Thoughts on stimulus
To break the deadlock we need a plan before we need more money

There is an economic school of thought in the U.S. that is advocating for more and earlier stimulus as a way to revive the economy.  This school has in Paul Krugman its most vocal supporter, and claims no less than Keynesian roots/legitimacy.

I employed "claims" instead of a more categorical verb, for a couple of reasons.  On the one hand, Keynes was much more aware of context whenever he made a recommendation than the scores of economists who followed him in all but spirit.  On the other hand, Krugman offers NO mechanism by which yet another money supply can stimulate anything except for a bigger bubble.

Given that Krugman, no less than Nobel laureate for economy, has been calling for a bigger stimulus for about 2 years, at least once a week in his NYtimes editorials,  I decided to comment on one of his recent pieces.  Here it is:
Krugman keeps talking about stimulus, yet what could a stimulus have done other than reignite another consumption-fueled bubble? And this could be so only if outsiders kept buying US paper.

We should have started rebuilding the country in 2000, yet we cut taxes, started a war on terror, and invaded Iraq in 2003. Bush should have signed Kyoto so the de-industrialization of America could have slowed down. Except that a future Nobel laureate economist was still praising trade liberalization, without concern for the unaccounted negative externalities associated with cheap imports. What was the middle American doing? Playing at the hands of the Government (Bush, Greenspan, Bernake), rating agencies, investment banks, and media&intellectual elites. Anyone still remembers the Republican Congress dealing with such important matters as doping in professional sports in June 2004? The public discourse had been about redoing the desert sands into oases of this and that while the bubbles in housing, defense, banking, healthcare and education (at all levels) were inflating.

At personal level, we should look at lowering expectations and increasing commitments. And, to avoid social collapse, let's make sure everybody puts skin in this game proportionate with their standing. People will mobilize to levels long-unseen if the burden of reinventing America is spread across, in a general climate of fairness. Treating us like responsible adults would be a good place to start. We did it, we'll do it again, just try us! 
Being treated like adults is a right we gave up long time ago, just see how the other guys keep pushing non-issues such as the Ground Zero Mosque(-rade).  Krugman, as if to appease a bunch of kids, is thinking short term and the reason for people like him to ask for stimulus, without a plan to spend it that would actually rebuild our economy, is his complete pessimism and/or his distance from the real economy.  The real economy is yet to find a way to move one car 1 mile with Twitter, yet that would be one of the more valuable pieces of American innovation in the last decade.

As a study in contrasts, consider how the Germans have approached their crisis. After 2 years of almost ignored calls for dumping money into banks, the Germans are rebuilding their post WWII cities:
Photo Gallery:A New City Quarter for Hamburg
Living with Sin: Germany Comes to Terms with its Ugliest Buildings (08/20/2010)
SPIEGEL Interview with Architect Christoph Ingenhoven: 'Modernism Is an Attitude, Not a Style' (08/13/2010)
Out of the Ashes: A New Look at Germany's Postwar Reconstruction (08/10/2010)
Interview with Architect Albert Speer: 'Calamity of Postwar Construction Came from Rejecting History' (08/11/2010)
The Germans, sometimes more capitalist than the US, have not fallen for the services economy, or the sanctity of the self-regulating market. They take their time to understand the consequences of their actions, and that goes even for their relation with China.

What are the Germans doing, do their cities need a makeover? Be it as it may; I think the Germans are investing in quality, for what else can you do in advanced capitalist economies?  Just as I called it in 2008, Encourage quality.  And we should say, there is a lot of unmet demand for quality in the US.  Unless you are, say, in some northeastern American state going through the annual ritual of re-paving the same traffic-jammed highways.

In closing, let's admit that what passes for stimulus has been of little consequence for the real economy.  It was meant to slow down the fall and give the decision makers some time.  From that perspective it was a qualified success.  A bigger stimulus could only have bought us more time, yet we also needed to signal fiscal responsibility/toughness to our partners.  Bernake has just told us that he is willing to move a lot of money from one pocket to the other.  I wonder who's going to be caught holding a mountain of paper in their hands.  To break the deadlock we need a plan before we need more money.


Klark, New York, NY said...

Krugman assumes that policy makers have the interest of the average American, and in particular the unemployed, at heart.

The name of Krugman's blog is quite revealing here: he indeed appears to have a conscience, and as a liberal (and further as one freely admitting to the same) he possesses a small healthy dose of naivete about your fellow man, generally believing in good intentions. I'm afraid the same can not be said about the majority of those at the Fed or otherwise controlling the reigns of the broader economy.

As an economist, he really should know better than anyone: whenever an inexplicable behavior arises, the best way to find an explanation is always to simply "follow the money". So who stands to benefit from high unemployment?

If he looked at the last ten years of US economic history, he'd see repeated rises and falls that all follow a similar pattern: when the economy is growing, the average worker fails to benefit. When the economy falls, the worker always loses the most, in terms of both buying power and job security. The benefit to large business owners, who control the majority of wealth and political power in the US, is substantial. The shakier the labor market, the more workers worry about their job security and the less compensation they are willing to work for. Eventually most workers are simply happy to have a job at all and are forced to settle for less and less.

What other explanation, for example, in the government's complicity in allowing US jobs to be shipped increasingly overseas?

The political and the wealthy in the US are well enough intertwined to form a well-oiled machine. The working class is increasingly powerless. The federal officials you seem to hope for see things in terms of what is most beneficial for them, and increasingly this is to work in alignment with the very wealthy, who contribute most to their election and who stand to offer most in the private sector when they cycle back out of government.

As long as labor is weak and nervous, with the promise of better times always around the corner, unrest is kept at bay enough to permit the rich to keep getting richer with little or no downside.

As nice as it would be to believe in a government with the interests of the little guy at heart, it's about as much based on hard evidence as Santa Clause. Let's grow up and either decide to stop complaining about it or talk about some way to fight back.

George, San Jose, CA said...

Why the Fed is wrong.

There's a couple of important structural problems with the US economy which haven't existed in prior recoveries, and are simply not being addressed by the president, the congress, or the Fed. First, consider simple arithmetic. 1945 is the first year of the baby boomers, who start retiring en mass at age 65: 1945 + 65 = 2010. It's 2010, we're there. The leading edge of the baby boomers are entering their retirement age.

Why care about the baby boomers anyway? Because this 15 year age group -- those born between 1945 and and 1960 -- represent a disproportionate segment of the population. Their demand for products and services has been driving the economy since 1960; however, as people approach retirement age they reduce their expenditures significantly. And in cases such as now where a person approaches retirement with unexpected losses in equities and real estate to boot, they will dramatically reduce their spending. Which is exactly what we are seeing. Fortune 500 revenues from US consumer spending for goods and services is down 40% or more. Baby boomers aren't buying houses, they aren't buying cars, they aren't buying much of anything. Frugality is their new motto. For the next 15 years the demand for goods and services by US consumers will be far less than in any recent memory.

Secondly, outsourcing of jobs and insourcing of foreign nationals to work on the few remaining local jobs (using H1B visas and the like) is dramatically and adversely affecting job and salary growth. This effect is very real. Consider Hewlett Packard Corporation for example. Since 1960 they have always had two huge product development sites in Silicon Valley. One at Palo Alto, their corporate headquarters, and one in a small town about 30 miles south, Cupertino. The Cupertino site has been responsible for a huge number of successful products for HP since 1960, and has been a source of jobs with good salaries for Silicon Valley scientists. So why care about HP now? Here's why: Within the past month HP announced it was closing the Cupertino product development site. Completely. HP no longers needs the space -- no doubt because they are able to outsource much of their product development work to other countries. And this is happening all over the country, not just in Silicon Valley. Tens of thousands of lost jobs for scientists and engineers, and with the current lack of political will in our government -- these jobs will never return.

So what are we left with going forward from 2010? Few jobs, low salaries, and a huge bolus of the population retiring, and who aren't going to be spending money near like the way they did during the 1980-2005 boom years. And what is the government and the Fed doing about it? Nada. QED

HL, NYC said...

What we are experiencing is a sea change in this country and this 'recovery' won't be permanent or real until radical changes in industries take place. Thankfully, the stimulus has these goals in mind but they are long term (i.e. green technologies). Right now, a perfect storm of economic disasters has created this situation. You had the real estate bubble that destroyed over a million jobs and these jobs aren't coming back. You have millions more jobs gone for good in manufacturing with outsourcing and these aren't coming back. Then you have a massive shift in wealth to the oligarchy and finance sector - sectors that take advantage of the masses. And with massive shifts of GDP going to finance, even with a bit of 'growth', it is largely unseen because it is on paper and not one of substance. Plus, investor profits only get shifted and traded around without hitting the 'street' as 'product'. Furthermore, you have massive technological advances that have rendered many good jobs obsolete. You then have transnational corporations that don't really care what country they're in - they are borderless and will usurp any labor for profit. Finally, you have a vicious, Republican party that will say or do anything to protect the oligarchy - hence slow job recovery here if any. Right now, the stimulus is keeping the wheel spinning but until the oligarchs and global corporations change or new innovative industries emerge, there will be no permanent recovery. Capitalism has somewhat destroyed itself with both too much success and too much greed and gluttony. Wealth in such few hands is the same thing as communism but under a different label - it's just private here instead of 'public'. The finance reform needed to be vicious to control this shift but in its current form, it's not going to make a difference.

Patrick Duffy, Pound Ridge, NY said...

Afraid of the unconventional? How more unconventional can they be? They wiped out the bond holders of General Motors and took over the company, eliminated brands, fired tens of thousands of people and declared success! They took over AIG and made all the contract holders whole, rather than let a bankruptcy judge do his job! They took over Fannie Mae and Freddie Mac and have tried to keep those preposterous business models going and expanding!
There are structural problems that the Fed and the Treasury cannot fix. They can ponder all they want about lending money or giving credits for the housing market but they can't stop the rising property taxes and rising State and Local taxes and shrinking incomes that conspire to make the cost of owning a home MORE expensive even with lower interest rates. What killed the real General Motors was not a drop in the sales of Pontiacs, it was the burden of paying 3 people for every one person that was actually still working there. The same is true for the State Pension Funds and City Pensions or any mature Municipality's Pension Fund. Can Fed Policy balance the California Budget? The U.S. needs an entire reconfiguration of how companies and governments compensate their employees. Nobody can pay employees for a lifetime in return for just twenty years of employment. The U.S. takeover of General Motors was a catastrophic move for a capitalist country. It prevented someone else from building a better model. That is the genius of capitalism! Pensions have to be external of a company on payday and grow in that depository. Municipalities must do the same. Pensions cannot be tied to the unpredictable success or failure of an Enron, a General Motors, or a California.
Right now there seem to be no rules in the United States regarding anything financial. Mortgage Foreclosures are forgiven, Trading Losses at Banks are replenished, State budgets are balanced, all through the largesse of the Federal Government. The fools and villains in these scenarios seem to be those who continue to work, pay their bills on time, or worse, save money!
For all the cries that the Fed hasn't "done enough" with regard stimulus, there is no evidence that the Great Depression would not have occurred in the 1930s regardless of how much money was delivered. The fact is a real Recovery cannot start until the government stops propping up over extended financial schemes and failed over leveraged banks. Then they need to put in place the same rules for all citizens and investors, not designer plans for selected favorites of the moment. That will give Americans confidence that we have a level playing field with rewards for those who play by the rules and penalties for those who don't.

Bill Pieper, Taiwan said...

People who know better are sugar-coating economic reality because they can get away with it. Administration officials are rarely challenged when they make ludicrous assertions about the economy or pretty much anything - unless of course the opposing party has a hissy fit, then there is 24/7 coverage. The DC press corps has shown too much deference to the president and his top policy makers. Perhaps not quite approaching the truly despicable level they did toward the previous administration, but too much nonetheless. The Obama administration has found it far more difficult to be convincing since they are making assertions about things people can see for their own eyes, like empty stores and quiet factories.

Anyone who has ever listened to the British PM during the regular press conferences will immediately recognize how this contrasts with the American version. Reporters in Britain do not hesitate to challenge anything and everything the PM says. British reporters are even asked if there are any more questions rather than being told there will be no more questions. This undue level of deference achieved a comical level in the previous administration when questions amounted to something on the order of "Mr. President, have you been working out?" They don't seem to have gotten quite that bad with this administration, not yet anyway - perhaps the President might try assigning demeaning fratboy nicknames to individuals in the White House press crew to get some respect.

Maybe the press does not push the administration on these issues because they are employed and for the most part handsomely compensated as well. This was not always the case. There was a time when the most prominent newsmen had much more in common with the factory laborer than with their six figure Ivy League brethren at the racket club. Like the DC policy makers and elected officials, the press in DC have completely lost touch with average Americans and have no clue what many people are going through, layoffs and foreclosures are merely abstract concepts, stuff that happens to unfortunate people in fly over country. I guess this is one reason why newspapers and journalism are dying institutions while the demagoguery machine of cable news is thriving.

Anonymous said...

Why We Need a Second Stimulus

OUR national debate about fiscal policy has become skewed, with far too much focus on the deficit and far too little on unemployment. There is too much worry about the size of government, and too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth. By focusing on the wrong things, we are in serious danger of failing to do the right things to help the economy recover from its worst labor market crisis since the Great Depression.

The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent, according to a government estimate issued Friday. Clearly, the pace of recovery is far slower than what is needed to restore the millions of jobs that have been lost.

Households and businesses are on a saving spree to rebuild their balance sheets. Their spending relative to income has fallen more than at any time since the end of World War II. So there is now a substantial gap between the supply of goods and services the economy is capable of producing and the demand for them. This gap is starkly reflected by the 23 million Americans who are looking for full-time jobs and the millions more who have left the labor force because they could not find one.

The situation would be even worse without the $787 billion fiscal stimulus package passed in 2009. The conventional wisdom about the stimulus package is wrong: it has not failed. It is working as intended. Its spending increases and tax cuts have boosted demand and added about three million more jobs than the economy otherwise would have. Without it, the unemployment rate would be about 11.5 percent. Because about 36 percent of the money remains to be spent, more jobs will be created — about 500,000 by the end of the year.

But by next year, the stimulus will end, and the flip from fiscal support to fiscal contraction could shave one to two percentage points off the growth rate at a time when the unemployment rate is still well above 9 percent. Under these circumstances, the economic case for additional government spending and tax relief is compelling. Sadly, polls indicate that the political case is not.

Two forms of spending with the biggest and quickest bang for the buck are unemployment benefits and aid to state governments. The federal government should pledge generous financing increases for both programs through 2011.

Federal aid to the states is especially important because they finance education. Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.

Anonymous said...

An increase in government investment in roads, airports and other kinds of public infrastructure would be cost-effective, too, as measured by the number of jobs created per dollar of spending. And it would help reduce the road congestion, airport delays and freight bottlenecks that reduce productivity and make the United States a less attractive place to do business. The American Society of Engineers has identified more than $2.2 trillion in public infrastructure needs nationwide, and a 2008 study by the Congressional Budget Office found that, on strict cost-benefit grounds, it would make sense to increase annual spending on transportation projects alone by 74 percent.

Over the next five years, the federal government should work with state and local governments and the private sector to finance $1 trillion worth of additional investment in infrastructure. It should extend the Build America Bonds stimulus program, which in the past year has helped states finance $120 billion in infrastructure improvement.

The federal government should also create and capitalize a National Infrastructure Bank that would provide greater certainty about the level of infrastructure financing over several years, select projects based on rigorous cost-benefit analysis, invest in things like interstate high-speed rail that require coordination among states and attract private co-investors in projects like toll roads and airports that generate dedicated future revenue streams.

But can the government afford this additional spending? The answer is yes. Despite the large federal deficit, global savers, including savings-hungry American households, are snapping up United States government securities at very low interest rates. And they will continue to do so as long as there is ample slack in the economy and inflation remains subdued. Over the next few years, there is little risk that federal deficits will crowd out private investment or precipitate a crisis of confidence in the American government, a spike in American interest rates or a sudden drop in the dollar.

On the other hand, as long as private demand remains weak, the risk is uncomfortably high that trying to reduce the deficit — by cutting spending or increasing taxes — will tip the economy back into recession or condemn it to years of faltering growth and debilitating unemployment. In fact, either outcome would depress tax revenue and could mean larger deficits.

Faced with these risks, as long as the economy is operating far below potential, policy makers should do two seemingly contradictory things. First, they should provide additional fiscal support for job creation and growth. And, second, they should enact a credible multiyear plan now to stabilize the ratio of federal debt to gross domestic product gradually as the economy recovers.

By easing capital market concerns about the government’s future borrowing needs, such a plan would permit larger deficits and slower debt reduction while unemployment is still high. The long-run debt problem — the result of imprudent fiscal decisions before the recession, escalating health care costs and an aging population — must be addressed once the economy has recovered. But for now the priorities of fiscal policy should be jobs and investment.

Laura Tyson, a professor at the Haas School of Business at the University of California, Berkeley, was chairwoman of the Council of Economic Advisers and the National Economic Council in the Clinton administration. She is a member of President Obama’s Economic Recovery Advisory Board.

multumnonmulta said...

“…if the Chinese stopped buying American bonds. But this fear is completely misplaced: in a world awash with excess savings, we don’t need China’s money — especially because the Federal Reserve could and should buy up any bonds the Chinese sell.”

Who do you think the author is? Are you sure it cannot be a Nobel prize economist?

Krugman does it again. What the heck are we supposed to pay in exchange for the US bonds the Chinese would sell? Higher priced paper… Which in turn, signals inflation. Together with economic stagnation, we have stagflation ( ).

Sure, when I discovered this, Krugman stopped accepting comments and I could not see the question raised.

If this is the best we can produce in economic thought, I’d say, Folks, get you passports ready and line up at some Australian/Canadian embassy!

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