Paul Krugman: Franklin Delano Obama?

Learning from FDR's mistakes:

Franklin Delano Obama?, by Paul Krugman, Commentary, NY Times: Suddenly, everything old is New Deal again. Reagan is out; F.D.R. is in. Still, how much guidance does the Roosevelt era really offer for today’s world?

The answer is, a lot. But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason..., which almost undid his whole program, was the fact that his economic policies were too cautious. ...

Rahm Emanuel, Mr. Obama’s new chief of staff, has declared that “you don’t ever want a crisis to go to waste.” Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come. ...

Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks,... propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that ... the ... New Deal brought real relief to most Americans.

That said, F.D.R. did not ... manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics... But the definitive study of fiscal policy in the ’30s, by ... economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”

This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll... Didn’t ...[this] amount to a major fiscal stimulus?

Well, it wasn’t as major as you might think. The effects of federal public works spending were largely offset by ... a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy ... was undercut by spending cuts and tax increases at the state and local level.

And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.

What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.

This history offers important lessons for the incoming administration.

The political lesson is that economic missteps can quickly undermine an electoral mandate. Democrats won big last week — but they won even bigger in 1936, only to see their gains evaporate after the recession of 1937-38. Americans don’t expect instant economic results from the incoming administration, but they do expect results...

The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in ... spending...; in reality, he was taking big risks with the economy... My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than ... too little.

In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity.

Comments

[reason]

Paul Krugman is a treasure, but I think on counter deflationary policy he is too conservative. You don't only need a fiscal stimulus, you need to finance it by printing money not issuing debt. Otherwise, you just subsidise rent seekers and withdraw money that might otherwise be spent or invested.

[save_the_rustbelt]

"the truth is that the New Deal wasn’t as successful in the short run as it was in the long run."

A sparkling piece of honesty amongst a lot of noise.

[save_the_rustbelt]

clarification - the noise is not from Krugman, it is the national discussion in general

[save_the_rustbelt]

clarification - the noise is not from Krugman, it is the national discussion in general

[save_the_rustbelt]

clarification - the noise is not from Krugman, it is the national discussion in general

[Arthur James]

In December 1933,the economist John Maynard Keynes wrote an open letter to President Roosevelt, which began:

"You have made yourself the trustee of those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out."

(quoted from Donald Markwell,"John Maynard Keynes and International Relations: Economic Paths to War and Peace", Oxford University Press, 2006, page 176)

Although the circumstances are different, exactly 75 years later President-elect Obama is in something like the same position. People around the world see him as the trustee of their hopes, both for better international relations and for revival of the world economy.

As in FDR's time, when Depression led remorselessly to war, so today, the two may be more closely connected than we would like to think.

President Obama must ensure that the US provides leadership in dealing with the global economic crisis of our day. This, too, is one of the lessons - probably not widely enough appreciated - of FDR's time, and of Keynes's insights (see Markwell's book quoted above).

[Real Person from the Real World]

Excellent Post. I never understood the hatred of FDR that some really older people had. If I pointed to parks that were built by crews of civilians of the WPA, or mentioned bank insurance on deposits, or even SS, I would get a rant that FDR did nothing, it was WWII. This explains it. I wish there was more emphasis on the Great Depression in history classes or social studies. When I was in school, there was almost nothing. My parents were older. While they were Republicans, they did not have the animosity against FDR that you see today, and mentioned how families stuck together and helped each other out. I guess I had an overly rosy view of what FDR did, but I still believe he did the best for the country that he could at that time, even if too cautious.

[anne]

http://newdeal.feri.org/misc/keynes2.htm

December 16, 1933

18, Norham Gardens
Oxford, England

In response to the New York Times' request for his views on the American outlook, Keynes has written "An Open Letter to President Roosevelt," which is scheduled to appear in the Sunday issue of December 31st and is to be syndicated in other parts of the United States.

So that you may see what he has to say before it is published, Keynes this morning sent me the enclosed copy of his article, which I hasten to get off directly to you through Miss LeHand (without forwarding it through the pouch) in the hope that it may catch the Bremen, which leaves tonight.

Yesterday's Times carried illuminating extracts from Wallace's Annual Report. What a good Secretary of Agriculture you have!

With warm regards,

Faithfully yours,

Felix Frankfurter

Hon. Franklin D. Roosevelt
Enc.

[anne]

http://newdeal.feri.org/misc/keynes2.htm

December 16, 1933

An Open Letter to President Roosevelt

Dear Mr. President,

You have made yourself the Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office. This is a sufficient reason why I should venture to lay my reflections before you, though under the disadvantages of distance and partial knowledge.

At the moment your sympathisers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood, whether there is a confusion of aim, and whether some of the advice you get is not crack-brained and queer. If we are disconcerted when we defend you, this may be partly due to the influence of our environment in London. For almost everyone here has a wildly distorted view of what is happening in the United States. The average City man believes that you are engaged on a hare-brained expedition in face of competent advice, that the best hope lies in your ridding yourself of your present advisers to return to the old ways, and that otherwise the United States is heading for some ghastly breakdown. That is what they say they smell. There is a recrudescence of wise head-waging by those who believe that the nose is a nobler organ than the brain. London is convinced that we only have to sit back and wait, in order to see what we shall see. May I crave your attention, whilst I put my own view?

You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.

Now I am not clear, looking back over the last nine months, that the order of urgency between measures of Recovery and measures of Reform has been duly observed, or that the latter has not sometimes been mistaken for the former. In particular, I cannot detect any material aid to recovery in N.I.R.A., though its social gains have been large. The driving force which has been put behind the vast administrative task set by this Act has seemed to represent a wrong choice in the order of urgencies. The Act is on the Statute Book; a considerable amount has been done towards implementing it; but it might be better for the present to allow experience to accumulate before trying to force through all its details. That is my first reflection--that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery.

My second reflection relates to the technique of Recovery itself. The object of recovery is to increase the national output and put more men to work. In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come n the market. Broadly speaking, therefore, and increase of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out o their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.

Now there are indications that two technical fallacies may have affected the policy of your administration. The first relates to the part played in recovery by rising prices. Rising prices are to be welcomed because they are usually a symptom of rising output and employment. When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essential to ensure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turn-over. But there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output. Some debtors may be helped, but the national recovery as a whole will be retarded. Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation's purchasing power.

I do not mean to impugn the social justice and social expediency of the redistribution of incomes aimed at by N.I.R.A. and by the various schemes for agricultural restriction. The latter, in particular, I should strongly support in principle. But too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round.

Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this. In a boom inflation can be caused by allowing unlimited credit to support the excited enthusiasm of business speculators. But in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.

The set-back which American recovery experienced this autumn was the predictable consequence of the failure of your administration to organise any material increase in new Loan expenditure during your first six months of office. The position six months hence will entirely depend on whether you have been laying the foundations for larger expenditures in the near future.

I am not surprised that so little has been spent up-to-date....

[anne]

http://www.huppi.com/kangaroo/Timeline.htm

1997

The New Deal and the Great Depression

Government Receipts & Spending

(%GNP)

1929 Hoover era, contraction begins
1930 ( 4.2) ( 3.4)
1931 ( 3.7) ( 4.3)
1932 ( 2.9) ( 7.0)
1933 ( 3.5) ( 8.1) Roosevelt era, contraction ends
1934 ( 4.9) (10.8)
1935 ( 5.3) ( 9.3)
1936 ( 5.1) (10.6)
1937 ( 6.2) ( 8.7) Recession begins, May
1938 ( 7.7) ( 7.8) Recession ends, June
1939 ( 7.2) (10.4)
1940 ( 6.9) ( 9.9)
1941 ( 7.7) (12.1)
1942 (10.3) (24.8)
1943 (13.7) (44.8)
1944 (21.7) (45.3)
1945 (21.3) (43.7)

[paine]

easily my favorite krug column...ever

[paine]

anne has the number

match the relative size
of fdr's 30 billion dollar deficit
in 43
but in one leap year
not after 10 years wondering
like the chosen people
in the desert

[wjd123]

First Stiglitz takes the name of fiscal conservatives in vain:

This year's deficit will approach $0.5tn; next year's will be even larger, as the US downturn steepens. America needs a big stimulus package. But Wall Street's fiscal conservatives (yes, the same people who brought us this downturn) will now be calling for deficit moderation (reminiscent of Andrew Mellon in the Great Depression.)--Joseph Stiglitz

Now Krugman does the same:

And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.

What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.

Can someone explain to me how "Wall Street's fiscal conservatives brought us this downturn"? Was it Wall Street's fiscal conservatives who brought us the nomenclature of securitization and subprime loans? And shouldn't Stiglitz wait until fiscal conservatives start acting like Andrew Mellon before he accuses them.

I'm a fiscal conservative and can see the need to stimulate the economy. However I want Obama to raise taxes on those making over $250,000 as he promised. I would like him to do it next year instead of waiting till 2011.

I see this as a way to keep the deficit from ballooning by the use of weak and inefficient top down tax cut stimulus.

Unlike the Great Depression people are heavily in debt from the middle class on down. Being able to pay off debt may or may not loosen the pockets of the middle class; however, distributing wealth upward isn't the way to get people spending again. I think a better way to loosen the pockets of the middle class would be a national usury law on credit cards to insure that more money stays in their pockets.

The effective income tax rate on top earners when we came out of the war was 90%. Today we are arguing about raising much lower rates on top earners no more than a few percentage points to help pay for lessening the load of those in the middle class.

Stiglitz and Krugman are helping to redefine a fiscal conservative as one who believes in trickle down tax cuts along with small government as an answer to every economic problem. That's not a fiscal conservative; that's the political mantra of the Republican Party.

I suppose there are many varieties of fiscal conservatives but they all should agree that whatever the ultimate goal--which isn't to cut taxes or spending--money should be spent in a way that gets the most bang for the buck. Otherwise we just raise deficits needlessly and cause fiscal stimuli to be less efficient in getting the economy going. For now, getting the economy going is the ultimate goal. The sooner that happens the sooner deficits can be eliminated.

It was Bush with his trickle-down, deregulationist economic idiology that got us into this mess and not fiscal conservatives.

If we would have followed fiscal conservative principles and erred on the right-hand side of prudence we wouldn't be in this mess. Voters rejected the Republican Party. They didn't reject fiscal conservative principles.

Those principles are a means to an end, not an end in themselves. Raising taxes on the rich, now rather than later, isn't inconsistent with fiscal conservative principles because it's not inconsistent with our ultimate end. The more efficient we are in stimulating our economy the faster we'll get back to a balanced budget. Stimulating from the bottom up without digging a deeper deficit with needless tax cuts for the rich is that way.

That's the way a fiscal conservative thinks. Using the key of lower taxes and smaller government to open the door to every economic problem is the way of the Republican Party.

Stop taking the good name of fiscal conservatives in vain.

[Arthur James]

Thank you for that letter from Felix Frankfurter to FDR regarding Keynes!

Markwell's book on Keynes ends:

"In April 1945, Felix Frankfurter wrote to Keynes that, sharing his 'feeling of the awfulness of the tasks that lie ahead once organized German resistance is over', he doubted if there were 'an adequate realization of the nature of those tasks and the demands their solution will make of wisdom, generosity and patience'.

[quote from Frankfurter} 'On the other hand, I find one very important factor favoring a more decent unfolding of world affairs that was wholly absent when you and I had our heartaches twenty-five years ago in Paris. A much more permeating and informed realization exists of the extraordinary difficulties of peacefully evolving a decent world order.'

To that realization, there is little doubt that Keynes contributed much."

Do our leaders today have a fully informed realization of 'the extraordinary difficulties of peacefully evolving a decent world order' - and of the importance of US leadership in the international economic cooperation it is one of the great lessons of Keynes that the world needs?

(I hope this isn't a breach of copyright...)

[Dunc]

Looks to me like you've stuck the wrong label on yourself. Fiscal conservatives don't, by and large, have much truck with taxing the rich or deficit spending.

[paine]

anne as usual swiftly provides
the sacred text for todays sermon

[paine]

"I'm a fiscal conservative and can see the need to stimulate the economy"

mores the pity

obviously the words of keynes
recovery before reform are lost on you

the vast burden shift of the tax structure over the last 40 years needs reversal...obviously

but lets chop off the payroll incubus first
to restore jobbler household budgets
increase effective demand ...fast
by a fully rebated SSI payroll tax
and keep it rebated
till further notice

declare
a tax holiday for hourly job toilers
even as we lower their income tax too

as to raising taxes on the winner class??

lets wait till the system is in hyper employment mode

and the trade balance dollar ???
my hoby horse of choice

delay till the global economy is zinging along
at full force again

plus never forget the spending by gub

send each state a check for 5k per capita
and oh ya
there's the little matter
of the 500 billion per annum 6 year plan
for total conversion
to green clean electricity generation
and smokeless transport

and then...and then .....

roughly 50% of gdp thru uncle's credit line ???

why not ..its like the quarter mile drags
time for the funny car fisc

[paine]

the baby bottle dream of the fisc conservative

do x cause "... the faster we'll get back to a balanced budget.." the better

piffle

leran the diff between micro and macro
part and whole

take a global view
not just a look from your bedroom window

[im1dc]

I nominate Paul Krugman to be the Leader of the Progressives.

Franklin Delano Obama?

By Paul Krugman
Published: November 10, 2008

I intend to print out Our Professor Krugman's Editorial today and refer to it often these next 4 years when our politicians try to undermine what the Obama Administration will be attempting to accomplish.

"Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.

PK just called me a Progressive and I'm A-OK with it!

"Americans don’t expect instant economic results from the incoming administration, but they do expect results, and Democrats’ euphoria will be short-lived if they don’t deliver an economic recovery."

Truer words have not been spoken since November 4th, 2008.

"The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little."

That is perfect advice based on a clear view of the historical record.

"In short, Mr. Obama’s chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold. Progressives can only hope that he has the necessary audacity."

YES!

[paine]

"....they) won't be able to get rid of the program
if it is successful... "

the guiding words on innovation and reform
....always

but for now
for fastest action
---and political consolidation
behind the recovery/reform package---
start sendin' out a flow of payroll tax rebate checks
to the mass of workin stiffs

"here... its yours anyway so till we get going again
you spend it "

[anne]

http://krugman.blogs.nytimes.com/2008/11/10/fiscal-fdr/

November 10, 2008

Fiscal FDR
By Paul Krugman

In the world according to the Wall Street Journal, Franklin Delano Rroosevelt pursued a decade of “pump-priming” fiscal expansion, but failed to achieve anything. The actual story is a bit different.

To get a bit more of that story, I’ve rolled my own version of the full-employment federal deficit for the period 1929-1946 (to take it though the war years). I’ve assumed that the 1929-41 trend represents potential real GDP, and that federal revenues, other things equal, would have moved proportionally with GDP. Crude, but good enough, I think. I’ve then calculated for each year what the deficit would have been as a percentage of GDP if the economy had in fact been at full employment.

Here’s the picture:

[The WPA versus the war]

What you see is that the fiscal stimulus provided by the WPA and all that was relatively small — and pulled back in 1937, with disastrous results. But when Dr. New Deal turned into Dr. Win the War, the economy got some serious stimulus.

[anne]

http://krugman.blogs.nytimes.com/2008/11/10/bigger-than-barack/

November 10, 2008

Bigger Than Barack
By Paul Krugman

Did progressives get a mandate from last week's election? Lots of people would like to claim that they didn't — that we're still a "center-right nation." And one of the assertions you hear to back that claim is that Obama's victory wasn't matched by down-ticket Democratic success.

Except it's not true: down-ticket Democrats actually did even better than Obama. The Dem share of the House vote, in particular, was higher than Obama's share of the Prez vote.

I'd been meaning to write this up, but hadn't had time to do the math. And now I don't need to: Andrew Gelman * is on the case. Here's the key graph:

A party ascendant [Chart]

Maybe the reason people don't see this is that the Democratic House gains were spread over two elections. But combining 2006 and 2008, what we've seen is a "Democratic revolution" substantially bigger than the "Republican revolution" of 1994.

* http://redbluerichpoor.com/blog/?p=260

[David Heigham]

Excellent posts, by Paul Krugman, anne and Maynard Keynes.

[anne]

What should be remember in terms of personal debt now and debt then so far as limiting a fiscal stimulus, is that we were not a middle class country in 1929, let alone in 1933. By 1929, the country had been struggling through a decade of selected economic difficulties, especially so in agricultural sectors where there was a far larger portion of the population than ever since. We were a country with wealth and income concentration in 1929, with possibly 50% of households at about subsistence level. We were not middle class as a country.

By 1933, there was above 24% unemployment with fewer women working beyond agriculture to begin with. We were a decidedly poor country, but we could have and should have afforded a Keynesian deficit spending stimulus just as Sweden did.

[Ed]

"After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections."

With respect to the 1937-1938 recession the role of monetary policy should be kept in mind. The Federal Reserve increased reserve requirements 3 times from August 1936 to May 1937 in an attempt to mop up "idle reserves." Money growth slowed in 1936 and even declined in 1937. This played a role in causing the contraction of 1937-1938.

[anne]

Whether China is a middle class country now, I do not quite know but would think a little nearer than we were in 1929. There is considerable personal savings however, more so than we had then. The personal savings can be drawn on in sustaining personal domestic consumption, and supporting further expansion in time, but not for the need of a near term general stimulus and besides not for the need for continued and sustained infrastructure development which is critical for what is to be a middle class China. India needs to immediately use the Chinese model, South Africa and Brazil almost as much so.

[Thank you for the kind comments.]

[Asia]

No one talks about the big stimulus plan China just rolled out?
Is it good, or bad, or ugly? I'd like to hear!

[anne]

The Chinese stimulus is especially promising for several reasons, experience with a similar though modest stimulus during the 1998 Asian financial crisis which sustained growth, experience with planning growth for specific economic sectors while avoiding bottlenecks (a technique that I do not fully understand), a stimulus directed to infrastructure which will likely have the most significant possible spending multiplying effect, the relatively massive size of the stimulus, control over domestic-international capital flows to foster financial stability, even ample international currency reserves and currency strength.

Also, an opportunity to relieve pressure on agricultural-rural households needing to move beyond agriculture production to increase income beyond subsistence as was needed here before and during the Depression by a relatively large portion of the population. (Roosevelt was always sensitive about farmer-migrant needs.)

[anne]

South Africa has an opportunity to focus on farmer-migrant needs. Brazil has an opportunity to focus on migrant needs, Mexico as well. India, on farmer needs while there seems relatively less migrant pressure.

[anne]

http://www.nytimes.com/2008/11/11/business/economy/11aig.html?hp&pagewanted=print

November 11, 2008

U.S. Provides More Aid to Big Insurer
By ANDREW ROSS SORKIN and MARY WILLIAMS WALSH

The government announced an overhaul of its rescue of A.I.G., after signs that the initial bailout was putting too much strain on the ailing insurer.

[The most ironic headline, almost, ever.]

[hari]

China's stimulus package of some $600 billion represents 7% of GDP - infrastructure and agri-sector investments will be continuous for 2yrs.

I was just reading The Australian, PM/Rudd said China did same 1998/99 during the Asean financial crisis to restore confidence (in the Yuan). He applauded China's stimulus package - will impact Aust. iron ore exports to China also.

It was a global confidence building stimulus which will impact commodity markets as well. Market indicators have all spiked and oil and metals jumped....

It sort of sets the stage for Pres. Hu Juntao's G-20 participation during 14-15 Nov meeting in D.C.

[anne]

http://www.nytimes.com/2008/11/09/weekinreview/09powell.html?pagewanted=print

November 9, 2008

Seeking a Poet for the Great Mess of '08
By MICHAEL POWELL

"Some years, like some poets and politicians and some lovely women," John Kenneth Galbraith wrote in 1955, "are singled out for fame far beyond the common lot, and 1929 was clearly such a year."

To talk of eras on Wall Street is most often to imbibe its intoxicants — the Roaring Twenties, the Go-Go Eighties, the Tech Boom Nineties, and so on. But single years — 1906, 1987, 2000 and most of all 1929 — just as often register as the tombstones of financial history.

Where will 2008 fit into this collective conceit? Our autumn of disintegrating stock markets, disappearing credit and depressing unemployment numbers can not reasonably be compared to 1929 and its aftermath. Not really. Not yet. But as traders exude panic and worried Americans read their 401(k) statements and wonder when this equities elevator reaches the basement and how much their new president will be able to do about it, popular evocations of that distant year grow louder and more insistent.

And who better to turn to than the popular chronicler Mr. Galbraith? His theories often ruffled the establishment economists, but few could have exhumed the financial apocalypse with more wit and panache than he did in his book "The Great Crash, 1929." Continuously in print, the well-respected if sometimes controversial history dealt with the consequences of high interest rates and lack of regulation, foolish adherence to gold standards and a maldistribution of income akin to today's.

But the book is perhaps most intriguing for its depiction of the delusion that swept the culture, and the ways financiers and bankers, wishful academics and supine regulators willfully ignored reality and in the process encouraged the epic collapse of the stock market.

No dreadful year is the same as another, particularly when that year is an epochal disaster. But similarities can be discerned and parallels drawn between the culture of that time and the modern day, when bubble followed bubble even as champions of the market insisted that all was fine.

Mr. Galbraith wrote his book while the crash remained branded on the national consciousness. Quite a few Americans still feared stock bubbles and speculators, shared a desire to regulate the financial sphere and harbored the inchoate conviction that a financier's wealth should not be conflated with wisdom. Mr. Galbraith offered his account as a sort of warning against regarding the manias of 1929 as ancient history.

"It is worth hoping," Mr. Galbraith wrote, "that a history such as this will keep bright that immunizing memory for a little longer."

He was a Keynesian economist, an adviser to President John F. Kennedy and an ambassador to India, but some have argued that in his critique of 1929, Mr. Galbraith gave short shrift to monetary policy. Milton Friedman, who as a conservative economist was a lifelong intellectual adversary of the liberal Mr. Galbraith, said he offered work that was "not so much economics as it is sociology."

Mr. Galbraith proudly wore the cloth of the heretic; he adored lancing what he saw as economic pretension. And in time, critics like this year's Nobel Prize winner in economics, the Times columnist Paul Krugman, came to embrace Mr. Galbraith's view that rising income inequality (a point Mr. Galbraith hammered on in "The Great Crash") was not simply a technical question — as Mr. Krugman once argued — but rather was rooted in power and politics....

[Lee A. Arnold]

Paul Krugman is absolutely correct. We should swing for the bleachers. Go for a full-employment economy into a green future. "Overdoing it" is not a danger right now. From that position of a strong economy, we can reapply our economics toolkit to deal with the regular tendencies of debt and inflation. And from the current financial crisis we are going to understand what sorts of regulations are required to prevent asset-gambling (excuse me, "risk-spreading,") from bringing down the whole system again. We are developing the knowledge and we have the opportunity. We are in the position to do this, people!

[anne]

http://www.nytimes.com/2008/11/09/weekinreview/09powell.html?pagewanted=print

November 9, 2008

Seeking a Poet for the Great Mess of '08
By MICHAEL POWELL

Mr. Galbraith proudly wore the cloth of the heretic; he adored lancing what he saw as economic pretension. And in time, critics like this year's Nobel Prize winner in economics, the Times columnist Paul Krugman, came to embrace Mr. Galbraith's view that rising income inequality (a point Mr. Galbraith hammered on in "The Great Crash") was not simply a technical question — as Mr. Krugman once argued — but rather was rooted in power and politics....

[Interesting, how much closer Krugman has grown to Galbraith, as a political economist or even a sociological economist when the terms have been fairly derisive.]

[anne]

Reading historically, the problem becomes more troubling, we are not in 1990 or 1980 with meaningfully high long term interest rates after a series of Federal Reserve tightenings, rather we are beginning a general recession after Fed loosenings, after an expansion that save for corporate revenues and savings was the weakest since 1945. Employment growth was relatively weak through the expansion, along with wages and benefits of ordinary workers, and for workers there has been a recession since January.

The monetary stimulus we have had has not been effective, the fiscal stimulus in the form of a temporary tax cut will have no long term effect and was only tepidly effective. There will be no meaningful international growth spur for too long a time though I think adoption of the Chinese-Keynesian model can be effective internationally.

[anne]

Here we are heading for zero interest rates, with the 3 month treasury at a telling and scary 0.27% and the 2 year at 1.28%. So much for there being no liquidity trap possible, save for Japan having done things wrong. Japan however did much right, and avoided any significant recession though growth was considerably dampened. Remember, the dampening of growth in Japan was both muted by a general deflation along with high employment and sustained wages and labor benefits, while Japan was also limited by the Asian financial crisis from 1997 on.

[anne]

http://norris.blogs.nytimes.com/2008/11/10/unbelievable-words-from-aig/

November 10, 2008

Unbelievable Words From A.I.G.
By Floyd Norris

Why do people insist on saying things that are obviously untrue?

Edward M. Liddy, the chief executive of AIG, says the latest bailout * is just a normal transaction.

“It is not exactly a bailout,” he said in a conference call this morning.

“The terms of the relation are commercial in nature,” he said, adding that everything was being done at “market interest rates.”

Does he want us to believe that there was anyone in the private sector that would have financed A.I.G. on these terms? Does he really think we will believe there is anyone in the private sector who would have financed this company on any terms? ...

* http://www.nytimes.com/2008/11/11/business/economy/11aig.html

[Oh.]

[anne]

http://norris.blogs.nytimes.com/2008/11/10/unbelievable-words-from-aig/

November 10, 2008

One more observation related to A.I.G.: If you have not read Gretchen Morgenson's excellent report * on how Merrill Lynch collapsed, you should do so.

Here is one paragraph:

"For years, Merrill had paid A.I.G. to insure its collateralized debt obligation stakes to limit potential damage from defaults. But at the end of 2005, A.I.G. suddenly said it had had enough, citing concerns about overly aggressive home lending. Merrill couldn't find an adequate replacement to insure itself. Rather than slow down, however, Merrill's C.D.O. factory continued to hum and the firm's unhedged mortgage bets grew, its filings show."

We now know that it took a really bad risk for A.I.G. to worry. You have to wonder why the Merrill management could not see the problem.

* http://www.nytimes.com/2008/11/09/business/09magic.html

-- Floyd Norris

[vorpal]

Mmm, I have less confidence than Paul Krugman, that expanding federal spending is the way to go.

Perhaps it is time for power to shift more onto the states. Nobody wants to do this because most states have to balance their budget, whereas the Federal gov does not.

The U.S. is not in the same situation as it was in 1933. It is much bigger. It has depleted resources (water, oil, land) and a massive dependency on consumption. Moreover, it faces stiff competition in a global economy.

George Bush expanded the Federal government, maybe that was the wrong way to go. Maybe, the states should shoulder more civic responsibility.

True liberalism encourages thoughtfulness over ideology. A true liberal would decide policy based on what is best at the time, and not whether such policy is labeled as 'left wing' or 'right wing'. This is 'liberal' versus 'doctrinal', rather than 'liberal' versus 'conservative'.

[Robinia]

Anne-- thanks for the info on AIG... it is really not getting a very high profile generally. Guess there is no reason to think that they would suddenly get either honest or responsible just because we are helping to foot the bill. But, it sure is discouraging to see the revisionism taking root in the contemporary reports.

[realpc]

"What saved the economy, and the New Deal, was the enormous public works project known as World War II"

So how can we know if the New Deal was generally helpful or harmful? Conservatives usually say WWII ended the depression, not the New Deal, and Krugman confirms that here. Isn't it possible WWII would have ended the depression without any New Deal? But Krugman is calling for more aggressive government action, the opposite of what conservatives want.

I don't think Krugman, or anyone, knows.

[roger]

"So how can we know if the New Deal was generally helpful or harmful? Conservatives usually say WWII ended the depression, not the New Deal..."

I can only attribute the conservative claim to some kind of attention deficiency disorder, since - to those whose attention spans are unimpaired, WWII appears to be the new deal on steroids - massive government spending, price controls, the government practically taking over the labor market, etc. If we had fought WWII by deregulating markets, cutting government spending, fighting it with a volunteer army, and zero rationing or price controls - then, of course, the Right would have a claim with some conceptual content. But since we didn't, they don't.

[Patricia Shannon]

Some weird thinking by some people : Spending money can end a depression, if it's for war, but not if it's on peaceful projects. It boggles my mind that people can so easily make statements that contradict each other within a sentence or two.

[OhNoNotAgain]

"Isn't it possible WWII would have ended the depression without any New Deal?"

The point is, and Conservatives miss it every time, is that WWII was just the New Deal on massive amounts of steroids. It was a massive public works project, funded by huge purchases of war bonds by Americans and deficit spending.

[OhNoNotAgain]

Damn, Roger. You beat me to the "steroids" line. :-)

[boqueronman]

Another of Krugman's thousands of Kabuki dances with the truth. Here's what E. Cary Brown actually said (and misrepresented by Krugman): "The primary failure of fiscal policy to be expansive in this period is attributable to the sharp increases in tax structures enacted at all levels of government. Total government purchases of goods and services expanded virtually every year, with federal expansion especially marked in 1933 and 1934. [But] the federal Revenue Act of 1932 virtually doubled full employment tax yields..." And, since we will immediately get cries of "but, FDR was not President in 1932," the Revenue Act of 1932 was followed by many further tax increases (e.g. Brown notes "...social security taxes began in 1937 to exert a pronounced effect..."). Will the Dem Congress resist the temptation to apply soak-the-rich taxes to the U.S. economy, and thus wind up making the same mistake FDR made? We'll see. Does Krugman excuse this blatant distortion of another person's work because it is service of the Greater Socialist Good? Or perhaps it is, as Paul Johnson described Ernest Hemingway, "he ha[s] the characteristic intellectual's belief that, in his own case, truth must be the willing servant of his ego"?

BTW the Great Depression was ended by stable post WWII monetary and fiscal policy (without FDR's rabid anti-business polemics restraining investment) and increased productivity from lessons learned by U.S. business during successful innovations developed and employed by them to accelerate WWII industrial production (with no positive contribution from government policy or regulation). FDR sustained the Great Depression until he died.

[Patrick]

The corollary to his is that we the gov't has to be ready to increase taxes, and spend less in good times. That part of the equation is often ignored.

[anne]

"Another of Krugman's thousands of Kabuki dances with the truth."

Notice the language, and immediately understand the following deceit.

[acerimusdux]

Well done by Krugman.

Economic growth from 1932-1937, the heart of the New Deal, was tremendous. The fact is that it was very successful, even if it didn't quite get us all the way back to full employment. And, it was fiscal conservatism which threatened to end that success, and did derail it some in 1938.

The fiscal conservatives seem to consistently fail to grasp how the economy actually works on the macro level. When you have the situation we have now, with capital, labor, and resources all underemployed, there is really no downside to increasing spending to close that gap. Where the real debate ought to be is over spending priorities; perhaps over how much we really need permanent social changes, rather than a temporary stimulus.

Per Krugman:

"Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come"

Now, I for one would like to see that. But these are things that I think we need regardless of the current economic condition. I think we ought to catch up to the rest of the Western world in the quality of our health system, and that we ought to transition our energy usage away from sources which appear to be causing severe ecological harm to the planet.

But, I don't think such ambitious long term changes are economically required to end this downturn. The WPA and CCC were very successful in temporarily employing the unemployed, without becoming permanent programs. We could easily make the investments we need right now in critical infrastructure--roads and bridges, the electrical grid, high speed rail, high speed data networks, new energy technologies, nuclear power plants--without creating any new programs that would "change the shape of American Society for generations to come."

But, most conservative commentators seem to reject standard textbook Keynesian economics altogether. Rather than engage in this debate, they seem to have nothing to offer at all in the current situation.

The "supply side" paradigm they favor addresses only a condition which seems to rarely occur naturally, the case of an economy in which there is excess demand but insufficient capital investment. I'm not even sure how this condition would occur outside of excessive government intervention, perhaps through too high taxes, tariffs, price fixing, and other policies which might discourage what would otherwise be profitable investment.

Faced with the opposite problem, an economy in which the supply side has been over stimulated, and all of that excess supply of financial capital seems to be having difficulty finding productive employment--Greenspan's so called "savings glut"--they seem befuddled. It seems they don't actually have any General Theory at all.

Thus, they also have nothing to say about inequality, which is really at the root of this imbalance between consumption demand and the desire to invest. Increase the income share of working middle class families, and consumption demand will obviously improve. The increasing concentration of wealth is the obvious cause of both the current shortage of demand for goods and excess supply of financial capital.

So, I will add, that a permanent long term increase in the size of government is not absolutely required, so long as Obama is willing to instead pursue more strongly redistributionist policies to correct this imbalance. A proper redistribution of resources could potential allow for a market equilibrium closer to full potential, thus requiring less government intervention.

This should be the real debate here; smaller government and more redistribution, or less redistribution and instead more taxes and direct government spending.

[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

[anne]

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

November 10, 2008

Stimulus Math (Wonkish)
By Paul Krugman

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

[China is doing $586 billion, which makes complete sense.]

[anne]

This is just not an ordinary cycle end, but a cycle end after a limited expansion and limited sharing in the expansion benefits for ordinary workers, the general recession is only beginning while the employment recession is 10 months old and together with a decline is asset prices there is no counting on personal consumption for a turn from here before the economic damage is far more.

Beyond building an asset base for banks, credit extension is quite another matter and there will be no hesitation to cut credit or simply no credit given when any risk is involved for quite a while. Monetary policy will not be much effective from here. Spending is needed, not tax cuts which are much less effective as a stimulus but spending primarily on infrastructure.

[Julio]

acerimusdux:

Thus, they also have nothing to say about inequality, which is really at the root of this imbalance between consumption demand and the desire to invest. Increase the income share of working middle class families, and consumption demand will obviously improve. The increasing concentration of wealth is the obvious cause of both the current shortage of demand for goods and excess supply of financial capital.

So, I will add, that a permanent long term increase in the size of government is not absolutely required, so long as Obama is willing to instead pursue more strongly redistributionist policies to correct this imbalance. A proper redistribution of resources could potential allow for a market equilibrium closer to full potential, thus requiring less government intervention.

This should be the real debate here; smaller government and more redistribution, or less redistribution and instead more taxes and direct government spending.

[A great perspective on the current conundrums. Gave me a lot to chew on, thanks.]

[Julio]

Krugman:

"So we need a fiscal stimulus big enough to close a 7% output gap...
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."

[I'd love to see paine's face when the headlines read "Nobelist catching up, now within sight of local blogger"].

[Julio]

So, here's a question (aka my addled thought experiment du jour):

Let's say Obama

1) Announces he's going to spend money on everything he proposed, and then some;
2) Doesn't want to burden the next generation or raid the SS fund or anything that sounds bad to common folk, so he's just going to fire up the printing presses and Bernanke's helicopters,
3) Realizes that this plan can cause inflation so he'll create a whole new set of measures and government financial instruments to help minimize the dislocation for people, especially retirees.

We get double-digit inflation for two or three years.

And the problem is?

[anne]

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

November 11, 2008

Fannie Mae Loses $29 Billion on Write-Downs
By VIKAS BAJAJ and CHARLES DUHIGG

The company’s results suggested that home prices are far from a bottom and that the government would probably have to pump tens of billions of dollars into Fannie Mae and Freddie Mac.

[Oh.]

[paine]

julio

an expenditure deficit equal to
10% of gdp is probably
the more like the number
krug in his heart knows
needs crossing

leakage rates are liable
to increase
in a hyper dutched up state
of the global economy

feature this:
vicious usury clamps and savage import price cuts

unless the dollar dives...

why don't he say so
why act bold over a mere 4% ???
any higher number
--right now ---
and he'd seem loony

btw
i wish folks would realize 700 billion in asset buys
prolly has a gdp effect
of maybe 70 billion in expenditures on real stuff

10% are wild here gang

[paine]

julio

a burst of inflation

"and the problem is "

u are extremely correct
uncle could prepare us wagelings
for an inflation "olay"

but ....

the corporate system comrade
what about the corporate system
can it take the economy running
suddenly safe at hyper speeds ???

without ....

it self risking a morphing
into some higher institutional arrangement

[anne]

China's stimulus plan should be worth about 7% of Gross Domestic Product, and since it will be directly spent on infrastructure the effect will be amply multiplied. Even the fresh experience with spending on construction for the Olympics shows China how significant but controlled the effect can be focused largely on a city. Infrastructure spending here is estimated to have a multiplying effect of about 1.59, as opposed to tax credits at about 1.26. *

http://www.epi.org/printer.cfm?id=3143&content_type=1&nice_name=webfeatures_snapshots_20081022

[Easy Money]

Tragic to see misguided government intervention being promoted here. I realize most here are well-meaning and think they have a good idea of how economies work. While an economy can tolerate some government bumbling, these audacious plans ensure serious damage. Few seem to understand how government interference often leads to production cutbacks and wealth destruction.

The great socialist experiments took decades to reveal the full extent of the disaster caused by know-it-all central planners. I'm not anti-intellectual, but have to say many fail to realize how wrong these geniuses can be. Now we get to see how much damage these grand experiments can wreak again.

[anne]

"I realize most here are well-meaning and think they have a good idea of how economies work."

But you are completely wrong.

I am not the least well-meaning, never have been, and do not intend to be well-meaning in future, never. I am all for socialism this and socialism that and socialism the other, only leave me my autographed Red Sox bat, my Manny bat actually. Thinking about it carefully, I suddenly even realize that they really do wear Red Sox, which explains why I am what I am.

[OhNoNotAgain]

"BTW the Great Depression was ended by stable post WWII monetary and fiscal policy"

Wow, it's like a bird-call. Mention the Republican canard, and boom, someone is johnny-on-the-spot to actually demonstrate it first-hand. Amazing.

[Jay]

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"*

[OhNoNotAgain]

Hey Easy Money, why don't you actuall back up what you're saying with some, I don't know, FACTS ? Why is everyone here wrong, and what, pray tell, is your solution to the problem ? And no Herbert Hoover answers, either, like "things will work themselves out". We all know that things work themselves out eventually, but I think we can all also agree that we'd like to be alive when it happens.

[Jay]

"why don't you actuall back up what you're saying with some, I don't know, FACTS ?"

-Correlation does not prove causation
-Post hoc ergo propter hoc is a logical fallacy.
-The effects of policy decisions are lagged by more than 0 years.
-Assuming ceteris paribus is as rational as assuming Dog exists.
-Inductive reasoning is inherently flawed and a deceitful tool used by charlatans.

[Julio]

paine,

"feature this:
vicious usury clamps..."

OK, so we cry uncle. Unless we decide to live within our newly minted means...

"...and savage import price cuts

unless the dollar dives..."

Which it would, wouldn't it, when the presses fire up?

"the corporate system comrade
what about the corporate system
can it take the economy running
suddenly safe at hyper speeds ???"

They'd make out like bandits when then toxic waste is suddenly, nominally in the black, no?

"without ....

it self risking a morphing
into some higher institutional arrangement"

Bring on the helicopters, already.

[Patricia Shannon]

OhNoNotAgain,
I had the same reaction. What does Easy Money think we should do?

[anne]

Inflation is not the issue now, nor anticipated to be for quite a while. Look to the bond market for a sense of how investors are thinking, even with the need for complete security. There was no inflation in Japan through zero interest rates and waves of government spending to sustain growth and especially to protect employment, nor did the Yen lose value relatively. The worry is not being as aggressive as Japan was in the 1990s.

Remember, again, that not only was Japan coping with a severe decline in asset prices that turned to a general sustained deflation, but as Japanese growth was quickening there was the Asian financial crisis and recessions or slowing growth among prime trading partners for Japan.

[Easy Money]

The economic calculation problem described by Mises and Hayek would be a good way to see the problem.

I was similarly shouted down years ago when I argued the central bank was pricing credit too low. I did not expect agreement this time either.

[anne]

"I was similarly shouted down years ago when I argued the central bank was pricing credit too low."

There is a difference in shouting, however, when the issue suddenly becomes "socialism," which is really meant to be "worse," which precludes discussion.

[anne]

The problem is we are going from 6.5% to 8.5% unemployment, and worse in terms of an absence of work or decline in the employment to population ratio. Absent a profound stimulus, and the recession will be far worse than what is already a given. We will not turn about quickly, and we have no program yet.

[Easy Money]

And I think the government should stay out of the economy, not bailout the banks, etc.

Give money to those in need as unemployment benefits or whatever, but do not interfere in the real economy. All these bailouts have done is distort things further.

[Julio]

anne,

"Inflation is not the issue now, nor anticipated to be for quite a while."

I'm suggesting treasury/fed should do all it can to make it one. It's not a problem, it's a solution.

[Julio]

And, if you do everything that's helpful except that it's supposed to cause inflation, and it turns out you don't cause inflation after all, then where's the downside?

[Patrick]

Uncle Ben is pushing on string right now, but I understand why some people are scared of too loose monetary policy. Look at the mess it helped create. I'm I wrong in thinking that monetary policy is an awfully blunt weapon that is awfully hard to control once unleashed? Better to use fiscal policy - it seems to have way more dials and knobs for fine-tuned control.

says...

I see everybody ignored my comment. How you finance the deficit is every bit as important as what the deficit is. Surely, somebody has looked closely at what happened in Japan? The last thing we want is future fiscal policy being hamstrung by debt interest payments. So why not take the first step away from debt=money. Just print the stuff, and spread it as wide (and low) as possible.

[reason]

That was me!

[reason]

Unkle Ben needs to take his helicopter money seriously!

[reason]

The culprit in times of hyper-inflation is exactly the remedy in times of debt-deflation. All is context, medicines are poisons in small doses.

[reason]

Easy Money...
let me spell it out for you in short sentences.
This is an emergency.
General Equilibrium theory is based on general equilibrium.
We don't have general equilibrium now, we have general disequilibrium.
The forces pushing us further away from equilibrium (massive insolvency) are not in the general equilibrium models. They are stronger now than the forces pushes us towards equilibrium.
Doing nothing is not an option.
My summary of Keynes "in the long run we are all dead".

[reason]

P.S. I am not necessarily convinced that there is a general equilibrium or that the economy left to itself is stable. And no, I am not a communist, nor do I believe that the government should plan the economy. I do believe, however, that it should care about an equitable outcome, stability and sustainability.

[reason]

I wonder if easy money thought that the answer to Katrina was to have people pay their rescuers?

[acerimusdux]

I'm not even sure how important it is right now whether they print money or finance spending instead with more debt. With no accommodation from the Fed, I expect the markets would still soak up that new safe treasury debt quite easily, with only a bit of upward pressure on interest rates. I doubt this would really cause much in the way of crowding out of private investment.

As for inflation, you might spark some, but there would be a lag there, it would only show up once you overshot and started to create pricing pressures in wage markets, asset markets, commodities, etc. In other words you'd be out of the slump first.

At that point, I imagine the Fed would be well equipped to correct the over reach. The only thing that modern inflation-targeting monetary policy has proven very effective at...is targeting inflation. So let the Fed worry about it when it shows up.

Thus, as Krugman says, "It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little."

The main potential negative consequence of persistently overdoing government stimulus, and relying on the Fed to correct it, would be that you might end up with government as a larger share of the economy than necessary. You would be at full employment equilibrium; but perhaps that same equilibrium could have been achieved with less government, lower interest rates, and more private enterprise.

So we would then get back to the old debate about the size of government, and whether or not it was doing some things that private industry could do more efficiently.

[reason]

acerimusdux
yes and no. It may not matter from the point of view of stimulus, BUT it does change the situation afterwards, and that is point. (And consider that a large proportion of newly issued bonds will be bought by foreigners, pushing the current exchange rate up and the future exchange rate down relative to what it might otherwise have been. I regard these particular movements as pernicious.)

[wjd123]

No one talks about the big stimulus plan China just rolled out?
Is it good, or bad, or ugly? I'd like to hear!--Asia

Asia,

I think China's big stimulus plan is good. Yet, I believe that when dealing with China the world should have one rule: "don't count your chickens before they're hatched." China should get no browney points for cooperation from the international community until China acts.

[wjd123]

obviously the words of keynes
recovery before reform are lost on you--paine

Paine,

Is there anything in Keyes that says we shouldn't try to get the most stimilus for our deficit bucks?

On the Lou Dobbs show I heard Paul Krugman say that he wasn't happy with all the deficit spending that we would need to have to fix our economic problems? Who would be. What I didn't here him say was that reform should be delayed until we are out of the woods. The more stimilus we get for our deficit bucks the less deficit bucks we will have to spend. Krugman should happy about that.

Explain why raising taxes now on those making over $250,000 would hurt the economy. Don't we need to be efficient as we raise the deficit? You seem to be saying "Let's not take any chances."

I don't know in what context Keynes was talking about "reform," but I doubt it had anything to do with the "efficient" spending of deficit bucks.

[Jay]

"I do believe, however, that it should care about an equitable outcome"

And which philosopher king is fit to define what equitable is? Does equitable preclude that we all make the exact same income? That sounds equitable to me.

[reason]

Jay,
we are a democracy. You may favour philospher kings (after all your Libertarian paradise still needs someone to make the rules), but I don't believe in them. We just need an outcome that people think is fair enough. There is no guarantee that the market left to itself (and given the initial distribution of asset ownership) will produce that.

[Jay]

"we are a democracy."

No we are a Constitutional Republic.

"We just need an outcome that people think is fair enough."

Our current political system gave us George W. Bush. In a democratic paradise you can't throw the bad results.

Also ask a Californian what they think about tyranny of the mob. Ask them what they think about Prop 8. I bet 48% of them will bitch.

[Jay]

*In a democratic paradise you can't throw out the bad results.

[wjd123]

take a global view
not just a look from your bedroom window --paine

Paine,

This is the deepest cut of all. For years I have been arguing that if we are to move forward globally, we can't leave the parochial behind. For instance being a member of the EU affords woman more rights in the workplace and voters more political power. You don't move ahead globally by dumping on the rights citizens have but by expanding them.

I have been extremely forward looking.

Earlier today I was looking out my bedroom window with an historical view. Historically I was viewing The Treaty of Versailles, how German reparations fit in to the global economy of that time, and German inflation. I was trying to see if this situation might have some analogy to the global economy today. I haven't come up with anything yet, but as you can see the view from my bedroom window isn't all parochial.

I don't know what micro-macro sins I'm committing in the economic sphere with "my" fiscal conservative outlook? I know that here in NYC, that I'll be getting a hefty increase in my local property tax. I know that I just received a $2.00 monthly increase by Verizon for my web connection. (I don't know how they justify this increase other than the fact they can do it, so they did). I suspect that I will be receiving many increases like this to my fixed income. Before the year is up I expect that my Medicare Advantage provider will find a way to get its hands on any cost of living increase the government added to next year social security check. I know that yesterday I told my oldest son who works for the city not to expect his union to negotiate a contract that would make up for inflation.

These are my parochial concerns. I wonder if this is the general trend in the country and what its implications are to deficit spending. I try to imagine what the parochial concerns are of people making over $250,000 a year are. I've yet to think of a scenario where their keeping a lower tax rate would be good for them or the country in the long run. That is, unless they are not planing on staying here.

Where all this fits into micro-macro economics I'll leave to the economist. I see all of it as a continuous string. I think of "my" fiscal conservative proclivities as a wax on that string, you, evidently, think of them as a rub.

says...

I didn't say democracy was paradise (its occupied by human beings) but it is better than the alternatives. And yes we can throw the bad results out (that is what elections are for). (And by the way I'm not an American so your - silly anyway - republic comment is irrelevant to me.) And whether you believe it or not, in your "natural law" paradise you are being ruled by philosopher kings, in this case dead ones. Like in a theocracy. Let's hope they weren't ever wrong and nothing unexpected ever happens.

[reason]

That was me wasting my time replying to jay's idiocy.

[acerimusdux]

Jay says:

"And which philosopher king is fit to define what equitable is? Does equitable preclude that we all make the exact same income? That sounds equitable to me."

I would argue that it is a matter of maximizing economic growth. When you get too much concentration of wealth and income, I think you end up where we have been recently, with insufficient consumer demand, and a lot of unemployed capital inclined to find its way into bubbles.

So for me, it's a matter of what level of distribution is efficient. I suspect that will be a level where income taxes aren't TOO high, say marginal rates even at the very top not more than 50%. But, to the extent an output gap remains, we will likely need for government spending to step in and make up the difference for lax demand.

Keep in mind, if the government doesn't address inequality, the market will itself, eventually. That is pretty much what is happening now. As the realization has come that consumer demand was unsustainable, we have had a sudden revaluation of assets. Much of that wealth at the top has already shrunk quite a bit. It will shrink more if economic recovery does require policies which turn out to be inflationary. Inflation, in essence, is a de facto tax on wealth.

I even wonder if the success of inflation targeting in the last decade hasn't contributed to the problem. A modest inflation rate, say more in line with historical average inflation of around 4%, might have been sufficient to ensure that workers got a larger share of economic gains and consumption remained strong. Another possibility to consider, if we prefer a lower inflation rate, might be a modest direct tax on wealth, of maybe 1%.

Such a moderate tax rate would only encourage more capital to be employed productively, by taking sufficient risk to yield returns above the inflation or tax.

[acerimusdux]

wjd says:

'Explain why raising taxes now on those making over $250,000 would hurt the economy. Don't we need to be efficient as we raise the deficit? You seem to be saying "Let's not take any chances."'

Is suspect you could go forward with those tax increases so long as you immediately put all additional revenue towards additional stimulus.

As a practical matter though, it would likely be more politically difficult to do things that way. Politically, you are likely going to get more done by getting as large a stimulus as you can, and then let the tax increases come into play by allowing the Bush cuts to expire as scheduled.

For politicians, the alternative which allows them to vote for the lower spending figure now, while not having to actually vote for the tax increases, will be much more attractive.

[Julio]

reason,

"You don't only need a fiscal stimulus, you need to finance it by printing money not issuing debt."
...
"I see everybody ignored my comment. How you finance the deficit is every bit as important as what the deficit is. Surely, somebody has looked closely at what happened in Japan? The last thing we want is future fiscal policy being hamstrung by debt interest payments. So why not take the first step away from debt=money. Just print the stuff, and spread it as wide (and low) as possible."

I didn't ignore it, I echoed it.
The underlying assumption in the thread is that it will cause inflation and inflation is a problem, and borrowing is better than printing.

I think printing money would bring in a number of advantages, among which I count a spike in inflation (provided uncle takes care of the losers, especially retirees).

So far I haven't seen a single problem (balance of payment problems, foreign currencies too high, mortgages underwater, excessive debt...) that a bout of inflation wouldn't cure.

I'm not sure I agree with your comment about being hamstrung by future debt payments; nor am I sure that printing money would not affect the ability to borrow in the future.

But, about the printing, I'm with you.

[reason]

Julio,
I must admit I just skimmed through the thread, I may have missed your comment. A few clarifications.
Printing money is relatively inflationary (but it this case it is relative to threatening if not actual deflation). But so is creating money by lending. I am not proposing this as a general policy (god forbid in inflationary times) but as a special policy against debt deflation.
Re Hamstrung by future debt payments - did I say debt payments - I should have said interest payments. The stock of debt matters because of interest payments. The interest payments go mostly to either the already rich (instead of productive investment) or to pension funds and are financed out of current taxations. This is either regressive or involves and intergenerational transfer. Do we want to be committed to this?

[im1dc]

This is not on topic but I believe it may be of great interest nonetheless since it means real substantial meaningful energy change is closer than any of us believed.

I believe, if this discovery is truly implementable as Prof. Nocera says, that this changes everything and I mean everything in the global sense.

This two minute video is extremely encouraging on the energy front.

It promises home electricity as long as the sun shines in the sky.

If Prof. Nocera's discovery is practical and cost efficient, and he says it is, then "Let the Revolution to Solar Power Begin Today".

MIT Chemistry Prof. Daniel Nocera describes new process for storing solar energy

http://techtv.mit.edu/videos/633-daniel-nocera-describes-new-process-for-storing-span-classhighlightsolarspan-energy

says...

I've been pushing this recently, people should read it (Mark Thoma should republish it). It is useful for the situation we are in now:
http://economistsview.typepad.com/economistsview/2006/05/babysitting_the.html

[reason]

That was me, agh!