"Nightmare on Main Street"

Nicholas Bloom says things could get bad if we forget the "major lesson from the Great Depression of the 1930s":

2009 will be the nightmare on Main Street, by Nicholas Bloom, VoxEU.org: Every horror movie fan knows the scene before the attack. Creepy electronic music plays. The victim is shown from behind. The camera scans around the bushes, in the dark, to the sound of heavy breathing. You know something evil is going to happen, but not when, where or how.

Right now the world economy feels a lot like that. Every economist is predicting a macabre 2009 (Philadelphia Federal Reserve 2008). But nobody quite knows where the blows will fall, how bad things will get or who will survive.

In this piece I want to provide one way of predicting the impact of the credit crunch on US and UK growth. This is the methodology behind my claim that output will contract by up to 3% in 2009 which I made in a VoxEU piece on October 8th.

Bad omens for growth

In my academic research I have been looking at the impact of large uncertainty shocks on the US economy over the last 40 years.¹ These events – like the Cuban Missile Crisis, the Assassination of JFK, the Gulf War and 9/11 – typically double stock-market volatility and reduce stock-market levels by 10%. Their average impact is to reduce GDP growth by 1.5% in the following 6 months, with a recovery within 12 months.

In comparison, the credit crunch is a monster of a shock. It has generated an incredible six-fold increase in stock-market volatility and a 30% fall in the stock market level – three times the average impact of the previous uncertainty shocks. Based on these numbers my central prediction is that GDP growth will be reduced by 4.5% in 2009 because of the credit crunch. Since the consensus forecast² before the credit crunch for US and UK growth was +1.5%, this reduction in growth leads me to predict a -3% contraction in 2009. Forecasting 2010 is even less accurate, but my central prediction is a return to about +1.5% growth.

The S&P volatility massacre

Figure 1 plots the predicted impact of the 30% fall in stock-market levels as a deviation against the prior forecast. The central prediction - denoted by the solid black line - is that this 30% fall in stock-market levels will reduce growth against prior forecasts by almost 4% by late 2009. But growth will recover to trend by mid 2010. The dashed red lines on either side of this prediction are the one standard-deviation confidence bands indicating the degree of forecast reliability.

Figure 2 plots the predicted impact of the six-fold increase in stock-market volatility since September 2008. The central prediction - denoted by the solid black line - shows a fall of almost 3% against trend by mid-2009, with a rebound by 2010. The reason for this rapid rebound is that uncertainty leads firms to pause investment and hiring. But once uncertainty falls back to normal levels – which I forecast will happen by the mid 2009 (based on the average duration of all previous large uncertainty shocks) – firms will start to invest and hire again to make up for lost time. Hence, the uncertainty impact of the credit crunch will cause a rapid slow-down in the first-half of 2009 and a recovery by late 2009.

Finally, Figure 3 shows the combined effect of the drop in stock-market levels and the rise in uncertainty. As can be seen the combined impact of this is to reduce output by 4.5% in mid 2009, which given the prior estimate of +1.5% growth in mid-2009, leads to my new forecast of -3% growth for 2009. By late 2009 this contraction will have eased off, with normal rates of growth returning by 2010.

Hence, I predict growth in 2009 will contract rapidly, falling by an annualised rate of up to 3%. But uncertainty should fall by mid-2009, releasing a backlog of investment and employment that should propel a rapid recovery in 2010, with growth returning to 1% or 2%.

The final lunge

But as every horror fan knows the monster never dies. Despite being skewered with every sharp object in sight it always manages one final lunge. In the case of the credit-crunch the risk of a final lunge comes from a damaging political response. Politicians around the world are pushing to roll-back free markets, impose greater regulation, restrict trade and provide multi-sector bail-outs. This move away from free-markets towards regulation, protectionism and subsidies risks turning a temporary downturn into protracted recession.

The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by US policymakers to block imports in a desperate attempt to protect domestic jobs. But it helped worsen the recession by freezing world trade. At the same time policymakers were encouraging firms to collude and workers to unionise to raise prices and wages.

The current backlash against capitalism risks leading to this repeat. This happened after the Great Depression and it happened after the major recession of 1974/75. Although 2009 will be a year of shrinking rapidly, if politicians protect free markets 2010 should see a return to growth.

References

1 “The impact of uncertainty shocks”, The predictions are made from VAR forecasts, which are often used by economists to forecast macroeconomic data. Details of the VAR forecasts is contained in the paper, with the underlying data in http://www.stanford.edu/~nbloom/VAR.zip
2 For the US see the Philadelphia Federal Reserve Board Survey of Professional Forecasters consensus prediction of 1.5% in August 2008. For the UK see CBI’s 1.6% forecast in 2 June 2008.

Comments

[lark]

"The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by US policymakers to block imports in a desperate attempt to protect domestic jobs."

The implication here is that a return to protectionism would be a re-run of Smoot-Hawley. But it wouldn't, because in the Great Depression The Sequel, China is America, and America is the U.K.

In the Great Depression the First, America was the export platform to Europe, helping to re-build after WWI. We were the current account surplus country. And we were hit far harder than say the U.K. (and definitely Germany). We were hammered to the tune of close to 40% of GDP. That is the role that will be occupied by China, if we go the protectionist route.

What's not to like?

[Bruce Wilder]

Politicians around the world are pushing to roll-back free markets, impose greater regulation, restrict trade and provide multi-sector bail-outs. This move away from free-markets towards regulation, protectionism and subsidies risks turning a temporary downturn into protracted recession.

De-regulation and globalization, meanwhile, has been such a boon to growth, having nothing whatsoever to do with the present difficulties.

The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster. . . . policymakers were encouraging workers to unionise to raise . . . wages.

Oh, the horror of it all. Politicians encouraging workers to unionize and raise wages!!!

But as every horror fan knows the monster never dies. Despite being skewered with every sharp object in sight it always manages one final lunge.

Bloom certainly proves that. Stake Bloom thru the heart; he's a vampire.

[Easy Money]

Amusing, lark. But UK didn't do so great either.

I just wish they'd realize money is being wasted when it could be saved for the rainy days ahead. Futile efforts to save jobs that are uneconomical. Instead the money would go a lot further to help those really in need when the time comes.

And just as important, keep the government from messing up whole industries with unintended consequences.

[a]

"The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster."

And we're well on our way. 700 billion in TARP, changing the tax law to give even more money to banks, a bloated Fed balance sheet consisting now of a lot of toxic waste on the asset side, and a Congress ready to spend another 600 billion on "stimulus".

"The infamous Smoot-Hawley Tariff Act of 1930 was introduced by US policymakers to block imports in a desperate attempt to protect domestic jobs. But it helped worsen the recession by freezing world trade."

There are other ways to freeze world trade. As Naked Capitalism has been tracking, world trade is already in free fall. Goods are piling up on the decks, cotton exports are down, and the price to rent a ship has fallen off a cliff. All that, without any new tarrifs. So maybe the Smoot-Hawley Act is getting the blame for a fall in world trade during the Depression, which would have happened anyway.

http://www.nakedcapitalism.com/2008/11/unsold-goods-piling-up-at-long-beach.html

"At the same time policymakers were encouraging firms to collude and workers to unionise to raise prices and wages."

Raise wages. Yep, the one thing some economists just hate.

[esb]

Amusing how guesswork takes on substance when accompanied by charts.

Reminds me of my favorite line from "Good Morning Vietnam."

"Not without slides."

[reason]

He is far too optimistic. He still thinks it is a shock (where did it come from) rather than the result of persistant imbalances being corrected. Hint people, look not just at flows but at stocks as well!

[reason]

Krugman understands:
http://krugman.blogs.nytimes.com/2008/11/17/after-the-stimulus/

[reason]

Basically it seems that Nicolas Bloom(ing) is assuming this recession is like all the others just bigger. He needs to look at Japan 1990 closely and then realise (oh shit) that USA is a deficit country unlike Japan was and then move to looking at Argentina.

[ndd]

Lark: spot on. Smoot-Hawley is trotted out as a trite talking point, without looking at the major, major difference in US position now vs. then.

It may be that protective tariffs erected by a continent-wide, previously self-sufficient economy, that is the world's biggest importer, may be a bad thing. Or maybe the fact that it is the world's biggest importer may change the result entirely.

Consider this a shout out for any good online material (that can be accessed for free) concerning the UK's experience during the Great Depression, and the effect of trade barriers on it. If memory serves correctly, the UK had the least painful experience of all the industrialised economies.

[save_the_rustbelt]

It is getting very ugly out here in the "real world."

[Noni Mausa]

I would like to see protectionism, but groundwater protectionism, not necessarily tariffs and such.

If you're going to throw money at a problem (often an effective tactic) throw it at the people. Maintain the below-median population so they will be able to bounce back when hiring and investment bounce back.

Also, keep them healthy so when the time comes they can buy the items each other will be selling.

What happens when a family hits the wall financially? They drop to a lower level of function (as workers, learners, buyers etc) and take a long time to recover, and their recovery is costly. A lot of the embedded value of such households is lost, to say nothing of the loss of energy and optimism. All kinds of daily routines and habits of thought are disrupted. In the case of children of these households, the deficits can lead to lifelong underperformance.

Nations are made up of people, not corporations. A business is simply a conceptual structure with no strength or utility until people are plugged into it. Keeping those people in good shape is necessary -- the businesses not so much.

Some big changes would go a long way to keeping the groundwater plenished:

-- universal health care -- would save citizens and businesses about $2000 - $4000 per employee
-- a return to the pre-2005 bankruptcy statutes, and allow people an easier way to get out from under debts (medical among them) that have built up in these hard times
-- save many families $2000-5000 per year by aggressively supporting public transit
-- support hiring, by covering half or more of the salary of new hires, nationwide. Each business would qualify for at least one hire, and for workforces above 50 people, one new hire per 50 existing employees.
-- college for returning veterans

Where's the money coming from? Where it always does, from the people -- in this case, the people who will be more productive and less expensive because of all the listed initiatives and, I would hope, more. All wealth, that of the rich as well as the poor, comes from people, they should get some of it back, don't you think?

Noni

[ken melvin]

Bon dit Noni

[Ninja Zombie]

Noni: "All wealth, that of the rich as well as the poor, comes from people, they should get some of it back, don't you think?"

They do. When people create wealth, they often demand a fraction of it to be returned to them. It's called 'wages'.

But I think you are advocating something different, perhaps a transfer from those who do create wealth to those who don't.

Your "support new hiring" plan also creates terrible incentives: by cutting the cost of labor, efficiency increases (automation) become less attractive. It also creates the incentive for a business to fire someone and replace them at (50%) taxpayer cost.

[calmo]

Lark: spot off.

tickled to the point of helplessness by ndd says...

Lark: spot on. And this is not about getting the dog on or off the carpet...such an improvement on 'The cat is on the mat.' and other bizarre propositions so dear to those whose hearts only beat for Philosophy.

So...another idiosyncrasy thingie, yes?
I know when I've been spotting on and off and this is not the regular case.
"Spot on" = BINGO. But "Spot off" = bsetser WRONGO.

(I was denied the fast track seat for teaching ESL only because management was spotty...quite spotty.)

Ok, ndd, one more spot like that and I'm done.

[bp]

vampire language translated from this

But as every horror fan knows the monster never dies. Despite being skewered with every sharp object in sight it always manages one final lunge. In the case of the credit-crunch the risk of a final lunge comes from a damaging political response. Politicians around the world are pushing to roll-back free markets, impose greater regulation, restrict trade and provide multi-sector bail-outs. This move away from free-markets towards regulation, protectionism and subsidies risks turning a temporary downturn into protracted recession."

to this

But as every horror fan free-market ideologue knows the monster of sensationalized crisis by liberals never dies. Despite being skewered with every sharp object in sight in the regulatory drawer of transparency, it frankensteinian derivatives of huge multiples lurking in the shadows always manages one final deleveraged lunge. to sink their vampire teeth into the soft underbelly of a consumption recession after a bloody withdrawal from crunching the more bony neckparts of credit. In the case of the credit-crunch the risk of a final lunge interfering with the subsidzed flow of market-failed welfare to free-market ideologues and restoring aggregate demand, much less credit flows and transparency, comes from a damaging political response that unmasks the maskers of unfree markets. Politicians around the world are pushing to roll-back the curtain on free markets markets that were never free to compete in the first place - shadow markets that were shielded from competition with insurmountable transaction costs, impose greater regulation transparency, restrict trade financial fraud and provide multi-sector bail-outs restore aggregate demand rather than bail out the financial criminals who caused the recession. This move away from free-markets the free-market ideology that caused this recession towards regulation, protectionism and subsidies policies that prevent systemic market failure risks turning a temporary downturn into protracted recession may prevent a recession from turning into a depression.

[2 Strategies]

"In the case of the credit-crunch the risk of a final lunge comes from a damaging political response. Politicians around the world..."

Final lunge? Politicians around the world are trying to protect their systems from a return bad US debt. Purging bad US debt from their leveraged systems has proven to be very expensive, and they don't want to do it again. Expecting overseas nations to again buy bad private debt because of super lax US credit standards is unrealistic.

There are 2 very different strategies going on. The US is trying to restore the flow of foreign loans to the US private sector, because the US doesn't have an adequate source of private savings. Everyone else is trying to protect themselves from any more bad US debt from being pushed on them. The easiest and most certain way for foreign entities to do this is to just reject all private US debt, or at least any private debt that does not meet their standards. Meanwhile, US policy is trying to loosen credit standards, and lower interest rates so low that default rates cannot possibly be covered by the interest.

The 2 sides are working against each other.

[Lee Adams]

A bailout that makes sense!

I'm in favor of giving $85,000,000,000 to
America in a 'We Deserve It Dividend'. To make the
math simple, let's assume there are 200,000,000 bona
fide U.S.Citizens 18+.

Our population is about 301,000,000 +/- counting every
man,woman and child. So 200,000,000 might be a fair stab at
adults 18 and up. So divide 200 million adults 18+ into $85
billion that equals $425,000.00.My plan is to give $425,000
to every person 18+ as a 'We Deserve ItDividend'.
Of course, it would NOT be tax free. So let's assume a
tax rate of 30%. Every individual 18+ has to pay$127,500.00
in taxes.

That sends $25,500,000,000 right back to Uncle Sam.But it
means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife has $595,000.00. What would you do with
$297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads

Put away money for college - it'll be there

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobsInvest in the market - capital
drives growth

Pay for your parent's medical insurance - health care
improves

Enable Deadbeat Dads to come clean - or else

Remember this is for every adult U S Citizen 18+ including
the folks who lost their jobs at Lehman Brothers and every
other company that is cutting back. And of course, for
those serving in our Armed Forces. If we're going to
re-distribute wealth let's really do it... instead of
trickling out a puny $1000.00 ( 'vote buy' )
economic incentive that is being proposed by one of our
candidates for President.

[calmo]

Excellent translation, bp

[Math]

"So divide 200 million adults 18+ into $85
billion that equals $425,000.00."

No it doesn't. 85B/200M is only $283.33 1/3. You would need 85T just to get to $283,333.33 Treasury can't borrow that much from overseas.

[Lafayette]

Fast-Reverse to Nonsense

lark: .... in the Great Depression The Sequel, China is America, and America is the U.K.

What a lark!, lark.

And bollocks to the above assumption that takes simplicity to the outer rim of incredibility.

History repeats itself, but never in the same way. This World Economy is not the World Economy of post-1929. The US and European economies today are nowhere similar to those of the early 1930s. It is just those differences, I suggest, that mean simplistic (gloom 'n doom) previsions are not even remotely believable. Why?

Because we have built in resiliency in modern economies, that we did not have in the 20th century, pre-WW2. Two of the most important are labor market flexibility and entitlements (such as retirement) that sustain a base economic output, as well as better coordinated world Central Bank management (despite the colossal blunder of the Sub-prime Mess). And, if pressed, I could think of a couple more.

Of course, maybe the UK would like to do a Fast-Reverse to Nonsense ... but I'll stick to the IMF's 1% contraction next year, but not another one percent it predicts for 2010, which will get us back to 2008 levels -- and continued growth thereon out for the rest of the decade.

My guess is as good as Bloom's.

[hari]

Now of some of you would like this news today in Germany:

Solar Global (Germany) has offered to takeover Opel (GM) and its three automotive car plants in Germany and turn Opel into a *green* car.

How about that for M&A? DAX didn't like it and Solar Global went south by about 16% by midday. The offfer includes 25% cash and rest debentures/condition: GM relinquish its control of Opel.

[hari]

The stanford academic (and more like him) are scared that global financial markets might get too transparent (under G-20 regime) and deprive them of their reserach or whatnot.
This type of scare mongering is symptomatic of academics who have no other axe to grind - but their own.

[Julio]

"The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster. "

Whereas in the last eight years a disaster managed to turn terrible policies into a financial crisis.

[Wannabe]

It was written above:
"If memory serves correctly, the UK had the least painful experience of all the industrialised economies."

Not even close. Japan, not burdened with an excess of Western economic ideas, went off the gold standard early, followed stimulative policies, and was out of the depression by 1932. By 1936 industrial production was 50% above 1929. IIRC, it was not until six or seven years later that the U.S. managed that.

[Mil Exp]

"Japan, not burdened with an excess of Western economic ideas, went off the gold standard early, followed stimulative policies, and was out of the depression by 1932."

Bad example. Japanese expansion during the period depended partly upon military conquest/exploitation of surrounding countries resources.

[JeffF]

"Not even close. Japan..."

I believe Sweden also did very well, by running a large fiscal stimulus mainly by spending a lot and not increasing taxes.

England's experience was, I think, kind of mediocre (so bad, but not really bad). It had a relatively strong social safety net for the time (unemployment) which was maintained, and it's protectionism took the form of reducing trade with Europe and the US while maintaining trade with it's empire. England, however, was also already in a prolonged slump before the depression. So perhaps it didn't have much of a local bubble burst?

However this is all just based on one article I read a few weeks ago that I'm having trouble finding again.

[JeffF]

And yea, Japan and Germany... not really models I think we should look to.

[merkury]

30 reasons for Great Depression 2 by 2011 - Paul B. Farrell

Scan these 30 "leading indicators." Each problem has one or more possible solutions, but lacks unified political support. Time's running out. We're already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

http://www.marketwatch.com/news/story/well-great-depression-2-2011/story.aspx?guid=B28B49B5-EFD1-4941-B57E-A2BA1545BA09&dist=SecMostCommented#comments

[roger]

Actually, the Japanese German model has been followed since the end of WWII - hence, the amount spent on the military and the excuse to spend more on the military that has become one of those annoying, 500 billion dollar per year parts of the U.S. economy. Only a country as eager to be deluded as the U.S. would think that the proper response to a paramilitary attack by a group that supports itself on around 10 million dollars per year is - to spend two trillion dollars. And not even get rid of the paramilitary group! I suppose this is why the rightwing is so successful in their propaganda campaign to make government seem magically unsuccessful.

Wages rising, investors chewing their fingernails - it sounds so awful! As we know, economics of the Bloom type is to the wealthy as theology of the medieval type was to the feudal order. And economists definitely want to keep it feudal. Perhaps the great de-leveraging is going to mean the great unraveling of the unjustified and malign level of inequality that has built up in the developed economies over the last thirty years - and which, over the last eight, has become a drag on the economy and a positive obstacle to investment in projects that are for the general good - rather than investments in high yield poker chips. The liberal era is going to have a chorus on the margins of economists like Bloom, all singing dirges. That will be fun.

[ndd]

Calmo:

Out, out, damned spot!

[halbhh]

Sorry to be trivial but it's hard for me to ignore the math mistakes. Both comments got it wrong. Checking your math isn't a waste of time. Sure, you are suppose to be focused on ideas/theories. But really, the concrete is where it all comes together.

[halbhh]

Re 85B/200M

[halbhh]

To be less trivial, here's a good question:

If you gave $425 (or more actually now) to each person over 18 in the US, would we all be better off a year later than if you saved AIG from bankruptcy?

I'd say yes.

[halbhh]

last bit of trivial pursuit - of course a tax "rebate" isn't taxable. Ok, I'm done with the trivial for today.

[Noni Mausa]

Mr. Zombie said: Noni: "All wealth, that of the rich as well as the poor, comes from people, they should get some of it back, don't you think?"

They do. When people create wealth, they often demand a fraction of it to be returned to them. It's called 'wages'.

And sometimes they get fries with that.

If 50 workers produce 10,000 units of wealth, who decides how much of that 10,000 accrues to the workers who produced it? The workers themselves? Hardly.

Working together they have produced 200 units each, above and beyond all legitimate expenses. These 200 units are pure profit, accruing to whoever can claim it.

Assume that a good middle class income, a "full life" income, is about 50 units. The business owner will do what he can (Adam Smith tells us) to return to them as little as he can of the 200 units. In times like today, he might be able to return to them only the 20 units they need to pay their minimal expenses. So they can work in the factory, but they cannot afford to buy the stuff they make.

What your model forgets that to make an economy work, two parties generate wealth -- the workers who make the stuff or provide the service, and the buyers who buy the stuff and receive the services. You can't have a magnet with only a north pole, you can't have a battery with only a plus terminal and no minus. For instance, you say:

But I think you are advocating something different, perhaps a transfer from those who do create wealth to those who don't.

You presume a caste of non-wealth-makers who lounge around like a disheveled Sergeant Bilko while struggling workers drop pork chops and peeled grapes in his mouth. You're correct, but you are wrong.

You presume the parasite class is made up of people on welfare, sitting on the sofa with a beer and a pizza and occasionally having another baby, just to pass the time. Not at all.

In 2005, the US government gave temporary assistance to approximately 2,000,000 needy people, govspot tells us. If they are receiving what our Canadian single recipients get, about $7000 a year, those 2 million people receive about $14 billion a year.

Contrast that with these guys: [1]

John Arnold -- $1.5-2B
James Simons -- $1.5-$2B
Eddie Lampert -- $1-1.5B
T. Boone Pickens -- $1B-1.5
Stevie Cohen -- $1B
Stephen Feinberg -- $800-900M
Paul Tudor Jones -- $700-800M
Bruce Kovner -- $700-800M
Israel Englander -- $600-700M
David Shaw -- $600-700M

Or more than $10.5 billion for fiscal year 2007 for the top ten hedge fund managers. I will grant you they are probably smarter and work harder than the welfare recipients, but 6,666 times smarter or more industrious? Nonsense.

Oh, and I bet those two million beer drinkers aren't in a position to pull down the whole edifice of western finance, either.

Your "support new hiring" plan also creates terrible incentives: by cutting the cost of labor, efficiency increases (automation) become less attractive. It also creates the incentive for a business to fire someone and replace them at (50%) taxpayer cost.

I proposed this idea as an immediate way to get several million people into the workplace. Short term initiatives don't get gamed as quickly, plus there is a non-trivial cost to firing and retraining people; probably they balance out.

According to this [2] "Census data show there were 5.7 million firms with employees ... in 2002 ... the most recent data [2004?] show there are 17,000 large businesses."

Using rough "don't even have an envelope" calculations, that would take at least 7 to 8 million people into the workforce within a few months, where they could begin earning and spending and replenishing the groundwater economy. According to this [3] , that is about the same number as the number of unemployed in 2007. How difficult is it to add one new hire to every fifty employees? Heck, it would be pretty cheap for business, they could "pay back to the community" like they're always saying, and write the new hire off under Public Relations. /irony

The guys at the top of the heap are only at the top of the heap because of a lot of people in the heap. This is not rocket science.

Noni "Uriah" Heap

[1] http://paul.kedrosky.com/archives/2007/04/11/top_ten_highest.html
[2] http://www.smallbusinessnotes.com/aboutsb/sbfacts/sbnumber.html
[3] http://data.bls.gov/cgi-bin/surveymost

[calmo]

Thanks for doing the arithmetic/checking halbhh...tis the taglhhh that duzlhhit...putzlhh a curslhh on alllhhus ...so stucklhh in the muddlhh we belhhh.

But to B fair to Lee, that was a lot of work and good intentions...anso...he was prolly counting on us to catch up to his so serious & harding workin self.
A test.
Of usall and ok, you, halbhh, was the fastest and made the rest of here...not look too bad.

Ok, I was not fast-tracked for more than ESL teaching positions...true.

[halbhh]

noni, I've tended to overpay workers often on many contract jobs, still I have a point to make regarding:

"If 50 workers produce 10,000 units of wealth, who decides how much of that 10,000 accrues to the workers who produced it? "

I can't tell you include the capital and managerial input into the productive activity as part of what produces the product.

Could the workers build their product without tools, or without someone to take a capital risk, or without someone to be responsible for the whole enterprise, selling the goods, and paying the workers?

That said, in theory, if a business underpays its workers, then a competing business could hire skilled workers away and win the marketplace competition for customers.

And this does happen.

On the other hand, when the job is low skill and there are too many unemployeed people, it's fair to point out that if there isn't enough demand for labor in one field, a person could choose to make the effort to work in a different field -- learn a new skill, even if it means being like a poor student for a while.

These issues of what private enterprise ought to do are separate from the big issues of what government ought to do.

Government ought to support education in a bigger way.

[halbhh]

Just for completeness, let me say that stopping a domino effect from AIG going under was and is worth doing.

But....if the Federal gov is nationalizing a company's losses, it's reasonable if it could make the counterparties pay a modest bit of that cost, instead of 100% of the costs on the taxpayer (assuming the net cost over time is indeed a loss).

So, sure, stopping the dominos is reasonable, and of course, doesn't help us at all with the bigger problem, not even a little.

[halbhh]

I mean that propping up rotten trees isn't the best use of time and energy. Somehow Yellowstone comes to mind. At least there is respect for the idea of the benefits of natural fires reducing undergrowth, instead of thinking that the big fire was only a "shock" and all fire should be fought always.

Ok, this topic isn't going to be handled in 300 words or less, heh heh.

[S Brennan]

The irrefutable fact that wildly popular tax credits are in fact subsidies to targeted industries are in effect no different than tariffs in that they artificially raise barriers to imports seems to escape the "conventional wisdom" of "free traders". The verifiable observation that "free traders" are the single biggest proponents of tax subsidies really does peg the hypocrisy meter.

When [if ever] the "conventional wisdom" of "free traders" calls for an end to tax credits as vociferously as they do for restrictions on trade, in such matters as laws regarding labor and environmental practices, that will be the day they have some standing. Until then the "free traders" should be considered either useful idiots or people who have something to gain by asymmetrically adjusting laws to their favor.

Furthermore the "conventional wisdom" of "free traders" ought get their mythology straight on Smoot-Hawley, because the decline in U.S. exports would have fallen regardless as incomes declined in Canada, the United Kingdom, and in other U.S. trading partners".

_______________________________________

"...In 1934 Joseph Jones wrote a very influential book in which he argued that widespread retaliation against Smoot-Hawley had, in fact, taken place. Jones's book helped to establish the view among the public and among scholars that the passage of Smoot-Hawley had been a policy blunder that had worsened the Great Depression.

Did Retaliation Take Place?

...in recent years there has been scholarly interest in the question of whether Smoot-Hawley did provoke significant retaliation and, therefore, made the Depression worse. Clearly it is possible to overstate the extent of retaliation and Jones almost certainly did. For instance, the important decision by Britain to abandon a century-long commitment to free trade and raise tariffs in 1931 was not affected to any significant extent by Smoot-Hawley.

We can construct an upper bound for the negative impact of Smoot-Hawley.

Between 1929 and 1931, real exports declined by an amount equal to about 1.7% of 1929 real GDP. Declines in aggregate expenditures are usually thought to have a multiplied effect on equilibrium GDP. The best estimates are that the multiplier is roughly two. In that case, real GDP would have declined by about 3.4% between 1929 and 1931 as a result of the decline in real exports. Real GDP actually declined by about 16.5% between 1929 and 1931, so the decline in real exports can account for about 21% of the total decline in real GDP. The decline in real exports, then, may well have played an important, but not crucial, role in the decline in GDP during the first two years of the Depression. Bear in mind, though, that not all -- perhaps not even most -- of the decline in exports can be attributed to retaliation for Smoot-Hawley. Even if Smoot-Hawley had not been passed, U.S. exports would have fallen as incomes declined in Canada, the United Kingdom, and in other U.S. trading partners and as tariff rates in some of these countries increased for reasons unconnected to Smoot-Hawley."

http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff

[BJ Feng]

Noni Mausa, how exactly should we figure out the share of profit that should go to labor? If the laborer is indeed responsible for so much of the profit, he can go and open his own shop. This is exactly what happens with auto repair shops and why you see so many of them around. But it's not as easy as it sounds, owners put their capital at risk and create the operating structure or business model. That is a big contribution.

As for Eddie Lampert, he rescued Kmart from bankruptcy and bought out a struggling Sears. He has lost billions already, does that go into your calculations? How many ordinary workers would have to go without to equal the losses Lampert has suffered?

In fact, this downturn has hurt the rich most of all. The story of Las Vegas Sands and its principal owner Sheldon Adelson is just a typical story.

"Chief Executive Officer Sheldon Adelson and his family invested about $525 million. That was in addition to the $475 million he injected Sept. 30."

The above doesn't mention that his stake in Las Vegas Sands has already declined more than $10 BILLION dollars. He was once one of the richest men in the world, now his stake is worth around $2 billion including the recent $1 billion injection.

T. Boone Pickens has also lost billions in this downturn. Sumner Redstone had to sell stocks to meet a margin call, a whole lot of well off people are having to make margin calls and seeing their wealth disappear.

Some, like the partners at General Growth, a REIT that owns a lot of shopping mall around the country, will be just about bankrupt after all this is over. Macerich and Developer's Diversified are also REITS. These stories were all from a few months ago.

"By far the largest sale came from Chief Financial Officer Bernie Freibaum, who sold 1.5 million shares, or 20% of his General Growth holdings, for $30.6 million, according to Securities and Exchange Commission filings. Chief Investment Officer Joel Bayer sold 500,000 shares."

"Arthur Coppola, Macerich’s chairman and chief executive, unloaded 345,173 Macerich shares on Thursday and Friday for nearly $13.9 million to cover a collateral requirement on his line of credit with his broker, according to Securities and Exchange Commission filings. The sales amounted to 44% of the Macerich common shares held by Mr. Coppola.

Also last week, Scott Wolstein, chairman and chief executive of Developers Diversified, sold more than 1.2 million shares for roughly $20.1 million to cover margin calls, SEC filings show. The sales cut Mr. Wolstein’s holdings by 45%."

http://blog.retailtrafficmag.com/retail_traffic_court/2008/10/15/margin-calls-hit-two-more-reits/

Since then, these executives have had to sell even more stock. General Growth might not survive, they have $18 billion in debt that needs to be refinanced in the next 3 years. No, it's not always up up and away for the rich. The losses the rich have suffered are staggering. You don't see any whining because when you have more skin in the game, you get burned more too. The poor are relatively sheltered from these kind of losses. They lose because they are dependent upon the rich to create jobs for them.

[Barkley Rosserr]

lark,

Very seriously spot off. Germany was a very big exporter and was hit hard by Smoot-Hawley. They owed US banks big time from the Dawes Plan and were unable to pay, once their exports collapsed. In fact, they were the only nation hit harder than the US, with an unemployment rate hitting 30% compared with our max at 25%. What came from that was the election of Adolf Hitler, who (accurately) promised to bring full employment.

This sort of talk is probably the stupidest and most dangerous sort of thing going around now with people who pride themselves on being "progressive." I was at a conference last week with a lot of people from abroad, and to a person they denounced any move to protectionism by the US (oh well, of course a bunch of furriners would do that, wouldn't they, but to heck with them, right?). At the G-20 dinner it was Sarkozy who held out until 11 PM against the call for a 12-month moratorium on protectionist moves.

[calmo]

Well if ain't the spot remover hisself.
Well I like Lark (at the pole position) just the same Barkley...and while there are things I don't like (he's askin), I thought, and still think that this bit was spot nearly on:The implication here is that a return to protectionism would be a re-run of Smoot-Hawley. But it wouldn't, because in the Great Depression The Sequel, China is America, and America is the U.K.Fairly describes what happened to the senior currency, yes? How significant the protectionist instrument, SH was in that transition, quite a bit more debatable than Germany's unemployment rate...but your glancing blow about that fulfilled promise of full employment...
Well, spot on.
Dang.

[Ninja Zombie]

Noni: "If 50 workers produce 10,000 units of wealth, who decides how much of that 10,000 accrues to the workers who produced it? The workers themselves? Hardly."

The workers and their employers jointly decide. Nothing is produced if both do not come to a mutual agreement.

"...So they can work in the factory, but they cannot afford to buy the stuff they make."

Indeed, the guys at Boeing and Airbus producing private jets generally can't afford them. I can't afford to buy the software I produce. Not everyone can afford everything, that's an unfortunate consequence of living in a world of finite resources.

"What your model forgets that to make an economy work, two parties generate wealth -- the workers who make the stuff or provide the service, and the buyers who buy the stuff and receive the services. You can't have a magnet with only a north pole, you can't have a battery with only a plus terminal and no minus."

I'm really not sure what the existence/nonexistence of magnetic monopoles has to do with wealth creation. Do you simply mean that you can't price wealth without a purchaser? That's fine, but it still exists. It just has an unknown price.

"I will grant you they [hedge fund managers] are probably smarter and work harder than the welfare recipients, but 6,666 times smarter or more industrious? Nonsense."

One group of people did some work; the other did none. Forget hedge fund managers: I did infinitely more work than people on welfare, not just 666x more.

"I proposed this idea as an immediate way to get several million people into the workplace."

That's a completely wrongheaded goal. No one wants a job. People want wealth: a house, onion rings, a wii, nunchucks, marijuana and lap dances. Jobs are merely a means to this end.

Ignoring the issue of gaming your system, it discourages wealth creation. It encourages hiring people rather than streamlining and automating your existing business. At the end of the day, we get the same level of wealth spread slightly differently. Same pie with smaller slices rather than a bigger pie.

By the way, at the level of low skill jobs, this will be gamed. Training costs there are minimal; if you can save 50% of one employees salary at the cost of a 1 day training session, that's a win. Every single McDonalds and walmart in america will fire/hire a worker.

[Joen]

Actually Lee Adams is onto something although his math sucks (but not as bad as the math from math). People are scared of the liquidity trap and how the Fed has lost the ability to use monetary policy at 0% interest rates. Now think if we do what Lee suggests. Lets give every man, woman and child 450K in cash. Start oiling the printing machines and print, print, print... baby! What would you do? Would you really hoard that cash? If I get one of those 450K rebate checks I'm already spending it before I get it on everything I can get my hands on, from Wall Mart crap to cars to houses to stocks. Why? Because prices will shoot up through the roof as soon as everybody else starts doing the same thing. I hope you actually disagree with me and hoard your cash since that will actually allow me to buy more goods because of the lower prices and you are the ones who get stuck paying the inflation tax.

[S Brennan]

Why attack people with this:

"This sort of talk is probably the stupidest and most dangerous sort of thing going around now with people who pride themselves on being "progressive." - Barkley Rosserr

Since you're so much smarter than everybody that disagrees with you. Respond with facts to this:

"...In 1934 Joseph Jones wrote a very influential book in which he argued that widespread retaliation against Smoot-Hawley had, in fact, taken place. Jones's book helped to establish the view among the public and among scholars that the passage of Smoot-Hawley had been a policy blunder that had worsened the Great Depression.

Did Retaliation Take Place?

...in recent years there has been scholarly interest in the question of whether Smoot-Hawley did provoke significant retaliation and, therefore, made the Depression worse. Clearly it is possible to overstate the extent of retaliation and Jones almost certainly did. For instance, the important decision by Britain to abandon a century-long commitment to free trade and raise tariffs in 1931 was not affected to any significant extent by Smoot-Hawley.

We can construct an upper bound for the negative impact of Smoot-Hawley.

Between 1929 and 1931, real exports declined by an amount equal to about 1.7% of 1929 real GDP. Declines in aggregate expenditures are usually thought to have a multiplied effect on equilibrium GDP. The best estimates are that the multiplier is roughly two. In that case, real GDP would have declined by about 3.4% between 1929 and 1931 as a result of the decline in real exports. Real GDP actually declined by about 16.5% between 1929 and 1931, so the decline in real exports can account for about 21% of the total decline in real GDP. The decline in real exports, then, may well have played an important, but not crucial, role in the decline in GDP during the first two years of the Depression. Bear in mind, though, that not all -- perhaps not even most -- of the decline in exports can be attributed to retaliation for Smoot-Hawley. Even if Smoot-Hawley had not been passed, U.S. exports would have fallen as incomes declined in Canada, the United Kingdom, and in other U.S. trading partners and as tariff rates in some of these countries increased for reasons unconnected to Smoot-Hawley."

http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff

So the while Smoot-Hawley act probably did not help the "free traders" have wildly overblown it's effects. In short the "stupidest and most dangerous sort of thing going" is idiots who parrot Jones ideologically driven treatise after it has been shown to be falsely premised.

Which brings me to another point.

The level of ideology and emotional drivel that the Economist community puts forth is reminiscent of the spirituality bankrupt, "Holy" Roman church when it murdered 3 million Cathars for their Christian beliefs which did not include worshipping the Roman seat of power. These followers of group of "think" are not dismal scientists, you're not a even a religion, you are simply deluded apparatchiks who seek to ingratiate themselves in a manner than allows them to live a life devoid of the principles they espouse.

[calmo]

From the center of Joen's post, so I get the spot using shot-gun techniques to cover my poor eyesight, shaky hands, Parkinson's....Now think if we do what Lee suggests. Lets give every man, woman and child 450K in cash. Start oiling the printing machines and print, print, print... baby! And return to one of MT's original video's "What is money?"...and see that it provides the mechanism, (ndd's "concrete") to control the distribution of resources...the (occasionally tenuous) successor to Stones & Clubs (Zimbabwe instructive). This role melting if we all have wads, yes?
The things I miss...thank you Joen.

[lark]

lark here, with a message from michael pettis, for youse. I don't have time to dig up refs, but pettis does quite a good job of putting my little snark above on a fairly solid historical footing.

from mpettis blog

To turn to something a little weightier and more abstract, I have been re-reading Keynes and the history of the Great Depression – most particularly about the global balance of payments in the 1920s and 1930s – to get a better understanding of the current mess. I am not trying to suggest that we are likely to repeat the 1930s, but it certainly seems that the imbalances that led up to the current crisis were in many ways similar to the imbalances of the 1920s – with a few countries, dominated by one very large one, running massive current account surpluses and accumulating, in the process, rapidly growing central bank reserves. In both cases the main current account surplus countries financed the current account deficit countries with capital exports (this is just a truism – surplus countries always export capital to deficit countries except to the extent deficit countries can draw down reserves).

In the 1920s excess and rising capacity in the US could be exported, mostly to Europe, while massive foreign bond issues floated by foreign countries in New York permitted countries to run large deficits, but as the US continued investing in and increasing capacity without increasing domestic demand quickly enough, it was inevitable that something eventually had to adjust. The financial crisis of 1929-31 was part of that adjustment process, and it was not just the stock market that fell – bond markets collapsed and bonds issued by foreign borrowers were among those that fell the most. This, of course, made it impossible for all but the most credit-worthy foreigners to continue raising money, and by effectively cutting off funding for the current account deficit countries, it eliminated their ability to absorb excess US capacity.

The drop in foreign demand forced the US either massively to increase domestic demand or massively to cut back domestic production. The fact that another consequence of the financial crisis was a collapse of parts of the domestic banking system, leading to banking panics and cash hoarding, meant, as it often does in a global crisis, that the US had to adjust to a drop in demand both domestically and from abroad. But instead of expanding aggressively, as Keynes demanded, FDR expanded cautiously, and in 1937 even decided to put the fiscal house back in order by cutting fiscal spending, thereby stopping the recovery dead in its tracks.

Keynes argued at the time that the villain of the story was excess savings since industrial overcapacity required that we save less and consume more. He also argued, if I understand him correctly, that high savings reduced the multiplier effect of investment on the economy. In that sense it is a mistake to see high savings as something that leads to high investment. As long as some part of income is saved, any increase in investment generates its own savings (this may seem counterintuitive but it is the standard multiplier effect in which investment causes a boost in income, part of which is saved and the rest consumed, which causes a secondary boost in income, part of which is saved, and so on). The higher the savings rate the smaller the multiplier.

I can’t help thinking that there is an important lesson in here for us. In the 1930s it was noteworthy that the current account surplus countries like the US and the net exporters in Latin America suffered more deeply from the crisis than did current account deficit countries, especially, it seems, once barriers to trade were imposed. The extreme case of the latter was Germany. As I understand it Germany imposed trade restrictions early, in which German imports were largely paid for in export credits, so that Germany more or less ran a balanced trade account after many years of large deficits. It was the first country to emerge from the Great Depression – in fact I don’t really think there was a depression in Germany to speak of – in part, I think, because its low savings and high trade barriers permitted the investment multiplier to work very effectively.

The US, on the other hand suffered a deep crisis in the 1930s, and its imposition of trade tariffs made things worse, not just because impediments to trade are costly to the global economy, but rather because it eliminated the ability of the US to absorb expanding demand from other countries and to force other countries to absorb excess US production. Once international trade is eliminated, in other words, US excess production over consumption had to be resolved wholly within the US, and that meant that either the US engineered a substantial increase in domestic demand by fiscal means, as Keynes demanded, or that it adjust via a collapse in production. It did the latter.

I am worried about some of the conclusions I might be drawing. The first conclusion, I think, is pretty clear and I have already discussed it. Demand has to expand and it isn’t like to be households or businesses that do the job. The burden must fall on governments to expand fiscally.

On that point I think most people agree with me generally, but are less convinced than I am that the main role in resolving the global demand problem must fall on the current-account-surplus countries, whose high savings rate must decline. They have produced more than the world is currently able to consume, and if they do not boost demand significantly, they will be forced to cut supply significantly.

Not everyone agrees that this means that China and other Asian countries, more than Europe and the US, must adjust. Paul Krugman recently argued in the New York Times, for example, that the US government and the Obama administration must act dramatically to expand demand. But I worry that the global problem has never been a lack of US demand – it has been lack of Asian demand. The US has already provided a greater share of global demand than is healthy for either the US or, as we have clearly seen, for the world.

A massive fiscal expansion by the US would certainly boost global demand, but it would do so at the expense of increasing US indebtedness by far more than it increases demand for US goods (much of the expansion in demand would simply be exported to countries that continue to suffer from overcapacity) and of course it would not solve the global overcapacity problem. It might even exacerbate it. The best that one could hope for, if the US took the lead in fiscal expansion, is that Asian countries make heroic efforts to shift their economies as quickly as possible from export dependence to domestic demand dependence, but I have already argued that with the best will in the world this will be a long and difficult process, and I am not sure anyway that most countries have the political will to force the shift. China, for example, is raising export rebates and talking about depreciating the currency – hardly the actions of a country working hard to reduce global overcapacity.

The second conclusion is more worrying – a least to a liberal internationalist like me. It suggests that although a collapse in world trade might be bad for the global economy overall, the pain will not be evenly distributed, and some countries might even benefit, and in that case they may actually move to restrict global trade. Current account deficit countries will suffer much less from anti-trade policies, in other words, and may even benefit because it gives their domestic fiscal policies greater traction. This may encourage them to attack trade if the global economy gets much worse.

As things currently stand, for example, fiscal expansion in the US has a much lower multiplier because in an open economy it is not US savings that matter but rather global savings, and global savings rates are much higher than domestic savings rates. In addition, a boost in US demand is exported through the current account deficit to other countries. Will the US continue to accept these limitations off trade if the US is forced to bear the brunt of the effort to increase global demand, or will at some point protectionist legislation become irresistible?

I think this is sort of what happened in the 1930s. The US refused to bear the brunt of the adjustment which, as the leading creator of global overcapacity it should have. Countries like Germany that opted out of the system seemed to bear little of the pain. When the US government enacted Smoot-Hawley, as a way of forcing even more of the US adjustment onto the rest of the world, it made it very easy for the rest of the world to opt out of the trading system, thereby forcing the full adjustment onto the US. In fact the US ended up bearing more than its full share of the adjustment because the decline in international trade actually made things worse for everybody.

The collapse in global trade forced most of the economic adjustment onto countries, like the US, whose excess savings and rapidly rising capacity created the global overcapacity problem in the first place. The Great Depression was brutal for the US and for some Latin American countries, but not nearly as bad for continental Europe and I think barely noticed in corporatist Germany and Italy. What if current account deficit countries conclude today, like they seem to have done in the 1930s, that by restricting trade they can force most of the global adjustment onto the current account surplus countries? That would be devastating for Asian exporters and especially China.

My conclusion? I am still trying to get my arms around all of this but I guess it is not terribly optimistic. I would argue that it might not help the world much – except in the very short term – for excess-consumption countries to boost consumption significantly via large fiscal programs. It was their excess consumption that created one side of the problem in the first place, and not only will the required fiscal boost need to be substantial (since much of it will be mitigated by the high savings rates of other countries), but it won’t be sustainable. Debt will rise, and overcapacity will still plague the system.

[Barry]

"The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by US policymakers to block imports in a desperate attempt to protect domestic jobs. But it helped worsen the recession by freezing world trade. At the same time policymakers were encouraging firms to collude and workers to unionise to raise prices and wages."

BZZZZZZZZZZZZZZZZZZZZZZZZZZT!!!!!!!!!!!!!!!!!!!!!

Thank you for playing, Mr. Bloom. Now, please go stand in the corner with all of the rest of the Depression cranks.
One more website which I won't feel bad about not reading.

[Math]

"Sorry to be trivial but it's hard for me to ignore the math mistakes."

Yeah, I divided 85B by total pop of 300M, but wrote 200M. Sorry about that.

[mrrunangun]

It may well be that the unwinding of the housing debt bubble will trigger the unwinding of imbalances in the world financial system that began in the late '60s when the USA ceased to be a world system creditor and began to build up ever larger debts payable into that system. Political economists have been saying for 40 years that because these debts were a small fraction of gdp, the amount was of no concern. During the time of debt accumulation, the proceeds of the borrowing were not invested productively. It was spent on direct payments to individuals, practically useless buildups of armaments, and tax subsidies to unproductive investments in real estate. We find ourselves with a large debt to the world financial system and an ever less educationally competitive workforce. Our remaining capital stock and its relatively efficient utilization is our sole remaining advantage. The government has embarked upon a policy whose result is likely to be the squandering of a great deal of that capital stock. The assumption that our creditors will lend to us without limit still underlies the hair-of-the-dog plan of borrowing more from foreign creditors in order to subsidize failing businesses whose failures are themselves the result of excessive debt buildup. Even if that assumption is still reasonable in the short run, it is not in the long run without a change in policy to direct capital into economically productive uses.

[Fred]

Lark hit the nail on the head. Protectionism would have an enormously stimulating effect on the United States, given the size of our trade deficit. I would recommend against protectionism against Canada, Mexico and Central America, however, since I don't see the trade deficit there as being dangerous to the long-run interests of the US.

Whereas the trade deficit with Asia is most definitely dangerous. We are in the process of becoming completely dependent on the Asians for many sorts of manufactured goods, to the point where we will be very vulnerable in the event of future conflicts with China. Regardless of your ideological views, the lesson of history is that conflict between the US and China is inevitable, so we can't just let our industrial base be shipped overseas like we are doing now.

Barkley Rosser correctly brings up the point that protectionism might itself cause conflict with China. But better sooner than later, since at least now we have the upper hand militarily and will will any showdown. Also, a military showdown might bring people in the US to their senses about deindustrialization. In the long run, there really should be no reason for the Asians to resent a little protectionism by the US. All we are asking them to do is consume the fruits of their labor rather than allowing us to consume them in exchange for promises to pay them back in the future, promises which can easily be repudiated by inflation or export controls.

[calmo]

Just one question Fred:Lark hit the nail on the head. Was that the head of the dog named 'Spot'?

[Lafayette]

The Obama Team

roger: economics of the Bloom type is to the wealthy as theology of the medieval type was to the feudal order.

Well put. Both are faith-based, with little foundation in economic thought.

Faith, however, is the hallmark of conservatism. One is asked to believe largely by suspension of thoughtful reasoning. It seems we have gone through a dark age of such thinking in America, over the past 8 years and perhaps longer. (Was Bill Clinton, in retrospect, all that Leftist in his political stance, or perhaps just left-of-center?)

Europe came out of the Dark Ages with the Renaissance. Will the US come out of its Dark Age with Obama? It's not obvious, the campaign gave few clues.

Besides, there are no grass-roots cultural values of a truly Leftist nature, that is, of the kind that would qualify as a foundation for a political wing called Social Democrat. For the moment, Americans are fed up with Crony Capitalism, but that does not mean for one moment that they cannot vote for a Republican (even presuming that Republicans remain with their current winner-takes-all political ideology).

They are still a long, lonnnggggg way from the mindset that would bring about Social Democrat economic policies. Which are policies that would stick, regardless of the prevailing winds of a Republican administration that will inevitably one day claw its way back into the White House. Perhaps to undo all that Obama will do ... ?

Obama's is no Sweeping Mandate to transform the economy to one with less Income Inequity. "Spreading the wealth around" is just a campaign cliché, which the Replicants harped mightily about because they thought he meant higher taxes. Well, he DID mean higher taxes! The question is, however, how much higher?

Will he reform Replicant bills that have brought capital gains taxes down to around 20%. Will he reform income tax marginal rates to put them back up to historical highs (see here) in the 1960s of around 90% (at >400K per annum, married couple) and at what level will those rates kick in? Then, raking in the money, what will he do with it. Decent, affordable Health Care? Leave-no-child-behind primary/secondary/postsecondary Education?

All interesting questions, which the Obama Team will have to answer one day. Hopefully soon?

[Lafayette]

Fred: Protectionism would have an enormously stimulating effect on the United States, given the size of our trade deficit. I would recommend against protectionism against Canada, Mexico and Central America, however,

Pifle.

Try a good dose of American protectionism, break all the rules established by the GATT, and watch the world react accordingly by protecting "their economies". Then, like in the 1930s, by shutting the doors to World Trade, America took another decade (and a war) to come back out of the pits. That is one bit of history that is thoroughly capable of repeating itself in exactly the same way.

Truly ignorant nonsense, Fred. Those who refuse to learn from history ... are condemned to repeat it.

[ndd]

Lafayette:
Let's take as a given that an international trade war would be bad for the global trade as a whole. Lark and Pettis raise the game theory issue: Do we know it would be bad for each and every participant, or would some of those participants come out ahead? If so, why should those participants act on behalf of others at their own expense? And in the case of the US, has its position changed such that the last time the "game" was played it was in the position of a loser, but this time might be one of those who could gain by not cooperating?

I see lots of spotty insults, but no citations to research.

[Lafayette]

Do we know it would be bad for each and every participant, or would some of those participants come out ahead? If so, why should those participants act on behalf of others at their own expense?

Because it would be stupid, which is the simple answer. The complex answer is that, as signatories to General Agreement on Trade & Tariffs, we uphold the World Trade Organization as a mediating body.

That means that there is an arbitration process in place and there are rules to observe as regards international trade. A country does not increase trade tariffs on a whimsy. We signed on to the GATT. We go back on our word, because the terms of trade have changed and that does not please us?

Of course, Uncle Sam can tell the world to go-to-hell. But, when that “world” consists of your largest debtor (holding a trillion dollars worth of your debt) it is better to tread wisely before pulling the rug from under their feet of the Chinese.

And in the case of the US, has its position changed such that the last time the "game" was played it was in the position of a loser, but this time might be one of those who could gain by not cooperating?

Go ahead, try it. Fools do such things without thinking.
Haven’t we done enough of non-thinking that got us into this present mess? Uncle Sam has the least credibility on international finance markets in more than a century. This sub-prime mess that it fostered upon the world has exhausted any remaining good will.

Want to start a trade war? … fine, but then assume the consequences. Some possible retaliatory examples:
*A massive switch from Boeing to Airbus aircraft. How about locking out Caterpillar? And Chrysler, that sells American-made cars in Europe?
*How about putting a huge tariff on any incoming computer, and maybe a quota, with a trademark Operating Systems, but no tariff (or quota) for Open-Source OS (Linux, for example).
*A quota on all American-origin software for Finance and Manufacturing.
*A run on the dollar as the Chinese dump their T-notes and head for the Euro, with the consequence that dollar-denominated petroleum goes back up (as exporting countries denominate sales in Euros).
*Europe, Russia and China slap a tax on all equity shares bought on an American stock exchange by their nationals. (Nationals who purchase the equities and stock them in offshore accounts are tracked down as criminals for avoiding taxes.)

Trade is not a "game". It is an orderly process of commercial exchange, with rules and an arbitration court for redress.

I see lots of spotty insults, but no citations to research.

The Pre-WW2 trade war was far and away the best lesson to date. It was one element in a series of policy mistakes that extended the economic doldrums of that time. In fact, it took WW2 to get us out of it for good.

Stupidity is as stupidity does.

[ndd]

Lafayette:

More insults, less citations.

"The Pre-WW2 trade war was far and away the best lesson to date. It was one element in a series of policy mistakes that extended the economic doldrums of that time."

All of them? A few above argue that isn't the case.

Insulting the questioner is so much easier than actually dealing with the question.

[Blissex]

«Your "support new hiring" plan also creates terrible incentives: by cutting the cost of labor, efficiency increases (automation) become less attractive.»

Any good reason why efficiency should increase, at least in the short term?

«It also creates the incentive for a business to fire someone and replace them at (50%) taxpayer cost.»

That might actually be a good idea. Sounds crazy, but the goal of a subsidizing labour is not necessarily that of increasing salaries, but profits, to stimulate investment.

«I proposed this idea as an immediate way to get several million people into the workplace. Short term initiatives don't get gamed as quickly, plus there is a non-trivial cost to firing and retraining people; probably they balance out.»

This is a bit of handwaving, and I think that much better ideas exist. Someone has proposed abolishing payroll taxes. This is always a good idea, and it is an especially good idea in a recession.

[halbhh]

lark, the mpettis blog entry was interesting. It suggests 2 points to me: The US is in a better position than it was in 1930 in an important way -- we don't have a big overcapacity problem, especially now that construction and finance have taken their hits. 2:China especially needs to boost domestic consumption for their own sake.

[Lafayette]

ndd: Insulting the questioner is so much easier than actually dealing with the question.

I've taken the pains to detail a series of arguments above and all I get from you is badmouthing. (Frankly, I could care less; but since you insist, I'm obliging you.)

You've got to do better than that around here. It's a debate forum. Try harder. Come up with some cogent rebuttal.