Question for Stimuskeptics
Megan McArdle’s dubious about the prospects for an economic stimulus given the background conditions shown in this chart:
And I’ll have to concede that that is an awful lot of debt. She also says that while stimulus “can ease the pain of a slowdown (at least in theory), as Tyler Cowen has been pointing out, the actual empirical evidence that massive government spending can shock an economy the size of ours into a permanently higher level of output is . . . well, it’s sort of hard to find a wittily apt description of something that doesn’t really exist.”
From where I sit, demands for evidence need to be put into perspective. There simply aren’t very many similar cases to analyze. The Keynesian reading of the empirical record of the Great Depression is that fiscal stimulus was working during FDR’s first term and that the recession-within-a-depression of his second term was caused by FDR’s decision to abandon stimulus in favor of an attempted return to balanced budgets. One would further note that the defense buildup associated with World War II led to economic recovery though wartime necessity eventually prompted government expenditures to suffer from diminishing returns and become macroeconomically counterproductive (it was a big war). That’s not the best empirical evidence in the world. What you would want would be a clear-cut case where we had a depression, then had a sustained stimulus, and then the depression ended. That’s not what we have. But it’s not as if there are tons and tons of examples of the industrialized American economy entering a depression to examine. There’s just the one case, complete with the policy choices that were actually made and the cataclysmic war that actually happened. Consequently, the empirical evidence supporting any prescription is necessarily going to be a bit thin.
So to pull a bit of the old burden-shifting, what’s the stimulus-skeptics’ alternative prescription? At this point in time just about everyone—liberal or conservative—agrees that it’s generally preferable to eschew fiscal stimulus and let monetary policy do the heavy lifting. The pro-stimulus analysis begins not with the idea that fiscal stimulus is awesome, but with the observation that we’ve already done a great deal of rate-cutting, can’t cut rates any deeper, and all signs are of the situation getting worse. Is the anti-stimulus idea to do nothing and hope for the best? To beg for the world’s surplus countries (Germany, Japan, China, oil producers, Switzerland, etc.) to do giant stimulus while we sit around? Are there “unconventional” monetary policy tricks Bernanke needs to be trying? I don’t mean those as rhetorical questions. But we do face an actual situation that’s rather urgent and calls for decisions to be made. The Republican Study Committee’s alternative to the stimulus plan is permanent income tax cuts, which isn’t a serious answer to the question. What do the smarter stimulus skeptics of the blogosphere advise as an alternative?
92 Responses to “Question for Stimuskeptics”
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January 23rd, 2009 at 6:33 pm
I’ve been kind of wondering if any of them are going to come around and say, “Print more money!” If interest rates are at zero and we still want to use monetary policy to generate easier money, that’s the obvious option.
Of course, it sounds like it should be said in a Zimbabwean accent, and nobody really likes to talk in a Zimbabwean accent.
January 23rd, 2009 at 6:42 pm
I think we should find out what we’ve been doing since 1985 to make the blue line go up and up and up like, that. Then we should stop doing it so the line will go down again.
Or, to put slightly less snarkily: what exactly is wrong with having a high ratio of credit market debt to GDP? It doesn’t seem to have been a problem for the last thirty years or so—why is it a problem now?
January 23rd, 2009 at 6:44 pm
OT: What’s going on with the wildly fluctuating debt-to-GDP numbers during WW2?
The line is a lot smoother everywhere else.
January 23rd, 2009 at 6:49 pm
Re Neil Lupus’s comment “it sounds like it should be said in a Zimbabwean accent, and nobody really likes to talk in a Zimbabwean accent.”
————
I sent Matthew an email earlier re news that Zimbabwe is issuing a $100 TRILLION banknote (worth about $33 US).
January 23rd, 2009 at 6:53 pm
Megan McArdle [...] economic
Jesus, give it up. McArdle has very little understanding, and no credential or track record to take whatever she says seriously. All she does is articulate DC common wisdom on financial matters. When have those people ever been right, in the last 30 years?
January 23rd, 2009 at 6:56 pm
Money must be spent soon (say, next 12 months) to stimulate growth. Most of the Obama stimulus won’t come until next year or even later, when the government’s borrowing to finance such spending will crowd out needed business borrowing. So, what about tax cuts? Tax rebates to individuals didn’t work–they only spent one-third of the rebates. Why not provide tax incentives to business to spend money. Use tax credits to spur business spending now–for example, a 10% investment tax credit for assets placed in service in 2009. Or maybe a tax credit equal to a percentage of salary and benefits for new hires. Be creative! That kind of stimulus will be effective immediately, and will help build the future productive capacity of the economy.
January 23rd, 2009 at 6:57 pm
1. Once an economy reaches full employment, fiscal stimulus no longer works. Of course you don’t want stimulus beyond full employment. In WWII we had full employment and we had to work hard to avoid inflation (wage and price controls).
2. Monetary policy is useful only for fine-tuning. A large amount of financial easing doesn’t work(pushing on a string) and a large amount of tightening results in recession (eg,the Volcker recession of the late 1970s.
3. There are real-world examples of fiscal stimulus working. Google “Swedish Model” or “Swedish ecomomic policies in the 1930s”.
“At this point in time just about everyone—liberal or conservative—agrees that it’s generally preferable to eschew fiscal stimulus and let monetary policy do the heavy lifting.”
You have the above round-about.
January 23rd, 2009 at 7:01 pm
Google “Swedish Model”…
Well, I did, and the results didn’t seem to (ahem) have much bearing on monetary policy. Perhaps I should’ve turned on “Safe Search.”
January 23rd, 2009 at 7:08 pm
One method for stimulus that no one’s currently mentioning is something along the lines of the WPA, but I suppose we should wait until we’re up to 30% unemployment before suggest a replay.
In my neck of the woods, there’s a hell of a lot of older concrete with the WPA’s stamp in it, not to mention my ex-NRL library copy of “Planck’s Radiation Functions and Electronic Functions”.
January 23rd, 2009 at 7:11 pm
It’s really a matter of context. For instance, “Megan McArdle’s insight” works really well for me.
January 23rd, 2009 at 7:13 pm
I hope you weren’t at work, James. Try the 2nd option.
Also, a very good book on this general subject is “A Journey through Economic Time”, by J.K. Galbraith.
January 23rd, 2009 at 7:17 pm
Is McArdle still blogging after being beheaded by Glenzilla yesterday? Now that’s chutzpah I can believe in! (Also the complete absence of self-awareness, but that’s sort of implied.)
Can we all agree that a definition of reality might begin with “1/McArdle”?
January 23rd, 2009 at 7:20 pm
1) I’m a systems engineer — cut the economists’ gobbly-gook. They’re full of shit much of the time.
You have to decide what kind of system you want the USA to be — an advanced civilization like Battlestar Galactica or something like Rwanda on a rainy day.
2) The problem with tax cuts is a) they may fall into a liquidity trap — people stuff them under their mattress rather than spend them and b) they encourage consumption vice investment (although consumption can indirectly encourage investment.)
3) The Republicans don’t like planned economies — but that’s deceitful bullshit. We obviously have a highly planned economy — the issue is who plans and for whose benefit. Republicans want it left up to their rich patrons and for the benefit of their rich patrons. We’ve seen how that works out.
The criticism of “Stalinist” policy is also ignorant — the USSR was a backward, undeveloped shithole when the Commies took over in 1918 and they managed to fight the USA to a draw even after losing an entire generation to the Nazis. ANyone who’s worked in the defense world knows that it works on that basis and can be highly competent if you shoot the fucking political gameplayers/saboteurs. Look at the Manhattan Project.
4) We obviously have had overinvestment in housing and severe underinvestment in energy and advanced technology. We need to fix that. But Investment by definition doesn’t pay off until several years later. We also need something to sustain us in the meantime.
5) IF you just give people income transfers — without them performing useful work –then you’re eating your seed corn. Eventually everyone will starve.
But by the same token , pouring $5 Trillion of BADLY NEEDED capital into incompetent , bankrupt financial firms is equivalent to throwing the seed corn into the fire. Those fucking assholes PRODUCE NOTHING — they never have.
6) So let everyone know that the US Government is going into the venture capital business. Invite every fucking CEO and Silicon Valley entrepreneur to Washington DC one month hence to make presentations on why they should get stimulus funding. Have the National Academy of Scientists sitting in on the discussions.
Make sure the taxpayer gets equity and is protected. You’ll need a roadmap –what to do in the near term, two years hence, and five years hence. You will need to ensure that basic life support industries in the USA are maintained. (Food, infrastructure, military, health care)
BUT the MAIN thing the US government needs to do is distinguish between those who do productive work and those who are highly paid parasites. ANd let the parasites know that the gravy train is over. When your scientists and engineers eat dogfood — and are increasing being imported — and your con artists on K Street and Wall Street grow fat , then you are doomed.
The OTHER MAIN THING Obama needs to do is define the future we are working for –the future for our children and our grandchildren. A future in which the USA leads the world in developing and exploiting advanced science and technology.
We have not had a fucking vision for where this nation should go since John Kennedy. We need a fucking ROADMAP — and we need our debates focused on that Roadmap instead of deceitful handwaving about economic myths.
That VISION will gain you a shitload of support from the common citizen — who will give much of himself and sacrifice for the greater good if his descendents will benefit.
It’s time to run the USA like a business — and kill the deadwood.
January 23rd, 2009 at 7:30 pm
Let’s also kick economists’ jargon out of the public forum. Their vague bullshit is used more often to obscure whose dick they’re sucking than it is used to enlighten and inform.
They don’t distinguish between a “fiscal stimulus” used to educate a doctor from a “fiscal stimulus” spent in the political equivalent of a titty bar.
January 23rd, 2009 at 7:37 pm
Venture capital works on a system where you are looking for the hockey stick growth idea. You fund six innovative ideas that look good on paper and you hope one of them goes off like a rocket because the other five, no matter how good the quality of the idea, they won’t catch on and will fail and go down in flames. In this economic climate, you would be nuts to bet on even good things.
If there things worth funding let them come forward, that’s not a bad idea in and of itself but the idea that the government should become a VC firm right now is really, really, bad. Maybe there is a model for what you think you want to do but that isn’t it.
January 23rd, 2009 at 7:37 pm
Exactly right Matt. On the one hand you have the most plausible theory so far about the relationship between depression economics and fiscal policy, plus a downside of it’s two or three years later and the economy is still on life support, but more people have been employed, more people have been educated, more people have been provided with healthcare, in the interim than would have been otherwise, plus there’s a bunch of awesome new stuff, ideas, knowledge, roads, for us to use. On the other hand you have two other options: tax cuts, which was the thing we most recently tried and which didn’t work — I think a third of those rebate checks were spent — or . . . NOTHING. Sitting around waiting for shit to get better in a situation where nad news compounds itself.
McMegan . . . blech.
January 23rd, 2009 at 7:51 pm
bob snyder, because a variety of different problems are impinging simultaneously, there is no one solution.
i’m all for an investment tax credit; the problem is, demand is eroding, not increasing, and in the face of eroding demand, why should anyone invest, tax credit or not? we’ve got overcapacity in many areas, not a promising condition for investment.
that said, yes, it’s going to take a while for spending stimulus to have any tangible results, which is why i do think tax cuts, however inefficient they are, have a near-term role to play. (i myself favor a one-year payroll tax holiday on both workers and employers, improving cash flow all around.)
January 23rd, 2009 at 7:53 pm
A very simple idea I haven’t heard discussed anywhere is for the gov’t to send out stimulus “gift cards” instead of checks. I.e., cards with no cash value, but that could be used to buy things. Make these cards expire after a certain date so nobody stuffs them under the mattress for a rainier day.
Free money that has to be spent by a date certain will get spent, every last penny.
January 23rd, 2009 at 7:57 pm
Re Ed Marshall’s comment “You fund six innovative ideas that look good on paper and you hope one of them goes off like a rocket because the other five, no matter how good the quality of the idea, they won’t catch on and will fail and go down in flames. In this economic climate, you would be nuts to bet on even good things.”
————-
I kinda think the successful VCs do a little more due diligence than that.
But you are right in one respect — you need really competent engineers to do Risk Management. Spiral development with prototying rather than the Maoist 10 year program that crashes and burns in the testing phase after a shitload of money has been invested.
January 23rd, 2009 at 8:01 pm
Re tsg’s comment “A very simple idea I haven’t heard discussed anywhere is for the gov’t to send out stimulus “gift cards” instead of checks.”
————
But you have the substitution problem. I.e., people use the gift cards to buy groceries, pay bills etc and stuff the cash savings from their paychecks under the mattress.
January 23rd, 2009 at 8:02 pm
To beg for the world’s surplus countries (Germany, Japan, China, oil producers, Switzerland, etc.) to do giant stimulus
Don’t know about the rest of them but Japan’s *public* debt is enormous, something like 170%-180% of the GDP (US is currently around 80%, Germany a bit lower at around 70%)
And China doing a ‘giant’ stimulus (at least in relation to the US)- which it in fact is doing if they go through with the plan publicized a month or so ago – may be just what the doctor ordered for long term, if it helps create domestic demand which grows to be self sustaining and helps equalize the structural imbalances in China/US trade.
January 23rd, 2009 at 8:04 pm
“What do the smarter stimulus skeptics of the blogosphere advise”
well, the first advice you’ll get from *anyone* smart in the blogosphere is:
don’t waste another second on mcardle.
she knows nothing, and there is nothing to be learned from her.
January 23rd, 2009 at 8:04 pm
Don Williams: That explains that re: “gift cards.” Thanks.
January 23rd, 2009 at 8:10 pm
Oh Boy! I can’t wait to read that.
January 23rd, 2009 at 8:10 pm
I don’t think Megan is good at discussing the complexities of our financial system.
I feel that the best thing to do is to look at what cause the depression or recession in the first place. The main culprit was the housing bubble and loose credit. This led to consumers and corporations to feel wealthier than they really are.
Keep in mind the crash of the housing market and the tightening of credit would have occured even if we had a sound banking system. If the banks sold these toxic assets to pension funds, mutual funds, and hedge funds the housing bubble would have sill burst and credit owuld have still tighten.
Due to the housing bubble and the loose credit the market overshot itself upward. That is GDP grew faster than it should. So we are complaining that we are in a recession because GDP is declining but the truth of the matter GDP should have never been that high in the first place. A decline in GDP is necessary to bring GDP back in line with actual wealth not the inflated wealth caused by the housing bubble and loose credit.
Now the only thing the goverment can hope to do is make sure we don’t overshoot on the way down. The goverment has to make sure that people and corporations don’t feel poorer than they actually are and consume and invest less than they should.
January 23rd, 2009 at 8:11 pm
This is a tough question, because serious answers are not allowed.
Ruled out, for example, is the idea that the government should build the wind equivalent of the Grand Coulee Dam. That project only put thousands of people to work immediately and only provided cheap clean energy to the Pacific Northwest, for the past 70 years, so that’s not good enough.
Dropping another trillion into the black hole aka the American banking system, OTOH, will let monetary policy do the heavy lifting.
Hey, wait a minute- if the American taxpayer is on the hook for that trillion, it seems to me it’s the taxpayer, and not the policy, that’s doing the heavy lifting.
You want deeper analysis, you have to get into questions about what keeps a dollar ricocheting around in the economy like a pinball played well instead of vanishing into some bank’s financial reserves. Give the poorest guy around a dollar and he’ll spend it, probably at some convenience store with overdue bills, and in this way you might get a little more mileage before the dollar finally disappears into somebody’s trust account. I mean, face it, the rich are already sitting on trillions that would stimulate us plenty if they would spend it.
It is refreshing to see rightwingers pointing out that military spending doesn’t really stimulate the economy. That might be something to keep in mind as we consider the $500 billion-plus military budget this year.
January 23rd, 2009 at 8:14 pm
to specifically answer this question:
“What do the smarter stimulus skeptics of the blogosphere advise as an alternative?”
1) keep the safety net stuff (unemployment benefits, food stamps, etc) and take what measures are necessary to ensure they’re fully funded.
2) Spend money, but take the time to make sure all the ‘investments’ (energy, education, supertrains, whatever) are done ‘right’. Rushing this stuff just to create jobs is going to waste money and effectiveness. Yeah, there’ll be a temporary uptick in employment, but it will be localized, the multiplier effects will be less, and the long term benefits will be non-existent.
3) Make some (*very* light) ‘regressive’ tax increases in addition to (*very* light) ‘progressive’ ones that your political allies want. Specifically, raise gas taxes by 25-50 cents a gallon. The normal ‘drag’ effects of a tax increase should be mitigated in the case of a gas tax with the greater than a dollar drop in the retail price already seen in the past few months. This would cause Obama to break a promise (not to raise taxes on families making less than 250K) but he’s already done this if he signs off on the cigarette tax increase.
January 23rd, 2009 at 8:15 pm
Why not let the economy recover without a stimulus? If we don’t know that wasting taxpayer money will do any good, why not simply leave people unmolested from being forced to pay off debt in the future (or lose the value of their assets to inflation)?
In one way, this is ‘doing nothing’ from a policy perspective. But I think this defines ‘doing something’ too narrowly, as if ‘doing something’ only could mean ‘the state doing something’. Asking the government not to engage in public policy is to have ‘the market’ do something, something it can typically do more intelligently than the government can.
January 23rd, 2009 at 8:22 pm
Wow, I’ve never seen anyone get more GlenZilla’ed than Mcardle did yesterday.
http://www.salon.com/opinion/greenwald/2009/01/22/abject_ignorance/index.html
Brutal.
January 23rd, 2009 at 8:23 pm
One would further note that the defense buildup associated with World War II led to economic recovery though wartime necessity eventually prompted government expenditures to suffer from diminishing returns and become macroeconomically counterproductive (it was a big war). That’s not the best empirical evidence in the world.
Why isn’t this good empirical evidence supporting the efficacy of Keynesian economics? Prior to 1940 the economy was characterized by dysfunction on a huge scale, intense, widespread poverty and deprivation, low wages, sluggish and/or declining living standards, and persistently massive unemployment. Then along comes ‘40-’45 and a vast increase in government spending financed primarily through borrowing (a net public debt increase of something like 2/3 of GDP — over $8 trillion in current terms — IIRC). And lo and behold the period after this explosion of federal spending/borrowing is characterized by low unemployment, growing productivity, increasing wages, rising living standards, and a general, widespread prosperity. Is this just a coincidence?
I think the fact that Keynesian measures got us permanently (well, at least up until 2007) out of recession despite the fact that most of the spending went for relatively inefficient (in terms of stimulus) war production only makes the arguments in favor of Keynes stronger. Just imagine what huge-in-scale Keynesian stimulus could do when targeted toward productive domestic expenditures.
Let’s also not forget a huge part of the Reagan boom in ‘83-’84 (the one that got him reelected in a landslide) was diretly attributable to Keynesian measures, too (not that The Gipper would ever have called it that, of course).
January 23rd, 2009 at 8:27 pm
Asking the government not to engage in public policy is to have ‘the market’ do something, something it can typically do more intelligently than the government can.
Does saying this not trigger some level of embarassment or cognitive disonance right now?
January 23rd, 2009 at 8:38 pm
There are two schools of stimulus opponents.
The first is political conservative. Those whose instinct always says any government spending which might find it’s way into a Negroes hand is bad; to put it crudely. Thus the stimulus is bad.
The second is the alt economics crowd. That would be me. One who has been watching that chart for 7 years and screaming at the top of my lungs like some lunatic. Sending spittle flecked missives into the intertubes warning of doom. And being rightly ignored. Except for the occasional misapprehension and comment that my screams are hostile. The obvious product of the worst sort of troll.
Now the alt econ crowd is overwhelmingly doctrinaire Libertarian/Austrian School. They now are absolutely convinced that the situation is hopeless and thus think the SP is a waste.
I am no Libertarian, I hate ideology, but I do appreciate the fundamental tenets of Austrian School economics. The difference is Libertarians think that government regulation is wrong. Period. Thus they are always in league with conservatives to thwart regulation. It’s a beautiful partnership. The Libertarians enjoying the sheer brilliance of their ideas and the Conservatives because it makes them and their friends rich and powerful.
So now the crash has come. Regulation has proven to be impossible. Well not exactly. If Clinton and the totality of the Democratic Party elites, not to mention the totality of our elites period, had not bought into the propaganda that was Free Market Fundamentalism and then institutionalized it’s engine, the Wall Street Paradigm of wildcat finance, we might have avoided this. That’s a big if. A huge if. It makes me think that the Libertarians are right, for the wrong reason. Regulation always seems to fail not because it can’t be done well in theory, as the Libertarians claim, but because social, political and cultural trends end up making it ineffective.
I think the SP should be scrapped. One two or three trillion should be allocated for welfare. None of this silly pretense about making jobs. Keep local governments running and making jobs. Keep supplemental payments of various kinds flowing. Keep local and regional banks solvent. Of course this is beyond insane as a political proposition.
Matt asks if there is an alternative prescription, to make things right presumably. No.
The only question is this. Will it be as bad as 81/82, 30-39, 1907, or even worse. The end of a cycle measured in centuries? This believe it or not is a legitimate question.
January 23rd, 2009 at 8:39 pm
Look, Matt, I know that the rich kids from good schools have to stick up for each other, but you’re taking policy advice from Megan McArdle? Based on her tremendous record of…what, exactly? She thinks coming from a background of immense privilege is some kind of reflection on her personal moral stature, like most libertarians do, and that’s about the beginning and the end of any wisdom I’ve ever seen come out of her mouth. This is a phenomenon not entirely unlike what Duncan is always talking about, with the “very serious people” who must always be deferred to, no matter how many times they are disastrously wrong.
January 23rd, 2009 at 8:40 pm
That is GDP grew faster than it should. So we are complaining that we are in a recession because GDP is declining but the truth of the matter GDP should have never been that high in the first place.
Adam: it may be that the economy got larger than it “should have” but I doubt it. The housing/real estate/domestic consumption/financial sector portions of the economy were larger than necessary, true. But other sectors (manufacturing) were undoubtedly smaller as resources were diverted away. So, I’d say it’s more a compositional problem than one of size. And let’s not forget, overall GDP growth during the Bush years was mighty shitty when it comes right down to it. So it’s not as if all that debt-financed consumptive activity was powering GDP growth to abnormally high levels. In fact, the economy was mostly pretty sluggish.
January 23rd, 2009 at 8:42 pm
And lo and behold the period after this explosion of federal spending/borrowing is characterized by low unemployment, growing productivity, increasing wages, rising living standards, and a general, widespread prosperity. Is this just a coincidence
With the US possessing over 50% of the world GDP in the immediate post war period, tax rates could be a lot higher to pay the debt back with less disadvantages.
Having 12 million men in uniform (25 million scaling for today’s population) provides a cultural change which spontenously creates it’s own productivity growth. You’re going to have a quite a work ethic from a bunch of people who’s worse day in their 9 to 5 job would still be better than their average day getting shelling in a cold trench or on a hot beach.
January 23rd, 2009 at 8:52 pm
This is redundant, but everyone must go to Greenwald and see his takedown of McMegan, and Instapundit sort of. Reynolds as always doesn’t actually endorse or repeat the ignorant comments, just provides a moronic echo.
I realize we’re hijacking MY with our McMegan animus, but if you continue to give her an audience…..
January 23rd, 2009 at 9:10 pm
Dems, liberals and progressives are stuck supporting the stimulus now, partly, because our opponents are against it. Even if their motives are as black as coal and they often are, does not make the thing worth supporting.
It is not going to save us. Or save us enough to be the identifiable turning point. Instead, like the TARP, it will be a political millstone around our necks. Already on TARP, unbelievably, the GOP is the populist voice of the people. It’s sick. The Brooks Brothers Riot was nothing compared to what is going to come of this. Uber billionaire, insiders insider Pete Peterson is now one of the worlds leading populists!!!
Still, the politics are secondary.
January 23rd, 2009 at 9:25 pm
How about a coupon for take out?
January 23rd, 2009 at 9:34 pm
Well, didn’t we pay off the WWII debt by taxing the fuck out of rich people?
January 23rd, 2009 at 10:08 pm
Serial Catowner said: It is refreshing to see rightwingers pointing out that military spending doesn’t really stimulate the economy.
Of course they do. So that when the Keynesian effects of Star Wars or the Iraq adventure affect the economy they can claim the effects are because of the tax cuts.
..,. it’s the same people who will be arguing tomorrow that the New Deal was ineffective and that the defense spending of World War II lifted us out of the Depression.
…. and the same people who a year ago where telling us that deficits don’t matter and now are rending their clothes over the deficit.
January 23rd, 2009 at 10:19 pm
Don Williams wrote:
Re tsg’s comment “A very simple idea I haven’t heard discussed anywhere is for the gov’t to send out stimulus “gift cards” instead of checks.”
————
But you have the substitution problem. I.e., people use the gift cards to buy groceries, pay bills etc and stuff the cash savings from their paychecks under the mattress.
Couldn’t you partly get around this by restricting what the gift cards could be used for? Sort of like an anti-food-stamp, they could only be spent on more “frivolous” types of goods that aren’t pressing needs for most households, like consumer electronics or new furniture…
January 23rd, 2009 at 10:27 pm
Well, didn’t we pay off the WWII debt by taxing the fuck out of rich people?
Sort of. We’re still servicing debt from the Second World, Korean, and Vietnam wars… and now, GWII.
January 23rd, 2009 at 10:28 pm
Sort of like an anti-food-stamp, they could only be spent on more “frivolous” types of goods that aren’t pressing needs for most households, like consumer electronics or new furniture
This quarter I got my bonus in the form of a mall gift card. My corporation is based out of Sweden, now I’m starting to wonder if they aren’t attempting their own attempt at stimulus instead of tightening their belt.
January 23rd, 2009 at 10:32 pm
This quarter I got my bonus in the form of a mall gift card. My corporation is based out of Sweden, now I’m starting to wonder if they aren’t attempting their own attempt at stimulus instead of tightening their belt.
What?!!! That sounds like an honest voluntary attempt by a large corporation to improve the public welfare! Such perverted socialism must never be allowed to take root in our precious American soil!!!!
January 23rd, 2009 at 10:38 pm
“But it’s not as if there are tons and tons of examples of the industrialized American economy entering a depression to examine. There’s just the one case….”
There’s Japan after its real estate bust where serial “stimulus” packages seemed to do nothing. Then there’s BushCo, who turned Clinton’s $250 billion surplus into a $3 trillion deficit spending/tax cut spree that led to a tepid recovery from the 2000 recession and even bigger problems down the road.
Trying to “stimulate” the U.S. economy back to a level higher than can be sustained from real income is a fools errand and I don’t think D.C. is facing that.
January 23rd, 2009 at 10:49 pm
Was bailing a viable strategy to save the Titanic? Something had to be done obviously.
I admit this is an analogy and a bad one. For the Titanic was a physical system and the financial economy is not. The financial economy including the money that is its medium of exchange and store of value is a complex abstraction, or a series of complex abstractions. Thus it follows that it should be amenable to repair and reform.
I argue the system is so broken that the reforms needed will be at very fundamental level. I cannot say what the reforms would be only that they must include the wiping out and abandonment of the bad debt. This is however fundamentally a political problem. Who gets wiped out first. The fight itself will likely forestall the tough decisions so that ad hoc measures will be taken over time which solve nothing. Which in turn bring about only more political trouble. A viscous circle, down.
Simply by asking the question of what buttons need to be pushed to set the system right again, pretty much as it was before assumes such is possible. It is not I maintain. I mean if you consider global warming and peak oil into the equation. Both were results of the credit and consumption bubbles. A trillion here or a trillion there isn’t going to do it. It will only make it worse, especially politically.
January 23rd, 2009 at 11:15 pm
I, too, think McCardle is silly, but that is an advantage. She boils down the bunkum sophistication of a Tyler Cowen into chewy junkfood.
But, to answer the question is to – look at the past eight years. The answer to the question of recession, beloved of conservatives, was to deregulate further the financial services industry and cut taxes on the wealthy. Within the confines of rightwing ideology, it might be the only thing the right can come up with. The credit was to make the right politically viable – because you get chased out of power if you not only destroy the middle class lifestyle, but you don’t even try to put some window dressing up so that the middle class can still continue, walking dead fashion, to enjoy it – and the tax cuts were to serve the people for whom the economy exists, that is, the upper 5 percentile income group.
In other words, the only real alternative that the right has is Paulsen’s plan, and the hope that we get back to a situation in which the financial service sector can once more bring in the lion’s share of profits in the American industrial system.
This ain’t gonna happen. Liquidate liquidate liquidate is not going to lead us to an equilibrium point, either. So they have run out of ideas. At least Marty Feldstein is brave enough to admit it.
January 23rd, 2009 at 11:30 pm
The conservative plan would involve more of an emphasis on tax cuts (ie, payroll tax cuts like Ed Glaesar proposed) and an immediate stimulus, with a strict timetable…less long term pork for liberal constituents.
January 23rd, 2009 at 11:43 pm
People are assuming that the US Government has a bottomless well of Money. But that may not be true.
Peter Schiff –who predicted this crisis was coming several years ago — thinks that the US Dollar is going to to collapse hard in the near future. If that happens then the US government –not just the banks — is out of money.
A few days ago, Schiff suggested getting out of the large cities and stocking up on food and guns. This ain’t a Montana survivalist talking — this is the head of a financial services firm who lives in Darien, Connecticut.
January 23rd, 2009 at 11:51 pm
“Sort of. We’re still servicing debt from the Second World, Korean, and Vietnam wars… and now, GWII.”
Yeah, I dunno. Google a graph for historical national debt levels, and Korea and Vietnam are barely blips. Upper tax rates seem to correspond much closer (sorry, I keep losing this comment, so I’m not going to paste the links anymore).
January 23rd, 2009 at 11:57 pm
I agree with Rapier, with the exception that, as an anarchist, I do think all government regulation is wrong because all government is wrong.
The problem with blaming the “Free Market” for bad economic events is that there is no “free market” anywhere and hasn’t been for a century or ever. The end result is a distorted bastard economy where all these issues crop up periodically and are further distorted by the corrective measures taken by the government.
And now you have a century or more of such distortions which makes it hard to comprehend how one could refer to all this as a “free market” problem.
Look, the bottom line is that every Austrian economist basically says this whole edifice has to collapse sooner or later with mucho pain for everyone who isn’t sitting on a horde of gold.
This may be the day.
More importantly, it is NECESSARY for the whole edifice to collapse if it is to be restored to some rational basis.
And THAT is where the problem is – because that won’t happen as long as people like Matt have faith in the government to repair the situation with more regulations and more interference and more shuffling of increasingly worthless money taken from Jack to pay off Jill (and Jill is some asshole on Wall Street).
Is there a problem in the free market with idiots and unscrupulous people taking advantage of others and causing bubbles and crashes? Sure. No free market economist pretends otherwise. Humans are stupid, irrational chimpanzees who tend to fuck up. DUH!
The issue is how bad the damage is allowed to get and how much trouble it is to recover from when it happens. And what no one has ever managed to disprove is the fact that the market can correct itself more effectively than an outside hand, regardless of how many stupid chimps have to suffer in the process.
Problem is – the basic problem of stupid irrational chimpanzees who build up bubbles and crashes is even MORE true in a regulated economy. Because the state works for the rich. Always. By definition.
One thing I can guarantee from the current situation: nothing will be done that solves the basic problems. And that means that if this situation is not the one that breaks the bank – and the US state – once and for all, then some future one will be.
Of course, something else might happen in the meantime, like an asteroid strike, which will make the point moot and permit the morons to continue to insist that they were always right and were never proven wrong.
I agree with Don, though, that if anything is going to be done by the feckless, criminal state, it should be dumping money into technology development. I wouldn’t exactly recommend the state become a VC, though.
One could start with the Nanotech Energy Initiative.
Immediately stopping all wars currently being fought and diverting those funds into more appropriate endeavors would be a critical step.
Trying to reverse an educational system that produces lawyers and financial types (and pundit bloggers) instead of engineers and scientists might be a useful tack.
January 24th, 2009 at 12:11 am
Let me see…Megan has a chart, showing the credit market’s debt to GDP ratio, and somehow this makes you dubios over the stimulus package? What exactly does that graph have to do with anything? Haven’t we seen the debt to GDP graph before, and didn’t it look like a mirror image of Megans’ graph? Hasn’t she proven herself intellectually dishonest in the past?
Dishonest conservatives like Megan like to make the argument that the stimulus needs to be “immediate”, with really no justification why a medium or long term stimulus program won’t be effective. They tend to trump up a few examples of pork programs, bridges to knowhere ironically built by their Republican friends. But never is there a thoughtful analysis (funny how they lack thoughts) of the long term nature of infrastructure investments to growth in GDP.
There is precedent, however. The “immediate” stimulus of tax cuts seem to have slight, and short term benefits. Just look at Bush’s tax cuts. The conservatives gloated over them in 2002-2004, but they had no long term effects on growth. Moreover, they proved shallow indeed. Remember the “jobless recovery”? Jobless indeed, the best year of Bush paled in comparison to the best of the Clinton years. Years that followed the largest tax increase in American history.
Conservatives gloated over the Bush stimulus tax cuts in 2002. They proved to be illusory. Ephemeral. They didn’t work. We would have been much better off investing that money in something that generated commerce and economic activity more substantial. As others pointed out, many of FDR’s projects are still generating positive gains 70 years later; the TVA, Hoover dam, and the Golden Gate Bridge all spring to mind. Here we are, a few years after the Bush tax cut stimuli, with nothing to show for all that lovely “stimulus”. At least the bulk of FDR’s make work projects had long term economic benefits. I can attest, I lived in a dorm built in the 30s with WPA money. That is 60+ years of returns on investment. How many years of ROI did tax cuts get us?
January 24th, 2009 at 12:15 am
Also, I’d like to point out the failing of the New Austrians right now. Remember how all the Paultards predicted hyperinflation? I’d cite Mr Paul himself, but he’s been predicting hyperinflation since the 80s, so that is like quoting Miss Cleo. Still, after all the inflation fears it looks like we are facing deflation, which is the exact opposite of what they predicted. How come these retards aren’t eating crow and admitting total defeat? Are they really that stupid?
January 24th, 2009 at 12:18 am
I think James Gary @ #2 hit the nail on the head in his first paragraph. If you look again at the graph, you might notice that since about 1980 -82 the graph takes a steady, step rise right up to the present. The beginning of the Reagan revolution of tax cuts for the rich, deregulation of leverage rates & the financial markets in general, & the first of the 2 largest increases in the National Debt on record. After a slight leveling off during the Clinton years, it resumes that same steep climb as we have even more tax cuts for the rich, even more deregulation, & an even sharper increase in the National Debt under Bush. From what I’ve been reading from Kevin Drum, Ezra Klein, & Matt Yglesias over the past 4 months, the overwhelming majority of that debt is between the financial institutions – much more than all other forms of debt combined. Though I haven’t seen much about total world debt, I think this is probably true world wide.
So though James thought he was being snarky, actually his suggestion of stop doing what we were doing all that time is probably a pretty smart thing to do over the long tem.
But what about short term? Pass Obama’s stimulus package ASAP. To prolong that process is just asking for another round of panic to set in. Find a way to get the new administration up & running now, rather than stretch that process out over the next 1 year+. We need to let our president (& Congress) do the job for which we elected them. Stop rescuing dead banks & let them fail into receivership; this would allow the government to take back control of the money supply.
Hey, you asked for my opinion. . .
January 24th, 2009 at 12:43 am
Actually, I agree somewhat with Mr. Hack here. However, I’m not sure I’m ready to face the consequences of such an event. But one thing is clear: as long as we keep rescuing failed banks, the longer we kick this can down the road, & the worse the final result will be.
Public opinion supports The President now. But public opinion is a fragile thing until the public is really desperate. The overwhelming reason FDR had such enthusiastic support was because the public was desperate, & he gave them results they could see. If he hadn’t given us positive results, the US would probably have slid into either fascism or communism. I don’t think we are desperate enough to give Obama the same leeway, yet. So until we see positives coming from his decisions, he will not be in a position to use radical solutions like Hack suggested.
And, no, I am not an anarchist.
January 24th, 2009 at 1:12 am
This graph shows the reason that we should allow judges — and require banks — to write-down underwater debt (it’s called “cram-down” over at The Wonk Room, today, for some reason.) Anyway, the sooner the better, because writing it down doesn’t affect monitary velocity in an inflationary way.
I love graphs like that because they make you think.
January 24th, 2009 at 1:14 am
In the 1930s Sweden recovered from the depression in 2 or 3 years, while the US languished until WWII. The difference-Sweden adopted an aggressive fiscal stimulus program, while the US was more timid.
In the early 1990s Sweden recovered from a real estate bubble-induced recession in about 2 years, while Japan didn’t recover from a similar situation for a decade. The difference-Sweden forced banks to write-down assets and nationalized the insolvent ones, while Japan let their banks limp along without the ability to lend. Japan tried fiscal stimulus but it didn’t work because of the condition of the banks.
The lesson for the US today: Make banks write their assets to market, nationalize the insolvent ones. Provide liquidity for the solvent banks. Provide enough fiscal stimulus to maintain reasonable employment levels. Reduce finance’s share of the economy to the level of the 1970s and replace that share with non-financial activities.
January 24th, 2009 at 2:18 am
Don Williams, I agree with you that the government should get into venture funding of green projects and quickly. It would be better to do this by putting money into existing venture firms, many of which are in the middle of existing projects in danger of losing funding because of the general climate. While I don’t agree with the conservatives on general government incompetence, the government has not built up the expertise on choosing venture projects, and academics are likely to choose the ideas that are most intellectually intriguing, rather than those that are sound businesses.
Ed Marshall, You don’t even seem to have an argument. Yes, we have a high failure rate; that’s why you want equity investments rather than, as in the current stimulus plan, loans – you want to capture more of the upside of the successes. The things that make the current situation unpromising for private venture capital – a poor climate for either IPO or aquisition, and a need to hoard cash for other obligations, do not apply to the government, which can much more easily wait out the current downturn. If your going to make claims like “really, really bad”, it would be nice to see some kind of rationale for that claim.
January 24th, 2009 at 4:53 am
Richard Steven Hack is right to say that “free market” is a bad term for what we’ve had for a while now. It’s not hard to describe what we did get: handouts in vast quantity for the rich, coupled with reduced oversight on what they were doing. Not free so much as unrestrained, with regard to the rich.
Back at Ms. McArdle, though. It’s more than ludicrous for someone who was in favor of massive tax cuts, greatly reduced oversight, and the Iraq war to demand evidence of anything from anybody. She should be groveling over her chosen incompetence and engaging in remedial studies, and nobody should be giving her the slightest respect until she does that.
January 24th, 2009 at 8:33 am
Well-to-do Republicans can ride out a neo-Hooverite downturn. Their bond portfolios will do well, and maybe they can make a killing picking up depressed assets. They can pick through the economic debris like vultures.
January 24th, 2009 at 8:39 am
“But, to answer the question is to – look at the past eight years. The answer to the question of recession, beloved of conservatives, was to deregulate further the financial services industry”
Bush signed into law arguably the most onerous set of financial regulations in decades, Sarbanes-Oxley. It’s worth remembering, too, that the financial industry is probably the most highly-regulated industry in the country. Whether most of those regulations are useful or effective is another issue.
January 24th, 2009 at 9:31 am
Ed Marshall, You don’t even seem to have an argument. Yes, we have a high failure rate; that’s why you want equity investments rather than, as in the current stimulus plan, loans
I don’t have a problem with the idea as it stands alone. I agree with nearly everything you say. I have a problem with the idea that the government “should act like a business”, which is why I blanched at the idea: the VC’s as virtuous models to follow. The differences you enumerate make it a completely different animal.
These projects may be worthwhile pursuits on their own merits, but I doubt their utility as an economic multiplier.
January 24th, 2009 at 9:48 am
AAAAAAAAAAAAAAAAAAARRRRRRRRRRRRGGGGGGGGGHHHHH!
That chart has nothing to do with anything! Who’s talking about debt?
Also, debt and GDP both vacillate hugely! The debt was larger compared to GDP during the Great Depression BECAUSE THE GDP DECREASED DURING THE GREAT DEPRESSION. THAT’S WHY WE CALL IT A DEPRESSION.
McArdle needs to pack it motherfucking in. She’s a spoiled ignoramus whose past decade of opining has proven to be definitively destructive. She needs to cut out the blogging cover and just suck cock directly for her profession.
January 24th, 2009 at 9:55 am
It’s worth remembering, too, that the financial industry is probably the most highly-regulated industry in the country. Whether most of those regulations are useful or effective is another issue.
Yeah, Dave, the current downturn is all part of the “normal business cycle” and any regulation is doomed to fail because guys like you are so awfully f*cking smart. We’ve heard it multiple times, especially from you. Now go away and enjoy your afternoon fapping at your Bloomberg terminal.
January 24th, 2009 at 10:15 am
daveinhackensack, to echo what james gary already said, if you don’t know what you’re talking about, it’s best to not say anything. the notion that sarbanes-oxley was the most “onerous” set of regulations in decades is ridiculous; the notion that finance is “highly regulated” when a whole shadow banking industry with no regulation at all has emerged over the past 20 or so years is beyond ridiculous.
January 24th, 2009 at 10:28 am
We can’t pursue spending stimulus because it would lead to too much debt, but tax cuts are fine? Huh?
January 24th, 2009 at 10:54 am
It is not a financial problem, it is not a housing problem, it is not a consumer problem.
IIt is a transportation bottleneck. Remove the bottleneck and the economy improves. Automate freight transportation, there are simple ways to automate that result in 3 to 4 times the energy efficiency of goods transportation. The total government expenditures to get us a more efficient transportation system is very minimal, but it does require government action, mainly some rule changes on the road.
At this particular point in time, the best indicator of economic health is the efficiency of UPS, and that efficiency is very bad, mainly due to government restrictions on road usage.
January 24th, 2009 at 11:18 am
Re MattYoung’s comment “It is not a financial problem, it is not a housing problem, it is not a consumer problem.
IIt is a transportation bottleneck. Remove the bottleneck and the economy improves.”
————–
I don’t think so: From http://www.trafficworld.com/newssection/rail.asp
———————
“After rail traffic was relatively flat in the first half of 2008, carload traffic fell 10.1 percent in November and then 14.2 percent in December compared to the year before. And the freight outlook is still darkening.
The first half of January saw a tidal wave of shippers closing retail stores and factories, curbing current output and capital spending – measures that can only mean more declines in freight demand.
Just this month large industrial shippers Alcoa, Peabody Energy, Dow Chemical and MeadWestvaco said they will sharply cut production and jobs, bringing more retrenchments to the already shrinking bulk railcar cargoes of metals and ores, coal, chemicals, paper, pulp and scrap materials.
The retail customer base is shrinking, too. The liquidation of Circuit City and its nearly 600 big-box stores will further reduce nationwide intermodal shipments, which were down 7.7 percent in the fourth quarter. Union Pacific Railroad, the country’s second-largest intermodal carrier, saw the loads decline 15.5 percent in the fourth quarter, or 126,117 fewer shipments.
Morgan Stanley Research “substantially” cut its rail earnings estimates Jan. 12, warning traffic is falling so hard that even the rails’ ability to raise freight prices may no longer boost earnings.
Until now, “pricing has supported rail EPS growth with volume declines,” said analyst William J. Greene, “but ‘09 traffic losses will be too large for pricing alone to overcome.”
January 24th, 2009 at 2:24 pm
It’s more than ludicrous for someone who was in favor of massive tax cuts, greatly reduced oversight, and the Iraq war to demand evidence of anything from anybody.
‘Amen’ to that. Pundits should be penalised in sporting terms: McAddled should really be on a one-term suspension for the amount of shit she’s spouted while clambering up the greasy pole.
January 24th, 2009 at 2:37 pm
Don,
I read your post end to start. The strip malls are failing because they cannot master the last mile of transport automation. That is driving the whole system down.
In the tech world over the last twenty years it was common knowledge that development stopped on advanced work because UPS would eventually be a bottleneck at the last mile.
This was the Amazon contradiction, Amazon could do well only if UPS did fabulous. UPS cannot be fabulous with the level of inefficiencies all along their chain.
Rail will never make a comback because steel wheel on steel trakc with dumb rail cars is astromonomically more expensive then microprocessor on rubber on asphalt with smart autonomous cargo trailers. Which is to say, the transport can operate like internet, fixed packets taking autonomous routes with internal intelligence.
In summary, quantum leaps in information technology leads to bottlenecks in UPS ad FedEx freight handling. We refuse to stop shopping online, so only the most valuable goods get sold, those that can take suffer the inefficiency of UPS and FedEx. That, in turn, splits the market in dual modalities, very inefficient.
January 24th, 2009 at 2:55 pm
Good GOd, Don, you got me expounding!
In the Great Depression, information technology, commercial radio, created mass markets that, almost immediately, called for our personal auto transportation industtry to appear as if it were 1965. By 1974, we were complete, but the next wave of information technology was on its way. The international telgraph caused a similar depression.
Goods eventually have to follow the flow of information. And information technology always tries to get advanced knowledge of goods flow.
The solution is so obviously simple that we cannot get past the trees. Paint green lines on the road and give autonomous vehicles rights of ways on these lanes. If we did that, then even small universities, like our own Cal State Fresno can redesign the transport system in months, yielding three to four times the efficiency all up and down the chain, from long haul freight to the last mile of delivery.
You see, an autonomous delivery trailer can wander the streets of my square mile neighborhood. Autonomous cargo trailers can re-arrange themselves in a line in large parking lots, carrying their own dual electric “rail” down their spine, so a simple, fixed speed diesel electric tractor can power this train up and move them down the road.
Rubber, asphalt, microprocessor.
January 24th, 2009 at 4:57 pm
Re MattYoung’s comment “Goods eventually have to follow the flow of information”
—————-
No, Goods eventually have to follow the flow of MONEY.
With $2 gal gasoline, transport costs are usually a small
fraction of total cost.
January 24th, 2009 at 6:46 pm
Now Don, you know that just before the crash gasoline was going up to $4 and higher.
Was the high gas prices and the crash related in time? The recent run up in price per barrel started in 2001 at $28/barrel and continued until the price was $95/barrel. Then the crash, a rise by $70 or about 200% in nominal prices.
Why did this run up in nominal prices happen, and why did the crash happen just afterward?
What happens after international telegraph? We rebuild access to ports, rebuild shipping, and the shipping lines flow over the telegraph lines.
Great Depression, I already mentioned, suburbs and shopping malls are organized around mass communications markets.
If you think goods and information flow do not tend to align, then consider the case of JP Morgan shipping gold from London to NYC. If he took a round about path, then the announcement of a huge shipment of gold, in a gold monetary society, would arrive before JP Morgan’s gold, and his effort to corner gold hedged by others.
Consider the same today when I buy a flat screen TV. The information about where are the best screens, who has the best price that I get is all on the web and greatly more accurate than anything the salesman can tell me at Circuit City.
My costs for using web shopping is the value of more accurate information minus the cost of UPS shipping. My information about goods is getting more accurate while my UPS shipping is still using 1950 technology.
January 24th, 2009 at 9:15 pm
How do you know it won’t make it worse?
January 25th, 2009 at 12:55 pm
“How do you know it won’t make it worse?”
Is this for me or for the general case of stimulus?
Let’s take the general case of stimulus. Stimulus by government has its multiplier effect greater than one when the ultimate outcome results in a smoother variety of goods, that is, no major gaps in my relative ability to choose one product over the other. They are adjacently and smoothly exchangeable across the spectrum of household goods.
I say that the ultimate outcome has to be smooth but in the short term it is likely that government will get its stimulus wrong. The Obama plan is to scatter shot and see what sticks. The things that work are the things that result in a better distribution of goods.
If I apply this to my specific proposal, namely give me 20 gallons of green paint and let Cal State Fresno work its magic with automated home delivery, then how do I know it works? That is how can I prove it would work and that we do not need experimental scatter shots?
Good question, but my answer is to experiment on a small scale around the university here. This should be done with a push from the Gubernator, it would be a lot cheaper if we limited the finances to California. But we are competing here with a $20 billion steel on rail bullet train proposal that passed, and our effort is mired in the noise of the moment.
January 25th, 2009 at 9:32 pm
Interesting idea that Matt Young has. I’ve noticed that some of the appeal of Internet shopping is diluted by UPS costs. I suppose Brick and Mortar stores still have an advantage based bulk transport –economy of scale. A Tractor Trailer of goods vice a single item delivered to the door.
However, one piece of info a brick and mortar store delivers that is NOT provided by the internet is the ability to physically examine the product.
January 29th, 2009 at 10:30 am
Fed or Treasury should buy sub-prime SIVs at a discount and then renegotiate the terms of the individual homeowner’s mortgages. The holders take a hit, but get something out of it, the Fed absorbs the bad paper, but not too much of it, and the homeowner gets to keep his house. What am I missing?
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