Paul Krugman: Fighting Off Depression

Will Congress do what's needed to stop the economy's downward spiral? (Related: Obama Plan Includes $300 Billion in Tax Cuts "to win over Congressional skeptics worried that he was too focused on government spending." Guess who the skeptics are? "Republicans have begun voicing criticism of what they describe as an open-checkbook approach to spending. By focusing more attention on the tax cuts in the plan, Obama aides hope to frame it as a balanced, pragmatic approach." The centrist urge to compromise may give too much away.):

Fighting Off Depression, by Paul Krugman, Commentary, NY Times: “If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression. ...

We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas ...  declared that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity...

It turns out, however, that preventing depressions isn’t that easy after all..., the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire... Yet credit remains scarce, and the economy is still in free fall.

Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute ... Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending... — is needed... The failure of monetary policy in the current crisis shows that Keynes had it right... And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy.

But these plans may turn out to be a hard sell..., the political posturing has already started, with Republican leaders setting up roadblocks... More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept ... a big-spending, F.D.R.-type solution...

The biggest problem..., however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.

This is a problem with which Keynes was familiar: giving money away, he pointed out, tends to be met with fewer objections than plans for public investment “which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles.” What gets lost in such discussions is the key argument for economic stimulus — namely, that under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.

All of this leaves me concerned... I’m sure that Congress will pass a stimulus plan, but I worry that the plan may be delayed and/or downsized. And Mr. Obama is right: We really do need swift, bold action.

Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going.

So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?

Update: On the point that fiscal policy requires "proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts," Ed Glaeser:

...macroeconomic events should never lead us to toss out the first rule of prudent policy: fund projects only when benefits exceed costs... What will minimize the risks of a fiscal fiasco? [One possibility is] new tax cuts for middle-income Americans... Tax cuts can be implemented quickly and entail minimal waste... Even if the tax cut doesn't end the recession, it  would at least ease the downturn's burden on poorer Americans. ... The country should take infrastructure investment seriously, but infrastructure spending is unlikely to be sound stimulus. ...

Comments

[Jon Claerbout]

Loan money to tax payers, interest free, for 10 years, repayable at 10%/year, in amount equal the sum of the last three years taxes.

[NLS]

I'm so happy that libertarianism killed itself. Too bad we all must suffer.

[Gegner]

If nothing else, at least Mr. Krugman is being consistent.

Why all of the mainstream pundits refuse to acknowledge that government spending has been 'off the charts' for the past eight years and we're still in a pickle is what confounds me.

The Bush administration took office with a 5 trillion national debt (the accumulated debt of every administration preceding it) and doubled it...and we have absolute spit to show for that money.

Worse is the fact that next year's GDP will be significantly lower than last year...(emphasis on the word 'significantly')

To which we must add the fact that we no longer possess the um, wealth creation capacity to pay any of this money back.

We no longer have the 'infrastructure' to be 'self-sufficient' (and I say this as a 30 year manufacturing professional.)

Sadly, I concur with Mr. Williams of SGS who says that 'hyper-inflation' is already in place, spending more money we don't have will do nothing to turn the economy around.

The true solution to the crisis lay in reducing the workweek/day to boost labor force participation/wealth creation.

[ndk]

I actually hope we get a chance to put Keynesianism to a full test here. Let alone its predictions' contradictions with reality in less dire times, empirical tests of the theory in the past in myriad ways have resulted in cries of "but if we had only spent more..." and a couple of possible N=1 counterexamples. I don't want to hear it again.

But lo and behold, guess what Krugman starts on about in his last paragraphs. Ugh.

We've discarded numerous economic theories such as Ricardian Equivalence and Say's Law due to empirical failures. Somehow Keynesianism remains beyond even question.

For a counterpoint to Krugman's piece, see Buiter (as discussed on naked capitalism) who does believe in Keynesianism, but frets over its viability in the US.

[gordon]

Well, it's easy to deprecate fiscal solutions to recession/depression if you're well cashed up and can afford to sit on (or even accumulate) assets whose value is falling. A very large part - maybe the whole real substance - of the neoliberal agenda since the 1970s has been the War on Labour. A recession/depression may well be seen as just another and very successful episode in this continuing campaign.

There were plenty of wealthy individuals who worked hard against the New Deal on the grounds of its "socialist" tendencies. I fully expect their children/grandchildren to do the same. A good depression is an excellent means to teach the lower classes a suitable deference to their betters.

Whose recession? Whose depression?

says...

You guys have been wrong up to this point, yet here you are still whining.

naked capitalism is okay on financial stuff, she actually has some experience there, but when it comes to economics you shouldn't listen - her economics is pretty bad - she has no formal training and is often just flat wrong. She guesses right and summarizes what she reads okay sometimes, but not always. What makes you think she has a clue about what the evidence says from, say, a DSGE model? She doesn't, and no amount of circular citing on blogs will change that.

And you should get over that man-kiw love thing, he hasn't played things straight, not at all. Isn't his agenda pretty clear? You do realize who he worked for and what he is defending don't you? How this is all wrapped up in his ego? And those tests you cite are meaningless in the current environment. You seem to know why, yet you act like we should beleive what they say. Pretty mankiw-ish. No wonder you like him so much.

People who advocated these things caused the Great Depression, and here they are trying to do it again.

[mmckinl]

Well, Krugman is finally getting around to brass tacks...

Unfortunately, Both he but especially Obama's spending plans are too little too late ... I've heard a rumor that the Dems will concentrate on tax cuts, $300 biilion of the pot worth. This is a totally bass ackwards approach in which those that have jobs are better off and will most probably save the money, not spend it.

Then there is the refusal to rationalize the banks through a bank holiday. These Wall Street Banks will suck the country dry of liquidity for years unless they are cleaned up.

The more I see the more I know that Great Depression II is just ahead. Where's your call for a Bank Holiday Mr Krugman? William Greider called for one over six weeks ago.

Time for a Bank Holiday ... By William Greider

[anne]

http://krugman.blogs.nytimes.com/2008/11/28/was-the-great-depression-a-monetary-phenomenon/

November 28, 2008

Was the Great Depression a Monetary Phenomenon?
By Paul Krugman

[Depression chart] Sins of omission?

Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?

A central theme of Keynes's "General Theory" was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, * claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it's hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.

So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base:

[Contemporary chart] Ben goes for broke.

And guess what — it doesn't seem to be working.

I think the thesis of the "Monetary History" has just taken a hit.

* 1963

A Monetary History of the United States, 1867-1960
By Milton Friedman and Anna J. Schwartz

[anne]

http://www.economagic.com/em-cgi/data.exe/fedstl/ambns+1

December 18, 2008

Monetary Base, 1927-1945

The monetary base shrunk in every month (year over year) from March 1928 through June 1929, then the monetary base shrunk in every month from December 1929 through December 1930. The base grew every month from January 1931 through January 1937, then the base shrunk again from February 1937 through March 1938, and grew from April 1938 through October 1941.

(Year - Month - Percent Change Year Over Year)

1927 01 ( 0.3%)
1927 02 (- 0.1)
1927 03 ( 0.5)
1927 04 ( 0.9)
1927 05 ( 0.8)
1927 06 ( 0.7)
1927 07 ( 0.2)
1927 08 ( 0.3)
1927 09 ( 0.5)
1927 10 ( 0.5)
1927 11 ( 1.3)
1927 12 ( 1.4)

1928 01 ( 1.0)
1928 02 ( 0.3)
1928 03 (- 0.3)
1928 04 (- 0.0)
1928 05 (- 0.2)
1928 06 (- 0.6)
1928 07 (- 1.0)
1928 08 (- 1.7)
1928 09 (- 1.4)
1928 10 (- 1.3)
1928 11 (- 1.4)
1928 12 (- 1.0)

1929 01 (- 1.1)
1929 02 (- 0.5)
1929 03 (- 0.4) Hoover
1929 04 (- 2.0)
1929 05 (- 1.9)
1929 06 (- 1.3)
1929 07 ( 0.4)
1929 08 ( 1.2)
1929 09 ( 0.4)
1929 10 ( 0.4)
1929 11 ( 2.2)
1929 12 (- 0.5)

1930 01 (- 2.0)
1930 02 (- 2.7)
1930 03 (- 2.7)
1930 04 (- 1.8)
1930 05 (- 1.9)
1930 06 (- 1.8)
1930 07 (- 2.9)
1930 08 (- 3.4)
1930 09 (- 3.7)
1930 10 (- 4.2)
1930 11 (- 5.7)
1930 12 (- 1.4)

1931 01 ( 1.9)
1931 02 ( 1.6)
1931 03 ( 1.7)
1931 04 ( 2.3)
1931 05 ( 3.2)
1931 06 ( 4.1)
1931 07 ( 5.2)
1931 08 ( 6.4)
1931 09 ( 8.7)
1931 10 (12.5)
1931 11 (10.1)
1931 12 ( 6.4)

1932 01 ( 7.2)
1932 02 ( 8.5)
1932 03 ( 6.8)
1932 04 ( 6.3)
1932 05 ( 7.8)
1932 06 ( 6.4)
1932 07 ( 7.3)
1932 08 ( 7.1)
1932 09 ( 5.6)
1932 10 ( 2.9)
1932 11 ( 5.2)
1932 12 ( 6.1)

1933 01 ( 7.1)
1933 02 ( 9.0)
1933 03 (20.7) Roosevelt
1933 04 (10.8)
1933 05 ( 5.6)
1933 06 ( 4.9)
1933 07 ( 2.5)
1933 08 ( 2.7)
1933 09 ( 3.4)
1933 10 ( 3.9)
1933 11 ( 3.7)
1933 12 ( 3.7)

1934 01 ( 3.6)
1934 02 ( 3.4)
1934 03 ( 1.2)
1934 04 (12.9)
1934 05 (17.3)
1934 06 (19.1)
1934 07 (21.2)
1934 08 (22.0)
1934 09 (19.7)
1934 10 (18.6)
1934 11 (19.6)
1934 12 (18.1)

1935 01 (19.9)
1935 02 (23.0)
1935 03 (13.7)
1935 04 (10.9)
1935 05 (13.7)
1935 06 (15.0)
1935 07 (13.5)
1935 08 (15.3)
1935 09 (16.6)
1935 10 (18.8)
1935 11 (20.5)
1935 12 (21.2)

1936 01 (18.5)
1936 02 (15.8)
1936 03 (13.9)
1936 04 (13.0)
1936 05 (12.7)
1936 06 (10.3)
1936 07 (15.0)
1936 08 ( 7.4)
1936 09 ( 1.9)
1936 10 ( 2.0)
1936 11 ( 1.2)
1936 12 ( 0.9)

1937 01 ( 0.3)
1937 02 (- 0.0)
1937 03 (- 4.2)
1937 04 (- 2.1)
1937 05 (-10.4) Recession begins
1937 06 (-10.7)
1937 07 (-14.3)
1937 08 (-11.9)
1937 09 (- 6.0)
1937 10 (- 7.3)
1937 11 (- 9.4)
1937 12 (- 9.6)

1938 01 (- 7.9)
1938 02 (- 8.2)
1938 03 (- 0.4)
1938 04 ( 3.5)
1938 05 (14.5)
1938 06 (17.7) Recession ends

[Noni Mausa]

mmckinl said. in part: ...Unfortunately, Both he but especially Obama's spending plans are too little too late ...

Too LATE? Krugman wasn't in office last time I looked, and Obama has 15 days before he takes the hot seat. (Yes, I have a countdown timer.)

Blame me too, mmckinl. I am not only not in office, I'm not even in the country.

Having snarked my snark, I wonder to myself just how much damage the fallen GOP intends to do in the next 2 years. And why do they apparently hate America so much? They're still at their right wing craziness. I suppose, because without it they have no other leverage at all.

Noni

[Blissex]

«under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.»

And this is ther difficulty: because keynesian stimulus is based on the idea that there is underused capacity, because of insufficient demand.

If demand is low because capacity is low, not because capacity utilization is low, a keynesian stimulus will only result in inflation, imports, or both.

Now there is the argument that the USA economy has been kept going for the past decade by colossal creation of new debt, both internal and external; this means that it has been kept going by imports. Because relatively little of what average USA consumers buy is manufactured in the USA.

Now the current situation is that there is a lot of unused capacity, but of different types and in different places: in the USA there is a lot of underused capacity in services and financial services, and India and China in manufacturing and some services, and in Arabia, Russia etc. in mining/oil extraction.

A large stimulus do demand in the USA will do wonders for reducing unused capacity in secondary industry in China and India and primary industry in Arabia and Russia, but not so sure about services in the USA.

The bigger problem is that capacity in the USA is poorly shaped: there is a wild excess of capacity in "headquarters" services like stockbroking, investment banking, ... targeted to businesses and too little capacity in actual production of things that consumers, as opposed to large businesses, want to buy.

This means that the USA should stimulate investment in productive capacity, not in demand for comsumption.

But that's politically impossible, because the USA elites associate manufacturing with unionization and services with non-union, and investment in creating production jobs as creating a seller market for labourers, so they will try to continue to export capital and jobs to countries with a buyer's market for labor.

That's why everybody wants more of the same, more of the bubble economics that has worked so well for the elites in the past 10-15 years.

[Rusty]

Well, out here in the sticks, it looks like there is plenty of credit available.

What is not available are people willing to borrow. They have "turtled up" and are waiting for some positive news.

Diagnose before prescribing.

As far as government spending, Obama seems to be in the "effective spending" camp as well.

All this should sort out by the end of February.

[Rusty]

From Politico this morning:

Aiming to foster bipartisan support for his record-setting economic stimulus, President-elect Barack Obama plans to propose huge tax cuts for businesses and middle-class workers that will total about 40 percent of the package, or up to $310 billion, congressional officials said.

The revelation is part of an intricately orchestrated rollout of the plan that includes an appearance by Obama on Capitol Hill on Monday and a major speech about the economy later in the week.

Obama plans to ask Congress for a stimulus package of $675 billion to $775 billion, so the planned tax cuts will total about $270 billion to $310 billion, the officials said.

Obama strategists say he wants to get 80 or more votes in the 100-member Senate, and the emphasis on tax cuts is a way to defuse conservative criticism and enlist Republican support.

But officials say the tax cuts will be based on historical and empirical evidence of what works, not ideology. Rather, the targeted tax cuts will be designed to stimulate job growth in the private sector and help middle class families, the officials said.

For families, the tax cuts include the $500 Making Work Pay payroll tax credit Obama proposed during the campaign.

For businesses, the tax cuts would include breaks for small employers and a “new jobs credit.”

Obama is scheduled to meet Monday with congressional leaders and will update them on what economists have told him about the country’s financial outlook, stressing the imperative for action and his eagerness to work with them on the specifics.

[bakho]

Public spending means transfer of wealth. Republican #1 economic policy is to limit or prevent all new social spending and wealth transfer.

[anne]

http://krugman.blogs.nytimes.com/2009/01/05/is-obama-relying-too-much-on-tax-cuts/

January 5, 2009

Is Obama Relying Too Much on Tax Cuts?
By Paul Krugman

I don’t know yet. But news reports this morning * certainly raise questions.

Let’s lay out the basics here. Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.

That said, there’s a problem with a public-investment-only stimulus plan, namely timing. We need stimulus fast, and there’s a limited supply of “shovel-ready” projects that can be started soon enough to deliver an economic boost any time soon. You can bulk up stimulus through other forms of spending, mainly aid to Americans in distress — unemployment benefits, food stamps, etc.. And you can also provide aid to state and local governments so that they don’t have to cut spending — avoiding anti-stimulus is a fast way to achieve net stimulus. But everything I’ve heard says that even with all these things it’s hard to come up with enough spending to provide all the aid the economy needs in 2009.

What this says is that there’s a reasonable economic case for including a significant amount of tax cuts in the package, mainly in year one.

But the numbers being reported — 40 percent of the whole, two-year plan — sound high. And all the news reports say that the high tax-cut share is intended to assuage Republicans; what this presumably means is that this was the message the off-the-record Obamanauts were told to convey.

And that’s bad news.

Look, Republicans are not going to come on board. Make 40% of the package tax cuts, they’ll demand 100%. Then they’ll start the thing about how you can’t cut taxes on people who don’t pay taxes (with only income taxes counting, of course) and demand that the plan focus on the affluent. Then they’ll demand cuts in corporate taxes. And Mitch McConnell is already saying that state and local governments should get loans, not aid — which would undermine that part of the plan, too.

OK, maybe this is just a head fake from the Obama people — they think they can win the PR battle by making bipartisan noises, then accusing the GOP of being obstructionist. But I’m really worried that they’re sending off signals of weakness right from the beginning, and that they’re just going to embolden the opposition.

Like Barney Frank, I’m feeling a bit of post-partisan depression. **

* http://www.nytimes.com/2009/01/05/us/politics/05spend.html

** http://thinkprogress.org/2008/12/22/post-partisan-depression/

[Beezer]

At least the guy is actually going to do something. That by itself is a 180 degree turn in the right direction.

I also agree that much of the policies the past 20 years, as a practical matter, have severely damaged labor wages and employment in general. The policies have misallocated trillions of dollars into various financial management industries at the expense of infrastructure improvements, sustainable energy industries, and environmental improvements.

Part of this policy problem arose because of the "small government" bias and all its attendant ills--like refusing to identify long term trends (here, I'm not even talking about government doing anything, we didn't even bother trying to identify long term trends).

So where we need productive investment right now is in places traditionally under the jurisdiction and guidance of government. Such investment will draw in private investment, if for no other reason than private investment wealth has taken a well deserved shellacking most recently and would welcome a safer place to go--even if it's into the muni bond market to fund public projects.

Meanwhile commodity deflation is giving us a shot of badly needed "oxygen," but that help will disappear rapidly as these projects gear up.

Obama promised middle class tax cuts and he's sticking to that. It will help him politically and, at the same time, offer short term stimulus. Meanwhile, he has to concurrently start all those badly needed projects (and badly needed jobs) that have been neglected for at least 30 years.

Most importantly, he will re-direct our attention to our real priorities as a nation. Labor first. Moral guidance in public life. Identification of long term trends. Educational investment. Sustainability.

Compared to most previous Presidencies, this one faces more, and deeper challenges. I, for one, wish him spectacular success.

[anne]

"Moral guidance in public life."

No question about the coming moral guidance in public life; should we begin with waging a forever war in Afghanistan which Obama has spent months promising? Pakistan? Somalia? Gaza? I am all tingly waiting for the old morality to become the new morality.

[anne]

http://krugman.blogs.nytimes.com/2009/01/05/faith-based-macroeconomics/

January 5, 2009

Faith-Based Macroeconomics
By Paul Krugman

Willem Buiter: *

"My recommendation is to go easy on the fiscal stimulus. The US government is ill-placed financially and fiscally, to engage in short-term fiscal heroics. All they can really do is pray for a stronger-than-expected revival of global demand, without any major stimulus from the US."

OK, I’m not being fair; Willem is a smart guy, and he’s raising concerns about the US long-term position that I also have, although not to the same extent. I don’t have time right now for a full numbers post, but here’s the preview: Willem is saying that America’s “exorbitant privilege”, its ability to borrow more cheaply than it lends, won’t last — which is probably true; but he’s also saying that this would be a devastating blow to the US economy, which I don’t think the numbers support.

But on the stimulus point: even if you’re deeply concerned about America’s future solvency, will going for, say, a $300 billion stimulus rather than an $800 billion stimulus do anything significant to help?

OK, some numbers. Based on BEA data, ** in 2007 the United States had $14.4 trillion in assets abroad, and $16.6 trillion in liabilities. You might think that this would imply that America paid more investment income to foreigners than it received, but in fact the balance on investment income was positive, $89 billion. This was because, according to the data, US assets abroad earned a 5.7% rate of return, while US liabilities paid only 4.4%.

Suppose that the United States lost this return differential, with the rate of return on liabilities rising to match that on assets. This would, by my count, raise US payments to foreigners by $215 billion a year, around 1 1/2 percent of GDP. That’s not a trivial number, but it’s not catastrophic either; it’s roughly the cost of a $50 a barrel rise in the price of oil.

Now, maybe something much more catastrophic will occur, and the United States will start having to pay third-world-type premiums on its debt. But the mere loss of the privileged US position, by itself, would only be a medium-sized shock.

* http://blogs.ft.com/maverecon/2009/01/can-the-us-economy-afford-a-keynesian-stimulus/

** http://www.bea.gov/international/index.htm

[anne]

http://krugman.blogs.nytimes.com/2009/01/05/faith-based-macroeconomics/

Willem Buiter: *

"My recommendation is to go easy on the fiscal stimulus. The US government is ill-placed financially and fiscally, to engage in short-term fiscal heroics. All they can really do is pray for a stronger-than-expected revival of global demand, without any major stimulus from the US."

* http://blogs.ft.com/maverecon/2009/01/can-the-us-economy-afford-a-keynesian-stimulus/

[The old moral guides become the new moral guides, and I am all like about to pray. "Our Mother, who art in heaven hallowed be thy Name...."]

[anne]

"Our Mother, who art in heaven...." Actually I always thought this was a question, but that's another story.

[Markel]

The physician prescribes a transfusion. The witchdoctor suggests bleeding. We must reach out and compromise, so we will IV transfuse through the left arm and bleed through the right. To win the witchdoctor's support, we will also add leeches.

Also, since we have to do something immediately, we'll bleed stat. But prudence requires an exhaustive review of the literature on transfusion going back to 1890 or so.

[Michael Cain]

Note that a federal income tax cut (and depending on the details of how it is implemented) will, in many states, result in a decrease in state income tax revenues. In most states, money in the state budget is not truly fungible; money given by the feds for infrastructure spending will not free up funds to use for other services. The states are already hurting; the new administration should take pains not to put them in a worse situation.

[anne]

http://www.cbpp.org/9-8-08sfp.htm

December 23, 2008

State Budget Problems Worsen
By Elizabeth McNichol and Iris J. Lav

States are facing a great fiscal crisis. At least 44 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion....

says...

"Yet credit remains scarce, and the economy is still in free fall."

During GDI, bank runs could have been slowed considerably by giving all depositors back their money as requested. Since banks loaned out domestic deposits during the era, providing liquidity would have ameliorated the problem (along with the FDIC). Depositors would have felt secure leaving their savings in the bank, since no depositor lost anything.

Banks no longer loan out domestic deposits (as their primary mode of operation), but broker loans for resale overseas. Preventing the modern day equivalent of bank runs today would be a matter of giving overseas purchasers of securitized loans back their money when requested. Providing liquidity to banks does not accomplish this. Foreign holders of securitized loans lose regardless, and refuse to buy any more private sector securitized loans.

[Patrick]

Back of the envelope calculation by a non economist... Corrections welcome.

Say the gap in US aggregate demand is $1 trillion (which is conservative by many measures, I think). Given that household balance sheets in the US are in absolutely terrible condition, chances are that most of a tax cut will simply be thrown into the de-leveraging singularity. Maybe 30% gets spent. So .3x = 10^12 ... hmmm so that means they need a tax cut worth $3.3 trillion to fill the gap in aggregate demand.

That's fiscally responsible?

[John V]

Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute ... Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending... — is needed... The failure of monetary policy in the current crisis shows that Keynes had it right...

So Friedman was wrong on that particular point. Fine. But how does this imply that Keynes was right?

Perhaps both are wrong. I don't follow Krugman's "If not A then automatically D" logic...as if no other POVs exist.

Besides, I think Krugman is blurring over both periods in a way that gives that impression that the problem is exactly the same and the solution is exactly the same. They are not.

Friedman, if I recall, made the point that the problem in the early 30s was collapse of the money supply by 30%. Mind you, I don't think he was trying to say that immediately increasing the money supply would have staved off a deep recession but rather that that was what provoked "The Great DEPRESSION" during a strong recession. That is not exactly the same thing.

Indeed, once money supply began increasing after the early 30s, things to started improve from DEPRESSION to deep recession. At the same time, FDR was providing heavy fiscal stimulus...ramped up to much higher levels than Hoover had been doing.

[vorpal]

More transfusions!!!

We can keep the patient alive for 4 more years!

[anne]

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

October 22, 2008

Economic benefits of a $1.00 stimulus provision from:

Food stamps - $1.73
Extending unemployment insurance - 1.64
Infrastructure spending - 1.59
Aid to states - 1.36
Payroll tax reduction - 1.29
Refundable tax credits - 1.26 *
Non-refundable tax credits - 1.02 *
Alternative minimum tax exemption - 0.48
Dividend and capital gains tax cuts - 0.37 **
Corporate tax cut - 0.30
Income tax cuts - 0.29 **
Accelerated depreciation - 0.27

* With a refundable tax credit all households would receive the same size check regardless of how much they owe in income taxes. A non-refundable tax credit would depend on how much is owed in income taxes.

** President Bush's tax cuts made permanent.

-- Mark Zandi
Moody's

[anne]

http://www.economagic.com/em-cgi/data.exe/fedstl/ambns+1

December 18, 2008

Monetary Base, 1925-1945

1925 5.98
1926 6.07
1927 6.11
1928 6.07
1929 6.05 Hoover
1930 5.88
1931 6.20
1932 6.59
1933 7.02 Roosevelt
1934 8.04
1935 9.39
1936 10.24
1937 9.51
1938 10.68
1939 13.22
1940 16.16
1941 17.29
1942 18.26
1943 22.52
1944 26.96
1945 31.70 Truman

says...

Patrick..."Given that household balance sheets in the US are in absolutely terrible condition, chances are that most of a tax cut will simply be thrown into the de-leveraging singularity."

Even if true, it still allows for eventual re-leveraging by the private sector. Unless the plan is to permanently replace private sector spending with increased public sector spending, the private sector balance sheep must be restored. A middle class tax cut is a good idea, as it helps restore the middle class balance sheet.

[anne]

"Friedman, if I recall, made the point that the problem in the early 30s was collapse of the money supply by 30%."

This is however wrong, for the monetary base declined 3.8% from a high in 1927 to a low in 1930, increasing from there till 1937.

[Alex Tolley]

I don't understand why tax cuts should help any more than giving banks money. Won't those with jobs start to save more to be prudent in case they lose their jobs, and those that lose their jobs won't benefit from a cut?

Isn't the point of a spending stimulus to short circuit the banks and individuals' decisions on whether to spend or save, to ensure that spending actually occurs.

[ECONOMISTA NON GRATA]

Hey Paul:

"..... Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going.....? "

That's your nightmare scenario....? That's my best case scenario.... The reality is that once the narrow self interests and the "quid pro quo" gentle-manly-lady (bipartisan) bargaining begins, well, you know exactly what we're going to get.... As you said, there is little time, if any at all, for persuasion, perhaps coercion may is the answer. Our new President is going to have to ASSERT the extraordinary executive powers that he has inherited from the current President in a way that this nation is not used to. It's a crap shoot buddy, let's just keep our fingers crossed. First we need a very "bold" plan then, we gotta hope it works.

Neither look very promising at the moment......

Best regards,

Econolicious

[pgl]

So will tax cuts have any real bang for the buck? My thoughts on this:

econospeak.blogspot.com/2009/01/obama-goes-for-tax-cuts.html

[Beezer]

Nice information Anne. And the order's right too. Don't let the poor go unfed. Don't let the unemployed go broke. Get labor back to work making useful contributions to the economy. Making contributions that will help industry compete globally from within the United States.

Could it be that common sense and sanity will return too?

[Patrick]

"Unless the plan is to permanently replace private sector spending with increased public sector spending, the private sector balance sheep must be restored. A middle class tax cut is a good idea, as it helps restore the middle class balance sheet."

Certainly household balance sheets need to be repaired, but it's hard to do that if unemployment is very high. Thus, whatever is done, the goal should be to maintain employment and wages. Referring to anne's data on the stimulus provided by tax cuts, its pretty clear tax cuts are a terrible way do this.

[Fred]

Blissex: A large stimulus to demand in the USA will do wonders for reducing unused capacity in secondary industry in China and India and primary industry in Arabia and Russia, but not so sure about services in the USA.

Bingo! Except he forgot the Europeans and Japanese. As long as we allow a massive trade deficit, fiscal stimulus will leak away. Fixing the trade deficit isn't going to be easy, but this is the only way to get out of the slump without running up a massive debt to foreigners. Not that running up a debt is necessarily bad. As long as we warn everyone in advance that we plan to eventually repudiate the debt, there is nothing morally wrong with eventualy repudiation. Also, threatening eventual repudiation might help us avoid running up a debt in the first place.

[anne]

"As long as we warn everyone in advance that we plan to eventually repudiate the debt, there is nothing morally wrong with eventually repudiation."

Astounding; Amendment 14 to the Constitution made it impossible for America to repudiate federal government debt, not hard but impossible without another Constitutional Amendment. A debt default is impossible, but were there a hint of Constitutional default interest rates would become immediately impossibly high creating a Depression almost immediately. However, default is impossible.

[kthomas]

anne, thanks. Fiddeling with Friedman has become so uselessly vogue, lately. You are always there to put it right.

[Chris]

Obama was a very poor choice as an "agent of change" for the very reason that he is too "different." Real change would have had to come from someone acting against type, an impeccable main stream white conservative turned liberal, a new Franklin Roosevelt. Obama (the "Muslim" black and the "socialist") can't be liberal and play against type. As a result he will have to be far more conservative in his moves than the nation needs and this is a sad development.

[kthomas]

Now, now, Chris. Be patient. I've got my own misgivings about Barack, but so far so good. Best to be patient.

[save_the_rustbelt]

What the middle class needs more than tax cuts is a robust job market.

Will the tax cuts help to create a robust job market? Will the tax cuts help to stave off a collapsing job market? Does anyone have any idea?

Stay tuned.

(In a way I hope there is a rebate, I need a bigger snowblower what with the 4 feet of global warming we have had this year.)

[kthomas]

str, very funny. Save your money, buy a shovel. You'll probably need to buy a new air-conditioning unit when spring arrives, then summer.

[Bruce Wilder]

"infrastructure spending is unlikely to be sound stimulus"

Assert. Repeat. Never offer actual argument or evidence.

It's called propaganda and it works.

[Richard H. Serlin]

"The centrist urge to compromise may give too much away."

Yeah! We may pay a big price for again putting too much weight on style and the superficial and personal characteristics, rather than what a politician would actually do. Obama all throughout the campaign, showed that he was very concerned with sounding "new-age" and compromising, at the expense of doing far more good. If you compromise with dangerous extremists you end up with something not very good or very bad -- The half way point between good and extremely bad is very bad. Hillary showed every indication that, like FDR, she would have fought for something very good, and she would have succeeded, again like FDR, with such strong public support for something very good and such strong majorities in congress.

When will we ever learn to vote for how much good they are likely to actually do and not all of these other less important or vastly less important things. I warned about this early in the campaign, for example here, here, and here.

[save_the_rustbelt]

kthomas:

I own several shovels, but my geriatric status makes me allergic to them. I do use them for chopping ice off the sidewalk though. About every third snow storm we have an ice storm, just to keep everything slick.

[Richard H. Serlin]

That first broken link is:

http://richardhserlin.blogspot.com/2008/05/what-really-matters-is-how-much-net.html

[don]

Blissex and Fred - you are focussing on the right problem. If Keynes were alive today, I believe he would write an open letter to Asian governments asking them to spend much of their massive foreign exchange reserves to stimulate demand.
Instead, too little attention is being paid to the foreign sector leakage to Asia and too much pressure is being put on Europe to make up deficient demand. Although the euro is already seriously overvalued, Uncle Ben intervened to the tune of over $600 billion to keep the U.S. dollar down. (I wonder if the other side of these 'temporary' swap agreements will materialize on schedule.) Unfortunately, none of the adjustments came from where they were needed, owing to Asian dollar pegs (including a still undervalued yen, which authorities in Japan have made clear they will not allow adjust further). U.S. business in China has no desire to see change - they pay local wages in artificially depressed Yuan and sell their output at overvalued dollars and euros. The stock answer to those who advocate U.S. pressure for Asian adjustments is that it is 'protectionist,' and look what happened with Smoot-Hawley. But it is not protectionist to insist that countries stop currency interventions.

[anne]

http://www.economagic.com/em-cgi/data.exe/fedstl/ambns+1

January 5, 2009

Monetary Base, 2008

Year - Month - Percent Change Year Over Year

(Billions of dollars)

2008 01 ( 0.9)
2008 02 ( 1.1)
2008 03 ( 1.5) Bear Stearns collapse
2008 04 ( 0.7)
2008 05 ( 1.2)
2008 06 ( 1.4)
2008 07 ( 2.2)
2008 08 ( 2.1)
2008 09 ( 9.9) Lehman Brothers collapse
2008 10 (33.4)
2008 11 (72.7)
2008 12 (97.0)

[kthomas]

Dr Serlin, you suprise me. Politics is the art of seduction and compromise. Where's your inner-Keynesian? Assuming 300Billion in tax cuts for middle-class gets approved, where's the harm....at this point? Basically, why the hell not?

STR, stay warm brother, or come visit us in North. Cali. We're in a drought.

[Fred]

A debt default is impossible, but were there a hint of Constitutional default interest rates would become immediately impossibly high creating a Depression almost immediately.

True repudiation is neither desirable nor nnecessary. The correct solution is a punitive tax on foreign holdings of certain types of US assets: debt certainly, passive holdings of stocks probably, real-estate probably, foreign direct investment hopefully not. If the foreigners want to spend their dollars building American factories, fine. Otherwise, hit them up with huge taxes. I doubt the Supreme court would call this unconstitutional, any more than it would rule that paper currency and inflation are unconstitional, even though the former is on dubious constitutional grounds (Congress granted power to coin money but no mention of paper and certainly no mention of Fed Funds book-entry money) and the latter is a form of debt repudiation.

The notion that interest rates will spike if the foreigners don't buy our bonds is Austrian nonsense. The Fed controls the overnight rate for Fed funds and everything else is then determined by a combination of the Fed rate and inflation expectations. I see no reason why debt repudiation via punitive taxation should cause inflation expectations to jump over 5%. Inflation expectations of more than 2% but less than 5% is just what is needed to avoid Depression mentality setting in.

[mike]

More and more I wonder if Krugman is panicking about his own personal investments more than the global economy. He's becoming increasingly irrational, making bizarre claims that have no basis in fact ("we're in an alternate universe now"), and prescribing economic remedies that simply don't make any sense. You don't have to be an economist to realize that adding more to America's already insane and unsupportable debt can only make the situation worse. A trillion dollar deficit is utterly insane, the most irrational and ridiculous idea I've ever heard. I mean, you can't seriously claim that stimulus program is going to have any significant impact. There have already been several such programs, and all they've done is make things worse, and increased the debt still more.

Keep in mind that he works for two organizations that are entirely financed by corporate investments (the NY Times and Columbia University), and his financial future is tied up with their economic health. So, naturally, he wants to protect his economic future. That's the only explanation I can think of. Maybe I'm missing something.

[mmckinl]

Noni Mausa says...
mmckinl said. in part: ...Unfortunately, Both he but especially Obama's spending plans are too little too late ...

Too LATE? Krugman wasn't in office last time I looked, and Obama has 15 days before he takes the hot seat. (Yes, I have a countdown timer.)

~~~~

I didn't say Krugman was in office ... Obama's Plan is coming to the floor before he takes office, He's in DC now to put a package together with the Dem leadership.

Both Krugman and Obama have discussed options regarding stimulus. Both have plans that will come up short. period.

Here is what I would do: Bank Holiday followed with a Public Central Bank whose job it is is to create all credit and currency and manage such responsibility for the profit of the US Treasury and to limit credit expansion.

For stimulus: Medicare for All. This would save millions of jobs right away by underwriting both the public and private sectors. It is a lot easier, cheaper and quicker to save jobs than it is to create them.

I'm hardly right wing Noni Mausa ...

[Fred]

The stock answer to those who advocate U.S. pressure for Asian adjustments is that it is 'protectionist,' and look what happened with Smoot-Hawley.

The stock answer to the Smoot-Hawley non-argument is to look what happened with the cessation of ALL trade with Europe and Asia starting around 1940. Namely, the US finally exited the Depression. Obviously, the less trade, the better for the economy. An idiotic conclusion, but then those who refer to Smoot-Hawley as the cause of the Depression are idiots so give them what they want.

The cause of the Great Depression was a collapse of aggregate demand and the solution was to pump up aggregate demand via a budget deficit, and this finally happened around 1940. To the extent that Smoot-Hawley caused an additional collage of aggregate demand in the net exporter countries (like the US in the 1930's), all that means is that the budget deficit in these same countries would have to be that much bigger. The US is no longer a net exporter so a collapse in world trade right now would tend to boost the US economy but crush almost everyone else.

[anne]

"The stock answer to the Smoot-Hawley non-argument is to look what happened with the cessation of ALL trade with Europe and Asia starting around 1940. Namely, the US finally exited the Depression. Obviously, the less trade, the better for the economy."

Beyond idiocy, but do keep on.

[Patricia Shannon]

bakho says...

Public spending means transfer of wealth. Republican #1 economic policy is to limit or prevent all new social spending and wealth transfer.

Actually, they want to limit or prevent all wealth transfer from the ultra-rich to anybody else. They want to facilitate wealth transfer in the other direction.

[Patricia Shannon]

It would be helpful if those who say the government shouldn't try to alleviate the financial crisis would say what they think should be done, and what they foresee happening as a result of their prescription. If you know something better, please let us know.

[Fred]

To continue with Smoot-Hawley, note that I'm not suggesting a cessation of world trade is a good thing. But the current unbalanced trade situation is clearly not in the long-run interests of the United States unless we plan on eventually repudiating all the debt we're accumulating now. (Repudiation via either punitive taxation or inflation, that is, since these are the only realistic options.) It is very short-sighted to think that we are benefitting from having other people work hard in factories while we sit around and consume the products of those factories and produce nothing in return.

[Patricia Shannon]

Anne, if you would learn to be a better reader, you wouldn't embarrass yourself so often. At least, I hope you are embarrassed when you make idiotic comments based on reading only part of a comment.

[anne]

"The stock answer to the Smoot-Hawley non-argument is to look what happened with the cessation of ALL trade with Europe and Asia starting around 1940. Namely, the US finally exited the Depression. Obviously, the less trade, the better for the economy."

Beyond ignorance or idiocy, because the ignorance and idiocy are willful, but do keep on since I am much impressed with the persistence.

[Patricia Shannon]

STR
Come to Georgia. It's January, and the temperature is in the 60's. It was already 59F at 8:30 this morning.

[save_the_rustbelt]

kthomas:

I have some distant cousins in your area, maybe it is time for the visit. Damn cold here.

Would be glad to send you several tons of snow, but shipping is a problem. My sump pump is getting tired.

Good luck with the weather.

[save_the_rustbelt]

Patricia:

How gracious, thank you. However we have three wonderful seasons here, and that sorta makes up for the winter. I do like to visit, and especially Atlanta.

[ken melvin]

Patricia - when thinking of right wing libertarians, think of Easter Island.

[Patricia Shannon]

Fred says...

The stock answer to those who advocate U.S. pressure for Asian adjustments is that it is 'protectionist,' and look what happened with Smoot-Hawley.

The stock answer to the Smoot-Hawley non-argument is to look what happened with the cessation of ALL trade with Europe and Asia starting around 1940. Namely, the US finally exited the Depression. Obviously, the less trade, the better for the economy. An idiotic conclusion, but then those who refer to Smoot-Hawley as the cause of the Depression are idiots so give them what they want.

"The stock answer to the Smoot-Hawley non-argument is to look what happened with the cessation of ALL trade with Europe and Asia starting around 1940. Namely, the US finally exited the Depression. Obviously, the less trade, the better for the economy."

Beyond ignorance or idiocy, because the ignorance and idiocy are willful, but do keep on since I am much impressed with the persistence.

Posted by: anne | January 05, 2009 at 11:36 AM

Anne, since you repeated your comment slamming Fred, willfully leaving off his comment about his own opinion on the matter, "An idiotic conclusion", the conclusion is that you are willfully slandering Fred for saying something he did not say, and whose actual opinion you agree with. Is this some initiation ritual you perform? So Fred is now one of the gang.

[Patricia Shannon]

Ken, excellent example.

[anne]

Here was the initial suggested solution:

"The correct solution is a punitive tax on foreign holdings of certain types of US assets: debt certainly, passive holdings of stocks probably, real-estate probably, foreign direct investment hopefully not."

Here is the following argument and solution:

"The stock answer to the Smoot-Hawley non-argument is to look what happened with the cessation of ALL trade with Europe and Asia starting around 1940. Namely, the US finally exited the Depression. Obviously, the less trade, the better for the economy. An idiotic conclusion, but then those who refer to Smoot-Hawley as the cause of the Depression are idiots so give them what they want."

Finally:

"So give them what they want."

I correctly understood the bizarre destructiveness immediately. The idea is to destroy the international trade and investment system.

[anne]

"True repudiation is neither desirable nor necessary. The correct solution is a punitive tax on foreign holdings of certain types of US assets: debt certainly, passive holdings of stocks probably, real-estate probably, foreign direct investment hopefully not. If the foreigners want to spend their dollars building American factories, fine. Otherwise, hit them up with huge taxes."

Again, the idea (calling this an idea is beyond comical) is to destroy international trade and investment.

[calmo]

The sparkel of Markel, a page back...don't pass out on us now, not with those leeches.
Another infusion please...

[bruce]

1940 and 1941 were good years for US trade with 1941 being each being consecutively the strongest year since 1929. There would be a drop during the war years of 1942 to 1945 but even these years were much above the trade levels of the early to mid 30's. See http://research.stlouisfed.org/fred2/series/EXPGSA?cid=108.

[GloomBoom]

"Will Congress do what's needed to stop the economy's downward spiral?"

What a joke. There is nothing they can do that won't make the problem worse. Why is it that Congress thinks they always have to be the hero? If they would stay out of the way, we might get somewhere.

[bruce]

Sorry for the typo:
First sentence should read "1940 and 1941 were good years for US trade with each being consecutively the strongest year since 1929."

[anne]

Bruce:

"1940 and 1941 were good years for US trade with 1941 each being consecutively the strongest year since 1929. There would be a drop during the war years of 1942 to 1945 but even these years were much above the trade levels of the early to mid 30's."

Thank you, here are the numbers:

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2006&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=no#Mid

[calmo]

Didn't we just get clouted with "ebracing risk"...our reluctance to just put out our hand to that friendly dog (and have our arm bitten off by the Rotweiler!) and take a chance after due diligence (the full hockey uniform...and stick)...that would instill the Old Confidence of yesterday, when we could hire another couple dozen illegals for those "jobs Americans don't like to do" (I feel there is money to be made in my edition of 'Bush Legacies from Hell'.) and plow more equity into our Ginormous Pile?

Well, dang it all if it isn't time to Embrace this Depression...rather than fight it.
I know, sounds counter-intuitive, but seriously...let's just faint and start allova...those rich people will be glad to start ova as long as we are not foamin at-the-mouth...and pose as children ready for the next round and their instruction...so helpful.
Well?
Ok, maybe a little early just yet.

[Fred]

Patricia: I have long been part of the "gang". I just haven't said anything recently to tick anne off.

My impression is that anne (along with paine) takes the view that because the US is very rich, we have a moral duty to help the third world rise from poverty, and if running up a big trade deficit helps accomplish that, then so be it. The first part of the preceding sentence I tend to agree with, but not the second. In fact, I think it quite immoral for rich Americans to be consuming the products of the hard-working and comparitively poor Chinese, while providing nothing in return but a bunch of IOUs. The United States is a world leader in environmental technology, and China is a world leader in pollution--we have here a trade match made in heaven. Let the Chinese give us plastic doo-dads and we'll sell them high-tech scrubbers for their smokestacks. And so on.

When the government runs up a massive debt and the debt ends up being owned by a few wealthy people here in the United States, then that is no problem. We just raise taxes sometime down the road to reduce the debt. There is no passing the burden from one generation to the next with domestically owned debt, in other words. But when the debt is owned by foreigners, then what is happening is that the current generation of Americans is being allowed to consume too much and work too little, and the price will be paid by the next generation. Again, I see this as morally wrong.

Consider our trade deficit with the Japanese and Europeans. What is happening is that their current generation of workers is preparing for their retirement by accumulating dollars (they are saving, in other words). The current generation of Americans benefits from consuming more than they produce, while the next generation of American workers will be doubly burdened--paying both for American retirees as well as Japanese and European retirees.

Finally, we have the oil exporters. This trade deficit is the least troublesome of the three, since the oil exporters simply can't spend the money gushing in when oil prices are high without wasting it. So we'll probably just have to live with that for a while longer. Though again, current Americans (workers and retirees) are overconsuming at the expense of future American workers.

[kthomas]

calmo, you are definitely the lighter, humorus side of any Recession/Depression. A modern day inciter, too. God favors you.

[anne]

Fred:

"When the government runs up a massive debt and the debt ends up being owned by a few wealthy people here in the United States, then that is no problem. We just raise taxes sometime down the road to reduce the debt. There is no passing the burden from one generation to the next with domestically owned debt, in other words. But when the debt is owned by foreigners, then what is happening is that the current generation of Americans is being allowed to consume too much and work too little, and the price will be paid by the next generation. Again, I see this as morally wrong."

The problems of domestic and international debt can be reasonably argued, but arguing concern especially with international debt is different than and does not imply the earlier conclusions effectively ending trade and international investment. Understanding the difference is really important.

[anne]

http://books.google.com/books?id=GcmvijkDrEcC&pg=PA93&lpg=PA93&dq=The+Smoot+Hawley+tariff+raised+the+average+tax+on+imports+by+about+40+percent,+but+before+the+tariff+imports+were+only+about+6+percent+of+gross+national+product.+krugman&source=web&ots=S6Yrbhc9Gb&sig=IEd_Wz_O8NHyLzSuL0jE1rpkf7Q&hl=en&sa=X&oi=book_result&resnum=1&ct=result

1994

The Supply-Siders

The Smoot Hawley tariff * raised the average tax on imports by about 40 percent, but before the tariff imports were only about 6 percent of gross national product. In other words, the effective tax increase was only about 2.5 percent. Yet employment dropped by one third from 1929 to 1933. Conventional economists find a response this large incredible. But the supply-siders have no doubt about the correctness of the diagnosis—after all, what else could it have been?

Peddling Prosperity
Economic Sense and Nonsense in an Age of Diminished Expectations

-- Paul Krugman

* June 17, 1930

[anne]

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2006&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=no#Mid

January 5, 2009

Percent of Real Gross Domestic Product of Imports

2007 (17.1%)

An increase in tariffs of Smoot-Hawley dimensions would be an effective tax increase of 6.8%.

[anne]

Actually the tax effect would be larger since I did not use GNP as Krugman, but GDP for convenience. I would estimate the tax effect of another dramatic tariff increase would be between 7.5% and 8.0% and the effect of the tax would be regressive.

[Mr. Econotarian]

"The failure of monetary policy in the current crisis shows that Keynes had it right."

I don't get what Krugman means here. First of all, the recovery from the Depression only began once FDR did the gold clause ban and went off the gold standard in whole-hog devaluation.

Secondly, FDR did not spend that much money until WWII. He did set up a lot of cartels of industry and labor (which were probably economically damaging), scared people with collectivist talk, and put some of the long-term unemployed into quasi-non-productive jobs. But actually a lot of people remained unemployed until WWII, despite the New Deal.

Full recovery from the Depression did not occur until after WWII, when FDR was dead and American businesspeople were sure that communism was "the new enemy" and wasn't going to happen in the US.

WWII certainly reduced US long-term employment, at the cost of essentially forcing millions into work against their will, wage and price controlling everything, and destroying Europe's manufacturing base. I'm sure we could do that again, but probably not such a good idea.

[anne]

Where was the whole-hog devaluation, I must have missed that?

http://www.measuringworth.org/datasets/exchangeglobal/result.php?year_source=1900&year_result=2007&countryE%5B%5D=United+Kingdom

December 18, 2008

Price of an American Dollar in British Pounds, 1929-1941

Pounds

1929 ( 0.21) Hoover

1930 ( 0.21)
1931 ( 0.22)
1932 ( 0.29)
1933 ( 0.24) Roosevelt
1934 ( 0.20)

1935 ( 0.20)
1936 ( 0.20)
1937 ( 0.20)
1938 ( 0.20)
1939 ( 0.23)

1940 ( 0.26)
1941 ( 0.25)

[anne]

"He did set up a lot of cartels of industry and labor (which were probably economically damaging), scared people with collectivist talk, and put some of the long-term unemployed into quasi-non-productive jobs. But actually a lot of people remained unemployed until WWII, despite the New Deal."

Care to precisely reference this, all of which Krugman has repeatedly shown to be nonsense?

Me, I get 65.% unemployment by 1941, with 3.5 million jobs having been created by New Deal programs productive enough to have given us the jobs building of and maintaining Tennessee Valley Authority among other such productive jobs. Actually, the New Deal years were wildly productive by the way and allowed for productivity increases for decades to follow.

[Chris]

Now, now, Chris. Be patient. I've got my own misgivings about Barack, but so far so good. Best to be patient.

If you don't make your bold moves right away, but hestiate and prevaricate, very soon your initiatives get eaten away by entrenched interests and opponents. The next President needs to forge full speed ahead, but Obama, given his baggage, simply cannot do this whether he wants to or not. He has to placate his enemies first, show that he isn't a "socialist" or a "Muslim", etc., etc. And as a result his opponents will end up in the driver's seat.

[Fred]

I would estimate the tax effect of another dramatic tariff increase would be between 7.5% and 8.0% and the effect of the tax would be regressive.

You're assuming the tariff is used to reduce the budget deficit, rather than keeping the budget deficit unchanged. If tariffs provide revenue and we keep the budget deficit unchanged, then other taxes must be cut, and this can compensate for any regressive effect of the tariffs.

Tariffs do indeed mean a short-term reduction in American living standards, at least from the perspective that consumption is the only source of utility in life and jobs are always a source of disutility. To get an idea of what a tariff will do, consider the Great Oil Tax of spring/summer of 2008, brought to us courtesy of the oil exporters working in collusion with speculators, which caused the beginnings of a boom in alternative energy production and creation of jobs, but a decline in consumption activities. The Great Oil Tax was NOT compensated for by cuts in other taxes, and hence was contractionary--there should have been tax cuts back in early 2008 to compensate for the Great Oil Tax. This wouldn't have stopped the current bust entirely, since the bust is primarily due to unrelated credit issues, but it would have cushioned the bust somewhat.

As I see it, the United States does not have a problem with consumption and hasn't for decades--no one is starving here. The problem is a lack of jobs and a massive across-the-board tariff can be part of a solution to that problem. Devaluation is effectively an across-the-board tariff, and devaluation is exactly what the current Fed policies will accomplish, assuming the rest of the world does not follow through with monetary and fiscal stimulus equal to that of the Fed.

[paine]

don
forget forex fiddles for now

the guns need to be trained on domestic solutions
to our ramapaging job slaughter

this spells fiscal thrusting effective demand
leakages be damned
pour it on till full employment is restored
and
shrewd class politics recommends to obama

hack wage earners payroll witholdings first...and big time

a trillion dollar give back now !!!!

[anne]

"The problem is a lack of jobs and a massive across-the-board tariff can be part of a solution to that problem.

Complete nonsense, and fortunately a complete fantasy.

[B Feng]

Of course tax cuts never have to be justified. That is because we live in America instead of a communist nation. What a person produces belongs to him, not the State. This is a government of the people, by the people, and for the people. The government works for us, not us for the government.

That means the government has to justify every cent it spends, it produces nothing, we agree to give a certain amount collectively because government happens to be more efficient at providing certain services. We agree to fund the government, the government is not entitled to anything beyond what the people agree to give. All the powers of the government come from the people, the government has no fundamental rights separate from what is given by us.

So anything beyond what we determine the government needs to function belongs to those who've earned it. A person's earnings doesn't belong to the government so of course he doesn't have to justify keeping his own wages or earnings.

Tax cuts NEVER have to be justified because the government doesn't own your wages, income, or wealth. However ALL TAXES MUST BE JUSTIFIED because it's OUR money and we deserve an accounting of how OUR money is spent. The question of IS IT WORTH THE COST has to be asked of every program and every item the government spends on our behalf. If the answer is no, then the government has excess funds that should be returned to taxpayers.

Wow, I can't believe this has to be explained. Do you have to justify why you get to keep your income to the gas company? Government is just another service, it has monopoly power and we can't opt out or decide not to buy their services. That's why special attention has to be paid to government spending and government must justify every penny it spends.

[anne]

Comparing the effective tax increase of a Smoot-Hawley tariff in 1929 and 2007:

http://books.google.com/books?id=GcmvijkDrEcC&pg=PA93&lpg=PA93&dq=The+Smoot+Hawley+tariff+raised+the+average+tax+on+imports+by+about+40+percent,+but+before+the+tariff+imports+were+only+about+6+percent+of+gross+national+product.+krugman&source=web&ots=S6Yrbhc9Gb&sig=IEd_Wz_O8NHyLzSuL0jE1rpkf7Q&hl=en&sa=X&oi=book_result&resnum=1&ct=result

1994

The Supply-Siders

The Smoot-Hawley tariff * raised the average tax on imports by about 40 percent, but before the tariff imports were only about 5.1 percent of gross domestic product. In other words, the effective tax increase was only about 2 percent. Yet employment dropped by one third from 1929 to 1933. Conventional economists find a response this large incredible. But the supply-siders have no doubt about the correctness of the diagnosis—after all, what else could it have been?

Peddling Prosperity
Economic Sense and Nonsense in an Age of Diminished Expectations

-- Paul Krugman

* June 17, 1930

[anne]

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2006&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=no#Mid

Effective Tax Increase, 1929 & 2007

(Imports / Gross domestic product) x Tariff increase = Effective tax increase

1929

44.3 / 865.2 = .05 x 0.4 = 0.02

2007

1,972.4 / 11,523.9 = .17 x 0.4 = 0.07

[A 2% effective tax increase in 1929, would be a 7% tax increase in 2007.]

[anne]

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2006&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=no#Mid

January 5, 2009

Gross Domestic Product, Exports, Imports, 1929-1945

(Billions of chained 2000 dollars)

Gross domestic product

1929 865.2 Hoover

1930 790.7
1931 739.9
1932 643.7
1933 635.5 Roosevelt
1934 704.2

1935 766.9
1936 866.6
1937 911.1
1938 879.7
1939 950.7

1940 1034.1
1941 1211.1
1942 1435.4
1943 1670.9
1944 1806.5

1945 1786.3 Truman

Exports

1929 34.9 Hoover

1930 28.9
1931 24.0
1932 18.8
1933 18.9 Roosevelt
1934 21.0

1935 22.2
1936 23.3
1937 29.3
1938 29.0
1939 30.6

1940 34.8
1941 35.7
1942 23.6
1943 19.9
1944 21.4

1945 29.9 Truman

Imports

1929 44.3 Hoover

1930 38.5
1931 33.6
1932 27.9
1933 29.1 Roosevelt
1934 29.7

1935 38.9
1936 38.4
1937 43.3
1938 33.6
1939 35.3

1940 36.2
1941 44.5
1942 40.4
1943 50.9
1944 53.3

1945 56.7 Truman

[anne]

There was a decline in exports during the World War, though exports remained above the Depression lows but any prospective employment effect was of no consequence because of the domestic stimulus through the war years. Imports expanded through the war years.

The wild conservative history of the New Deal years from exchange rate to employment to productivity suppositions on, has long been false and purposely so. the idea being to discredit the New Deal legacy of social-economic values and to undermine Keynesian economics and especially a Keynesian economic approach to dealing with economic crises. Every line of the standard wild conservative (supposedly "contrarian") history of the New Deal is false.

[mrrunangun]

Excess demand resulting in excessive debt accumulation is what caused the American problem to get to the current unmanageable scale. Further fueling demand without protecting production makes no sense if the recovery of the American economy is the primary goal of policy. There is as yet no indication that the Asian export economies are willing to accomodate our need for revaluation of their currencies. That wish is unlikely to be fulfilled. Why should they revalue when it looks like American stimulus policy will work to their advantage more strongly if their currencies remain undervalued? They, especially China, have serious domestic economic/political problems best managed by counting on the Americans to further indulge themselves. Debt liquidation is needed. Political policy should be directed at strengthening the social safety net while debt liquidation proceeds and assisting American industrial revival.