Paul Krugman: The Obama Gap

Is the incoming administration's proposed economic recovery plan large enough to get the job done?:

The Obama Gap, by Paul Krugman, Commentary, NY Times: “I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.”

So declared President-elect Barack Obama on Thursday... He’s right. This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.

But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering ... falls well short of what’s needed. ...

Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come. Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. ...

[T]he C.B.O. says ... that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more... — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect... Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. ... Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

Why isn’t Mr. Obama trying to do more?

Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing... But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately ... about the consequences of failing to act — there’s a real risk that we’ll slide into a prolonged, Japanese-style deflationary trap — but the consequences of failing to act adequately aren’t much better.

Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects... But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.

Or is the plan being limited by political caution? Press reports ... indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark. There also have been suggestions that the plan’s inclusion of large business tax cuts, which ... will do little for the economy, is an attempt to win Republican votes...

Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.

Comments

says...

For a contrast, read Brooks' article :-P.

[Winslow R.]

Krugman "There are dangers associated with large-scale government borrowing..."

What is going on? Paul will not mention the one who must not be named?

[Winslow R.]

It is important to state the two dangers on the extremes so people can make an informed choice of where we should aim

-deflation, oversupply, war, chaos

vs.

-inflation, lack of sufficient resources, war, chaos

We are likely to be headed more towards deflation, suboptimal growth.

[Markel]

Obama seems to care more about politics than economics. He's badly miscalculating on both. He gets only one shot at fixing the economy, as best as it can be, or he's one and done.

Increasingly, Obama reminds me of a senior VP in a corporation that suffers from internally focused management. He talks like he just came back from an offsite where the senior team spent the weekend building rafts together and giving each other PowerPoint presentations. He has the outlook of a man who rose in the world through promotion, recognized for excellence by an insider elite whose insular views he now shares.

[Jon Claerbout]

Interest-free loans to taxpayers could be larger, quicker, would be seen as fairer, and would be fairer.

[ken melvin]

We needed a wonk.

[mmckinl]

It's DLC politics. Look who he has surrounded himself with: Rubes, I mean Rubin sycophants ...

Where did this business tax cut come from anyway. Let the Republicans bring it up. Why do your adversaries' business for them? Or was it that they knew most of that business tax cut would never be claimed because very few businesses will be hiring anytime soon ? Too clever by half.

Krugman is only being polite with the obvious... Obama is not up to the job. The situation requires bold measures for enormous problems and incrementalism will not get the job done, and, with failure, only lose more trust, and make the situation worse down the road.

[calmo]

Markel snorkels [inciting me]:Increasingly, Obama reminds me of a senior VP in a corporation that suffers from internally focused management. [only VP...like the Car Rental #2 tryin harder?...do you prefer Harriet?...luckily I have no corporate experience.] He talks like he just came back from an offsite where the senior team spent the weekend building rafts together and giving each other PowerPoint presentations. [so instead he coulda announced he was thru with that whole bunch of assholes!!] He has the outlook of a man who rose in the world through promotion, recognized for excellence by an insider elite whose insular views he now shares.[hard to see this complaint is about Obama and not American political culture...you figure he shoulda surprised us with a Tibetan Monk costume?]
I'm totally relieved by the mere fact that this man can...speak. Such a small little thing, but after 8 years of embarrassment and worse of BushCo, I'm a happy customer so far: he does not give me the impression that he is pre-wired (and antennaed!) by his handlers, that although his views are still far to the right of mine, those views are his, not ones he is tryin to learn from cue cards.

[lark]

My big question about Obama is whether his approach of meeting his opponents in the middle is going to work with this crisis.

His opponents dug us the hole we are in. It is their free market ideology that let things get so out of whack. Why should we trust their judgment now? Why should Obama take their policy preferences into account?

I say no - not because they lost, but because they've been wrong, wrong, wrong.

[bob mcmanus]

Oh, I think there are hopeful possibilities

1) Obama lets Congress add everything they can dream up. some bad some very good, and the bill reaches 1-1.5T by the time it reaches his desk. He signs it, and

2) Moves toward a very large healthcare bill in Feb-March, and then

3) Lets the regular budget go loose

We could still end up with 2-3 trillion this year

But I never did think he was adequate to the job. Everybody else was worse. Bad luck, that.

[bob mcmanus]

Very bad luck really, because after 1 or 2 weak Obama terms, we will get a Republican. After a weak Clinton term, we might have gotten...Obama.

So my guess is not ten bad years, but 25.

[lonesome moderate]

Reading this column was scary; then I read the Brooks column suggested above, and together the columns are very scary, because they both appear to be right.

It is probably true, as Krugman says, that from an economic perspective what Obama is trying to do is much too cautious and politically compromised and therefore unlikely to give the economy anything like the help it despearately needs. But it's also true, as Brooks says, that from a political and administrative perspective it is incredibly audacious and arrogant and even somewhat naive. There's almost no chance that he'll get anything like what he wants out of Congress. And even if he did, can we really expect a brand new team to get a public works program of this scale up and running efficiently within a few months? That's apparently what they'll have to do to prevent disaster. As bad as things are now, it seems inevitable that they will be much worse at the end of the year.

[Patrick]

Patience.

Let the just awful news sink in. The unemployment numbers are going to be just awful. As the terrible earnings reality is parsed, the current bear market rally is going to run out of steam and reverse in a vicious way. Lots of smart people see the S&P headed to the 650-700 range. Regional banks are going to start going bust in big number (see CalculatedRisk), and the general panic will start to set in again.

This will be the cue to go Rove. Once it's obvious that the US is headed for >10% unemployment and the financial system is heading for another myocardial infarction, that will be the time to strike. Hit congress with universal health care, nationalize of the banking system, and pump-up the fiscal response by a couple o' trillion. All in the same week. Anyone opposing it is vilified as unpatriotic econo-terrorist plotting to starve destroy America and starve your children so Wall St. fat cats can drive Maseratis and bathe in Bollinger.

The revenge will be complete!

BWAHAHAHAHAHA

Or not.

[calmo]

Reading bob mcm vs barack ob
is like reading a chess match:

1. Ob moves into WH [!]
2. Mcm moves to lawn out front [?]
3. Ob signs ass off: $1-1.5T []
4. Mcm blinks..considers healthcare...farts. [?]
5. Mcm concedes...downed by evil winds [!]

Ok, I refuse to transcribe 2nd post bob.
This man deserves more of your closer attention and less of your "Everybody else was worse. Bad luck, that."
He wasn't born yesterday.
He taught law school before he entered politics and he surprised everyone, especially the Clintons, with an amazing ground-up campaign.
Capable he is...if not perfectly aligned with our particular political views.
Get over Hillary.

[Alan]

Mr Krugman seems to think that you can spend and consume your way to prosperity. But isn't that what got us into this mess in the first place ?

[Bruce Wilder]

Alan: "Mr Krugman seems to think that you can spend and consume your way to prosperity. But isn't that what got us into this mess in the first place"

Not exactly.

Pointless and extremely expensive war. Not taxing or regulating the really rich Republicans. These had something to do with it.

[calmo]

Howdy Alan, no Krugman is not so seeming to think like that...like us....like you. He's almost as smart as the Swedes think he is: dynomite smart!
He's worried that there will be this angry mob with nothing better to do than express their dissatisfaction...no, not like Mick sings.
He knows that there has to be a huge gov Step-in...to the hole opening up as we type! where private enterprise once was, giving jobs and respect and civility and even community?...and where most of us hope, that private enterprise will once more return...after the reparations are made.
Time healing all wounds...it used to B.
So...the Krugman response is short term...practical. Understandable.
Reasonable...appropriate.
Not the time to be doctrinaire and...a brilliant academic.

[reason]

Krugman will never be popular with politicians, he is a truth teller (at least he tells the truth as he sees it, and he sees better than most). Politics is about conning your opponents to sign on to something they don't like. Truth tellers aren't wanted.

[Linda]

Reading all this was pretty depressing (no pun intended), which made the smiles even more welcome. Thanks, Patrick and Calmo!

"Hit congress with universal health care, nationalize of the banking system, and pump-up the fiscal response by a couple o' trillion. All in the same week. Anyone opposing it is vilified as unpatriotic econo-terrorist plotting to starve destroy America and starve your children so Wall St. fat cats can drive Maseratis and bathe in Bollinger.

The revenge will be complete!

BWAHAHAHAHAHA

I love it! If only....

[Chris]

It is difficult to be bold when you are carrying as much baggage as Obama. He's black, and let's be honest:that puts off too many Americans, he is by many thought to be some kind of "Muslim", and others think he is a "socialist". FDR he isn't. And we need someone with FDR charisma to push through what is needed.

[Beezer]

First, he's going to strap down Wall Street, and downsize its political clout, by restoring discarded regs that weren't broken to begin with. A political and practical no-brainer.

As for the stimulus, as the news gets worse (the market's not going to help here, BTW, it's bottoming) Obama's remarkable communication skills will pressure Congress to step up to the plate.

My only criticism so far is that he's not been positive enough. He's not talked enough of values and he should. This is a practical matter because values are shared across almost all income/ethnic/political divisions.

Positive means he describes a future. Right now, it appears as though he's a little overwhelmed by the challenges. It's true that once you take this office, your understanding changes. You simple get told more than you expected, about more than you expected.

Give him time. He's got all the tools in abundance. And he does understand the urgency (how about Cali. budget deficit for urgency).

This stimulus package is going up, not down. And Congress will go along. We do govt by attachment. Attach, attach, attach.

[Rusty]

Would the law of diminishing returns apply to a stimulus package? Is there a point at which additional stimulus does not stimulate?

Is this just one giant lab experiment?

[ken melvin]

I'm declaring war and letting the battle lines be drawn. When I hear some ignorant arsehole congressscritter from TX, AL, LA, GA, MS, OK, ... on the floor braying I say take'm out's the only way. These are Newt's newts. They are dumb as dirt and twice as ignorant. If you did reach a compromise, what would you have?

[Jimbo]

"Mr Krugman seems to think that you can spend and consume your way to prosperity"

No, he thinks that you can produce your way to prosperity - but that producers won't produce anything unless they think they can sell it. Consumption and production have to go hand in hand.

Don't fall into the trap of a fallacy of composition: an individual can save (since "savings" is the accumulation of financial claims against the rest of society), an entire society cannot.

[bp]

the barter task force concluded
the confidence gap is denuded

with underground markets of in-kind goods
the soupline exchange, where anything goes

one kidney available for transplant, seeks nice bungalow
obo - doublewide, single, or a really big offroad

prices don't matter, can't deflate this
the George Carlin More Stuff Market

a stimulus for the masses
with high propensity to consume

three of these and one of those for this and two of that
at least a three-point multiplier, specially with no tax

[ken melvin]

The nation's economy is much more like running a business that working for wages. We can't save our way out of this no more than a business can save it way to profitability. Nothing passive about either an economy or a business.

[SNG]

Some many of the comments above represent ideas and suggestions by people who clearly "get it". I hope they can gain traction - YESTERDAY!

This is truly an EMERGENCY; and, "BUSINESS AS USUAL" will have a very different effect in our present situation.

SNG

says...

http://www.bls.gov/webapps/legacy/cesbtab1.htm
http://www.bls.gov/webapps/legacy/cpsatab1.htm

The Bush experience in monthly job creation has been,

37,850 x 96 months = 3.6 million jobs created in all so far;

the Clinton experience was,

240,300 x 96 = 23.1 million jobs created in 96 months;

enough job creation to keep up with civilian work force growth would have meant,

140,600 x 96 = 13.5 million jobs created in 96 months.

Bush = 3.63 million jobs created
Clinton = 23.07 million jobs

Bush = 37,850 jobs created monthly
Clinton = 240,300 jobs monthly

[anne]

There we have the job creation experience of the Bush years, Clinton years and what would have been necessary job creation simply to keep up with growth of the civilian labor force for the last 96 months. The experience of the Bush Presidency was job creation falling more than 100,000 short each month, which means falling 9.9 million jobs short of necessary simply to keep up with labor force growth over 8 years.

This is the worst extended labor market experience since 1945.

[Sorry about forgetting my name, somehow, above.]

[anne]

http://www.nytimes.com/2009/01/10/business/economy/10jobs.html

January 10, 2009

Unemployment Hits 7.2%, a 15-Year High: U.S. Loses 524,000 Jobs in December
By LOUIS UCHITELLE

December’s job losses brought the total for 2008 to 2.6 million, spanning a recession that started 12 months ago.

[save_the_rustbelt]

What will work better?

1) a stimulus plan with a few very large programs

2) a stimulus plan with many programs and parts

We seem to be drifting toward #2

[Lars]

"I'm totally relieved by the mere fact that this man can...speak."

Obama speaks well when reading a script or teleprompter, but stumbles when asked unexpected questions. He seems too robotic and rehearsed leaving me to wonder if his eloquent words and thoughts are really someone else's. No big deal if he can think and take effective actions. Time will tell, but Krugman may have similar doubts.

[anne]

The experience of the New Deal suggests strongly that a public works stimulus program will be effective, for even the relatively limited deficit spending of the New Deal focusing on public works added 3.5 millions jobs, markedly cut unemployment from the beginning of the Roosevelt Presidency, spurred industrial production from the beginning, and spurred productivity with effects lasting decades to come.

While the New Deal consisted of relatively few programs, and the programs were always experimental, within the programs there was always a branching of projects so that effects branched from the few or core programs.

[lonesome moderate]

Rusty:Would the law of diminishing returns apply to a stimulus package? Is there a point at which additional stimulus does not stimulate?

It seems to me that that point will be reached when short term T-Bill rates rise above, say 1%. The private sector is lurching from recession to depression because investors are, understandably, no longer willing to put their money into anything that could turn out to be a scam. Nowadays that means almost anything but government debt.

The point of the stimulus package is, as I understand it, to find something economically productive to do with all that money that's being stuffed into the government mattress.

[anne]

A stimulus plan lacking in core focus, as opposed to the New Deal sort of focus, could be quite problematic. Simply think of the the rural programming in the New Deal to understand how rural life, life involving a far larger relative population than now, was revolutionized with Roosevelt to understand the need for focus.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105628

November, 2003

The Most Technologically Progressive Decade of the Century
By Alexander J. Field

Abstract:

There is now an emerging consensus that over the course of U.S. economic history, multifactor productivity grew fastest over a broad plateau between 1905 and 1966, and within that period, in the two decades following 1929. This paper argues that the bulk of the achieved productivity levels in 1948 had already been attained before full scale war mobilization in 1942. It was not principally the war that laid the foundation for postwar prosperity. It was technological progress across a broad frontier of the American economy during the 1930s.

[reason]

Rusty
yes of course there is a law of diminishing with a rescue package - but it only bites when it really works.
Yes it is one giant lab experiment, but so is life. We haven't been here before, but individual parts of the world economy have seen something similar. And we know palliatives work to some extent, but noone has excaped pain free yet.

[anne]

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=259399

May, 1975

Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941
By Michael R. Darby

Abstract:

A major conceptual error in the standard Bureau of Labor Statistics and Lebergott unemployment estimates for 1933-1943 is reported. * Emergency workers (employees of federal contracyclical programs such as WPA) were counted as unemployed on a normal-jobs-to-be-created instead of job-seekers unemployment definition. For 1934-1941, the corrected unemployment levels are reduced by two to three-and-a half million people and the rates by 4 to 7 percentage points. The corrected data show strong movement toward the natural unemployment rate after 1933 and are very well explained by an anticipations-search model using annual full-time earnings.

* http://www.amazon.com/Manpower-economic-growth-American-Economics/dp/B0006D6B0E/ref=sr_1_3?ie=UTF8&s=books&qid=1227561179&sr=1-3

[reason]

Jimbo
Don't fall into the trap of a fallacy of composition: an individual can save (since "savings" is the accumulation of financial claims against the rest of society), an entire society cannot.
It depends what you mean by "entire Society" doesn't it. A whole country can save if it "accumulation of financial claims" against foreigners. In fact this is a large part of the source of the problem.

[reason]

But Rusty you are old enough and canny enough to know all that, why do I need to answer those obvious questions for you?

[lonesome moderate]

SNG: Some many of the comments above represent ideas and suggestions by people who clearly "get it". I hope they can gain traction - YESTERDAY!

Unfortunately blog comment boards tend to be self-selecting communities; reader comments on the more mainstream finance boards don't have nearly as many people who seem to me to "get it".

[lonesome moderate]

Alan: "Mr Krugman seems to think that you can spend and consume your way to prosperity."

You can't spend your way to prosperity, but you can spend your way from depression into recession, at least for a while. When credit is not flowing because of lack of trust, the government will be the nation's banker until trust is restored. The only question is, what should the government be doing with all that money coming in?

[anne]

Here then are the astonishing seasonally adjusted job creation figures for the Bush Presidency and comparison:

http://www.bls.gov/webapps/legacy/cesbtab1.htm
http://www.bls.gov/webapps/legacy/cpsatab1.htm

The Bush experience in monthly job creation has been,

31,300 x 96 months = 3.0 million jobs created in all;

the Clinton experience was,

240,300 x 96 = 23.1 million jobs created in 96 months;

enough job creation to keep up with civilian work force growth would have meant,

140,600 x 96 = 13.5 million jobs created in 96 months.

Bush = 3.00 million jobs created
Clinton = 23.07 million jobs

Bush = 31,292 jobs created monthly
Clinton = 240,300 jobs monthly

[Denis Drew]

On page 195, of The Price of Loyalty:
"We are looking at every [stimulus] instrument that's ever been used and some that haven't been... ...O'Neill said. Among the options on the list, he said, are INCREASES IN THE MINIMUM WAGE, a "supplement" for people who pay no income taxes, and a reduction in the capital gains tax." (my emphasis)

This was Bush's first Treasury secretary Paul O'Neill on how to avoid recession, post the 9/11 attack.

Doubling the minimum wage would toss 350 billion the way of bottom 40 percentile earners -- those now earning below the $500/wk.

Since Michael Harrington wrote "The Other America", in 1968, 25% of our labor force has slipped below the minimum wage of that era -- though average income doubled since. To me that is a much more significant emergency than looming 9% unemployment.

Minimum wagers wont get the whole raise in one jump. Will they get it in time to help ward off recession? Raise the incomes of those above 40 percentile by realistic unionization -- which can only mean sector-wide labor contracts, mandated by law -- and enough will get enough to help ward off recession.

As Ezra Kline recently pointed out, the card check may only produce unions that employers ignore, that employers refuse to bargain with. Under sector-wide: no contract, no legal work (at least it can be written that way). That should imply no scabs: the WHOLE AND ENTIRE point of unionizing is to force the employer to bargain ONLY with those employed now, not with everyone passing by on the street as before unionizing -- not just to make bargaining with everybody who passes by on the street inconvenient.

If as many as 90% of our workforce is EXPECTING phased in raises (proportionately more the lower the current wages) over the next couple or three years, consumer confidence should be enhanced as much as anything can enhance it.

[anne]

Looking to the seasonally adjusted figures then, we have come through 8 years missing the creation of 10.5 million jobs needed to keep up with civilian labor force growth, while the difference in job creation during the Bush and Clinton Presidencies comes to 20.1 million. The employment problem will surely deteriorate from here, unlike 1933 when there was steady improvement from the beginning of the Roosevelt Presidency and the immediate and successful efforts at creating jobs.

There is a reason Paul Krugman is so worried, and so critical.

[ken melvin]

And, the winner and new champion is GWB, with 500,000 jobs lost in December.

[Julio]

anne,

"A stimulus plan lacking in core focus, as opposed to the New Deal sort of focus, could be quite problematic."

Bravo. A focused vision of where we want to be would go a long way, both to sharpen the plan and to carry along the public and the naysayers.

[evagrius]

I think Obama's caught between Iraq and a hard place.

Give the guy a break for at least a few months.

The Republican "conservative right-wing" is hell-bent, truly hell-bent on blockade and even destruction.

This is not just an ecomic crisis. It really is a moral, ( yes, even a spiritual), crisis.

Confronting the crisis is not up to just one person but to the entire U.S.

Let the "conservative right-wing" have their say and then expose it for what it really is- a hatred of humanity and a love of power for its own sake.

[mrrunangun]

At risk of lese'majeste toward Pres. Obama, back here in Illinois we have a long line of pseudoreformers in politics who run on refom platforms and give up on reform at the first sign of serious resistance from the established players here. Our famous current governor is but the latest. If you were to unearth Gov. Blagojevich's campaign themes from his first election victory, they would be familiar, as Pres. Obama and Massachusetts Gov. Patrick both used them. David Axelrod remarked during the casmpaign that Obama's themes had been field tested. He wasn't actually kidding. Obama was not a reformer in Illinois, altho he did not participate much in the work of the offices he held here, as he was always busy running or getting ready to run for the next office up. Like a lot of attractive folks, he may turn out to be a disappointment once we get to know him better.

[Patricia ShannonP]

The plans are not set in stone for all time. I think Obama is smart enough to make adjustments according to results.

[bob mcmanus]

The Republican "conservative right-wing" is hell-bent, truly hell-bent on blockade and even destruction.

FDR:"I WELCOME THEIR HATE!"

[Callahan]

Some say this re-cession could last for years. Hmmmm, hell fire, we've had a re-cession here in Michigan for, well, ...
years. We've been getting through it by leaving Michigan for more prosperous territory. But the future may not hold much such territory anymores. Anyways if you want to be with those who are experienced at the struggles of a very poor economy, why come see us. Be glad to show ya. Darn tootin.

[Beezer]

During the Depression, savings jumped-consumption fell. Banks actually stopped taking in deposits. At least one bank closed because there was little demand for loans--they just told everyone to come get their money. There was no willingness for private savings to be invested. None. That's what's happening now. It will continue for the forseeable future.

Spend the dollar you can spend, when no one else will spend their dollar. The government dollar.

The goal is to increase production, overtime, that throws off enough cash to service, and eventually retire, the money created in the stimulus. No one has, to my knowledge, identified what that number is. Is it another $2-3 trillion? More?

Also, taxes have to be increased. Right now our tax rates are almost flat, with the lowest groupings paying about 29% of income, and the top groupings 30%. Only when govt. supports to the poor are included, does the net tax burden for the lowest groupings drop to 10% and thus make the rates go from 10% to 30%.

According to historian James Livingston, there's no evidence to support the argument that steeply progressive tax rates on the uber wealthy decrease economic growth. In fact, he says, the opposite is true.

Krugman is correct. The danger is to underestimate the need for stimulus, and to have no understanding what the medium term results (the goals) need to be to pay for the stimulus.

[anne]

"At least one bank closed because there was little demand for loans--they just told everyone to come get their money."

Reference this, since the comment makes no sense as a bank can always buy Treasury debt and Treasury debt was completely safe and high yielding at the peak of the recession. I do not believe the anecdote can be true.

[anne]

"Treasury debt was completely safe and relatively high yielding at the peak of the Depression."

[Ben]

Krugman: The Keynesian perpetual motion machine works if you give it a big enough push. Trouble is, the push is never big enough.

Keynesian economics doesn't work in a consumer-based economy.

[anne]

"Keynesian economics doesn't work in a consumer-based economy."

Care to explain and document what I take as complete nonsense? I can hardly stand the wait.

[save_the_rustbelt]

Reason:

I have been through lots of ups and downs, and I do not feel canny, because

1) every one of these crashes/recessions is different, and

2) we always come out, but we never get a clear cause-and-effect summary of why

Canny, no.

[Ben]

"Care to explain and document what I take as complete nonsense?"

I won't bother. Your mind is made up.

[Beezer]

http://books.google.com/books?hl=en&lr=&id=FnuKMfXfE4AC&oi=fnd&pg=PR5&dq=%22moody%27s%22+%22productive%22+%22capital+construction%22&ots=p2Ow8__jrr&sig=ME2kMEl3t17CDtHffjScRYBYiZo#PPR14,M1

Anne: It's in this 1940s doc. But it's a long doc and the specific mention is a quote from a newspaper at the time when a bank announced it was closing and sending all the money back. But it's in there, trust me.

[Callahan]

Hurd any good ones lately?

Ya, ya betcha,
3 guys from Michigan walked into a bar.

Bartender sez "GET OUT!"

See, da bartender he knew do's guyz from Michigan dey
could'nt afford to pay. Ya.

Here's another,

Guy sez I was once part of da owner-ship society.
Now I need a bail out, but I never even wanted that ship with da hole in it anyways cuz it's no good. Other guy, he sez "ya, ya got dat right".

[anne]

A particular bank may or may not have closed during the Depression, since about 10,000 banks closed from 1929 to 1932 or about 40% of the 1929 total, but the reason for the particular closing was not for lack of demand for loans when there was always demand for loans from the Treasury at an interest rate that made continuing banking worth while especially through a time of deflation.

That private investment continually declined from 1929 to 1932 is however true, with investment increasing from 1933 as Roosevelt became President.

Thank you for the reference, which is worth having no matter the particular anecdote.

[im1dc]

Patience please, Obama knows what he is doing, he's selling his stimulus into increasing demand to overcome the objections of his political opponents and recalcitrant members of his own Party.s

See:

Obama Says His Economic Plan Will Be Refined
By THE ASSOCIATED PRESS
Published: January 9, 2009

Filed at 12:23 p.m. ET

WASHINGTON (AP) -- President-elect Barack Obama said Friday that he and Congress will ''hone and refine'' his nearly $800 billion economic recovery plan, as he seeks to patch fissures with senior Democrats over key features of the still-emerging plan.

And,

Unemployment Hits 7.2%, 16-Year High

U.S. Loses 524,000 Jobs in December
By LOUIS UCHITELLE 1 minute ago

December’s job losses brought the total for 2008 to 2.6 million, and a rapidly deteriorating economy promised more in the months ahead.

And,

Wall Street Slides After Jobs Report
By JACK HEALY 19 minutes ago

While the job report fell short of the direst predictions, it was still bad enough to spark a broad decline.

[anne]

"Keynesian economics doesn't work in a consumer-based economy."

What by the way is a non-consumer based economy in which Keynesian economics could work, unless the exceedingly high saving rate in China could be an example, and in China Keynesian economics has worked remarkably and for many economists surprisingly well for years?

[Beezer]

Anne:
I can't take credit for finding this doc. It was in a comment by Steve Roth at Livingston's site.
http://72.36.139.202/politicsandletters/showDiary.do;jsessionid=D7B8B99190E754D71806663B92DCF184?diaryId=169

Roth called the doc a "smoking gun" re: Livingston's assertion about the relationship that "Suffice it here to say that economic growth has proceeded as a function of declining net investment"

[anne]

Notice what the New Deal meant for private investment, save in 1938 when there had been an attempt to limit government spending for the sake of a budget balance:

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1947&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=no#Mid

December 8, 2008

Private Gross Domestic Investment, 1929-2007

(%Change)

1929 Hoover

1930 ( - 33.3)
1931 ( - 37.2)
1932 ( - 69.8)
1933 ( 47.5) Roosevelt
1934 ( 80.5)

1935 ( 85.1)
1936 ( 28.2)
1937 ( 24.9)
1938 ( - 33.9)
1939 ( 28.6)

1940 ( 39.3)
1941 ( 22.1)

[Ben]

What by the way is a non-consumer based economy in which Keynesian economics could work

The 1930s in United States

in China Keynesian economics has worked remarkably and for many economists surprisingly well for years?

Yes, China's economy is doing great, isn't it?

[don]

"There are dangers associated with large-scale government borrowing... But it would be even more dangerous to fall short in rescuing the economy."
I be more comfortable if some facts accompanied this assessment. As it is, I think BO's people have come up with a more appropriate balance.

[anne]

"Yes, China's economy is doing great, isn't it?"

Yes; Economic change in China has dramatically improved the lives of hundreds of millions of people in a way and with a speed that development economists considered impossible in the early 1990s. There is every reason to think China is flexible enough in economic management to adapt and continue to grow through this dangerous period.

[Ben]

"There is every reason to think China is flexible enough in economic management to adapt and continue to grow through this dangerous period."

I hope you're right. I'm not as optimistic as you, however.

[anne]

"There are dangers associated with large-scale government borrowing... But it would be even more dangerous to fall short in rescuing the economy."

"I would be more comfortable if some facts accompanied this assessment."

Reading would help, since Krugman has been explaining for months.

[GloomBoom]

Obama wants to spend billions and Krugman wants to spend more! Obama is loquacious on a subject about which he hasn't a clue. To quote Lao Tsu, "We don't consider a dog to be good because he barks well." I don't think this is going to to have a happy ending but at least I can hope.......

[anne]

http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/

January 6, 2009

Stimulus Arithmetic (Wonkish But Important)
By Paul Krugman

Bit by bit we're getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we're probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus.

In the extended entry, a look at my calculations.

The starting point for this discussion is Okun's Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun's Law coefficient * range from 2 to 3. I'll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.

Now, what we're hearing about the Obama plan is that it calls for $775 billion over two years, with $300 billion in tax cuts and the rest in spending. Call that $150 billion per year in tax cuts, $240 billion each year in spending.

How much do tax cuts and spending raise GDP? The widely cited estimates ** of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective.

In particular, letting businesses get refunds on past taxes based on current losses, which is reportedly a key feature of the plan, looks an awful lot like a lump-sum transfer with no incentive effects.

Let's be generous and assume that the overall multiplier on tax cuts is 1. Then the per-year effect of the plan on GDP is 150 x 1 + 240 x 1.5 = $510 billion. Since it takes $300 billion to reduce the unemployment rate by 1 percentage point, this is shaving 1.7 points off what unemployment would otherwise have been.

Finally, compare this with the economic outlook. "Full employment" clearly means an unemployment rate near 5 — the CBO says 5.2 for the NAIRU, *** which seems high to me. Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we're looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan's perceived failure, if it's spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we're talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says "See, government spending doesn't work."

Let's hope I've got this wrong.

* http://blogs.wsj.com/economics/2007/07/19/more-on-okuns-law/

Take the Okun's law equation :

Multiplier = a

Actual growth = potential growth - a x d(unemployment rate),
which implies
Potential growth = actual growth + a x d(unemployment rate).

** http://www.economy.com/mark-zandi/documents/Small%20Business_7_24_08.pdf

*** Non-Accelerating Inflation Rate of Unemployment

[anne]

Ben:

"What by the way is a non-consumer based economy in which Keynesian economics could work?"

"The 1930s in United States."

Please do explain further; where is the Keynesian problem, relative debt as opposed to saving and why would debt limit a temporary stimulus program?

The reason for hopefulness about China is that, as in the past when slowing growth was threatening, China has already begun a significantly sized infrastructure spending stimulus. I wish India and Brazil were as aggressive.

[Ben]

It's not the debt that's the problem; it's the target. The stimulus package needs to stimulate consumer spending. Instead, it is targeted at infrastructure, which would help production, eventually - not consumption - at least, not directly nor effectively, and certainly not fast enough to prevent an utter collapse in consumption.

Then there's the problem with ending the program, which is an entirely different economic time bomb. The allusion to a perpetual motion machine is apt.

[anne]

"The stimulus package needs to stimulate consumer spending. Instead, it is targeted at infrastructure, which would help production, eventually - not consumption - at least, not directly nor effectively, and certainly not fast enough to prevent an utter collapse in consumption."

Thanks, but this really makes no sense to me. Creating jobs, creates consumer spending and there is no reason I can imagine why hard and soft infrastructure spending will not quickly create jobs. There are cuts that have been made and are being made currently in state basic services, and the services can almost immediately be restored and broadened. Education is infrastructure, and education spending is necessary from schools to libraries to teachers and librarians.

[don]

"Would the law of diminishing returns apply to a stimulus package? Is there a point at which additional stimulus does not stimulate?"
The obvious one is when full employment is reached. I think that is why the multiplier for government spending fell in WWII. I don't think it was rationing (as PK said, banging head on table). The rationing came because there was a shortage of goods - we were making all we could, and had to ration to supply the war effort. In other words, rationing did not crimp the multiplier, it was a response to allocate goods that were made scarce because the multiplier had hit its wall.

[anne]

Here is what Krugman wrote, and Krugman is correct:

http://krugman.blogs.nytimes.com/2008/12/11/dont-know-much-about-history/

December 11, 2008

Don't Know Much About History
By Paul Krugman

Bob Hall and Susan Woodward * argue against the multiplier effect of infrastructure spending by pointing out that GDP and military spending rose by about the same amount during World War II.

Um, rationing? *

"With the onset of World War II, numerous challenges confronted the American people. The government found it necessary to ration food, gas, and even clothing during that time. Americans were asked to conserve on everything. With not a single person unaffected by the war, rationing meant sacrifices for all."

[Bangs head against the table]

* http://woodwardhall.wordpress.com/2008/12/11/measuring-the-effect-of-infrastructure-spending-on-gdp/

** http://www.u-s-history.com/pages/h1674.html

[Ben]

"Creating jobs, creates consumer spending and there is no reason..."

I'd not thought of it before, but yes, Keynesian spending would work, and Krugman would be right if we spent $5 trillion. Give everyone in the unemployment line a $30k/yr job for whatever. That will work, temporarily. And when the program ends, we're deeper in debt, and all those folks go back to the unemployment line. Unless we follow it up with another spending spree, and so on. Even Krugman admits there's no exit strategy for this.

The current spending plan won't create enough jobs in the sectors that are seeing the most unemployment. They aren't spending enough money to create the bleed-over - again, this is all Krugman. And even in those sectors that do see some employment, it won't create jobs nearly as fast as they are lost.

You'll see.

[Ben]

"Creating jobs, creates consumer spending and there is no reason..."

I'd not thought of it before, but yes, Keynesian spending would work, and Krugman would be right if we spent $5 trillion. Give everyone in the unemployment line a $30k/yr job for whatever. That will work, temporarily. And when the program ends, we're deeper in debt, and all those folks go back to the unemployment line. Unless we follow it up with another spending spree, and so on. Even Krugman admits there's no exit strategy for this.

The current spending plan won't create enough jobs in the sectors that are seeing the most unemployment. They aren't spending enough money to create the bleed-over - again, this is all Krugman. And even in those sectors that do see some employment, it won't create jobs nearly as fast as they are lost.

You'll see.

[anne]

Simply look at the problem we already have, not full employment but years of gathering unemployment, years of markedly slow job creation, and the unemployment of failure to create enough jobs problem problem is worsening still:

http://www.bls.gov/webapps/legacy/cesbtab1.htm
http://www.bls.gov/webapps/legacy/cpsatab1.htm

January 9, 2009

The Bush experience in monthly job creation has been,

31,300 x 96 months = 3.0 million jobs created in all;

enough job creation to keep up with civilian work force growth would have meant,

140,600 x 96 = 13.5 million jobs created in 96 months;

enough job creation to keep up with slowing civilian work force growth would have meant.

[Ben]

sorry for dup post.

Real world example: "Boeing Co., the world’s second-largest commercial-plane maker, plans to cut about 4,500 jobs this year to reduce costs"

How is modernizing federal buildings going to get the Boeing workers to go buy a new BMW?

[anne]

"The current spending plan won't create enough jobs in the sectors that are seeing the most unemployment. They aren't spending enough money to create the bleed-over - again, this is all Krugman. And even in those sectors that do see some employment, it won't create jobs nearly as fast as they are lost."

There is no evident logic here, really.

[anne]

"How is modernizing federal buildings going to get the Boeing workers to go buy a new BMW?"

I have no idea what such an example could mean, but former Boeing workers who become teachers will be able to afford cars, and there is no reason to believe Boeing has sold the last plane ever, there will be need for more planes in time.

[Ben]

"There is no evident logic here, really."

I understand now. Thanks for playing.

[anne]

By the way, should debt be an issue we might possibly at some future time for some sane reason elect legislators or a President who is willing to actually look at military spending. Where Barack Obama seems determined to continue the military spending emphasis of George Bush, such an emphasis which characterized budgets of the Bush years could possibly be changed in time. For now, generals and legislators seemed determined otherwise.

[anne]

http://www.nytimes.com/2009/01/09/washington/09petraeus.html

January 9, 2009

Major Push Is Needed to Save Afghanistan, General Says
By ELISABETH BUMILLER

Gen. David H. Petraeus said that the country would require a sustained commitment from the United States and other nations, but declined to suggest a time frame.

[Should I be proud?]

[anne]

"How is modernizing federal buildings going to get the Boeing workers to go buy a new BMW?"

What is fascinating is explaining that building and working for Boeing still mean people working and still being able to buy cars and even take vacations with planes being needed for taking vacations and helping Boeing in time, but explaining so nicely evidently does not mean making a dent.

Tra la, tra la.

[kthomas]

@ Ms anne "....that building and working for Boeing still mean people working and still being able to buy cars and even take vacations with planes being needed for taking vacations and helping Boeing in time.."

Eventually, yes. But one must still hope. Plus these workers....the transition would be harsh, and certainly the jobs wil lnot be like those at Boeing, in terms of pay.

[save_the_rustbelt]

Callahan:

Speaking for Michigan

Funny, really funny.......

[Markel]

Unless we follow it up with another spending spree, and so on. Even Krugman admits there's no exit strategy for this.

He says no such thing. The theory says no such thing. A Keynesian stimulus is not a permanent dole. You don't seem to understand the theory at all.

[don]

Thanks for bringing up Krugman's statement. I stand by my assessment. The rationing was presumably done, because capacity constraints were hit. These constraints also constrained the multiplier. Rationing was a symptom of the restrictions on the multiplier, not the cause.
As for reading to learn, I fail to see from your posts exactly where PK describes the downside of too much government borrowing. The closest I saw him come to this was when he argued that if the stimulus is too big, we can easily constrain the inflation.
Exactly as Winslow R. observes - if Paul is being a scientist (rather than a politician talking down to us) he should be forthcoming about the downside, and there should be no one 'must not be named.'

[anne]

Don:

"As for reading to learn, I fail to see from your posts exactly where PK describes the downside of too much government borrowing."

I am at fault for not being clear; think back to the many times Krugman worried and explained the worry about government deficits when deficits could have easily been avoided or limited in size from the Presidential campaign of 2000 on when the potential problems with tax cutting were. When limiting the deficit has not been a problem for the economy, Krugman has always favored doing so and written that only to be sneered at by conservative analysts.

This time however there is a difference, we are no longer in 2000 but in a serious or severe economic contraction and Krugman is arguing deficit now, worry about the deficit a lot later.

I have to think of columns to reference.

[mrrunangun]

Back in 1954 Linus Pauling was awarded the Nobel Prize in chemistry. He was a great scientist. Later in life he became fond of making public political pronouncements. He was an effective self-promoter and his Nobel was always cited in the many articles quoting his political opinions in order to give them weight. The articles never mentioned that his Nobel had nothing whatever to do with his policy proposals. PK is perhaps a particularly brilliant economist (small praise that these days). That, if a fact, does not necessarily make his political policy proposals commensurately brilliant. Some of his proposals make good sense to me, but sometimes he goes so over the top that I wonder about what is seriously meant and what is polemical showboating. I share his doubt about President Obama, but only because so few men bred in the twentieth century Illinois political system have been effective at anything other than self-enrichment. None come immediately to mind. Many men and women of modest means enter the Illinois legislature, but none ever leave it-including Obama.

[lambert strether]

What I want to know is how the Chief Performance Officer is going to measure Obama's stimulus package. What metrics, and so forth?

[Stephen Kriz]

Someone needs to investigate the "deep events" that occur when a Democratic administration is coming into office following a Republican administration and vice versa. There is an ugly pattern here:

* In 1960, Kennedy was handed a failed Bay of Pigs invasion already planned by Ike and a CIA stirring up trouble in Laos. This set the stage for a troubled foreign policy.
* In 1976, Carter was handed an economy that was in the tank with out of control inflation and low growth. George H.W. Bush was CIA chief and put in place Team B, which exaggerated the Soviet threat.
* In 1992, Clinton was handed the largest budget deficit in history to date, and Bush had already started to gin up pointless investigations into Clinton's past, starting with the passport file flap, that would plague Clinton's presidency.

Compare this to incoming Republican administrations:

* In 1968, Nixon had a budget surplus, the Vietnam War was winding down and Henry Kissinger, working for LBJ, gave Nixon inside information about the Paris Peace talks that would give Nixon credit for ending the war.
* In 1980, George H.W. Bush, working behind the scenes in an October Surprise, negotiated with our enemy, Iran, to hold the hostages longer so that Reagan would get credit for their release.
* In 2000, George W. Bush inherited a budget surplus, a booming economy and a world at peace.

You think any of this is coincidence???

[S Brennan]

"Obama's caught...give the guy a break for at least a few months". - evagrius

evagrius,

Obama signed up for this job...he said, he knew what changes needed to be made.

So far, his policies have been more of the same.

We don't have time for Barak to personally learn that the same old shit ain't gonna work no more.

The Presidency is not a training ground, it is not a resume boosting job. If Obama is not ready...as you suggest...he needs to be let go. Any guy who ran as vicious of a campaign as Axelrod did for Obama does not deserve an ounce of pity.

It's the economy stupid.

Barak either gets it right away or Democrats need to distance themselves from Obama and start looking for a real FDR and not somebody who gives great teleprompter. We had one of those and even though Obama thinks Reagan was the greatest...Reagan sucked.

[Arne (not anne)]

One of the cut lines is: "Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. "

Does anyone know how that is determined? Is it if everyone were employed? Is it if all businesses were running at capacity? Are the two the same - if all businesses ran at capacity would we have full employment?

Obviously this is really a snapshot and new businesses and new workers are coming into the economy at all times, but I still wonder what the snapshot would look like. How much would be problematic, such as constructing buildings that would go unoccupied, or selling stuff to people who don't need it?

[evagrius]

And exactly what is Obama expected to do? Pull a rabbit out of a hat?

The present situation is the result of at least 25 years of "conservative" notions about government and economics.

It's been 25 years of constantly being told that the purpose of life was to die with the most toys.

Ol' Uncle Ronnie wasn't responsible. He was just the mouth.

No. Those responsible are the ones who took his message and ran roughshod over each other to the big bonanza round the corner, the hi-tech boom, the real estate boom, the pet rock boom. All a crazy dash for money, easy money.

Completely disregarded, ignored on purpose, was the ethical/ moral inheritance of civilization that made possible the economic comfort of those now running after big loot.

I recently saw the old film, "It Happened One Night", a "screwball comedy" made at the beginning of the Great Depression. What's interesting in the film is that the hero/ protagonist, played by Clark Gable, adhered to the ethical/ moral inheritance of civilization, refusing to even consider money as a solution to his problem. This was a fantasy, of course, but a fantasy that was faithful to that ethical/ moral inheritance.

The films of the 30's, especially those of Warner Brothers, really did communicate that inheritance, an inheritance shared by all Americans.

FDR could not have succeeded without recourse to that inheritance. After all, some of his major New Deal projects were inspired by, gasp, actual theologians who had reflected on economic life and is purpose.

I don't think Obama can rely on that ethical/ moral inheritance. It's been shattered by too many people, "conservative" and "liberal" alike. It will take at least another 25 years for a new ethical/moral foundation to replace the shattered one. That will take some heavy, deep, critical thinking and reflection, something I think the present generation in charge is quite unable to do and I'm not too sure about the succeeding generation, so immersed is it in distraction.

So...rather than waiting for the magicia from OZ to help you why not take a deep look into what you can do to help?

[Patricia ShannonP]

Stephen Kriz, thanks for your setting the record straight on some conditions presidents in our time have had to deal with, to counteract the Republican propaganda machine.

I hope it's all right that I put it in my own blog.

[S Brennan]

To evagrius says...rather than waiting for the magicia from OZ to help you why not take a deep look into what you can do to help?

If you have been reading this blog you know all my suggestions. See below for a repeat of what I think is the top line item.

If FDR came in and took a few months to get his footing it'd been all over. FDR came in swinging and the people followed. See Anne for the numbers.

_______________________________
_______________________________

Lower Medicare age eligibility.

Lower Medicare age eligibility frees up income to the tune of 290-1800.00 per month.

It is only used by the truly needy, nobody I know gets sick in order to collect.

Since older workers are seen as a liability because of statistics, they would be more likely to be hired.

Since medical expenses are the leading cause of bankruptcy, the financial sector will benefit.

Secure people will spend, insecure people will hoard.