IIRC, the proposal is to send money your way also - remember the income redistribution fight during the campaign? Any program that doesn’t send money to the unemployed and underemployed is just stupid.
As a former Cantabrigan, that’s awful news about the Longfellow Bridge. I’m not sure that bridge repair needs an environmental impact statement. I wonder if people have ignored the many articles about our infrastructure repair needs that have come out in the past couple of years.
So, pray tell where the money is going to come from for businesses to fix their balance sheets if no one is spending? Remember, not only businesses with big debt loads are getting hurt now. Well run businesses, with no or very small debt, are seeing a big decline in revenue also. Ditto consumers - businesses are not laying off those with too much debt only, they are laying off all sorts of people.
Even GM doesn’t have a debt problem. Their problem is that their sales are down so far that they are losing money and running through their cash.
Which is why the next one must be continuing, not a one time check. I agree that a single rebate, even one bigger than the last one, won’t do much good.
It’s too bad that some parties decided that tax cuts for the rich and useless and expensive wars were more important than following the very reasonable fiscal policy you mentioned.
Government spending does not wipe out consumer spending. It might hurt if it were inflationary, but since we are now close to deflation, that isn’t a big concern. We can prudently balance our budget into a depression, as Hoover did and as FDR did in 1937.
What is a productive business in an environment where no one is spending money? What moron is going to invest in new capacity when demand has dried up? As for government, we do indeed have serious infrastructure issues which have been ignored due to tax cutting mania. I think fixing bridges and roads are very productive investments.
This is a fundamental misreading of the theory.
From the very beginning of his groundbreaking work, Keynes was mostly indifferent to the general reasons behind the business cycle or the cause of any particular recession. He focused instead on the proper prescription for an economy already in recession regardless of how the economy got into that situation. His was a narrow analysis of a specific sort of trouble, not a dynamic analysis of the typical ups and downs of the world. His concern was how to get everything functioning again even after monetary policy had failed.
And monetary policy has absolutely failed us. Taking their cue from the libertarian monetarists, the Fed has been aggressively expanding the monetary base. But Friedman was wrong and Keynes was right: there has been no appreciable effect from the increased money supply because we are stuck in a liquidity trap. And precisely because of that, we don’t need savings right now, quite contrary to what you claim. Our goal of a personal savings buffer against the downturn is hurting businesses dependent on consumer spending, which is hurting the economy in general, which is making it more difficult for us to reach our savings goals, which is causing us to try to save even more to get that buffer against the troubles. And thus the vicious cycle continues. This is the “paradox of thrift”, straight from the man himself, and unfortunately it applies directly to our present situation. But thankfully, Keynes also gave us a way to solve this problem, if we’re smart enough to follow his advice instead of putzing around with counter-productive half-measures.
This once again shows a misunderstanding of how economies in crisis actually function.
We’re not operating at our peak output level. That’s essentially what a recession is, and this is why it’s patently ridiculous to state that government spending will “divert resources” from productive to non-productive causes. There’s no way to divert resources away from something that they’re not even being used for. We have idle hands and idle capital, more every day, and we’re diverting nothing whatsoever if we give them something to work on. And as I’ve already said, this doesn’t necessarily have to be the direct employment of those out of work. We just need to get money moving again. That means that investment should be pushed into areas where it wouldn’t otherwise go, because our current problems are based on the fact that investment is going absolutely nowhere. That’s why so many experts are bitching about the banks in the first place. The bailout gave them solvency, but now they refuse to invest, partly because trust has been destroyed by the subprime mess, but also because the outlook looks bleak. Again: liquidity trap. There’s plenty of money out there but it’s stuck in mattresses and bank vaults, and it’s not doing us any good. The government must step in to compensate.
Ideally, this means large public works projects, the likes of which add real value to our country for decades but which are ordinarily too expensive to justify. Now we have that opportunity, and Merijeek is exactly correct on this point: to denigrate infrastructure improvements as “makework” is simply insulting. We have documented instances of our government neglecting to keep up with its infrastructure responsibilities, as I specifically mentioned and as EddyTeddyFreddy has cited. Infrastructure has always been one of the primary functions of government, and to blithely dismiss that is a cheap rhetorical shot.
However, you might possibly be right about another matter. It’s certainly possible that we won’t be able to control spending after we pull ourselves out of this mess and get things working again. But that argument basically boils down to: “We’re too dumb to follow good economics in good times, so let’s not follow good economics now.” I don’t hold with that. We should push for the best possible plan at any given time. Sometimes this means prudence, and sometimes this means deficit spending. And we are in a textbook deficit spending situation right now. The fact that we’ll be in need of prudence in the future is no reason to claim that we shouldn’t be deficit spending right now.
That’s a *superb *post, **Kendall Jackson **. Whilst Keynesianism did become associated with smoothing the business cycle, the economics of Keynes (to use Leijonhufvud’s term) was about precisely the sort of situation we face now.
This stuff is still in the intermediate macro textbooks. It’s just that most of us thought we would not see these days again because central bankers were smarter and the financial system was more robust and sane than it turned out.
One clarification: the situation does not strictly call for deficit spending, it calls for a move towards deficit. That the US has come out of a series of enormous booms with a deficit means that you have to have a bigger one. In countries with prudently acquired surpluses, a move to a smaller surplus may suffice. It’s not whether you have a deficit that matters here, it’s the change in fiscal stance towards expansion.
A quibble: You have to be careful about Friedman and the current situation. Yes, monetary policy so far has been like pushing on a string, and that does count against him. But, he did say that the test of monetary policy’s efficacy over fiscal policy was, in the end, helicopter money. Let’s hope we don’t see a test of that.
There is also a sense in which the current situation kind of favours one of Friedman’s things: rules v discretion. Not Friedman’s rule of course, but when the US gets out of this there will be no more Greenspanism, there will be something like a Taylor rule or explicit inflationary targeting (presumably with a measure of inflationary pressure that is broader than the CPI).
Friedman believed that if the Fed intervened in the economy so as to keep the growth of the money supply at a constant rate, that massive fiscal stimulus would never be necessary.
Friedman was right about many things, but monetarism wasn’t one of them. Monetarism was undone by Goodhart’s Law in the early 1980s. And today, the financial crisis has shown that well timed and vastly expansionary monetary policy can’t prevent recession if the financial infrastructure is gummed up. So Friedman’s Monetary History of the United States isn’t holding up too well. (OTOH, Bernanke’s take on the Great Depression is looking better and better.)
If only it were otherwise… if only monetary policy was the panacea that Friedman had hoped for…
Some say that quantitative easing has already begun.
The challenges that the Obama administration faces are truly awesome. The most straightforward are macroeconomic: textbook economics calls for massive fiscal stimulus: with 3 month treasury bill rates basically at zero, conventional monetary policy has run its course. (Then again, I expect Bernanke to continue with unconventional methods.)
But as Brad DeLong notes we have deep structural problems in the auto, housing finance, high finance, energy, and health care sectors. Separately, each is an intricate and technical policy challenge. Coordinating these policies and parrying Republican obstructionism will require some heavy lifting.
Well, that’s all true, but a little more slicing up of the first bit is in order:
Friedman thought that the macroeconomy was stable and that poor monetary policy was the cause of instability. Yes, his monetary rule is thoroughly discredited, but his broader point remains open. Had Greenspan not reinflated the bubble, who knows whether poor financial practices would have brought on a crisis or whether a few bad firms would have gone bust. Myself, I lean towards the (Minsky) view that the dynamics of the financial system generate instability that must be controlled by activist monetary policy. That does not necessarily mean discretionary monetary policy, just that a rule like inflation targeting is required to deal with the instability.
So whilst the current situation has shown that Friedman’s view about the power of monetary easing was wrong, it hasn’t *shown *that he was wrong about the stability of the system, nor that giving central bankers discretion is a good idea. Indeed, on the latter point, he’s looking pretty good, IMHO.
As to DeLong’s list, yeah, it’s a mountain. Then at some stage you need fiscal consolidation. I can’t imagine how the US political system is going to manage it after what happened last time.
I appreciate you saying so. And of course, your clarifications are also spot on. I didn’t mean to imply that Friedman was wrong about everything, just that he had some large holes in his analysis relating to the present topic. Still, he was far from the worst. A lot of people make a business of distorting the Great Depression for partisan purposes, and it’s hard for casual readers to sort through it.
I think it would be a good thing for a lot of Dopers, left and right, to go through one of those intermediate courses. Hell, I’d even offer to start an SDMB class if I thought people would be actually interested in learning about it instead of just continuing to rely on the crutch of their favored ideologies. But this is just wishful thinking on my part. Even someone as intelligent as Friedman can be moved so much by what he wants to see that he fails to see what’s in front of him. Same with Newton and alchemy. More economics knowledge here might make the conversations more interesting to me, but it wouldn’t change the underlying dynamic.
Keynesian economics works fine-except that Keynes did not consider a mercantilist nation (China), which absorbs the pump-priming spending. Those $600 checks that the treasury sent us…they all went to China (and not to Detroit). That is why our domestic auto factories are idle-and Chinese factories are booked. China would be OK if they bought American exports-they don’t, will not, and won’t.
That is the current problem. They DO buy pieces of paper (Treasury certificates)-that is the way to balance things off (for now).
Yet everybody knew. Now they reveal not only are we in one but have been in one for a year.
If you ever do, I’d certainly be interested. Economics is an area in which I’m completely ignorant but have been doing my best to learn more about lately. [/OT]
The line I typically heard from Friedmanites is that the actual economy isn’t necessarily all that stable, it’s just that the government doesn’t improve matters. So we’re comparing 2 imperfect worlds.
Such a treatment could account for the tumultuous 1800s, when we had neither fiscal nor monetary stabilization policies (though some of the GDP and unemployment data of the era tend to exaggerate matters).
I’m not sure whether rules are looking all that great. Fed policy during the 1990s was pretty consistent with nominal gdp or inflation targeting. Yet some blame Greenspan for the stock market bubble and say he should have targeted asset prices as well. Admittedly, there’s a more conventional case to be made that the Fed should have increased rates faster during the onion decade, at least according to the Taylor Rule, as I understand it.
But heck, I would argue that the Fed was following rules: they obeyed the Taylor rule as modified by the injunction that they should never raise rates by more than a quarter point at a time. Otherwise, some municipality in Southern California might make a dopey bet on interest rates and end up in crisis. Alas, this last rule was a bad one: better to promote periodic and manageable crises than full-blown ones later on.
Intermediate Macroeconomics
There are a number of course notes on the web. Here’s one that uses the text of Bush’s former CEA head, G. Mankiw, for those worried about liberal bias. http://www.uwyo.edu/aadland/classes/econ3010/
Yeah, but Kendall Jackson explains it so well! Sign me up for Econ for the Semi-Retarded!
A question, though: Bernanke is said to be THE goto guy about the Great Depression. Did that expertise help or hinder him in the current unpleasantness?
This is an important issue, even though I think you are exaggerating a bit ralph124c.
The first thing to remember, as I’ve said here many times over the years, is that bilateral trade balances don’t matter. So it’s true that China has a trade surplus with the US. But Australia has one with China (indeed the commodities boom has sent Australia’s overall trade balance into substantial surplus for the first time in a long while)and the US has one with Australia. You could do a loop like that the encompasses the whole world.
And China’s position is more complicated than mercantilism. Partly they have been doing this because they don’t have the capacity to absorb the pool of savings that have been generated by their growth (this is or was the Bernanke view of the US current account deficit, IIRC*) Partly, they’ve been doing it to ensure political stability - ie the ongoing power of the Communist Party - by making sure that the social dislocation that goes with rapidly growing incomes and income inequality is held back by a low RMB suppressing consumption. But partly they’ve been doing it because of a lack of confidence in their own and financial systems in general because they remember the Asian Financial Crisis of the 1990s and don’t want to lose control and sovereignty the way countries did then.
Furthermore, a large consequence of China’s high yuan policy has been massive acquisition of official US debt. An unwinding of China’s position on the RMB to let in more imports generally would necessarily be accompanied by more expensive financing of current US government debt and a lower dollar. This could be rather disruptive at this time. Fortunately, this unlikely to happen.
But - to finally get to ralph124c’s point - there *is *a real issue about the leakage of any stimulus into imports. The point of stimulating the economy is that you want to stimulate domestic demand because it’s inadequate. If some of the stimulus goes on imported consumer goods, that’s less bang for your buck.
So the temptation here is to do some switching that promotes domestic demand at the expense of foreign demand. A real temptation is protectionism - by adding protection you stimulate more domestic demand with your stimulus and add more to domestic demand by virtue of the switching effect of the protection on existing demand. There are two problems with this: (1) you hurt exporters (and the other traditional victims of protection, consumers, although they won’t mind too much if you’re throwing them enough stimulus money); and (2) you risk the doom spiral of international trade retaliation.
Here again, it’s like economic history come to life. The Smoot-Hawley Tariff Act resulted in retaliation from other countries. These sort of polices are referred to as “beggar-thy-neighbour” policies. At the end of the cycle, you just get less trade. It doesn’t help anyone and you lose the various benefits of trade.
Policy makers seem to have learned some of the lessons of the depression. Not only have we not seen moves towards protection or attempts at competitive devaluations, we have seen attempts to have coordinated monetary and fiscal stimulus packages across a bunch of countries. The US is a laggard here. In Australia, money is being dumped in people’s bank accounts next week. China has a four trillion yuan package in the works. India’s moving. The UK has jumped in with both feet, as has Germany.
Note also that infrastructure spending is not very import intensive. 
Oh, help. The US response has been less than fabulous, but if Bernanke hadn’t got going when he did things could have got very ugly very fast. If nothing else, his expertise made him say “holy living fuck!” and start doing something before this became a catastrophe. At the moment (at least sitting here in Australia) it looks like a biggish disaster for the real economy. But not a catastrophe.
*[sub]There has been much discussion over recent years about the US external accounts. Were they, with government debt, just on an unsustainable path (my view, on balance - which is why I expected an eventual crisis of the $US)? But if so, why [del]did[/del] does the dollar not fall? Was there something about the productivity of US investment we didn’t understand (the “dark matter” view)? Or was the driver not the US but a pool of excess savings in fast growing poor countries? This remains a puzzle.[/sub]
Now 6.7% and rising. (And those are stats for November. A lot of job cuts have already been announced in just the first few days of December.)
After writing that post I popped over to read a few economics blogs. Now I’ve seen this I realise that I was not responding to ralph’s perfectly reasonable but off-the-table post but that serious people are actually talking about this as on the table.
Pardon me while I inventory my rice and beans. :eek:
Why do you class those two countries in the same category?
I’d put it in stronger terms. Bernanke was the probably the very best man for the job. He adopted unconventional monetary policy very quickly and kept at it all throughout 2008. The policy missteps have been in Treasury and especially on the fiscal side (and prior to that, catastrophic regulatory failure).
(As it happens, the current crisis has tended to support Bernanke’s interpretation of the Great Depression – that the key factor in the great contraction was the disappearance of financial services in vast swaths of the economy. Milton Friedman thought that the problem was that Fed policy was insufficiently accomodative: they cut interest rates, but not fast enough. This chart shows the vast expansion of the monetary base starting in the 2nd half of 2008. The Friedman approach simply was inadequate. Still, it certainly didn’t hurt and it was worth a try.)
Here’s some ammo for Sam. Bernanke (2002) basically denies the existence of a liquidity trap and shows that there’s a lot that the Fed can do, even when the Fed funds rate is basically zero. As it is today. Right on schedule, the Fed bought $5 billion of agency securities last week. (h/t Calculated Risk)
Still, massive job losses were reported yesterday: “Not since December 1974, toward the end of a severe recession, have so many jobs disappeared in a single month — and the current recession, far from ending, appears to be just gathering steam.”
There are billions of unmet infrastructure needs. A reduction in oil imports, driven by fuel efficiency and conservation would really help our trade accounts over the medium run. And starting in 1990, recessions recoveries tended to be slow. So commencing a multi-year infrastructure and research investment program would be prudent now, though it would have been even better if it was launched last spring. But over the short run, the best way to stimulate spending would probably involve massive block grants to the states.
Some forms of stimulus create more spending than others, per dollar outlay by the Federal government. Here are some options: higher multipliers imply greater bang for the buck.
And between 10 and 12% are out of work, the rest having given up looking. Not exactly slightly worse than full employment.