take a basic economics course.
So you subscribe to the notion that Jews have some kind of inherent economics knowledge? How very odd indeed.
Refund on that lobotomy . . . ? Because it was unsuccessful?
Ray,
Then enlighten us. Where are we utterly confused? Or am I just wasting my time on another troll?
Rob,
I don't think paying down debt is a bad thing. I consider a relatively neutral act. However, the deleveraging is going to involve debt write-offs. In other words, a lot of people are not as wealthy as they thought.
Or am I just wasting my time on another troll?
We have a new nominee for stupidest sentence ever written!
Psittakos,
I may have to move Steinglass to second dumbest thing I read this week, unless Ray really meant to compliment Rob.
And now I get to point out, echoing Megan, that when all you have to say is "stupid!" and point fingers, it means you're losing the argument.
Yancey, you're wrong. "The" problem isn't that there is too much debt for the country to service. There isn't a "the" problem. The problem of too much debt creates credit flow problems. That redounds in every industry. It boomerangs through state budgets and services. The problem of too much debt creates transparency problems as banks refuse to own up to their bad debt. Those transparency problems proliferate as people doubt what others have on their balance sheets. And so on.
Any solution to the present economic crisis that begins with the words "we should just" is wrong. We have to solve ten different problems at once. That requires doing lots of things at once. The economy, much as it may pain you to admit it, is a complicated machine.
For example, state governments are cutting public transit budgets because tax revenues are falling and they can't borrow. That means people can't get to work, which means they lose their jobs, don't have money to spend, apply for unemployment relief, and cause more problems for state budgets. How does engaging in risk arbitrage with Treasury vs. ARM mortgage rates or whatever prevent the M15 bus from going to a once-an-hour schedule next month, causing me to either lose my job or not be able to shop for food for my kid? It doesn't. Funneling federal funds to state governments to prevent transit cuts, however, does.
There are a lot of things going wrong right now. Megan's idea would address one of them. Seems like a nice idea to toss into the bill along with all the rest of the things we have to do.
Yance,
Have you ever tried to explain something to a toddler? They don't necessarily understand why you don't want them touching the oven. They see it as fun, because they don't have the requisite knowledge base to recognize that by touching the hot flame, they may incenerate themselves (which wouldn't be the case if they had the requisite knowledge base). Get my drift?
Mr. Lyman, I'm not quite sure what you were talking about before with regard to members of the Hebrew persuasion, but I will use the logical non-sequiter that it represents as evidence that your lobotomy didn't work as it didn't render you unable to blog which would be a good thing to all concerned.
I'm not quite sure what you were talking about before with regard to members of the Hebrew persuasion
You didn't get my other first either, as it happens. I will leave it to Yancy, Thorley, or the Mouse, all of whom I feel confident did understand me fully, to attempt the tricky task of explaining my irritating habitual word games to a toddler.
Great! You, Jugdish, Mohammet and Lonny should have lots to talk about.
Matt,
I am not saying that the too-high debt levels don't have multiple effects, but all you and other supporters of this bill have proposed is to simply increase the debt levels in trying to ameliorate the various symptoms of the disease. You either believe the problem is too much debt to income, or you don't. If you don't, then by all means, borrow and spend 5 or 10 trillion dollars on anything you want. If you think that the debt load is a major problem and source of the all these symptoms, then I just don't understand why one would call for increasing the debt at an even greater rate.
Do you think we have too much debt to income, or not?
Yeah...I can see them now, sitting around their parents house blogging in their underwear.
"Do you think we have too much debt to income, or not?"
That is like asking Jessica Simpson to tell you the Gross National Product of Dijbouti.
I imagine that Jessica Simpson has access to Wikipedia: $1.74 bn
In our next thread, we will discuss the difference between opinion and fact.
Ray:
The principal is your pal and Djibouti is Djibouti. There is no Dijbouti, although there is a Frank Zappa record called Sheik Yerbouti.
Ray,
No, it is like asking Jessica Simpson if she thinks Beyonce wears too much make-up. In other words, I think Matt Steinglass might actually have an informed opinion on the matter, and knowing it might allow one to better understand his prescriptions.
And, for future reference, the word you were looking for earlier was "principles".
I see Psittakos beat me to it.
Does anybody want to take a whack at my bizarre reference to the Sons of Jacob? C'mon guys, I'm not that opaque, am I?
No...it really is like asking Jessica Simpson. Now if Beyonce asked Jessica Simpson whether she knew the GDP of Dijbouti, that is more analagous to your situation regarding Matt Steinglass because he is as likely to know the correct answer to the question as Jessica is hers.
As for your Conan the Grammarian routine, it doesn't make you appear smarter. What it does do is make you look like a smart aleck or in other words a dick.
The Sons of Jacob aren't "Jeezus guys"...
How dare you guys discuss economics on an economics blog! blaspheme! Only those educated in the arcane arts, only the grand guild masters, only those bright rays of light are allowed to mention to words debt, principal, and multiplier!
Now begone, you unwashed masses, go do something else, and leave those comments, so that the greatest thinkers of our generation can think.
What it does do is make you look like a smart aleck or in other words a dick.
Heaven knows I would hate for anyone to think that, what with the extraordinary decorum and gentility which prevails around here.
Another member of the underwear club pees in.
The Sons of Jacob aren't "Jeezus guys"...
I'm not the one who said "Jeezus guys," though...
What is the point of talking about economics on an economics blog if you don't understand economics. It would be as if I was trying to correct a jet engine mechanic as to how to properly repair the 5th fetzer valve....not gonna happen.
Rob,
I have to admit that I didn't immediately get your reference to the missing comma in "Jeezus guys". I just assumed it referred back to Ray's very first phrase.
Rob writes: "I'm not the one who said "Jeezus guys," though..."
Uy vey, what a nitpicker. No wonder you've found a career as an attorney.
What is the point of talking about economics on an economics blog if you don't understand economics
What is the point of refusing to talk about economics on an economics blog?
Uy vey, what a nitpicker
Normally I'd let it slide. I've seen probably 100 principal/principle confusions going both ways in the past few weeks. But as Ray refuses to offer anything substantive to engage with--and as he has a rather high opinion of himself--I'm taking the opportunity to hone my deliberate misinterpretation skills.
Ray,
If you do, don't forget the 3 in 1 oil and the gauze pads.
As it happens, Djibouti is the world's third largest producer of fetzer valves. It is the export of these fetzer valves and the steady hand of Sheik Yerbouti that allows Djibouti to consistently run a current account surplus. Also, as we all now know, the Djiboutian franc is pegged to the dollar. I have learned a lot here.
Rob,
When does that fact/opinion thread start?
In my opinion, it will start at 7:03 PST today.
However, only PHD economists will be allowed to participate, because the rest of us don't need to discuss it.
I get the sense that Yancey and Rob are the same person...or if they are not the same person, they are very close...maybe even too close if you know what I'm saying.
Anyway, either of you geniuses want to explain the Slutsky Equation? It should be a snap.
Silence. Oh well. I'm sure Krugman could.
maybe even too close if you know what I'm saying.
So now you have something against gay people?
But to get down to brass tacks here:
The Slutsky equation states that a change in demand as a result of a price change is a result of two components, the substitution effect (in which equivalent goods may be substituted for the good in question or vice versa) and the income effect (in which a change in price affects a consumer's perceived purchasing power and therefore spending habits).
Having done that, have I earned the right to a response containing something other than logical and grammatical errors?
Actually, Ray, why don't you explain its relevance to this thread? It should be a snap.
Actually, Ray, why don't you explain its relevance to this thread? It should be a snap.
By my count, Ray has now exceeded the authorized response time by 1130%.
You either believe the problem is too much debt to income, or you don't.
Well then, I guess the answer is that I don't. I don't believe "the" problem is too much debt to income. If that were "the" problem, the solution would be to force banks to deleverage at any price and let the ones that turn out to be insolvent go bust. Wipe out the debt and move forward. Simple, right? But that was what was tried with Lehman Bros., and their collapse threatened to bring the flow of money and credit throughout the US and ultimately the global economy to a screeching halt. And then all the solvent banks go down with the insolvent ones, and the US government ends up paying out in FDIC funds the sum total of all deposits in all the country's banks -- how? It issues government debt. So it turned out we can't do it that way.
Now we have to try to tease our way through forcing banks to deleverage without letting any of the big ones collapse. The problem is that while we're in that process, we have a huge liquidity problem: banks won't lend because the environment is so uncertain you'd have to be crazy to lend. For that matter, businesses won't borrow for the same reason; smarter to play it safe and cut costs by firing people. And individuals won't spend, for the same reason: they might get fired, so it's smarter to save. And so we spiral downwards into a liquidity trap, destroying value and productive capacity as we go.
We have a debt problem AND a liquidity problem. We can't work only on the debt problem while ignoring the liquidity problem, because the liquidity problem will destroy our economy and by the time we've reshaped the debt problem into a form we can start paying off, our GDP will be so much lower that it'll be harder to pay off that debt. We don't want to have to pay off all of Citi's CDO debt while also paying long-term unemployment or welfare to 3 million people in the Midwest because our auto industry went belly-up because a credit crunch rendered it unable to weather 2 years of losses. We have to keep our economy afloat while we clean out our banking system. We have to work on both problems simultaneously.
When Mexico, Thailand, SKOrea, etc. went through this kind of thing, they had IMF funds and guarantees to help them preserve liquidity while they sorted out their banking situations. But we're the US, so there's nobody to help us. Nobody's big enough, and they're all in crisis too because of us. So we just have to fix it ourselves. It's not going to fix itself if we just hand everybody in the country a few thousand bucks. The government actually has to do something in this situation. That's just the way it is. All of the solutions are bad, but temporarily nationalizing many banks with a view to reselling them, and borrowing at low rates to keep government services and maintenance going, funnel cash to the needy/spending-propense, and do some infrastructure and other worthy spending, seems like the best of a set of bad options. It is a complex set of problems and requires complex coping strategies.
I also just wanted to add that it was way harder for me to spend my stimulus money last spring on anything in the US economy than for most of y'all, because I live abroad. And so I saved it for six months and then, when I came back in December, used it to pay for half of a gen-u-ine all-American MacBook. So my stimulus creds are totally impeccable. It's not my fault that all the MacBook's parts are made outside the US. At least the profit stays in Cupertino.
America, bitchez -- love it or leave it, or love and leave it and return periodically to visit your parents and buy cheap electronic gear.
Matt:
I guess I'm not entirely understanding what you are saying. You say we have a debt and liquidity problem. If the treasury hands out a massive tax rebate, some people will use it to pay down their debt, thus helping the debt problem, and this money will, at the same time, capitalize banks, which will help the liquidity problem. Other people will simply spend that money, which will create consumer demand for manufactured goods. Maybe spending that money isn't the smartest decision, but I have near infinite faith in peoples ability to make poor financial decisions.
However, even if every single cent of this rebate is saved, it would still re capitalize banks, and ones banks balance sheets are improved, they will feel much better about loaning money. Near everyone is invested in treasuries at the moment, which are paying nothing, people would love to invest their money in something more profitable, and this will give the the opportunity to do so.
The greatest benefit of all this is that it can happen very quickly. In fact, I can see only two ways this would not work. One is if the added income causes people to take on even more debt (hard to imagine since borrowing is difficult right now), or if people choose to save these rebates underneath their mattress, rather than in their savings account, which doesn't seem likely either.
So what am I missing Matt, why wouldn't this work?
"BB&T CEO (and Objectivist) John Allison recently discussed a reasonable approach to the crisis and a full plan for resturcturing. How about some thoughts on that plan Megan. It's not Keynsian based. Summary here:
http://fr33agents.com/bbt-chairman-on-bailouts-and-govt-stimulus/"
How can a smart person take Ayn Rand seriously?
Saving is NOT stimulative, Ms. Galt. Just ask the Japanese(, or the Chinese for that matter).