There is no particular reason to believe that public sector spending provides a lower return than private sector spending. That is an ideological assertion and not something based on economic theory. Public spending can be very beneficial in economic activities that create positive externalities or show increasing returns; and these are common features of many infrastructure projects. If the infrastructure projects are well chosen they could easily earn a higher (combined social and private) return than private sector spending.
Similarly markets don’t work very well for a number of reasons for example assymetric information. Financial markets are especially prone to systemic failure particularly when bubble-like conditions develop. The pattern that we saw in the last few years: massive risk-taking, opaque financial “innovations”, massive leverage and a herd mentality have been seen many times over the course of the last few centuries. Needless to say in such conditions financial markets aren’t doing a good job of allocating capital. Stock markets in 1999 weren’t doing a good job of allocating capital to the tech sector and markets in 2004 were certainly not doing a good job of allocating capital to the real estate sector. And no, contrary to what CATO says it wasn’t primarily because of the Fed, the mortgage deduction or Fannie and Freddie.
Of even greater importance is that the current situation isn’t a case of private sector spending being crowded out by public sector spending. That would be true in normal times but today you are seeing a massive shortfall of private sector spending which is leading to unused, wasted capacity in the economy. So even if you believe that private sector spending is a priori more efficient that doesn’t undermine the rationale for a stimulus in a severe recession.
Don’t you conservatives, with your love of the past, ever read history? The reason the Fed was created was that even the rich figured out that panics could be moderated, and the government was the right place for this to be done, not their personal fortunes as was done in the early part of the 20th century.
Earthquakes happen, but we build earthquake resistant structures to minimize the damage. Tornadoes happen, but we build storm cellars. Famines used to happen a lot, but we figured out how to reduce the variation in food supply to minimize the impact of bad weather. Economic downturns happen also, no way of stopping that, but we can try to reduce their impact on people. I would think the Depression was enough evidence of what happens when we ignore them. That economies naturally oscillate is no reason not to damp the oscillation, especially when there is so much damage when they get out of control.
No, government intervention has nothing to do with the broken window fallacy. I think others have already shown how infrastructure repair and improvement isn’t an instance of this. I love the window improvement idea, by the way.
We’re not going for optimal here, just improved. I do agree with you on the lack of success of the first $3.5 billion bailout, which goes to show that you can’t trust a Bush appointee to do anything right. The banks are not necessarily saving the money, by the way, some are using it to buy smaller competitors. Congress did have directions for use of the money, which went with Paulson’s original plan to buy damaged assets. He reversed course, and I agree what he did was not optimal or even very useful. It might have stopped more failures, at best. Still, that is not evidence that things would have been better without any bailout, or a well directed one won’t improve things.
Why wouldn’t it? It certainly won’t improve the economy by itself, but don’t you think assisting low income people in not having unwanted children isn’t advantageous? You’re aware of the study suggesting that the legalization of abortion in New York helped reduce the number of poor teenage men years later, contributing to the drop in the crime rate, right?
What are you talking about? The current schedule has it on his desk in mid-February. A 3 week delay is not a few years. I suspect the decrease in withholding for the tax cut will kick in pretty fast. I’m not sure when the first shovel ready projects can get going, but certainly before 2011 or even late 2010 at worst.
Maybe government spending isn’t as efficient as private spending - **but there is no private spending now. ** (Or not enough.) Consumers aren’t spending because they’ve either lost their jobs or are scared of losing their jobs. 75,000 jobs lost just yesterday. Businesses aren’t spending because consumers aren’t and because they can’t get loans to finance expansion even if they are in a sector where they can expand. Where is this private spending going to come from?
Yeah, that’s what happened during the Great Depression. We ignored it. :rolleyes:
All I’m saying is this: When there is a problem, all courses of action should be considered for its solution. Before implementing one of those solutions, we should be reasonably certain that a) there is actually a problem and that it is possible for us to solve it b) the proposed solution will actually fix the problem, c) the proposed solution will not cause more problems than it fixes. Maybe – this is a crazy idea, I know – actually research history, ask ourselves if this problem has come up before, what was done to fix it, and whether it worked. I’m pretty sure handing out money by the buckets-full and sponsoring enormous amounts of busy work is an idea that has failed in the past. It also fails a, b and c above. (Well there is a problem. I just don’t think it is possible to fix it at this point. We’ve done all we can.)
It is cargo-cult science: “When the economy was going well, we were all spending money like crazy. So now that the economy sucks, we should spend even more money to get it back the way it was.” Running around like a headless chicken, trying to implement feel-good measures to keep up appearances of “doing something” helps no one. Well, I suppose it does help politicians get elected.
Well the Depression was ended by a massive expansion of government spending financed by borrowing. The basic idea that a recession is usually caused by a decline of private-sector spending is pretty solidly established. So the idea of curing a very severe recession with a deficit-financed stimulus is based on pretty solid theory and evidence. Unlike some liberals like Krugman I don’t buy the argument that monetary policy is completely effective in the current situation; I think the quantitative easing will help though the magnitude of the effect is uncertain. Therefore it’s best to supplement it with fiscal policy as well.
I didn’t say anything about tax cuts. We have a huge amount of debt, and as much as I hate taxes I don’t know how else we’re supposed to pay that off.
Cite? I’m not being snarky, I just don’t know. I said before I wasn’t an expert.
This issue keeps coming up and for all the argumentation, I’m just not seeing the other side. Spending less is a symptom of less money which is a symptom of less wealth. Without actual innovation and the creation of wealth, I don’t see how spreading thin what little money we have left is going to help anything. It’s just like building wooden planes and dirt runways and expecting all that precious cargo to come flying back. It doesn’t work that way. What am I not getting here?
Hoover ignored it - in fact he made it worse by trying to cut spending and balance the budget (and raise taxes to throw the right a bone.) FDR did improve things a lot, by bank holidays, by the FDIC, by at least seeming to do stuff to help. I know the gospel of the right these days is that he didn’t help, but that’s crap. My parents were young teenagers during the Depression, and they and my grandparents loved FDR. They guy didn’t get re-elected 3 times before the war for nothing.
Of course we should consider all courses of action. Monetary policy should be, and was, tried first, but it didn’t work. Infrastructure repair is not busy work - we have gotten far behind because of tax cuts and opposition to government spending, and catching up is a fine way of improving our efficiency and economy. Paying people to dig holes and fill them up is like the broken window fallacy - filling potholes which are slowing traffic and costing money by damaging cars isn’t.
Throwing bucketfuls of money at the problem isn’t good, which is why the first round of TARP has been so inefficient. If it had been used to buy bad assets, the banks would have the money and any further losses from the bad assets would be off their balance sheets. Using the money to prevent foreclosures would have helped put a bottom on the housing market. That is spending for a purpose.
We know what Hoover did wrong, but since this hasn’t happened before we can’t just look at history and find the magic cure. Luckily, we elected someone who isn’t going to sit around, wring his hands, and say we can’t do anything. We’re on uncharted ground here, but that is where history is made.
You misspelled voodoo economics. It’s not like the best and the brightest of mainstream economists supported Bush’s mishandling of the economy. We have a chance to apply some non-ideological common sense now. Tax cuts for the rich didn’t help much. The economy got floated by low interest rates which allowed the common folk, who weren’t getting money from raises despite increased productivity, to keep spending by borrowing. We also deregulated based on demands for a more competitive system. And, everyone ignored the problem until it was too late. Now we have to clean up the mess. If some clown overeats over 8 years and gets a heart attack, you shouldn’t keep the doctor from going in to fix it because it will leave an ugly scar.
The government can borrow for a lot less than corporate America, and is not nearly as beholden to shareholders. Buy borrowing at the best rate, even some of the inefficiencies in government action are overcome.
Fed money -> bridge builder -> bridge workers -> taxes, bar, mortgage, etc.
PLUS you get a better infrastructure. I am a fairly right wing type for this board, and I support Keynesian style spending IN A RECESSION.
The problem has been that people took the good part of Keynes (government spending can help the economy), and applied it to EVERY part of the cycle. Instead of putting into place short term projects, we just kept on spending - never cutting back.
Nobody ever pays attention to the part where you are supposed to slow down the government spending once you get out of the recession / depression.
The current problem doesn’t come from a lack of gas in the gas tank, but a lack of oil in the crankcase. There is no lack of innovation. Because the banks screwed up so badly, and because companies are going under, everyone is afraid of loaning money (the oil) in case it goes bad and their bad situation gets worse. One new problem is that banks are getting scared to lend to even good credit risks, because with the increase in layoffs even someone with a good job now may become a risk later. BofA found that Merrill was in worse shape than they thought, so they have to cover the problem with more money, which means less to lend, which means they are even more cautious.
Say you’ve got $5,000 in the bank, and would like a new TV. Ordinarily, you’ve got plenty to cover it, so you get it, without even borrowing. Today you’re not sure whether you’ll have a job in six months, so you figure you’re safer keeping the money in the bank. Even if you never lose your job, the retailer loses out, the manufacturer loses out, they lay off people, and you (and I ) get even more scared. if we can get some people working on infrastructure, or buying stuff with their tax cuts, we can avoid more layoffs, which makes everyone more confident, which puts oil into the engine so it stops seizing up.
It’s not just spending - it is deficit spending. In an upcycle you can either raise taxes or cut spending or both, and pay down the debt you accumulated during the recession. The economy can handle the impact. But if you are anti-tax no matter what, you’re in trouble because it is often politically impossible to cut spending. it is even worse if your answer to every question is tax cut.
Right. It’s like a massive prisoner’s dilemma. We’d all be better off if we cooperated, but each of us feel better by defecting. The government can break this.
Well the massive government spending that got the US out of the Depression was the second world war which was financed by massive deficits. As for private sector spending falling during recessions, no online cites I can find quickly but you could look it up in any principles of economics textbook.
In a nutshell the basic argument for a fiscal stimulus goes like this:
Aggregate demand consists of four components: consumption, investment,government spending and net exports. Ideally you want this total demand to equal the potential output of the economy which is the total output that the economy can produce if it is operating at near full capacity. The problem is that in a recession both consumption and investment fall so aggregate demand isn’t sufficient which means there is a lot of excess capacity in the economy which is going to waste. How do you boost demand?
One way is to boost net exports by letting your currency fall in value but obviously all countries can’t do this. The other is monetary policy which lowers interest rates and stimulates investment and consumption. The problem is that conventional monetary policy which has been tried isn’t working very well. There are unconventional measures called “quantitative easing” which are probably pretty powerful but no one knows for sure. Tax cuts are also possible but they don’t directly boost demand; only if they stimulate consumption and investment which is uncertain in a deep recession. So the last resort is to boost government spending.
Well someone is sure as hell talkin bout tax cuts!
Just crazy folk I guess, but maybe if we ignore em, and just talk about how stupid it is try to spend ourselves out of a slowing of the movement of money, they’ll go away.
Sure they will!
Here’s an idea: If the free market is so good at allocating resources, let’s let the biggest employer in the country decide how to spend the money. Sound good?
