Paul Krugman: Depression Economics Returns

Since I've been saying that monetary policy loses its ability to stimulate the economy when we are in a recession for over fifteen years, and since I've been making this point repeatedly since the crisis first began, I can hardly disagree:

Depression Economics Returns, by Paul Krugman, Commentary, NY Times: The economic news, in case you haven’t noticed, keeps getting worse. Bad as it is, however, I don’t expect another Great Depression. ...

We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.

To see what I’m talking about, consider ... the 2001 recession and the 1990-1991 recession, both of which ended up being relatively mild by historical standards...

But on both of these earlier occasions the standard policy response to a weak economy — a cut in the federal funds rate, the interest rate most directly affected by Fed policy — was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target...) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut.

And with no possibility of further interest rate cuts, there’s nothing to stop the economy’s downward momentum. ...

To pull us out of this downward spiral, the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress — and the stimulus plan won’t come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices.

One ... is the fear of red ink. In normal times, it’s good to worry about the budget deficit — and fiscal responsibility is a virtue we’ll need to relearn as soon as this crisis is past. When depression economics prevails, however, this virtue becomes a vice. F.D.R.’s premature attempt to balance the budget in 1937 almost destroyed the New Deal.

Another prejudice is the belief that policy should move cautiously. In normal times, this makes sense: you shouldn’t make big changes ... until it’s clear they’re needed. Under current conditions, however, caution is risky, because ... any delay in acting raises the chance of a deeper economic disaster. The policy response should be as well-crafted as possible, but time is of the essence.

Finally, in normal times modesty and prudence in policy goals are good things. Under current conditions, however, it’s much better to err on the side of doing too much... The risk, if the stimulus plan turns out to be more than needed, is that the economy might overheat, leading to inflation — but the Federal Reserve can always head off that threat by raising interest rates. On the other hand, if the stimulus plan is too small there’s nothing the Fed can do to make up for the shortfall. So when depression economics prevails, prudence is folly.

What does all this say about economic policy in the near future? The Obama administration will almost certainly take office in the face of an economy looking even worse than it does now. ...

All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.

So the question becomes, will the Obama people dare to propose something on that scale?

Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring. For we’re now in a situation where it would be very dangerous to give in to conventional notions of prudence.

Comments

[wjd123]

It all makes sense. It's all so clearly written.

[Mikko Sarela]

There's one problem with the red tape fiscal stimulus thing that we may come to see in this recession/depression. I hope we don't.

As your posts have remarked, the government can borrow money and thus stimulate the economy; but if the stimulus is offset by similar tax increases or by crowding out private money that could/would have been used for other investments, then it won't be of help.

In case of a global economy, a single country or even several can do this borrowing from the future. But the global economy cannot. All capital spent today is part of today's global capital pool. Somebody has to lend capital now for future earning for the scheme to work. (Increasing money supply to do this cuts corners from everybodys money earnings and does the same).

Thus, if all the countries in the world do this at the same time, the result is that there is that much less capital for private investment and you will not get nearly as much stimulus as you would think you see.

Of course, you can assume that the future is so uncertain that most of the capital would not be invested in anything - and in that case having it invested in government expenditures may help things. But this is separate claim (and a weaker one) than the basic analysis in which you can just take the increased debt as an exogenous variable.

[a]

"When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly."

So let's see, after living two and a half decades beyond our means, Krugman's advice is to continue to live beyond our means for several years more - indeed, throw caution to the wind, and just spend as much as we humanly can. It's a wonderful world where this is possible. Of course, everyone loves the suggestion, because who wants to spend only what he has?

Krugman had a piece a day or so ago where he explained that FDR wasn't a Keynesian and his economic policies didn't solve the Great Depression - no it was the Keynesian stimulus of WWII. This strikes me as profoundly wrong. FDR's policies did help solve the Great Depression because he gave work and dignity to many people. And the Keynesian stimulus from WWII only worked because, at the end of the war, we Americans were the only guys standing, and we could use all that investment in factories to sell to the rest of the world. It was pretty bleak in Europe for the fifteen years or so after WWII, and that poverty went to support American prosperity.

So anyway, if the Keynesians have their way, get ready for Great Depression II.

[divorce consultants and son]

Accidental that is
in mamas book.

The mama s not a subscriber
to this kinds of recipes, see.
The mama will cook to another one.

Your preaching is wishful
Not wise.

In a libertarian world
of mama and spendster
those papers get offered
and then there s demand.

And you
have a problem with ethics.

You do not confess.
You do not repent.
You do not excuse.

In fact
The only single thing you re
able to do
is ask for much more.

Looks like
The mama s deciding
to teach you

a lesson.

[Arthur James]

Why is there not a single word in Paul Krugman's article about the fact that the economic risk - of recession and even depression - is international, and that the kind of economic policy approach needed in such circumstances has to have a strong international focus?

And this on the eve of the G20 economic summit in Washington?!

Paul Krugman's "intellectual hero" John Maynard Keynes certainly believed in the crucial importance of international economic cooperation. There are important but under-read passages in "the General Theory" where Keynes makes this clear.

Only theoretcial economists who have reduced his rich writings to simple theorems wholly abstracted from reality, or economists who have never read or have forgotten what he wrote, could doubt this.

Keynes was also, of course, one of the twin chief architects of the International Monetary Fund and the World Bank - partly to ensure that coming out of World War II there would be much more constructive management of the international economy than there was during the Great Depression or coming out of World War I (which he had written about so powerfully in "The Economic Consequences of the Peace").

Anyone like Paul Krugman interested in this could - should - read one of the excellent biographies of Keynes, or Markwell's book on Keynes and international relations.

It is essential that generally enlightened economic commentators like Paul Krugman help to encourage the in-coming Obama administration to provide the strong and effective leadership in multilateral international economic cooperation that the US and the world need to get us out of the economic hole we are all in together, and to keep us out of that hole.

Paul Krugman has urged a Franklin Delano Obama. FDR's Secretary of State, Cordell Hull, understood the importance of international economic cooperation - and above all, the importance of free trade (which is compatible with Keynes's approach). Who - as has been asked elsewhere - will be Franklin Delano Obama's Cordell Hull?

[Gegner]

Well said a. There isn't a debt councilor in the world that would advise you to go on a spending spree to dig yourself out of a hole.

As I see it, the investors aren't too keen on employing people right now, let alone paying them a living wage.

This results in a lack of customers...and commerce that fails to attract a sufficient number of customers go bankrupt.

This is the 'negative loop' that needs to be interrupted.

If investors are um, unwilling to sacrifice a few percent of their margins for the sake of maintaining their own customer base, I'd say they don't understand business and should have their charters revoked!

As a practical matter, it is the investors and the relentless pursuit of returns that caused this mess.

Since investing is also a 'privilege', we should revoke that as well.

Ironically enough, governments are established to protect society from mankind's predators...which is to point out that this whole mess can be erased with the 'stroke of a pen'.

[hari]

Time is of essence...I've been saying that for a long time now. Political decision-making is really difficult when the dossier is confused with side-issues - those which can best be dealt with once economic stability is achieved - European countries, one after another, are legislating fiscal stimulus of one kind or another to avoid unsurmountable unemployment down the road next year. Deficit financing is the order of the day and hopefully G-20 meeting today and tomorrow will also provide some global policy support on IMF structural reform - to anticipate next year.

[bakho]

One can extrapolate from Krugman and hypothesize that there are a range of interest rates over which monetary policy is effective. Anything outside those rates will be ineffective and must be fixed by fiscal or regulatory steps. If this hypothesis is true, then the argument can be restated, "What is the effective range of monetary policy?"

This is an important discussion because some monetarists claim that monetary policy can fix any problem and this belief is widely held by many politicians.

Another course of action if the economy overheats is to collect more revenue as taxes and pay down debt or decrease deficit at that point.

Are current low interest rates causing problems through market distortions? If the current interest rate is no more stimulatory than an additional 1%, would it be better to have a larger fiscal stimulus to avoid the distortion of too low interest rates that might entice borrowers into unsustainable contracts?

[bob mcmanus]

I am reading a CR article about Federal Reserve Assets increased 139 billion this week and a 600 billion dollar stimulus package looks woefully inadequate.

We need to get the markets' attention. Double it triple it.

$2 Trillion. More.

[Robinia]

Mikko Serala, it is not a matter of the available capital being held rather than invested (although, short term, that is certainly happening the past two or three months), but more an issue of capital pools having sloshed massively into unproductive, unwise, and, in some cases, fraudulent investments. People currently have their capital invested in deals that are too good to be true, predominantly speculative bets based on insufficient actual production and value.

Governmental borrowing does crowd out private investment in this instance, but, such action is, under current circumstance, a boon. Governments, acting as the adults in the room, redirect investment into productive endeavors, rather than unproductive gambling.

[Real Person from the Real World]

I'm tired of hearing how we were all on a spending spree. I sure haven't. US workers have been squeezed dry by predatory credit card rates, predatory mortgage lending, predatory student loans, lawyers, collection agencies, and items with prices inflated by advertising strategies and marketing lies.... despite low wages.... while the middle men and top CEOs and their boards raked it in and lived the good life. And throughout the bailout, these guys will still be raking in the loot. Gov't money will go for bonuses! These over paid *rock stars* who were at the top of the pay pyramid were the problem that caused everyone's lost IRAs, nest eggs, etc, and will still end up retiring rich. So, the average joes and janes are supposed to become calvinists now, and do penance for the sin of spending at walmart?

[ken melvin]

Been thinking on preemptive and why preemptive war was so necessary in 2002 and preemptive action on the economy in 2003 wasn't. Seems creative financing was the much greater threat and the housing bubble much worse than Osama. What actions should have been taken in 2003?

[anne]

Mark Thoma:

"Since I've been saying that monetary policy loses its ability to stimulate the economy when we are in a recession for over fifteen years, and since I've been making this point repeatedly since the crisis first began, I can hardly disagree...."

Actually, Mark Thoma has been making the point before a crisis was recognized asking for a significant stimulus for at least a year, and by significant I do not mean a minimally effective short term tax cut but spending. The problem is however that there does not seem to be a sense still of how important a spending stimulus is. Even supposedly liberal economists have seldom been thinking in terms of sustaining employment as the crisis has been recognized.

[anne]

http://krugman.blogs.nytimes.com/2008/11/10/stimulus-math-wonkish/

November 10, 2008

Stimulus Math (Wonkish)
By Paul Krugman

I wrote this morning's column * partly because I had a hunch that the Obama people might be thinking too small on stimulus. Now I have more than a hunch – I've heard an unreliable rumor! So let's talk about stimulus math, as I see it.

Actually, before I get to the math, some concepts. Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future. In normal times, that would be a reason to cut interest rates. But interest rates can't be cut in any meaningful sense. ** Fiscal policy is the only game in town.

Wait, there's more. Ben Bernanke can't push on a string – but he can pull, if necessary. Suppose fiscal policy ends up being too expansionary, so that real GDP "wants" to come in 2 percent above potential. In that case the Fed can tighten a bit, and no harm is done. But if fiscal policy is too contractionary, and real GDP comes in below potential, there's no potential monetary offset. That means that fiscal policy should take risks in the direction of boldness.

So what kinds of numbers are we talking about? GDP next year will be about $15 trillion, so 1% of GDP is $150 billion. The natural rate of unemployment is, say, 5% — maybe lower. Given Okun's law, every excess point of unemployment above 5 means a 2% output gap.

Right now, we're at 6.5% unemployment and a 3% output gap – but those numbers are heading higher fast. Goldman predicts 8.5% unemployment, *** meaning a 7% output gap. That sounds reasonable to me.

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it's too small. What's the multiplier? Better, we hope, than on the early-2008 package. But you'd be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

That's twice what the unreliable rumor says. So if there's any truth to the rumor, my advice to the powers that be (or more accurately will be in a couple of months) is to think hard – you really, really don't want to lowball this.

* http://www.nytimes.com/2008/11/10/opinion/10krugman.html

** http://www.econbrowser.com/archives/2008/11/the_new_improve.html

*** http://www.marketwatch.com/news/story/Goldman-forecasting-biggest-rise-joblessness/story.aspx?guid=%7BC174CCA5%2D803B%2D4656%2D9340%2D5591106B08D8%7D&dist=hplatest

[im1dc]

My response to all of this hand wringing and dire prognostication (Thoma, Krugman, the commenters, et. al.) is: What me worry?

Fact is Ecomomists are not to be trusted. The best they can do is to predict the economy part of the time, about what you can do if you were to make an educated guess of your own.

Today's best Economic Prognosticator is Economist Nouriel Roubini since he's been right for a couple of years now and called this recession. But even his Doomsday forecasts will one day be wrong.

That's life.

Here's a small proof for the above written by Floyd Norris that shows you too would be wiser and richer to ignore the Economists:

November 13, 2008, 5:07 pm

They Missed the Start; Now They See the End

"The Wall Street Journal reports today that its poll of economists showed a consensus that the recession would end by mid-2009. They think that the current quarter will be down sharply, at a 3 percent annual rate, and that there will be a lesser decline in the first quarter of 2009. The second quarter is expected to be up at an annual rate of 0.3 percent, and solid growth will be back in the second half of the year.

Let’s hope they are right. But the sad fact is that economists as a group have a horrid forecasting record. I think they are overly optimistic, again.

A year ago, the combined wisdom of the economists was that there was a one-third chance of any recession arriving. It was not until March that this group thought a recession was more likely than not."

There is more at the link.

http://norris.blogs.nytimes.com/

[anne]

http://www.nytimes.com/2008/11/15/business/economy/15econ.html?ref=business&pagewanted=print

November 15, 2008

A Record Decline in October’s Retail Sales
By ASSOCIATED PRESS

WASHINGTON — Retail sales plunged by the largest amount on record in October as the financial turmoil and the slumping economy caused consumers to sharply cut back on their spending....

[A 2.8% decline in retail sales, marking the fourth straight month of sales declines is another sense of how serious this recession is, and how serious the decline in employment will be.]

says...

Um,
the first two commentators should be aware of a couple of things.
1. We are talking about a very special circumstance here, in which resources are idle!
2. If we ignore the foreign (and Arthur James is right we shouldn't) sector, the government and private sectors balance sheets are mirror images of one other. Financial assets generally represent claims on someone else. So a disastrous state of private sector balance sheets requires the government to issue IOU's precisely in order to improve the perilous position of the private sector. The foreign sector in the case of the US is not so important as with most countries because almost all US originated debt is written in USDs.

What I personally don't like is that we issue debt to pay for public works. This works in so far as the rich who buy the debt aren't doing anything productive with the money anyway and the poor(er) who receive will spend it, but I personally think in a slump you are better monetizing any new debt so that their is no future liability (even more so if foreigners are likely to be the buyers).

[reason]

Oops that was me

[robertdfeinman]

The world is missing a big opportunity to rethink the idea that capitalist, never-ending growth, is the only viable economic system.

We have been on a drunken binge for decades and are now suffering from the hangover and the only suggestion offered is to start drinking again, as soon and as much as possible.

What if we redirected all those who are under employed into a new course of action where they were paid (by the government) to do productive things for a change? I've mentioned CCC and WPA type projects, but now I'm suggesting supporting the development of a post-materialism lifestyle.

This would focus more on getting the most out of life and not accumulating "stuff". Exactly what form this would take is open to discussion - and discussion is just what we are not having. The best anyone offers is some vague ideas about rebuilding infrastructure.

What about making it a norm that everyone engage in lifelong learning? Not learning aimed at improving one's chances to find a job or switch careers, but learning as a social good in itself. I claim that learning new things is a social and personal good in itself, let's foster it.

Similarly spending more time and energy on cultivating the lives of the young is a social good. Too many kids are put in storage in school or childcare when they could be developing their creativity.

I'm sure there are lots of other areas which could provide activity and economic benefit without going back to the mindless consumerism that has gotten us into this mess.

Economists not only make poor predictors, they also are ill equipped to design social policy - which doesn't stop them from attempting both.

[Out With the Old, In With the New]

During the Great Depression, citizens were unwilling to loan to others. They stuffed cash in mattresses, instead of in the bank. Businesses couldn't borrow to retool for a different product mix. Policy attempted to stimulate demand for the old product mix (e.g., food), but this only prolonged the transition to new production (at great cost).

Today, citizens are similarly unwilling to loan to others. However, there is little cash in mattresses. Citizens are hoarding their savings in inflation hedges (e.g., houses), which cannot be loaned out. Policy is again attempting to stimulate demand for the old product mix (e.g., SUV, McMansions), rather than easing the transition to a new product mix.

[dirtyal]

"This is an important discussion because some monetarists claim that monetary policy can fix any problem and this belief is widely held by many politicians."

Of course, we have the example of Japan in which monetary policy was not enough.

The point of the Keynesian theory of spending our way out of a recession (depression) is that we need to maintain full employment of all resources (not simply labor but factory capacity and raw materials) and if the private economy can't do it by itself, which it appears not to be able to, it's a good time for the government to step in and begin to fund all the projects that have been backlogged as being unimportant. This would include infrastructure repairs, new rail and transportation improvements such as an upgrade to the air traffic control system etc. etc.

And, yes, it will mean that at some point in the next few years, there will again be a serious competition for available resources with the resulting danger of inflation. But without the initial sitmulus, we are bound to have a cycle of under production, higher unemployment of labor and all the bad things that come with an under utilized economy.

So, we are in for quite a ride in the next five to ten years. It would be good if we could all learn to get along with less and live within our means. We will have to do that.

The whole thing is pretty scary, especially living on the income of a retired person and seeing that the plans made over the past thirty years are at serious risk.

[Fred]

What I find curious is that all sorts of intelligent people chimed in yesterday in response to that illiterate-sounding krzn ("things sucked majorily in the past and they'll suck less majorily in the future" or some such gibberish) but then we get all the idiot deficit-hawks chiming in today in response to the ever-lucid and highly literate Krugman. My own theory is that envy and inferiority complex is the underlying problem. Same as with Keynes. When someone speaks intelligently, the second-raters are immediately filled with hatred, because they are envious by nature and they know they can't possible produce anything intelligent themselves. This sense of resentment causes them to blindly oppose whatever it is the intelligent are saying.

"Eunuchs ran through Hell and met
On every crowded street to stare
Upon great Juan riding by:
Even like these to rail and sweat
Staring upon his sinewy thigh."
- Yeats

I have no idea how to deal with this situation, unfortunately.

[Farrar]

Mikko -
What the hell are you talking about? Crowding out WHAT private investment?
And even if govt investment is entirely financed by taxes, it still stimulates.

RDF
I'm also in favor of the simpler life and accumulating less stuff. Perhaps we can explain to the guy who's lost his job and is thrown out on the street just how lucky he is.

[anne]

http://etext.library.adelaide.edu.au/y/yeats/william_butler/y4c/part48.html

1907

On Those that Hated the 'Playboy of the Western World'

ONCE, when midnight smote the air,
Eunuchs ran through Hell and met
On every crowded street to stare
Upon great Juan riding by:
Even like these to rail and sweat
Staring upon his sinewy thigh.

-- William Butler Yeats

[Farrar]

Hari -

"European countries, one after another, are legislating fiscal stimulus of one kind or another to avoid unsurmountable unemployment down the road next year. "

I hope you're right. From where I sit (France), it looks as tho the big spenders are paralyzed by Euroland debt limits and/or inflation fears.

[Callahan]

Real Person from the Real World has it really right.

[anne]

http://www.nytimes.com/2008/11/15/technology/companies/15sun.html?hp&pagewanted=print

November 15, 2008

Crisis Spreads to Tech Sector as Sun Plans to Cut Work Force
By ASHLEE VANCE

Sun Microsystems has started a restructuring that could see up to 6,000 employees lose their jobs as it joins a growing list of technology companies reeling from the crisis.

[anne]

Hari:

"European countries, one after another, are legislating fiscal stimulus of one kind or another to avoid unsurmountable unemployment down the road next year."

What and where? I do not even find a reasonable response in Japan as yet, and Japan should know precisely how to respond. The Japanese response has been to propose a tax credit of about $100 a payer, which is comical.

[drunk]

robertdfeinman

Gimme some of that youre smoking.

"What about making it a norm that everyone engage in lifelong learning? ... Similarly spending more time and energy on cultivating the lives of the young is a social good."

I'll drink to that. Leviathan, I agree with your utopiate sentiments in general. I suggest you start your social engineering program with a smaller pilot project: raise the consciousness of blacks, or change the hearts and minds of adult citizens that lack a high school diploma, or Hollywood actors.

Once you work out the kinks on a smaller population, we can move on to society at large.

Or just stick to economic policy.

"Economists not only make poor predictors, they also are ill equipped to design social policy"

Amen Brother! Amen.

[Patricia Shannon]

im1dc
Reflect on the fact that most people are more optimistic about themselves than warranted.

[roger]

Contrary to Mikko's assertion, I think government spending is now crucial to jumpstart private investment. However, it would be nice to start thinking about what the government should spend on, rather than suggesting abstract spending in general. Obviously, infrastructure is one of the areas, but I would include in infrastructure revamping the automobile and some discussion about redoing the energy networks upon which the auto depends. Should we go to diesel, as in Europe, with the greater mpg? How are we going to deal with emissions? Should we be putting money into building much, much more efficient coal power plants? The problem with private investment over the last eight years is low yield, but highly important investments in plant, innovation and green manufacturing were crowded out by investments in such things as synthetic CDS. And the government's policy, at the moment, is to revive the system that manufactures synthetic CDS - wall street financial firms, in short. That is more and more evidently not the way to go - revive an economy in which the money is made by real innovation, rather than innovating a la Las Vegas.

If a midsize investment bank like Lehman brothers can go belly up owing almost a trillion dollars, a large, large State like the U.S. can afford to owe a couple trillion more dollars. In fact, the only way to pay for the deficit in the future is to get the economy going. The discussion about burdening future generations yesterday totally seemed to miss the point - how are those future generations supposed to be productive if we don't lay the basis now? That has been the real crisis of capitalism over the last eight years - it massively misaligned investment with need. We don't need another innovative financial instrument!

[Sigmund]

Fred

"My own theory is that envy and inferiority complex is the underlying problem. . . I have no idea how to deal with this situation, unfortunately."

Thanks for the psychology lesson. That was the thesis of my high school junior year honors essay. My theory is that incompetence and too much attention to castration is the underlying problem.

Hey, there goes Juan! Keep up the good work!

[Patricia Shannon]

im1dc, I jumped the gun. I should have read your whole comment before commenting on it. I thought you were going in the opposite direction.

[roger]

ps - one of the things I don't understand about the deficit hawks. We all saw that, given a boom, the government can pretty easily pile up a significant surplus - 2 trillion dollars by 2001. Surely we can can the rhetoric about burdening future generations - what we really need is to quit cutting taxes in good times, but raise them, and lower them in hard times. Just the opposite of the GOP robo-program. If Bush had raised taxes during the 2006 peak, he could have halved the deficit we have now. The dumbness of GOP tax policy is that it ignores the business cycle.

[Patricia Shannon]

Fred,
True. Also, I have observed that bad people hate good people.

[Benign Brodwicz]

To say the past 15 years are recession avoids the interesting issue of cyclical fluctuations (although I agree there have been trend-like problems with median income and inequality). See my blog for a current forecast.

[calmo]

I see im1dc has dissed the Economists...following the tactic of the Reptiles dissing (All) the Politicians as there is not a dime's difference between Democrats and Republicans (as the Reptiles have it).
And that has some merit if you (convertible Reptile) gaze long enough at Lieberman the notion of Electability...and find that MT in the Economic departments is as rare as Krugman is in the Reporting departments.
We posters are not terribly troubled by your assertions, but we need to point out that your actions of posting here in River City speak differently...and effectively QED.
In fact the caliber of the posts here go a long ways to alleviating my fear and anxiety...thanks for the medicine you people.

[JIMB]

Massive government spending will surely make a depression. In the short run, consumption and investment track each other. In the longer run they are a tradeoff as real constraints exist. The idea, that after an overconsumption binge, we have 'forced consumption' by the government is just monumentally stupid. What is needed is a resurgence of savings even though it is painful. That will make the future much better.

[Ninja Zombie]

Anne, Sun isn't a victim of the economy (much as it's executives will try to pretend it is). It's a victim of free software.

Sun used to sell expensive servers running Solaris (not to mention Solaris licenses), which were the high end of computing. LAMP (and more current variants) on commodity boxes is now good enough. LAMP variants have greater mindshare and better application support.

In fact, due to competition from free software, Solaris is now free. The only thing left for Sun to sell is support.

The death of Sun is a symptom of a good thing: free stuff given away to everyone.

[anne]

http://norris.blogs.nytimes.com/2008/11/14/consumers-retreat/

November 14, 2008

Consumers Retreat
By Floyd Norris

It is a truth that forecasters have learned over and over again. Never bet against the American consumer. No matter how indebted, consumers will consume.

Until now.

Today’s retail sales numbers for October confirm that the bottom dropped out of the economy about the time Lehman Brothers failed. The only category showing strength is general merchandise stores, which means Wal-Mart. They presumably are gaining market share from everyone else, while consumers consume as little as possible.

On a month-over-month basis, the broadest measure of retail sales fell 2.8 percent, the most ever. It was only the second time that there were four consecutive monthly declines, after September to December 1974, and the four-month fall was slightly larger this time. (The figures are seasonally adjusted, but they are not adjected for inflation).

Auto sales are falling rapidly, or course, but the 2.2 percent monthly decline excluding them was also a record low. Using a three-month moving average to smooth out the often volatile sales at car dealers, they are down 18.5 percent on a year-over-year basis. That broke the previous record decline, of 17.3 percent, set in May 1980.

These numbers help to explain this week’s reversal by the Treasury secretary, Henry M. Paulson Jr., who announced plans to focus the bailout on consumers, without actually having a plan to accomplish that. If the problem is that a lot of consumers cannot get credit, then maybe that will help. But if the problem is that people are scared, then we may have to find a way for them to get over the fright, and that could take time.

says...

"Treasury secretary, Henry M. Paulson Jr., who announced plans to focus the bailout on consumers"

He did? Thats great news! I am a consumer! Where do I sign up? What? Scared? Fright? Time?

So if we wait a little while, I won't be afraid, and I can get credit from Henry M. Paulson Jr., then I can consume! Brilliant! Floyd Norris is a genius!

[anne]

"Sun isn't a victim of the economy (much as it's executives will try to pretend it is). It's a victim of free software...."

Interesting, my sense being that Sun which is used on Wall Street was especially effected by the financial crisis. Technology however will not be insulated from this recession.

[Patricia Shannon]

Benign Brodwicz says...

To say the past 15 years are recession avoids the interesting issue of cyclical fluctuations (although I agree there have been trend-like problems with median income and inequality). See my blog for a current forecast.

Thanks. I feel so much better calling a period when unemployment is high and people are going bankrupt, etc. a "cyclical fluctuations" instead of a "recession".

[Patricia Shannon]

Zombie
How much time do you spend writing free software for other people to use?
Where do you get the money to pay your bills?

[bakho]

Krugman was talking a lot about liquidity trap during the 2001 recession. The notion that monetary policy was working as stiumlus is not clear. Monetary policy helped create the housing bubble. Much of the problem with Bush era policy is fiscal and monetary policy that was poorly targeted to fit the economic needs.

The current low interest rates may be "generally stimulatory" but they fail to target the problems.

[Bruce Wilder]

Tipped by our gracious host, I find:

Felix Salmon asking, "Is Your Money Safe at Citibank?"

If you have to ask . . .

[Fred]

What is needed is a resurgence of savings even though it is painful. That will make the future much better.

Continuing with my earlier the psychology theme, since no could be so stupid as to believe this sort of drivel on the basic of logic and the evidence of the senses, we must looks for hidden motivations, either money on the line (he's long bonds and waiting for stocks to collapse so he can buy in cheap) or else some sort of distrubed psychology. For example, perhaps a childhood wherein beatings by a stern Austrian fathers was always followed by kisses by an indulgent mother, and vice-versa. Extrapoloating from these childhood experiences, he concludes that an economy must also go through cycles of good and bad, and the better the period of prosperity, the worse must be the subsequent bust.

[Noni Mausa]

Gegner said: There isn't a debt councilor in the world that would advise you to go on a spending spree to dig yourself out of a hole.

A government and a household aren't the same. Especially not in a situation like this.

Right now the consumers and the sellers and the manufacturers and the financiers are all in a competitive limbo-dance, each one trying to crouch lower than the other.

Businesses can slow down, contract or even close down. Citizens cannot. And citizens are the key to the whole problem, since their work and their choices fuel the whole economic cycle. They also determine the lowest the dance can comfortably go, since below a certain level they experience collapses of lifestyle into much lower levels, (like electrons dropping to a lower shell) and at those levels they can't function strongly as either consumers or workers.

Now the collapse of the financial sector doesn't much effect the real economy, in the sense that there hasn't been a plague, a volcano, or a dinosaur-sized meteor. But there has been a loss of groundwater liquidity -- either people have lost their incomes altogether, or their incomes are wholly committed to large fixed costs leaving little free for the normally huge ecosystem of smaller purchases that supports many workers and businesses.

I think this outcome is the logical result of trying to pay as little as possible to workers, and then wondering why they stop buying stuff. It's a real subtle and contra-intuitive process and no wonder the eggheads missed it.

So what to do now? Patch the damned boats (interfere with the normal bankruptcy and job-loss process) and raise the water levels (social supports, and employment and wage increases), I should think. I watch with interest to see how the next administration will approach those two jobs.

Noni

[Ninja Zombie]

Anne, Sun still sells to wall street, and they may die sooner as a result of the current problems. But this is nothing new:

http://news.zdnet.co.uk/software/0,1000000121,39165142,00.htm

http://discuss.joelonsoftware.com/default.asp?joel.3.335802.30

Tech will get hurt like everyone else, but sun would be dying regardless of the economy.

Patricia: "How much time do you spend writing free software for other people to use?
Where do you get the money to pay your bills?"

This year, only about 100-120 hours. The libs I'm associated with are now close to production quality, so there was no pressing need to do much. It's probably time to branch out.

I get the money to pay my bills by writing custom software, most of which uses various free software packages (both the ones I'm involved with and others).

The way I work is simple. I turn Business Problem X into Math Problem Y; this will cost you. I give away the solution to Math Problem Y if it's likely that someone will care.

[Patricia Shannon]

Zombie,
Why are you selling your software? Wouldn't it be better if it were free?

[don]

As noted in another of Marks posts (above) "'Arguments which focus almost entirely on the U.S. are missing a crucial aspect of the issue,' Bernanke stressed."
I wouldn't put BB in the same class as PK (for one thing, BB's SAT scores are too low). However, on this one point he is right and points to a crucial, if not fatal, omission in PK's discussion. PK's omission is as bad as arguments I have heard that the stimulus will require foreign borrowing, otherwise interest rates will rise and crowd out the effect on demand. Nevermind that anyone with a BA in economics should be able to reason out why such borrowing would negate the stimulus. (Hint: Use the effect of a net increase in foreign borrowing in the BoP identity and add to the basic NIPA equation - if the stimulus comes as a tax cut, the net effect on aggregate demand for U.S. output is negative. If it comes as an increase in government spending, it is a wash - no net effect on this demand and the increase in U.S. debt is incurred for no purpose.)
It is true that the increase in U.S. borrowing will stimulate foreign economies (by creating trade surpluses for them) and have some (weak) feedback effect on the U.S. economy, but this reduces the need for foreign countries to institute their own stimulus programs and encourages them to continue policies of currency mercantilism. So, the question is, how much of the U.S. borrowing helps U.S. production, and how much it merely goes to keep up production abroad.
PK surely has some notions about these issues. His current post is just an attempt at politics - try to convince people to follow a policy that he presumably knows is best. But he certainly doesn't give enough information to show his answer is the right one.

[eric]

Mark Thoma: "we are in a recession for over fifteen years"

That's a long recession, Mark... Still, I suppose for some slices of American workers it's been more like over thirty years!

[Ninja Zombie]

Patricia, indeed it would be. If free software existed made my labor unnecessary, the world would gain.

My current customers would still gain the value of my labor. People who would like to hire me but cannot (due to time, location or price) would also use the software, and gain. I would find another type of work to do, and someone else would gain the value of that work (e.g., the value of a sweaty muscular guy in biker shorts delivering packages quickly).

However, if I simply did my current work for free, the world would not gain. I would not produce more value than I do currently.

[anne]

http://www.nytimes.com/2008/11/15/business/economy/15fed.html?ref=business&pagewanted=print

November 15, 2008

Central Bankers Ready to Take Collective Action
By MATTHEW SALTMARSH

Ben S. Bernanke told a conference that “policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.”

[Oh.]

[calmo]

Such a thought-provoking idea NZ...the world not gaining...but I am latently distracted by In and Out World poster Ok, I will commit fewer errors by scrolling upOut with the Old World in with the Mattresses who reports:Today, citizens are similarly unwilling to loan to others. However, there is little cash in mattresses. Citizens are hoarding their savings in inflation hedges (e.g., houses), which cannot be loaned out. Policy is again attempting to stimulate demand for the old product mix (e.g., SUV, McMansions), rather than easing the transition to a new product mix (e.g., boots, camping gear). Blow me down if this is not a sly nod to a very Old bank: bartering.
And "Citizens" is a sure sign that the author is a genuine (post-consumer) alien...I'm talking Mars, maybe further out there.
And that "new product mix"...I think the alien really means "shovel" or any other implement associated with productive ("gainful" LMAO) employment once upon a time known as "work", yes?
Ok, Woild, which planet if not Mars...we are not your ordinary micro-level people..we are onto you.

[anne]

The 3 month Treasury finished the week at a comical or scary low 0.10%, while the 2 year Treasury was at 1.20%, with a Federal Funds rate at 1%.

[Paulson]

I agree with robertdfeinman above.

If we take the goal of life to be 'growth' and riches, then the economic stimulus will be doomed to failure. Not only is that way of life unattainable, it has caused endless conflicts around the globe.

Explaining that to the irate American populace, and the extravagantly wealthy of Wall Street, will take in interesting feat of social engineering.

[Julio]

calmo:

"And "Citizens" is a sure sign that the author is a genuine (post-consumer) alien...I'm talking Mars, maybe further out there."

Citizen, n.: a broke consumer.

[Larry]

I'm actually reading Krugman's 1999 book named "The Return of Depression Economics"...

The thing I can't figure out about "stimulus" is that the government is already running a ginormous deficit. Doesn't that count for something in Krugman's math?

Also, the money that the government spends has to come from somewhere. That means either some pool of unloaned funds inside the country, or some pool outside the country. Inside the country we had so few unused funds that we just borrowed 250B from overseas to create some. Not sure if we did, or if we mostly just restored the normal leverage ratios. If the whole world is supposed to be stimulating, whose savings pool are we tapping? Who's loaning the money?

If there aren't unused funds, stimulus spending is competing directly with private spending. You may prefer government choices over private ones, but where is the stimulus? Perhaps we should simply print the money. I don't believe Japan tried that in its odyssey to escape deflation. It might just work. I presume we could do it more effectively than Zimbabwe with its 11 million % inflation. (They should put the note's power of 10 - if it's 1 trillion, just put a '12' - on their currency.) Japan did try massive fiscal stimulus - for many years...

@robertdfeinman - "Exactly what form this would take is open to discussion - and discussion is just what we are not having. The best anyone offers is some vague ideas about rebuilding infrastructure."

Anyone who wants to can discuss this. Most people are discussing making their mortgage payments.

"What about making it a norm that everyone engage in lifelong learning?"

How about we make graduating from high school a norm? In many places it is not, despite all kinds of hectoring from nanny staters.

@Out - "Today, citizens are similarly unwilling to loan to others."

Anybody with a bank account is loaning money to others, just not directly.

@dirtyal - "This is an important discussion because some monetarists claim that monetary policy can fix any problem and this belief is widely held by many politicians."

Which monetarist is that? Monetarists claim that monetary policy can only control inflation.

@Farrar - "What the hell are you talking about? Crowding out WHAT private investment? And even if govt investment is entirely financed by taxes, it still stimulates."

First, individuals and institutions are all engaged in "deleveraging". I.e., creditors already loaned out and borrowers borrowed too much money. We may not have invested in the right stuff, but most banks are over- not under-invested.

Krugman acknowledges that government spending has to be financed through borrowing if it has any chance of stimulating. Government spending (he says) exploded during the depression, but so did taxes, so there was no stimulus.

@Hari - "European countries, one after another, are legislating fiscal stimulus of one kind or another to avoid unsurmountable unemployment down the road next year. "

Some are (France) and some aren't (Hungary).

@don - "PK surely has some notions about these issues. His current post is just an attempt at politics - try to convince people to follow a policy that he presumably knows is best. But he certainly doesn't give enough information to show his answer is the right one."

Yup

[Julio]

Noni:
"Businesses can slow down, contract or even close down. Citizens cannot. And citizens are the key to the whole problem, since their work and their choices fuel the whole economic cycle. They also determine the lowest the dance can comfortably go, since below a certain level they experience collapses of lifestyle into much lower levels, (like electrons dropping to a lower shell) and at those levels they can't function strongly as either consumers or workers."
...
"So what to do now? Patch the damned boats (interfere with the normal bankruptcy and job-loss process) and raise the water levels (social supports, and employment and wage increases), I should think. I watch with interest to see how the next administration will approach those two jobs."

Top gymnast again nails the landing.

[calmo]

Imagine that: Larry does not enumerate me. Not even an honorable mention.
Shoot.
If this isn't worse than Crowding Out, I don't know what is.

Expandin Explorin our repertoire the economic tool kit, is there an inverse?
Is there!
........Ghosting In........sorta like coasting, but more ephemeral.
You may not have heard of it, but it is everywhere.
Like ether. Only denser.
Black Holey.
Exactly.
Just put that on your resume (Certified Practitioner in G.I.) and brace yourself for real animation.

So allow me to Ghost In on some of Larry's post [like this]:@Farrar [no slouch and somewhat firey] - "What the hell are you talking about? Crowding out WHAT private investment? And even if govt investment is entirely financed by taxes, it still stimulates."

First, individuals and institutions are all engaged in "deleveraging". [Nah, mostly HFs...a very few people: the traders ]I.e., creditors already loaned out and borrowers borrowed too much money. We may not have invested in the right stuff, but most banks are over- not under-invested. [Nah, they couldn't stand how much the HFs were heisting and abetted the practice. They got carried away with the greed and made lousy bets. They did not make investments. Please visit Kasriel who raises questions about the poor Business Investment esp w TAF ...ponder MSFT's large share purchases through 07, possibly the model for other nervous nellies.]

[roger]

I so totally agree with Nona Mausa when she writes:

"Gegner said: There isn't a debt councilor in the world that would advise you to go on a spending spree to dig yourself out of a hole.

A government and a household aren't the same. Especially not in a situation like this."

Interestingly, the same deficit hawks who moan about borrowing money seemed pretty happy when Bush spent the surplus on a trillion and a half dollar tax cut. That the stimulus this time should be about three times that is pretty clear.

However, there are true deficit hawks and then the fake GOP deficit hawks. And the former are an interesting group, because they point to one of the early paradoxes of capitalism, the Mandeville paradox: private virtues can be public vices. And vice versa. Of course, when a household saves, it does so for a biological reason - aging. But the U.S. may do many things - grow, stagnate, decline - but it won't retire. And, as Mandeville long ago pointed out, certain of our instincts, instilled from millenia of an economy that was balanced between feast and famine, growing very very slowly, interfere with the way in which an economy that depends on relatively quick growth should be thought of. To my mind, the collapse of a system that was massively misallocating capital opens an opportunity, for the kind of investment that will not produce an immediately juicy yield. If you look back at the great twentieth century American industries, I doubt you will find many in which the Gov didn't play a very heavy role. Look at how, for instance, radio came into its own after WWI, with investment by the U.S. Navy and the government push that led to RCA. Or look at the role the government has played in organizing ports. The myth of the private sector does seem to blind people to the real history of American industry. Surely the convergence of an environmental crisis, an energy crisis and the lack of private investment in the technological structure we need right now should give us as good an excuse as a world war to create public private collaborations that deviate quite a bit from the U. of Chi model of how the world is supposed to be. Unfortunately, economists have a bad habit of talking about spending in the abstract, which will certainly make the sums the government will have to borrow politically difficult. Instead, we should be talking about positive government initiatives that will spread the wealth around - in the same way that Bush, in 2002, gave away government money to the wealthiest by talking about how it is "your money".

[Larry]

Interestingly, in his recommendations for Japan, trying to escape its 90's freeze-up, Krugman recommends - inflation! He doesn't make that recommendation for us now. Can we expect that come January?

[Patricia Shannon]

Roger,
You might want to read "The True Believer" by Eric Hoffer
and "When Prophecy Fails" by Leon Festinger, Henry W. Riecken, Stanley Schachter, and Elliot Aronson
"When Prophecy Fails" is back in print, fortunately.
Some sociologists joined an end of the world group to observe.
When the world didn't end, some of the believers became even more committed to the cause. Studies have shown that the more sacrifices people have made for such a cause, they more likely they are to react with increased commitment when the prophecy fails.

[Larry]

@calmo - How could I have been so cold-hearted? A thousand apologies...You aren't THE Calmo are you?

"Nah, they couldn't stand how much the HFs were heisting and abetted the practice. They got carried away with the greed and made lousy bets."

Are you trying to distinguish between "investment" (good) and "bets" (bad)? In either case, the money got lent. The stimulators can 't borrow it...

@roger - "If you look back at the great twentieth century American industries, I doubt you will find many in which the Gov didn't play a very heavy role."

Gov definitely played a role, but a smaller role than it did in competing countries. And we did...better! DARPA makes a great model for government involvement. WPA does not.

[roger]

It is difficult to know what the model is for quantifying big and little here, Larry. Take the Red states - say, Georgia, Alabama, Mississippi and South Carolina. What states were more active, over the past thirty years, in using tax measures to compete for sites? Mississippi has even used state and local bond issues to buy buildings to attract industry. Yet, these same states are full of voters who will tell you they are all for "small" government - by which they mean nothing more than government that doesn't enforce civil rights laws and doesn't raise taxes to invest in education. And they are right, to extent, in the latter - why invest in education when you can take a free ride on the higher investment in education of Blue states and attract business with tax deals (and these businesses, wisely, bring down their own people from the Blue states - after all, they need an educated workforce).

So, is this small or big government?

My guess is that every developed nation probably ranges around a certain percent of the GDP that goes to positive or negative government interventions. When a country falls below a certain threshhold, I think things will start to unwind, as we've seen in the last eight years. Infrastructure, for instance, will become a political football that certain minorities (for instance, small Midwestern states) will maneuver for, trying to find key positions in the political market that will translate to key inflows of revenue to the state. Thus, the state can maintain a certain "small government" image, while actually operating as a parasite on "big government." It is as if, in a restaurant in which ten people are dining, one brags about only eating a small amount, ordering cheap dishes, and then stealing food from the other plates. You could say that person is a small eater, or you could say that that person is taking advantage of dining decorum to gain more than his fair share.

WPA preceded DARPA, for good reason - it was appropriate at the time. I don't think any WPA progam would look the same nowadays. But the discussion should certainly be about what the government needs to spend on, more than that the government needs to spend. I think the latter is a political loser.

[Larry]

@roger - ""Take the Red states - say, Georgia, Alabama, Mississippi and South Carolina. What states were more active, over the past thirty years, in using tax measures to compete for sites?"

I don't know who originally devalued that currency, but royal blue California is no slouch in the "industrial development" category. See the NUMI auto plant from 30 years ago or the Tesla plant from...2008 for reference. I ignore your other, gross, off-topic slurs on red states.

"So, is this small or big government?"

On the economics side, I measure size by the fraction of GDP that runs through government hands. Tax rates are obviously far lower in most of the red states than in the blue ones.

"My guess is that every developed nation probably ranges around a certain percent of the GDP that goes to positive or negative government interventions. When a country falls below a certain threshhold, I think things will start to unwind, as we've seen in the last eight years."

Bush didn't cut spending! He increased it faster than Clinton! You can't make everything up...

[roger]

Larry, I was making a case that your metric doesn't really capture the size of the government. And I don't see that you defended the small/big government metric by taxes very well. The West, as is well known, depended for its entire development, from the genocide of the indians to the giving away of land via the homesteader act to the damming of rivers on the Federal government. So, when Carter moved to take down the Federal support for agri-industry and the engineering control of the riversheds, what did "small government" Reagan do? Restore the water projects of the Army corps of engineers, and the subsidy to the agribusinesses in terms of cheap water. That is a subsidy, by the way, you won't catch in your metric. Which is one of the reasons it is such a bad one.

[cm]

Ninja Zombie: Regarding Sun - I only half (maybe 2/3) agree with you. Back in its good days (until about the dotcom bust or somewhat earlier), X86-based systems (e.g. PC-style server racks) plus the software predecessors to LAMP were not up to par (standard systems that would work out of the box).

You could not just install a commodity Linux server farm, run with it, and extend/maintain it in a snap. That has now changed.

Don't discount the hardware part. A lot of improvement and standardization has happened meanwhile. These days you can expect a standard kernel to work on any system and support all peripherals, if only in "standard mode". Not so 10 years ago. Back then you had to tinker in many cases, or use certified hardware/distro combinations at a nontrivial premium.

[cm]

Ninja Zombie: Another aspect is that today you have established/proven Linux enterprise distros with industrial-grade commercial support. Back then that segment was in its infancy. Sun/HP/IBM had it (MSFT too, but we are talking about Unix). That's a non-negotiable requirement for most corporate customers.

[cm]

Patricia: (re Ninja Zombie) You are confusing service and product. What NZ sells is the labor of creating a software from specific requirements, using off the shelf (including free) components.

The concept that the value of free software in commercial context is very limited without competent labor, and that much of the commercial value is in the service of using the free software to solve specific and largely unique (i.e practically non replicable) problems enbedded in unique environments dates back to the first days of the free software movements. Actually the majority of money in any variety of IT applications is made with putting equipment and base software to specific uses, regardless of how much the equipment and software cost.

[cm]

Actually that's precisely an example of the greatly touted high-value-add services. Unfortunately it turns out that all the needed labor in the respective specialties can be provided by a comparatively small part of the workforce, because of the large economies of scale of software.

[cm]

In somewhat related news, today a freshly laid off employee of a Santa Clara semiconductor outfit returned to the office, shooting 3 people including the CEO and COO of the company. Link

[cm]

Ninja Zombie: "However, if I simply did my current work for free, the world would not gain. I would not produce more value than I do currently."

False - the world would not gain more from you. It would however potentially gain from somebody/something else, roughly in the amount of your waived wages. It's an opportunity cost thing.

It's only "potentially" because you may in turn have spent your wages more wisely than your customer who saved your fees. (But then it may as well be the other way around.)

[calmo]

Uno momento Larry: [while I respondo like thiso]@calmo - How could I have been so cold-hearted? [so many posts, so little time, so much work for tired eyes...is the excuse I use. ] A thousand apologies [me too, ok maybe I can muster only a hundred]...You aren't THE Calmo are you? [ oh no, I am the lower case 'calmo' stumbling over the plains on an old mule...following the water buffalo tracks of the Illustrious Calmo...there is no comparison. ]

"Nah, they couldn't stand how much the HFs were heisting and abetted the practice. They got carried away with the greed and made lousy bets." [In the case of the financial banks, I believe this was true...disagreeing with Ackman's neutral picture of these banks merely facilitating the trades.]

Are you trying to distinguish between "investment" (good) and "bets" (bad)? In either case, the money got lent. [Yes I B tryin. And tryin hard. And I must succeed with this attempt at making this important distinction: money was loaned/levered to HFs for their CDO plays, (see Felix on the RH sidebar esp the Swiss banks.) and this impaired the banks to loan to their regular customers even if they had good credit scores, sound business plans and an indefatigable sense of humor lady luck. At the same time, their deposit base shrank with decreasing returns on loans that were too heavily concentrated on mortgage related income streams (see Kasriel here) and that is the story...still unfolding IMHO.] The stimulators can 't borrow it...[the commercial banks were bled dry...insolvent, not illiquid (the mark to myth market write-downs, at best a partial disclosure) There was no business investment (plant expansions, material, machines, etc) Kasriel's disdain for all this: "You people"

[What Mark Meant To Say]

Since I've been saying for over fifteen years that monetary policy loses its ability to stimulate the economy when we are in a recession....

[calmo]

Greetings cm and I hope you are well...and not shaken by that shooting.
Reading from your link above about the shooting by the 47 yr old (was he overweight? did he have tatoos? why do they tell us his age? why isn't "middle-aged" good enough?) engineer of 2 of his bosses and a 3rd employee, the Police chief reports: "These are truly innocent people whose lives were taken. It's just not right." and I find myself thinking it was/is certainly a tragedy and prolly not a case of the engineer being a monster killer...even though engineers are not my favorite sort of people.
It appears he killed at least 2 of the people he held grievances against (he wasn't firing indiscriminately, killing "truly innocent" bystanders ).
The story gives a photo and notes he had a house, but does not tell us whether he had a family or much else...like say, 5 years work experience with this "small" company.
It doesn't feel like a community.

[Real Person from the Real World]

I know of recruiters laid off, and this is only the start of the recession. Considering the ubiquity of bodyshops, this is not a good sign.

Noni M: "I think this outcome is the logical result of trying to pay as little as possible to workers, and then wondering why they stop buying stuff. It's a real subtle and contra-intuitive process and no wonder the eggheads missed it."

YUP! you got it Noni M.

[Larry]

@roger - "your metric doesn't really capture the size of the government."

As metrics go, it does better than any other. Do you have an alternative metric (as in measure that can be used to compare times and places?) I don't claim spending (I never claimed it was taxes) is perfect, but I know of no better.

@calmo - "this impaired the banks to loan to their regular customers"

They continued to loan to their regular customers, at least until September. Until then credit was available and interest rates were low.

"the commercial banks were bled dry...insolvent, not illiquid"

The macro point remains. Who do we borrow the money from without squeezing out those "regular customers" you talk about?

@Noni M: "I think this outcome is the logical result of trying to pay as little as possible to workers, and then wondering why they stop buying stuff. It's a real subtle and contra-intuitive process and no wonder the eggheads missed it."

Businesses always do that, but we don't always have recessions or crises. The troubles lie elsewhere. Krugman's book goes over the surprisingly (to me...how soon we forget) financial-crisis-ridden 90's. He covers Japan, Mexico, Argentina, Russia, Brazil, Thailand, Indonesia, Korea, and Hong Kong. He points to the poorly understood tasks of regulating currencies, currency flows, and understanding boom/bust generally as being the source of the problem. He doesn't get into bubbles or asset prices in that work.

[ken melvin]

Remember, capitalism is merely a slightly evolved form of feudalism. The past thirty have been hell bent ones to return to the form where used and unneeded workers are thrown on the trash heap. The forty-seven year old could do the arithmetic, to wit, fifty minus forty-seven.

[bp]

the calmo effect

coulditbethat
bad money crowds out good

oritcouldbethat
insolvency crowds out liquidity

maybeitwas
stimulators crowd out terminators

nowait
governments don't crowd, markets do

maybeit's
leverage crowds out homeowners

igotitnow
it's drive, not crowd

asin
good money drives out bad

orin
free-market ideologues drive out regulation

cause
bad money can't drive, it only crowds

[Real Person from the Real World]

ken melvin says..."The past thirty have been hell bent ones to return to the form where used and unneeded workers are thrown on the trash heap."

Right! Been there, done that: You have a degree but go to some body shop where a 20 something, who only got her associate's, or just took a few classes toward a bachelor's, is a "PM", or to a company where the same young twit is running HR, and it's screw you, to anyone over 40. Off course, "you're over qualified, but you'll find something." or "you wouldn't be a good fit for this." Yeah, and it's the same crap everywhere.

Barriers to entry of new jobs:
- Weird questions, or questions that really have nothing to do with the job, just there to provide a plausible reason why you weren't chosen.
- The recruitment where they don't care about your qualifications, as much as your *PASSION*
- Don't you dare say you need a job to pay your mortgage or get health insurance.... that information would suggest you would run if some other job offered more, or even worse, that you might get sick, or would actually need benefits.
- Too may job applicants already, including legal immigrants on the top job end, as well as illegals at the pits end.
- jobs that aren't what they seem
- sales jobs (see above)
- more sales, business development, marketing, sales "associate", whatever -- jobs where your requirement to produce is blind to the reality of the economy; besides is EVERYONE a salesman? Now-a-days, yes.... sell, sell, sell your soul, but sell.
- jobs that aren't what they seem, version II: games employers play, to comply with regulation to "prove" they can't find a "qualified" American born here.
- jobs where they prefer cheap, out of school kids over people that have financial obligations
- out and out crap jobs .... sales where the others steal your sales credits, or are commission, all commission, no salary or benefits.
- permatemp, contracting jobs where a vendor gets a cut of your pay as a stream of income from you
- etc., etc.

[cm]

calmo: Thanks, as good as it gets (I guess). Long time no read.

As for the shooting, not meaning to be flippant, but I'm not sure 47 can be considered "middle aged" in the context of any engineering profession. At least in midsize-plus companies (which this wasn't), it appears overall the only way of staying in an engineering job at that age is when they cannot replace you with somebody younger, either for lack of suitable applicants (who will do it for less), or because they cannot figure out how to transfer the tacit know-how from your damned head to the other guy's. Of course there is always the catch-all of financially triggered mass layoffs, where most bets are off.

[Farrar]

Larry seems to have made some halfway good points, there, but if there is going to be a debate - and there surely will be a long one, much longer than this thread - I'd rather be on Krugman's side than on Larry's.

I think Larry, Mikko and others are being overly fearful about crowding out, or maybe I have misunderstood them. Going back to basics - the real economy - and comparing potential GDP vs short to medium term GDP forecast, there is obviously NO danger of crowding out, as Krugman points out so clearly.

If you want to take a very narrow financial point of view, there are probably plenty of badly run banks which don't have loanable funds available. But with all the capital Paulson has been plowing into the banking system (and there's much more where that came from) capital to loan ratios should no longer be the real problem. People wonder why banks aren't lending after all these capital infusions. The obvious answer is that there aren't that many credit worthy (emphasis on CREDIT WORTHY) customers asking for loans. Paulson may have done as much as anyone can by pushing on a string.

But that's precisely the point. We can't at this moment depend on banks or money markets to get the ball rolling again. What's needed is direct government investment or lending, especially in underdeveloped sectors of US infrastructure. Print money if necessary as long as the economy is performing way under potential. This demand side pull on the string will certainly bring private investors back into the game, and at that point one can add jawboning or even direct sectorial controls, in addition to monetary tightening, in order to avoid wasteful bubbly investment, or crowding out of desirable private investment.

Larry talks about unused pools of money and other conventional ways of raising finance, but this is pure bean counting compared the the reality of the GDP gap that the US is facing. After all, the creation of money is a sovereign prerogative, which the US government has hitherto subcontracted to banks and similar institutions. If necessary a creative government and a creative Fed - with Helicopter Ben at the helm - can surely find new ways of mobilizing resources to fill that imaginary financial gap.

[Real Person from the Real World]

Bailing out banks is temporary.... we need to get some decent jobs, and decent pay for jobs. It's useless to rant about immigrants legal or illegal. Some of "them" are now "us". Fact is, any of us below mid management are all throw-a-way commodities to corporate America. Biz is amoral and not particularly social minded despite spin to the contrary. The engineer that went berserk in silicon valley may have been a citizen, visa serf, or green card, but the worse is that he had a couple of kids and down the guy is a desperate fugitive who could do anything. The CEO had a family too. At a small place like that, there would once have been a social contract that would be mitigating some of the problems of employment, but the economic downturn has turned ruthless rock bottom biz economics into brutal reality that can explode.

[calmo]

the bp effect
on calmo: WOW
Where have U bin?
Lemme sit down
An hear the rest
Superbomoso
moso moso

Ok, we B ready

[roger]

Larry, my point is that the metric big or small, in itself, is useless. If I tell you that some man is very small, and you say, well, he's bigger than the biggest ant, your comment wouldn't be very relevant, since the question is about an organic metric - how it relates to a specific organism. Thus, what one wants is to know how big the states are in developed economies, and one wants to look for things like if one part of a developed nation freerides on the rest of that nation. Your remark about California is pertinent. California, which has been a huge recipient of federal money, used to be the very home of talk about "small government" - if you'll remember, a certain California governor rode that talk all the way into the white house.

Now, California is different from, say, Mississippi because California developed itself with that federal money. Thirty years ago, Mississippi was using its government to create special tax incentives to bring in industry. But when the industry was brought in, Mississippi did not grow its government accordingly - it didn't, for instance, invest in educational infrastructure. Instead, it became addicted to the free rider technique of using tax incentives and the products of higher taxes in other states - ie educated human capital - to survive. It has grotesquely too little government. So, if you are looking at big and small, you need to have a sense of what is median - otherwise, the terms are useless.

[cm]

Real Person, all: The larger problem with running any economy (as a very significant if not the largest part of general social interaction) is that once the basics of bare-bones sustaining the current economic/social paradigm are provided, what mechanism do you put in place to grow beyond the basics?

Note, "basics" does not have to mean that everybody in a given society is living in comfort or even surviving, just that the respective socioeconomic paradigm can muddle along. You can look at what societies exist today and have existed in various places at various times in history, and one can probably say that many societies have been around for quite a while (arguably a plausible definition of "success") without being prosperous, at least by contemporary Western standards.

The problem, at least with the post-WW2 state of technology and human capital, is that widespread prosperity (not necessarily of the stereotypical "American way" variety) appears to be eminently feasible, but attaining it has to be enabled by doing things "the right way".

There have been various experiments including several styles of top-down management as well as near-complete "laissez faire" and attempts at "hybrids", with various degrees of (lasting) success. That's in the political/social management sphere, in economic paradigms the US/Western debt finance, supply side policy, and "service" economy looked OK to good for a while, but was obviously unsustainable.

I don't know the answer, but it looks likely the experimenting still has to continue.

The Central/Western/Northern European models, to the extent they have resisted aggressive supply-side style "reforms" (e.g. parts of Scandinavia, perhaps France and Germany (prior to the recent unemployment "reforms")) seem to merit closer inspection (not necessarily full emulation).

[anne]

http://angryarab.blogspot.com/2008/11/and-falsely-shouting-socialism-in.html

November 15, 2008

"And falsely shouting 'socialism!' in a crowded theater such as Washington causes an epidemic of yawning. This is the only major industrial society that has never had a large socialist party ideologically, meaning candidly, committed to redistribution of wealth. This is partly because Americans are an aspirational, not an envious, people. It is also because the socialism we do have is the surreptitious socialism of the strong, e.g. sugar producers represented by their Washington hirelings." *

* George Will - http://www.washingtonpost.com/wp-dyn/content/article/2008/11/14/AR2008111403045.html

-- As'ad AbuKhalil

[calmo]

Thanks cm, we do go back years thru this stupid little box (and I need to complain rightnow !)
To [tap back like this] As for the shooting, not meaning to be flippant,[ I've learned to take anything as humorously as I possibly can...so much depends on this excruciating point ] but I'm not sure 47 can be considered "middle aged" in the context of any engineering profession. [I was distracted by the overly numeric statistical bureaucratic impersonal nature of the descriptor: he was not likely anyone's chum, colleague...at best he just happened to be your age (if you happen to be 47) a coincidence they know is unlikely] At least in midsize-plus companies (which this wasn't),[so here's where we are invited to think this could be a company about the same size as yours, (IIRC the report says "small" not, "31 employees") ] it appears overall the only way of staying in an engineering job at that age is when they cannot replace you with somebody younger,[and here is where we need to know the length of his employment with the company, not to mention renumeration agreements ] either for lack of suitable applicants (who will do it for less), [ and this is where the photo comes in, should the name not have registered: he's a visible minority ] or because they cannot figure out how to transfer the tacit [tacit or explicit, I bet he's competent and responded to being shafted, you? ]know-how from your damned head to the other guy's. Of course there is always the catch-all of financially triggered mass layoffs, where most bets are off.[sure, but does the story guide us in this direction esp w the Sheriff's remarks? ]
Ok, a joy to read you as always, even if this one made me worry about you a little.

[calmo]

Larry, my friend,
bp is here to save usall
And I hope he unnerstands \
how thick we is
Crowding out is soooo out
gone...
now derelict
still yet
An I want nobody but bp Drivin
...you know?

Hello bp

Calling bp

Your order is ready

[cm]

calmo: I wouldn't presume to pass any judgement about the guy's professional attributes. And of course, however factual a statement or opinion one can pass, it can at best be only an approximation and generalization of any specific circumstances one finds out there.

[Farrar]

Hmmm, cal mo and c m both back about the same time - curious?

[Larry]

@Farrar - "I think Larry, Mikko and others are being overly fearful about crowding out, or maybe I have misunderstood them. Going back to basics - the real economy - and comparing potential GDP vs short to medium term GDP forecast, there is obviously NO danger of crowding out, as Krugman points out so clearly."

There are certainly unused productive resources in the world economy. I was asking where the money is coming from. To be stimulative, spending has to not simply replace other spending, which is what happens when government outbids other borrowers.

"with all the capital Paulson has been plowing into the banking system (and there's much more where that came from) capital to loan ratios should no longer be the real problem."

I can't prove that it is. I was hoping one of you could demonstrate that it is not. Remember, the Fed has been selling paper like never before. That is dipping into the pool, too.

"After all, the creation of money is a sovereign prerogative, which the US government has hitherto subcontracted to banks and similar institutions."

Right. And Krugman in the past has proposed simply printing the stuff. I'm just wondering if that's what he's saying now. I'm not even saying he's wrong. I seek understanding!

And thanks for the kind words.

@roger - "the metric big or small, in itself, is useless."

If we can't measure it, we can't really figure out how to fix it.

"Now, California is different from, say, Mississippi because California developed itself with that federal money. Thirty years ago, Mississippi was using its government to create special tax incentives to bring in industry. But when the industry was brought in, Mississippi did not grow its government accordingly - it didn't, for instance, invest in educational infrastructure. Instead, it became addicted to the free rider technique of using tax incentives and the products of higher taxes in other states - ie educated human capital - to survive. It has grotesquely too little government. So, if you are looking at big and small, you need to have a sense of what is median - otherwise, the terms are useless."

As long as we're not making France the new median...Remember, it's California, not Mississippi, whose budget just vaporized.

@real - "The Central/Western/Northern European models, to the extent they have resisted aggressive supply-side style "reforms" (e.g. parts of Scandinavia, perhaps France and Germany (prior to the recent unemployment "reforms")) seem to merit closer inspection"

They've been moving in our direction, to good effect, cutting corporate income taxes, freeing their labor markets, etc. Now we should return the favor?

[cm]

Farrar: Yeah, what a coincidence!

[cm]

Larry: What you are attributing to '@real' was from me.

It's not a matter of returning "favors", or more likely reciprocating imitations. But if "your" approach to things has broken down and been severely discredited (which I believe to be an accurate description), looking at the playbook of others is not the worst thing one can do. In business it happens all the time, by the name of "best practices".

[bp]

There are certainly unused productive resources in the world economy. I was asking where the money is coming from. To be stimulative, spending has to not simply replace other spending, which is what happens when government outbids other borrowers.

some lunches are more free than others
like the employment of "unused" resources

idle resources available for hire
which remain unemployed for lack of demand

have a near zero opportunity cost
for obtaining employment versus remaining idle

it's a free lunch to society
when those resources are put to work

to the extent their employment
does not displace other employment

as to spending not displacing
other spending to be stimulative

it's a moot point because it's the point
there's nothing to displace

if there was
the resources wouldn't be idle

[Farrar]

Perhaps everyone has abandoned this thread, but just in case Larry, calmo, cm and a few others might still be hanging around (at least, there is no longer any danger of CROWDING people OUT of this thread) I'd like to throw out a few balance sheet ideas as a suggestion on how crowding out could be avoided.

I'll have to admit that my ideas on money and finance are a bit hazy because I used to fall asleep in that class: it was right after lunch and the prof was not a dynamic speaker. Anyway, that was fifty years ago, so you can see why I am still sooooo Keynesian. I am pretty good at balance sheets, however, so i will throw it out and hope there is still someone around to correct me.

Suppose, as Larry suggests, that there is no one left domestically with enough free funds to buy Treasury bonds/bills, and furriners no longer accumulate trade surplus Dollars enabling them to buy bonds (which may not help much anyway in view of BP equation [good point, Larry]).

In such a case, Treasury sells obligations to the Fed which offsets these assets with demand deposits due to Treasury, which pays them over to some some newly created US Reconstruction and Development Bank. My first and main question, therefore is, why can't this go on forever, or at least until rampant inflation rears its ugly rear end, which is not likely to happen until the unused resource gap is substantially reduced.

The USRBD then lends or invests in worthy projects (and let's not get into an endless discussion about who can best decide which projects are worthy), their accounts at the Fed are transferred Fed, which in turn increases commercial bank reserve accounts at the Fed. (The books are still balanced, aren't they?) This increases commercial bank lending possibilities - as we all know, the reserves are against deposits, but the loans of the banking system wind up as deposits on their books. So the banks can also make new loans for worthy purposes, and even their unworthy clients may not get crowded out.

But this may be even better than it looks on the surface because it seems to me that there will be some financial multiplier at work here. But this is where my memory gets a bit hazy, so maybe others can help.

[Farrar]

Sorry for the typo -
"their accounts at the Fed are transferred Fed"
should read
"their accounts at the Fed are paid over to private actors"

[Patricia Shannon : workable links]

Regarding the laid-off engineer who killed 3 people, including his boss.

http://www.mercurynews.com/ci_10987100?source=most_viewed
Wu, in some news reports, was said to have a wife and two children.

And how do we know whether or not the people shot were "innocent victims"? We don't know anything about how they treated him.