I don’t know if the need for debt to finance basic business practices (like the auto loans I mentioned) and natural expansion that happens even during a recession is a supply side issue. For this I do support supply side remedies, like what Congress intended the bailout to be. I admit I misunderestimated the ability of a Bush appointee to screw even this up, like Paulson allowing the banks to sit on the $350 billion.
Got a cite for this? I believe you, but I’d like to use it as an example of someone who, as WFB said, is a prisoner of his own rhetoric.
Thanks for re-linking that, as I missed your response the first time around. Reading it now, I don’t disagree a whole lot with it.
I understand Keynes well enough, thanks. And I agree that Keynes himself was interested in solutions to recession in general, and not just balancing the business cycle. However, since his time, most Keynesians have used that argument, and so it is closely associated with Keynes, rightly or wrongly.
As for whether monetarism has failed and Keynesianism has won, that gets directly to the point I’ve been making about this not being a garden-variety recession. Monetary policy won’t work in this case, because the classical response to a lowering of interest rates won’t happen when businesses are less interested in profit maximization than they are in balance-sheet restructuring. So you wind up in a liquidity trap, with zero interest rates and a low velocity of money, and you wind up deflating. I think we both agree with that.
Hell, even Milton Friedman recognized this possibility, and jokingly talked about one way out being to drop money on the population from helicopters, directly injecting money into the economy rather than relying on businesses to borrow it. And indeed, that’s pretty much what we’re talking about doing now - the government’s going to borrow a whole lot of money, and dump it into the economy willy-nilly in the hope that it will start moving around and generate economic activity.
This is the response Japan took to its balance-sheet recession, and some economists such as Richard Koo think that massive capital injections by the government and infrastructure spending and such will ‘short-circuit’ the spiral of contracting business investment and consumer spending. He thinks that’s what saved Japan from a massive melt-down.
And in fact, I think there’s some merit in this, and I think there’s a role for the federal government to use fiscal stimulus to help keep the economy afloat now that monetary policy has fired all its bullets.
But where I part company with you, and side with the Austrian economists, is that I think it’s important to recognize that after all the fiscal manipulation and monetary manipulation is done, you have to remember that what makes for a healthy economy is a productive mix of enterprise that provides the goods and sevices people need. To the extent that a fiscal stimulus maintains non-productive enterprises and prevents necessary adaptations in the real economy, it does long-term damage even though it might do some short-term good. Sometimes, excess productive capacity is not just the result of a recession, but the result of a changing economic order that moves demand elsewhere. That excess productive capacity needs to die off and the resources it uses up allocated elsewhere.
It’s even possible to have excess productive capacity simply because the aggregate economy is no longer capable of supporting it, and therefore it needs to go away and not be replaced by anything at all. Japan’s population, for example, may crash by 50% in the next 50 years due to declining birthrates and inadequate immigration. The productive capacity required for a population twice the size is no longer required, and therefore there will have to be a restructuring and perhaps even a reduction in overall GDP if productivity gains can not keep up with population decline. Any attempt by Keynesians OR monetarists to manipulate the economy to prevent a recession of this type would be disastrous in the long run.
Likewise a rapid increase in energy prices could consume more wealth than can be managed through productivity gains, and other industries would, and should undergo a reduction in size.
An economy is a spontaneously ordered, constantly changing thing. That change needs to happen. When central governments muck about with it in an attempt to prevent necessary change from happening because it is painful in the short run, they do long-term damage. Japan has suffered from this - there was a huge over-investment in infrastructure in the attempt to stimulate the economy, and now the country has more infrastructure than it needs, and much of it is inefficient and would not exist on its own merits but only exists because it was built to stimulate the economy temporarily. But now it has to be maintained indefinitely.
Finally, the other objection to a massive fiscal stimulus is that it requires that other countries continue to be willing to lend money to the U.S., and that they continue to invest in U.S. dollars. I see a real risk in the collapse of the dollar if the debt gets too high, which would be a disaster for the U.S. economy, since it is driven by consumer spending and imports. I don’t know where that point is, but trillion dollar deficits cannot be sustained.
Bottom line: I think there should be some fiscal stimulus, but I think Obama is right to go cautiously, and Krugman’s “go big, go fast” prescription is wrong. The focus now should not be positive economic growth, but just enough stimulus to keep the economy from seriously melting down, however much that needs to be.
I like the idea of jump-starting infrastructure projects that were already green-lit and are ready to break ground, because those will be the highest-quality projects that have the best chance of actually being necessary. I wouldn’t be opposed to something like a blue-ribbon commission to look at necessary infrastructure repairs and upgrades to see if more can be done (there are a number of bridges around the country that need to be upgraded and repaired, and this is necessary work that absolutely has to be done sometime, so accelerating that would be fine with me).
The stimulus should be as big as is necessary to keep the economy from serious contraction, and not one dollar bigger, because anything we do today will have long-term consequences we’d rather avoid.
If it cuts consumer debt, isn’t that a good thing?
I’m sorry, I haven’t managed to wrap my head around this. I think you’re describing “demand side” in terms either nonsensical or unexplained. Smells like straw in here.
You do realize that supply & demand are just phenomena derived from price, right?
Seriously, I just can’t make this stuff up. My favorite quote:
We might be headed to a ten percent unemployment rate, and he’s worried about labor supply? You have to read it to believe it. (I got this link from Brad DeLong’s blog.)
I should’ve suspected that. It happens to me sometimes, when real life gets in the way.
You’ve got yourself a reasonable sort of post there, so thank you for that. I don’t agree, of course. There is a truly astounding cost to an economy that gets stuck indefinitely below its potential output level. And that opportunity cost, what we would have to give up because of insufficiently assertive policy, could easily compound year after year. Almost none of your future fears seem even remotely important considering our present problems, especially given the fact that we’ve loaded up on this much debt before, as a percentage of GDP.
You’ve got it backwards. Price is derived from supply & demand.
Price is information about supply and demand. Price, therefore, is not a law-of-gravity that supply & demand obey.
For most everyday casual purposes, this distinction about what causes what is academic. However, since you’re taking the stance of “enlightening” someone about it, it seems like this should be clarified.
Huh. It has been a while since college. But I guess I would say that the three act on each other.
Can supply-side economics continue to be justified as beneficial for most Americans in the age of globalism and outsourcing? Even foreign companies in the U.S. are cutting jobs and starting to outsource. When globalism encourages capital to flow out of the U.S. into cheap labor markets, policies intended to increase investment and production become a giveaway to maximize corporate profits at the expense of American workers.
The Reagan revolution did give Americans the benefits of market innovation and low prices, but most Americans, despite the enormous growth of the national economy, now have a lower standard of living and no money to buy the cheap goods and services.
Obama and Biden have emphasized a stimulus that creates jobs that can’t be outsourced because it is a serious problem that current U.S. supply-side policies exacerbate in a global economy.
It is even more important in the age of globalism, because American companies now have to compete against other companies operating under different rules.
For example, by 2012 the corporate income tax rate in Canada is going to be 15%. In the U.S., it will be over 40%. Can you see how that is going to seriously handicap American companies who are attempting to compete against their Canadian counterparts?
In an era of open borders, if you tax your rich too much, the rich will leave, or they will park their investments in countries that don’t tax as much. If all of Obama’s campaign promises were carried out, Canada would have lower corporate taxes, lower capital gains taxes, lower estate taxes, lower income taxes, and a less progressive tax structure than the U.S. Can you not see how that favors Canada in attracting the brightest immigrants and business formation capital?
Obama’s been pretty savvy so far, and he has a good economic team, so I’m guessing that those ‘tax the rich’ promises are going to go the same way as his promise to immediately start withdrawing from Iraq and his promise to let all the Bush tax cuts expire.
30 years ago, not many countries could compete with the U.S. in terms of capital investment and worker productivity. So high marginal tax rates could be somewhat sustainable without major capital flight. Today, many countries in Asia are competitive with the U.S. in terms of capital investment and productivity. And the emergence of large consumer markets in Asia means shipping costs will also be less of a barrier. So the U.S. is losing its competitive advantages, and along with it its ability to maintain high tax rates on the productive assets of the country.
You mention outsourcing. Perhaps the question to ask is why companies are outsourcing. The only answer is that it’s profitable for them to do so. It would also seem that there are only two ways to prevent this - one is to make it less profitable to outsource by erecting barriers to trade and capital movement, and the other is to make it more profitable to create things at home by lowering taxes and regulations.
My greatest fear is that the U.S. is heading down the former path - increased taxes and regulations, which will cause increased capital flight, followed by protectionist measures to prevent that capital flight. If the U.S. goes down that path, it will do great harm to the country’s economy.
If you look around the world today, even countries that have historically been more socialist than the U.S., such as Germany and France, are cutting business taxes and easing up on labor regulations and other costs to business. These are supply-side measures, and they are putting the U.S. increasingly at odds with the rest of the world. The U.S. currently has the highest corporate tax rates of any major country (the second highest corporate tax rates in the world, other than, I believe, Liechtenstein). Obama campaigned on raising those taxes even further, at the same time as the rest of the world is continuing to lower theirs. This is a very bad idea, and I hope he backs off that pledge.
Do you believe most Americans have a lower standard of living than they did before the Reagan era? If so, that would be completely wrong. By almost all measures (home size, per-capita GDP, number of vehicles, amount of vacation travel, life expectancy, etc), Americans are far better off today than they were in 1980.
Which jobs can’t be outsourced? You mean infrastructure building? Some of the biggest players in that field (Bechtel, Siemens, etc) are foreign companies. A lot of the industrial hardware that would need to be purchased will come from abroad. The steel used in such projects is largely imported. The energy that will be burned in those projects is largely imported. An awful lot of that infrastructure spending will go directly to workers in other countries. That’s just the nature of a global economy.
The only jobs that won’t be outsourced are the labor jobs used to actually build the infrastructure. That’s only a small part of the cost. And what happens to all those jobs once the infrastructure projects are finished?
I’m curious to understand why you think that ‘supply side policies’ have exacerbated outsourcing. Could you be specific?
If it is driven by deficit spending, it amounts to a transfer of debt from consumers to taxpayers, rather than a reduction in debt overall.
Two-thirds of our economy is driven by consumer spending. Insofar as the current recession is driven by a reduction in consumer spending, stimulus checks that are used to pay down debt won’t address the issue, because they don’t increase spending.
Living beyond your means is a stupid idea anyway, and not much less stupid for the US government than for me. Transferring my debt to the government doesn’t help anything, because it doesn’t address the issue of living beyond your means.
The notion of deficit spending to stimulate the economy in a recession is one of those ideas that gets carried out for political reasons rather than economic ones. Suppose we borrow a trillion dollars a year and spend it. If we spend it on infrastructure improvements to increase productivity, it might make sense. But we won’t. The projects that get funded will be those in states where their Senators are on the appropriations committee rather than those projects that will actually do some good.
If you borrow money and spend it on things that don’t increase your future income stream, then the debt comes due and you don’t have the increased income to pay the debt.
Regards,
Shodan
Does a $300B tax cut, including $100B for businesses make him a supply sider?
You know what the best theory I ever heard is? Communism. It works great in every way except one-when you try to institute it as a governing system for fallible human beings. Then it utterly fails because it’s a system that is inherently unworkable by large groups of human beings because of human nature. The same is true of a Keynesian stimulus package. No matter how good it sounds in theory, no matter even if it’s proponents can rattle off facts and figures about how “carefully targeted expenditures in areas X,Y, and Z would result in A,B, and C, blah, blah, blah”, even if they are completely, 100% right (which I don’t believe), it STILL doesn’t matter because the mechanism we have in place to distribute this borrowed money to the masses is bloated, inefficient and utterly, completely, by temperament and by historical track record, incapable of carefully and rationally distributing money in a calm and thoughtful manner to carefully targeted, deserving recipients who will maximize the return society gets on it’s ahem “investment”. Partisan influence, political power games, patronage, ideology, influence, bribery and every other sad vice present in the human animal will control the flow of funds to the piggies at the trough in the real world. I know it, and I suspect the biggest proponents of this stimulus boondoggle know it too, in their heart of hearts, but refuse to admit it because it challenges their ideological sacred cows. All it will do is saddle us with a boatload of debt in one fell swoop (more than the total cost so far of Iraq and Afghanistan combined) without accomplishing it’s intended purpose, and the ideological purists will sit in their ivory towers and wonder “Why? Why didn’t it work, the theory was so sound, I can show you the numbers that prove it!!” while never, NEVER understanding that the fault lies not in the stars(idealistic theory), but in themselves(fallible human beings).
This “human nature” of which you speak? If you are going to base your argument on your clear understanding of what it is, and how it functions, perhaps you could clarify?
Hasn’t the current economic crisis, and the need for the government to bail out coroprate America basically proven that laissez-fair capitalism can’t work? We now know for fact that the government has to be in charge. Marx wins.
No one has ever tried Communism, by the way.
Help me out here.
Of course I want my check…send it to me Obama! 
However, giving money to me and others…will it help the U.S. recession if I go out and spend it on items imported from other countries? Wouldn’t the money be more usefully spent on things that will be spent in the U.S. as much as possible? Infrastructure improvements can’t be made in China and imported…
Or is it as good for the U.S. for people to receive checks and spend it on imported goods?
Serious question…as someone who struggles with whether it is “good/bad” to outsource and/or have such a substantial difference in U.S. imports/exports.
No. The crisis is a direct result of government intervention into free market lending practices. Providing as a “solution” more of what caused the problem in the first place is idiocy. Of course, you know all that, but you habitually deny facts that don’t support your ideology, which makes even attempting to discuss anything with you rather pointless.
The government doesn’t need to bail out business. They can let them fail, which is what I think they should do. But businesses are naturally going to scream for help when they’re failing, especially if they think they’ll get it.
Yeah, right. And no one has ever tried laissez-fair capitalism either.
As with your interesting interpretation of the word ‘attack’, in the imortal words of Inigo Montoya, “I dinna think that word means what you think it means…”.
-XT
Just thought I’d mention, since I thought it was hilarious, that I just heard woman from Moscow Idaho complaining on MPR that pouring money into infrastructure wasn’t fair, since it’s a male dominated industry. Instead, we should stimulate the economy by investing in arts, etc instead.