News Stimulus spending (split from cap& trade thread)

[WhoWee]

Stimulus spending (split from "cap& trade" thread)

Don't worry, Obama can spend $10,000,000,000 per year for 10 years with one hand tied to the tele-prompter.

 

[Chalnoth]

Don't worry, Obama can spend $10,000,000,000 per year for 10 years with one hand tied to the tele-prompter.

Uh, what? Obama has been extraordinarily reluctant to expand spending. He's done some, but not nearly what the economy has required.

 

[russ_watters]

Uh, what? Obama has been extraordinarily reluctant to expand spending. He's done some, but not nearly what the economy has required.

Uh, what? Obama pushed through the largest "stimulus" we've ever seen. When (until perhaps this past week*) has he ever shown reluctance to spend money? Really, the problem for him was that once he got it passed, he had trouble spending the money as fast as he wanted to!

[edit] *Or is that what you mean - he's been "extrordinarily reluctant" to expand spending more than the trillion dollars he's already expanded it this year?

 

[Chalnoth]

Uh, what? Obama pushed through the largest "stimulus" we've ever seen. When (until perhaps this past week*) has he ever shown reluctance to spend money? Really, the problem for him was that once he got it passed, he had trouble spending the money as fast as he wanted to!

[edit] *Or is that what you mean - he's been "extrordinarily reluctant" to expand spending more than the trillion dollars he's already expanded it this year?

What I'm saying is that the amount of stimulus has just not been up to the task. The entire purpose of an economic stimulus is to close the unemployment gap. The amount of stimulus provided only closed the unemployment gap by around 2% or so, but we're looking at around 10% unemployment anyway.

As a result, we're looking at a number of years of unemployment at around the 10% level. And that is going to do far, far more damage to the national economy than a little bit of extra debt could ever do.

 

[mheslep]

What I'm saying is that the amount of stimulus has just not been up to the task.

I'd say it was the type of stimulus that has not been up to the task i.e. spending, not the amount.

... The amount of stimulus provided only closed the unemployment gap by around 2% or so,

How do you know that?

but we're looking at around 10% unemployment anyway.

As a result, we're looking at a number of years of unemployment at around the 10% level. And that is going to do far, far more damage to the national economy than a little bit of extra debt could ever do.

It is not a 'little' extra debt, by any standard.

 

[WhoWee]

What I'm saying is that the amount of stimulus has just not been up to the task. The entire purpose of an economic stimulus is to close the unemployment gap. The amount of stimulus provided only closed the unemployment gap by around 2% or so, but we're looking at around 10% unemployment anyway.

As a result, we're looking at a number of years of unemployment at around the 10% level. And that is going to do far, far more damage to the national economy than a little bit of extra debt could ever do.

The focus of the stimulus seems to have been "saving or creating" government jobs and tempory construction jobs.

 

[russ_watters]

What I'm saying is that the amount of stimulus has just not been up to the task.

No, what you said is that Obama has shown restraint. I countered that by saying what you are calling "restraint" was, in fact, a historically large amount of spending and I don't consider such actions to be showing "restraint".

Anyway, I agree that the stimulus hasn't been up to the task! It's an impossible and wrong-headed task!

The amount of stimulus provided only closed the unemployment gap by around 2% or so, but we're looking at around 10% unemployment anyway.

2% was what Obama claimed he was going to do, but it isn't what he now claims he did. This is a month old, but he was claiming 640,000 jobs created:
http://money.cnn.com/2009/10/30/news/economy/Stimulus_jobs_created/index.htm

With a labor force of about 153 million, that's 0.4%

The entire purpose of an economic stimulus is to close the unemployment gap.

One of the major problems with the stimulus package was a good fraction of it was not economic stimulus targeted to where it was most needed, but rather economic stimulus targeted to the pet projects and ideological pet causes of those who designed it. Real economic stimulus appeared to me to be a secondary consideration.

 

[Chalnoth]

No, what you said is that Obama has shown restraint. I countered that by saying what you are calling "restraint" was, in fact, a historically large amount of spending and I don't consider such actions to be showing "restraint".

As a fraction of GDP, this is hardly the case. First, the money is to be spent over a period of a few years, so it must be divided by the GDP over those years. Second, just compare it to the last bit of spending that dredged us out of a similar situation: World War II. The spending for World War II topped at around 37% of GDP. As our GDP is around $14.2 trillion, the paltry $550 billion of the stimulus spending comes in at less than 4% of GDP, even if divided by a single year's GDP.

You may note that I'm ignoring the tax cuts and the bank bailouts, because those are economically very different things.

Anyway, I agree that the stimulus hasn't been up to the task! It's an impossible and wrong-headed task!

Um, if this were true, then your next statement would also be impossible:

2% was what Obama claimed he was going to do, but it isn't what he now claims he did. This is a month old, but he was claiming 640,000 jobs created:
http://money.cnn.com/2009/10/30/news/economy/Stimulus_jobs_created/index.htm

Well, I was perhaps a bit sloppy in my language. The impact of the stimulus hasn't peaked yet (that should come around next year), and I slightly overstated the expected amount (which will be closer to 1.5%). So yes, when you state the case more explicitly, it only makes the case for a stronger stimulus package even better.

Finally, let me point out that even despite the reckless tax cuts and spending during the Bush years, our debt as a percentage of GDP is nowhere near crisis levels: we have quite a bit of headroom that we can and should exploit to pull us out of this crisis sooner.

One of the major problems with the stimulus package was a good fraction of it was not economic stimulus targeted to where it was most needed, but rather economic stimulus targeted to the pet projects and ideological pet causes of those who designed it. Real economic stimulus appeared to me to be a secondary consideration.

That's not a serious problem. First, I don't think you'd find more than a very small fraction that was put to such projects. Second, economically speaking, it actually doesn't matter very much where the money goes, as long as it enters general circulation. Obviously with any similar proposal, there would be a fair amount of waste. But this doesn't actually negatively impact the short-term economic outlook, so it's not really a valid reason to oppose such legislation.

 

[mheslep]

You may note that I'm ignoring the tax cuts and the bank bailouts, because those are economically very different things.

All of the debt is economically identical. Regardless of the source of the deficit that accumulated it, the consequence is identical.

 

[Nebula815]

As a fraction of GDP, this is hardly the case. First, the money is to be spent over a period of a few years, so it must be divided by the GDP over those years. Second, just compare it to the last bit of spending that dredged us out of a similar situation: World War II. The spending for World War II topped at around 37% of GDP. As our GDP is around $14.2 trillion, the paltry $550 billion of the stimulus spending comes in at less than 4% of GDP, even if divided by a single year's GDP.

Economic stimulus has historically never worked. That is why the European countries refused to try it when President Obama requested they enact stimulus of their own economies, because they have experience with it causing inflation.

Regarding WWII, that too is debatable. We had a high unemployment rate, but then we sent a massive portion of our workforce over to fight the war. As women and those not sent took up the jobs, the unemployment rate came down.

Once WWII was ended, we had no real economic competitor. The British went and nationalized a bunch of industries, which proved disastrous, and Europe and Japan were busy recovering and re-building.

Also, because the birthrate had declined during the Depression, there was now a more limited supply of workers who were in very high demand by industry, which helped keep wages up.

So the U.S. economy dominated through the 1950s, then stalled when the 1960s (due to foreign competition finally beginning to surface, taxes that were too high, and so forth).

If you want to spend like World War II, that would mean a stimulus of something like $3 to $4 trillion, and I would not hand $3 to $4 trillion to politicians who love to spend money and expect accountability. You'd have money going to every pork project and special interest you can think of, along with massive lobbying on Capitol Hill (both of these occurred with the current stimulus).

Government is too slow, and too inefficient, at spending the money.

Also, paying down the debt would be tougher. After WWII, we didn't have Medicare and Medicaid, welfare, or as large an interest on the debt, as we have now.

Finally, let me point out that even despite the reckless tax cuts and spending during the Bush years, our debt as a percentage of GDP is nowhere near crisis levels: we have quite a bit of headroom that we can and should exploit to pull us out of this crisis sooner.

I wouldn't call the Bush tax cuts "reckless," although I would say the spending was. I know small business owners who were able to hire additional employees precisely because of the Bush tax cuts. As it is, I think taxes are still too high and need to be cut further. Government needs to stop spending so much.

That's not a serious problem. First, I don't think you'd find more than a very small fraction that was put to such projects. Second, economically speaking, it actually doesn't matter very much where the money goes, as long as it enters general circulation. Obviously with any similar proposal, there would be a fair amount of waste. But this doesn't actually negatively impact the short-term economic outlook, so it's not really a valid reason to oppose such legislation.

You make a bill that large, no one knows what is in it because no one has any time to read through it in-depth. You make it in the trillions and people will be even more clueless as to where the money is going. Just not a good idea.

If money in circulation is good, then why not just suspend income taxes up to the equivalent of the stimulus?

 

[russ_watters]

As a fraction of GDP, this is hardly the case. First, the money is to be spent over a period of a few years, so it must be divided by the GDP over those years. Second, just compare it to the last bit of spending that dredged us out of a similar situation: World War II. The spending for World War II topped at around 37% of GDP. As our GDP is around $14.2 trillion, the paltry $550 billion of the stimulus spending comes in at less than 4% of GDP, even if divided by a single year's GDP.

Yes, you had to go back 60 years to find the comparison. Again, that doesn't fit my definition of "restraint".

That said, he's having trouble spending the money as fast as he wants. As of Sept 30, about $173 billion had been spent. And that's another reason we shouldn't get another stimulus.

Um, if this were true, then your next statement would also be impossible:

Huh? It's pretty straightforward: it isn't doing what he said it would do, therefore it is a failure.

I don't understand why you think that even though it has produced less than a quarter of the job savings/creation predicted, that means it should be expanded. It isn't working, so you want to do more of it?! How is that logical?

Well, I was perhaps a bit sloppy in my language. The impact of the stimulus hasn't peaked yet (that should come around next year), and I slightly overstated the expected amount (which will be closer to 1.5%). So yes, when you state the case more explicitly, it only makes the case for a stronger stimulus package even better.

You didn't misstate Obama's claim - he really did claim that without the stimulus, unemployment would surpass 10% and with it, unemployment would peak around 8%. He was wrong.

That's not a serious problem. First, I don't think you'd find more than a very small fraction that was put to such projects. Second, economically speaking, it actually doesn't matter very much where the money goes, as long as it enters general circulation. Obviously with any similar proposal, there would be a fair amount of waste. But this doesn't actually negatively impact the short-term economic outlook, so it's not really a valid reason to oppose such legislation.

That's so shortsighted. Let me give an example: road paving projects. An awful lot of money went to them because they take very little planning, so they are an easy way to spend money fast. But they are self-contained projects and they end when the stimulus money ends and the people holding the jobs get laid off. A better way to spend stimulus money would be to use it to save jobs in regular businesses. This wouldn't just benefit the employees and businesses in the short term: hiring and firing is expensive and it hurts companies to lay someone off now just to hire someone back in a year.

 

[mheslep]

There are some good arguments showing that deficit spending does not do well at stimulating economic demand.

o Recently there was this published on VoxEU, saying the http://en.wikipedia.org/wiki/Fiscal_multiplier" was as low as 0.5:

Unfortunately, we find substantially smaller government spending multipliers than those used by Romer and Bernstein. For example, the multiplier associated with a permanent increase in government spending by the end of 2010 lies between 0.5 and 0.6. In other words, government spending does not induce additional private spending but instead quickly crowds out private consumption and investment.

http://www.voxeu.org/index.php?q=node/3373
[Romer is Obama's economic advisor]

o And we have the reality coming against Romer's predictions:

o Federal spending is now nearly 25% of GDP, not seen since WWII

o Total federal, state, and local government spending is now nearly 45% of GDP

http://www.usgovernmentspending.com...tack=1&size=m&title=&state=US&color=c&local=s

 

[Chalnoth]

All of the debt is economically identical. Regardless of the source of the deficit that accumulated it, the consequence is identical.

As far as the later payments required on said debt are concerned, yes. But the difference I'm talking about here is in the impact on the current economy, not the future debt load. And the impact of the increased debt on the current economy is markedly different based upon how it is accrued.

Reduced taxes don't do much to stimulate the economy under the current situation, so you just end up with a net loss. Spending money, on the other hand, puts money into peoples' hands that would otherwise have none, money that they then spend and put back into the economy, and so on and so forth. In the end, this means that you have a lot more people back at work, and the actual debt cost ends up being only around half that which is spent (due to increased returns in taxes). And by being careful about spending that money for projects that are likely to increase future productivity, the added debt isn't a burden at all, but just an investment in the future.

Please note that the economic case for a stimulus only exists because the nominal interest rate is stuck against the 0% lower bound. If we were not in liquidity trap conditions, then there would be better things that the government could do to stimulate recovery. Those avenues are simply closed due to these conditions.

 

[Chalnoth]

Yes, you had to go back 60 years to find the comparison. Again, that doesn't fit my definition of "restraint".

Well, it's been that long since we've had an economic crisis of similar magnitude. Even then, though, no I didn't have to go that far to find emergency spending beyond what has been done in response to this economic crisis. The Vietnam and Korean wars were also quite a bit larger in cost as a fraction of GDP.

That said, he's having trouble spending the money as fast as he wants. As of Sept 30, about $173 billion had been spent. And that's another reason we shouldn't get another stimulus. Huh? It's pretty straightforward: it isn't doing what he said it would do, therefore it is a failure.

Try compare to the actual projected targets before claiming it's a "failure". The only way in which it is a "failure" is that the economic downturn was quite a bit worse than predicted.

That's so shortsighted. Let me give an example: road paving projects. An awful lot of money went to them because they take very little planning, so they are an easy way to spend money fast. But they are self-contained projects and they end when the stimulus money ends and the people holding the jobs get laid off. A better way to spend stimulus money would be to use it to save jobs in regular businesses. This wouldn't just benefit the employees and businesses in the short term: hiring and firing is expensive and it hurts companies to lay someone off now just to hire someone back in a year.

That's a pretty silly claim. The entire point of a stimulus is for it to be temporary emergency spending. We want it to be filled with temporary jobs that run out once the stimulus is over, because otherwise we'd be forcing a new long-term spending commitment onto the federal government.

The whole point of the stimulus is to sort of buoy the economy through the slump. If the stimulus were large enough, it would help the rest of the economy to pick up, which would make more jobs available in the private sector, which would pick up the jobs as the stimulus money runs out.

But because the stimulus was far too small, it's not looking like there will be any such recovery. The inventory bounce that's buoyed us for the last few months is running out. The stimulus money will also run out before too long. And now, because Obama went for far, far too little for the stimulus, the political will to go for a larger one has been largely eroded. And so we seem to be likely headed for a second dip in the next two years or so, which will only further erode the political will for reasonable forward action.

In short, we could be seriously stuck for a long time in this slump. We could well be looking for something similar to what happened with Japan in the 1990's, which basically lost an entire decade of economic growth.

 

[mheslep]

As far as the later payments required on said debt are concerned, yes. But the difference I'm talking about here is in the impact on the current economy, not the future debt load. And the impact of the increased debt on the current economy is markedly different based upon how it is accrued.

Eh? Certainly one can argue that the economy overall (gdp, investment, jobs, whatever) would differ depending on the manner of spending, but the debt impact is a simple aggregate figure. The interest rate paid to the Chinese T-Bill holder is the same whether the money was spend on bombs or butter.

Reduced taxes don't do much to stimulate the economy under the current situation,

Sure they would. The problem is they have to be http://en.wikipedia.org/wiki/Permanent_income_hypothesis" .

We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recession

[from G.Mankiw]
http://www.economics.harvard.edu/faculty/alesina/files/Large%2Bchanges%2Bin%2Bfiscal%2Bpolicy_October_2009.pdf
or see http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf" (author of Obama's stimulus plan)

[...] VI. CONCLUSIONS
This paper investigates the causes and consequences of changes in the level of taxation in the postwar United States. ...
In terms of consequences, there are six main findings. First, tax changes have very large effects on output.

so you just end up with a net loss

Spending money, on the other hand, puts money into peoples' hands that would otherwise have none, money that they then spend and put back into the economy, and so on and so forth. In the end, this means that you have a lot more people back at work, and the actual debt cost ends up being only around half that which is spent (due to increased returns in taxes).

Spending stimulus is more complicated than that. As stated that assumes a multiplier greater than one. The evidence is increasingly that it is less than one. Think about it, if what you state there were absolutely true governments could simply spend their way into infinite prosperity. In reality, the money spent by the government has to be first taken from the private economy which is where, as the President just stated, the real job engine lies.

Please note that the economic case for a stimulus only exists because the nominal interest rate is stuck against the 0% lower bound. If we were not in liquidity trap conditions, then there would be better things that the government could do to stimulate recovery. Those avenues are simply closed due to these conditions.

Yes, agreed no more can be done with monetary policy at the moment. The fact that interest rates are as low as they can go does not somehow make the argument that deficit spending works as claimed to stimulate the economy.

 

[Chalnoth]

Spending stimulus is more complicated than that. As stated that assumes a multiplier greater than one. The evidence is increasingly that it is less than one. Think about it, if what you state there were absolutely true governments could simply spend their way into infinite prosperity. In reality, the money spent by the government has to be first taken from the private economy which is where, as the President just stated, the real job engine lies.

The problem with this analysis is that it completely ignores context. Yes, if your taxes are above a certain point, reducing them can certainly stimulate the economy. But this isn't really the case under the conditions of a liquidity trap, where the problem is a problem of demand, not a problem of supply.

Spending money, as opposed to simply not taking as much out, directly addresses the problem of insufficient demand by, well, buying things.

Of course, under conditions other than a liquidity trap, this argument breaks down, and there are other, better ways of dealing with the situation. Spending more money during an already booming economy, for instance, would merely offset existing jobs in the private sector, leading to no net gain in the economy as a whole, but likely a loss of efficiency. So you generally only want to do this sort of things for situations in which private enterprise isn't providing the required need (e.g. roads).

Yes, agreed no more can be done with monetary policy at the moment. The fact that interest rates are as low as they can go does not somehow make the argument that deficit spending works as claimed to stimulate the economy.

Yes, actually, it does, because it closes off other means of stimulating the economy, while at the same time making it so that government expenditure won't offset private employment.

 

[Nebula815]

In short, we could be seriously stuck for a long time in this slump. We could well be looking for something similar to what happened with Japan in the 1990's, which basically lost an entire decade of economic growth.

They also tried ten separate stimulus packages. Also, cutting taxes puts money directly into the hands of the people, as they get to keep more.

Some argue this doesn't or won't work because in a recession such as this, people will hoarde the money as opposed to spending it, however if the government simply distributes money to everyone, the same effect would likely happen. If people are going to spend the money, a tax cut guarantees they get it.

If one makes the argument that since people will not spend the money, that government should spend it instead, well this is based on the idea that government knows how to spend the money, which I wouldn't put much faith in.

 

[Chalnoth]

They also tried ten separate stimulus packages. Also, cutting taxes puts money directly into the hands of the people, as they get to keep more.

Right, which makes it a perfect testing ground for what sort of economic action is the best. The years of strongest growth? Those with the largest stimulus.

Some argue this doesn't or won't work because in a recession such as this, people will hoarde the money as opposed to spending it, however if the government simply distributes money to everyone, the same effect would likely happen. If people are going to spend the money, a tax cut guarantees they get it.

Again, as I said, the difference is that it's a problem of lack of demand, not lack of supply. So the government buying things (e.g. resources to build bridges, roads, whatever) helps to adjust for the lack of demand, boosting the economy.

On the other hand, simply putting the money in peoples' hands, either through tax rebates or other means, doesn't fix the fact that under these economic conditions, those who have money do best by hoarding it. And the Fed has been trying to do this, by the way, in vast quantities. The money they've put out there hasn't been very successful.

If one makes the argument that since people will not spend the money, that government should spend it instead, well this is based on the idea that government knows how to spend the money, which I wouldn't put much faith in.

Nope, that's not part of the argument.

Basically, it's assumed that the government isn't going to be as efficient in spending the money as private enterprise. This is precisely why the case for an economic stimulus only becomes strong under very specific economic conditions (a liquidity trap). And then the case is only made because it would be as good, for the current economy, to literally pay people to dig ditches then fill them back up as it would to do anything else: precisely how the spending is performed doesn't make much difference to the economy as long as it puts people to work.

Now, we should be somewhat careful in what we spend because a fair fraction of the money will end up as debt and needs to be paid back. So we want to spend on things that are likely to have a decent return (as opposed to digging ditches and filling them back in). But the nice thing is that under liquidity trap conditions, we expect a 50% return just from increased tax revenues due to the stimulus, so we don't actually need much of a return on investment from the actual projects. Simply getting a bit more than half of our money back from whatever projects are provided by the stimulus, then, would allow us to break even in terms of long-term debt.

 

[Nebula815]

And then the case is only made because it would be as good, for the current economy, to literally pay people to dig ditches then fill them back up as it would to do anything else: precisely how the spending is performed doesn't make much difference to the economy as long as it puts people to work.

You sure about that? I mean if you just pay people to do that, you aren't going to create any economic growth, you're just creating work, but you're getting nothing from it.

If government can step in and fulfill the role of the consumer by creating demand while there is no consumer demand, provided government can do this successfully, I could see a stimulus working, but just paying people to do the equivalent of dig holes then fill them back up creates nothing. It just provides a safety net for the people. And since it does nothing, one might as well just give the people checks via the mail without having them do anything.

Now, we should be somewhat careful in what we spend because a fair fraction of the money will end up as debt and needs to be paid back. So we want to spend on things that are likely to have a decent return (as opposed to digging ditches and filling them back in). But the nice thing is that under liquidity trap conditions, we expect a 50% return just from increased tax revenues due to the stimulus, so we don't actually need much of a return on investment from the actual projects. Simply getting a bit more than half of our money back from whatever projects are provided by the stimulus, then, would allow us to break even in terms of long-term debt.

I think the problem is that the government is not very efficient at spending the money on such projects though, and because the stimulus is so big, and was signed so fast, no one really had time to review exactly where all that money was going to go.

One thing I am curious about, you say the current stimulus isn't big enough. But the current stimulus has only itself had a fraction of the money spent. It isn't as if they flooded the economy with $787 billion and no effect yet, only a fraction of it has been paid out, and certain of that to creating government jobs. So how do you know it isn't big enough? Even if it was a $10 trillion stimulus, if only a small amount is paid out thus far, I doubt it would make any difference in the economy.

 

[Chalnoth]

You sure about that? I mean if you just pay people to do that, you aren't going to create any economic growth, you're just creating work, but you're getting nothing from it.

Actually, you are: you're employing people. Instead of those people barely getting by, they're able to live at least somewhat comfortable lives. They're able to buy adequate amounts of food, homes, some basic amenities. Sure, due to the economic conditions, they're still more likely to save than they would under a more stable environment, but they're still spending quite a bit more.

If government can step in and fulfill the role of the consumer by creating demand while there is no consumer demand, provided government can do this successfully, I could see a stimulus working, but just paying people to do the equivalent of dig holes then fill them back up creates nothing. It just provides a safety net for the people. And since it does nothing, one might as well just give the people checks via the mail without having them do anything.

True enough. But again, this is only an argument that we don't need to be overly-concerned with efficiency. It's not an argument that we actually should pay people to dig ditches and fill them back up. Like I said, we want to be able to pay the money back later.

Bear in mind, by the way, that the last time we had an economic crisis of similar severity was the Great Depression. We pulled out of the Great Depression through war spending, and war spending is even worse than the economic equivalent of digging ditches and filling them back up: you're actually extracting natural resources and then doing what amounts to dumping them into the ocean.

I think the problem is that the government is not very efficient at spending the money on such projects though, and because the stimulus is so big, and was signed so fast, no one really had time to review exactly where all that money was going to go.

Sure, but like I said, this doesn't really impact the argument.

One thing I am curious about, you say the current stimulus isn't big enough. But the current stimulus has only itself had a fraction of the money spent. It isn't as if they flooded the economy with $787 billion and no effect yet, only a fraction of it has been paid out, and certain of that to creating government jobs. So how do you know it isn't big enough? Even if it was a $10 trillion stimulus, if only a small amount is paid out thus far, I doubt it would make any difference in the economy.

Basically, the stimulus should be large enough to close the output gap. In late 2008, it was looking like the 2009-2010 output gap would be around $2 trillion. Because the stimulus has a greater effect on the GDP than simple expenditures, this would have required a stimulus of about $1.2-1.3 trillion to close. Of course, the economy ended up a fair amount worse, so the total stimulus should have been a bit higher than this. But still nowhere near $10 trillion.

As for the other money, there are three other types of spending:
1. Tax cuts. The economic case for these is extremely weak. They produced some growth, after all, but it appears that they produce quite a bit less growth for the money, under current conditions, than stimulus.
2. Bank bailouts. These were addressing a problem that really needed to be addressed, but in my opinion were handled exceedingly poorly. What we really needed was a major overhaul of the banking system, not to just hand out money to the same broken system and hope it's going to be okay.
3. Industry bailouts. These occupy an exceedingly minuscule fraction of the total, and were basically necessary. The overall effect here was quite positive, as near as I can tell, especially because the money is expected to be paid back.

 

[mheslep]

...
Basically, the stimulus should be large enough to close the output gap. In late 2008, it was looking like the 2009-2010 output gap would be around $2 trillion. Because the stimulus has a greater effect on the GDP than simple expenditures, this would have required a stimulus of about $1.2-1.3 trillion to close.

Where does this number, $1.2-1.3T, come from?

 

[Chalnoth]

Where does this number, $1.2-1.3T, come from?

Stimulus * multiplier = output gap.

Output gap = expected GDP without recession - expected actual GDP.

So with an output gap of $2 trillion, and an estimated multiplier of about 1.5, the amount required to close the gap would be around $1.3 trillion.

Of course, the output gap turned out to be a fair bit worse, so this would still have been too little (but at least it wouldn't have been the paltry $600 billion or so that we got...).

 

[WhoWee]

Nobody's mentioned the EPA today?

 

[Nebula815]

Actually, you are: you're employing people. Instead of those people barely getting by, they're able to live at least somewhat comfortable lives. They're able to buy adequate amounts of food, homes, some basic amenities. Sure, due to the economic conditions, they're still more likely to save than they would under a more stable environment, but they're still spending quite a bit more.

Yes, but why not just send them free checks in the mail? Because the labor they are doing is utterly pointless. They aren't creating any economic growth or building any infrastructure doing the equivalent of digging holes and then filling them back up. So you are paying them to do labor that accomplishes nothing. Why not just pay them without the labor?

True enough. But again, this is only an argument that we don't need to be overly-concerned with efficiency. It's not an argument that we actually should pay people to dig ditches and fill them back up. Like I said, we want to be able to pay the money back later.

Bear in mind, by the way, that the last time we had an economic crisis of similar severity was the Great Depression. We pulled out of the Great Depression through war spending, and war spending is even worse than the economic equivalent of digging ditches and filling them back up: you're actually extracting natural resources and then doing what amounts to dumping them into the ocean.

But war spending is actually producing goods and services. Sure, one could say they are worthless to the human condition, but what is the difference between producing military machinery and weapons purchased by the military (government) and producing the millions of consumer products that the public love that are technically useless?

For example, let's say the government decided to quadruple defense spending (I think it's a little over 5% GDP right now). So the economy would convert from producing consumer products, which the public prefer, but right now cannot afford, to producing far more weapons and military equipment, which the government would readily buy up, taking on debt temporarily to stimulate the economy, providing huge demand to the defense industry to make up for the lack of demand in the rest of the private sector.

That would definitely stimulate the economy. The problem is the consumer economy would take a huge hit, plus then we'd have a bunch of weapons with nothing to do with.

Sure, but like I said, this doesn't really impact the argument.

How does it not though? Because if the money just goes to fund the pet projects of various politicians, it isn't producing anything, and hence no economic growth. For example, if the money goes to legitimate projects, like building roads or bridges, it can create growth, but if it is just funding entitlements, for example, then no growth.

Basically, the stimulus should be large enough to close the output gap. In late 2008, it was looking like the 2009-2010 output gap would be around $2 trillion. Because the stimulus has a greater effect on the GDP than simple expenditures,

How do you know the stimulus has greater effect than simple expenditures?

this would have required a stimulus of about $1.2-1.3 trillion to close. Of course, the economy ended up a fair amount worse, so the total stimulus should have been a bit higher than this. But still nowhere near $10 trillion.

Yeah, I just used the $10 trillion as a random example. But the Congress has to have time to review exactly where all of the money will be spent to make sure it is going to create growth.

My point on the $10 trillion is what difference does it make if the stimulus is billions or trillions of dollars since only a fraction of the money has been spent now? For the stimulus to have it's full effect, wouldn't you need to flood the economy with all the money immediately? Which is very difficult because then you need to find where exactly to spend it all, which leads to corruption b/c no one can keep track of everything.

As for the other money, there are three other types of spending:
1. Tax cuts. The economic case for these is extremely weak. They produced some growth, after all, but it appears that they produce quite a bit less growth for the money, under current conditions, than stimulus.

I think it depends. Historically, we have seen growth result from tax cuts. We have never seen growth result from economic stimulus, except for maybe World War II, and even then, that is debatable.

That said, it also depends on where are the taxes. If they are already pretty low, then you're right, cutting them probabl won't make much difference, but if they are too high, then cutting them can have a significiant difference.

2. Bank bailouts. These were addressing a problem that really needed to be addressed, but in my opinion were handled exceedingly poorly. What we really needed was a major overhaul of the banking system, not to just hand out money to the same broken system and hope it's going to be okay.

Yes, IMO they need to break up those enormous banks or subject them to very heavy regulations, because they are not longer free-market. They will always be bailed out because they are too big too fail, and because of this, it will incentivize corruption and lead to another catastrophe in the future I think.

So they should be broken up.

3. Industry bailouts. These occupy an exceedingly minuscule fraction of the total, and were basically necessary. The overall effect here was quite positive, as near as I can tell, especially because the money is expected to be paid back.

Not sure on these. Part of the industry bailouts, such as that of the auto industry, I'd say was more a bailout of the unions, not the industry itself.

 

[mheslep]

Stimulus * multiplier = output gap.

Output gap = expected GDP without recession - expected actual GDP.

So with an output gap of $2 trillion, and an estimated multiplier of about 1.5, the amount required to close the gap would be around $1.3 trillion.

I provided a literature reference for the multiplier in post #12: 0.5 to 0.6. Where are you getting your figure?

 

[mheslep]

[...]
1. Tax cuts. The economic case for these is extremely weak. They produced some growth, after all, but it appears that they produce quite a bit less growth for the money, under current conditions, than stimulus.

You've been provided authoritative references in this thread (post #15) showing [STRIKE]the opposite.[/STRIKE] Edit: differing opinions, opposite is too strong. What is the basis for this statement?

 

[Chalnoth]

I provided a literature reference for the multiplier in post #12: 0.5 to 0.6. Where are you getting your figure?

Well, you can look in a number of different places. Here's the official estimate from the authors of the plan:
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

You can also look at what economists like Paul Krugman are saying, for instance:
http://krugman.blogs.nytimes.com/2009/11/10/depression-multipliers/
or
http://krugman.blogs.nytimes.com/2009/10/01/multiplying-multipliers/

 

[mheslep]

Well, you can look in a number of different places. Here's the official estimate from the authors of the plan:
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf...

Yes I read Romer's estimate and her earlier papers; I also saw Romer's estimate of the expected outcomes, and posted them in this thread, which as we now know are way off. I've also seen Krugman's blogs on this topic. Let's keep in mind here 'official' means only Romer's (expert) opinion on a controversial subject. For anyone doing similar reading, they'd likely be aware that many other notable economists, including macro laureates, have been stating the multiplier is much lower.

Knowing both sides of this debate, and now seeing the disappointing results, I suggest that we should consider it at least possible, even likely, that the estimated effects of the spending were wrong (ie the multiplier and Keynesian policy) and not blame it all the patient, ie the economy in recession being sicker than we thought. So while it is certainly possible to argue that more spending will substantially help, it is not defensible to state as fact in this thread that spending another ~$trillion would close the GDP gap.

 

[Chalnoth]

Yes I read Romer's estimate and her earlier papers; I also saw Romer's estimate of the expected outcomes, and posted them in this thread, which as we now know are way off. I've also seen Krugman's blogs on this topic. Let's keep in mind here 'official' means only Romer's (expert) opinion on a controversial subject. For anyone doing similar reading, they'd likely be aware that http://online.wsj.com/article/SB10001424052748704471504574440723298786310.html", have been stating the multiplier is much lower.

Knowing both sides of this debate, and now seeing the disappointing results, I suggest that we should consider it at least possible, even likely, that the estimated effects of the spending were wrong (ie the multiplier and Keynesian policy) and not blame it all the patient, ie the economy in recession being sicker than we thought. So while it is certainly possible to argue that more spending will substantially help, it is not defensible to state as fact in this thread that spending another ~$trillion would close the GDP gap.

It doesn't make any sense, though, that the multiplier could possibly be less than 1 under liquidity trap conditions. Did you confirm that these other estimates take into account the fact that we're under liquidity trap conditions? In particular, did you confirm that the data they used to estimate the model parameters used liquidity trap conditions to estimate said parameters?

 

[Nebula815]

One thing on Paul Krugman, don't rely solely on his opinions on the subject, as he is a rather hardcore leftist and rather ideological. Make sure to check the opinions of various economists of differing views.

 

[mheslep]

It doesn't make any sense, though, that the multiplier could possibly be less than 1 under liquidity trap conditions. Did you confirm that these other estimates take into account the fact that we're under liquidity trap conditions? In particular, did you confirm that the data they used to estimate the model parameters used liquidity trap conditions to estimate said parameters?

Yes they recognize interest rates are near zero. I'm not sure how that's relevant. Liquidity traps are about the limits of monetary policy and interest rate manipulations. They are not arguing for lowering the interest rates, as they can not be lowered. The paper is about fiscal policy. They argue, I think very effectively, that federal spending has much less stimulative impact than forecast by Romer.

http://www.volkerwieland.com/docs/CCTW%20Mar%202.pdf
It's an unusually straightforward read for an academic paper.
BTW, Taylor, is the creator of the "Taylor Rule" on interest rates, a part of the economic cannon now.

 

[Chalnoth]

Yes they recognize interest rates are near zero. I'm not sure how that's relevant.

It's entirely relevant. In fact, you could say it's practically the entire argument: it is specifically proposed that the liquidity trap conditions are what make it so that fiscal stimulus is beneficial. Any analysis that ignores this fact, or bases its empirical estimates of model parameters upon conditions other than a liquidity trap is destined to give the wrong answer.

By contrast, analyses that specifically look at liquidity trap conditions (specifically from the Great Depression and Japan's lost decade) find significant multipliers for fiscal policy.

 

[mheslep]

It's entirely relevant. In fact, you could say it's practically the entire argument: it is specifically proposed that the liquidity trap conditions are what make it so that fiscal stimulus is beneficial. Any analysis that ignores this fact, or bases its empirical estimates of model parameters upon conditions other than a liquidity trap is destined to give the wrong answer...

You didn't answer my question. I asked how does a liquidity trap impact spending stimulus, not for more of the same assertions.

 

[Chalnoth]

You didn't answer my question. I asked how does a liquidity trap impact spending stimulus, not for more of the same assertions.

Uh, this is at the foundation of the entire argument for a fiscal stimulus. The argument goes like this:

1. Under conditions of a liquidity trap, everybody wants to save, and the supply of money is essentially "free": money is hoarded instead of being let out into the general population. In this situation, monetary policy is ineffective, and cannot stimulate demand.
2. Because demand is suppressed, the economy can be stimulated by a large injection of demand, i.e. a fiscal stimulus.

It really is that simple. The lack of demand also means that a fiscal stimulus doesn't offset private spending, so you are guaranteed a multiplier greater than one.

 

[mheslep]

Uh, this is at the foundation of the entire argument for a fiscal stimulus.

The argument goes like this:

1. Under conditions of a liquidity trap, everybody wants to save, and the supply of money is essentially "free": money is hoarded instead of being let out into the general population. In this situation, monetary policy is ineffective, and cannot stimulate demand.
2. Because demand is suppressed, the economy can be stimulated by a large injection of demand, i.e. a fiscal stimulus.

Where, in this, is a liquidity trap 'a foundation for the entire argument'? I asked how liquidity traps could possibly force the multiplier above one as you assert in #29. Citing some econ 101 this and that is not a response.

It really is that simple. The lack of demand also means that a fiscal stimulus doesn't offset private spending, so you are guaranteed a multiplier greater than one.

Ok, a switch from liquidity trap to a lack of demand. They're not the same thing, even if the former depends on the latter. I'll have to take that as correction to #29.

I've found the common problem with these blogosphere derived discussion on fiscal policy is they forget or ignore:

GDP = Consumption + Investment + Govt spending + trade.​

Yes everyone always remember C and G, as it seems easy to control those. The problem is Investment, which is all about the private economy looking into the future and forming an expectation of the value, not of buying a car (that's C), but of starting a new company, of opening another factory in Podunk, and which BTW creates the vast majority of jobs. The investors are not fooled by road projects and large transfer payments to the states, which must be paid off either by large tax increases or currency inflation, pick one. Investment is required to raise the multiplier, and investment sucks right now.

 

[mheslep]

Some excerpts rom the paper Taylor et al on why the multiplier estimates from Romer are likely wrong:

I. The Problem with an Interest Rate Peg
Romer and Bernstein assume that the Federal Reserve pegs the interest rate—the federal funds rate—at the current level of zero for as long as their simulations run. Given their assumption that the spending increase is permanent, this means forever. In fact, such a pureinterest rate peg is prohibited in new Keynesian models with forward-looking households and firms because it produces calamitous economic consequences.

And at the last Fed meeting the Fed gave strong indications it is putting a raise of interest rates on the horizon. As they say above, Romer held it at ~zero for the entire stimulus period.

more coming ...

 

[Chalnoth]

I've found the common problem with these blogosphere derived discussion on fiscal policy is they forget or ignore:

GDP = Consumption + Investment + Govt spending + trade.​

Yes everyone always remember C and G, as it seems easy to control those. The problem is Investment, which is all about the private economy looking into the future and forming an expectation of the value, not of buying a car (that's C), but of starting a new company, of opening another factory in Podunk, and which BTW creates the vast majority of jobs. The investors are not fooled by road projects and large transfer payments to the states, which must be paid off either by large tax increases or currency inflation, pick one. Investment is required to raise the multiplier, and investment sucks right now.

Why? Why is investment required to raise the multiplier?

Because right now we can call trade basically a wash (everybody's in the same boat, so we shouldn't expect trade to change much). Investment is basically suppressed by the liquidity trap scenario, where the prime rate near zero ensures that people just want to hold cash (or equivalent) as much as possible. So we're left with C and G that can be meaningfully changed. And under the conditions of a liquidity trap, when you increase G by, say, 1%, then C automatically increases by around 0.5% just because you have more people making a living wage.

If the government really wants to raise investment, what they need to do is credibly raise the expectation of future inflation. If they can do that, then people will want to get away from holding cash and its equivalents into holding, well, investments. And raising the prime interest rate wouldn't do that, because it would just make us more likely to enter into deflation, which would make holding cash even more appealing, which would bring us deeper into the liquidity trap.

Let me also point out, by the way, that a sufficient fiscal stimulus is a pretty good way to credibly raise the expectation future inflation, because it puts more money into general circulation, and it adds to the national debt which the government is likely to want to inflate away (not too fast, mind you).

 

[mheslep]

Why? Why is investment required to raise the multiplier?[...]

The multiplier = dY/dG
Y = output (GDP), Y is a function of investment: C+G+I
G = Government spending.

Edit: oh, and Consumption is also dependent on Investment.

 

[Nebula815]

Uh, this is at the foundation of the entire argument for a fiscal stimulus. The argument goes like this:

1. Under conditions of a liquidity trap, everybody wants to save, and the supply of money is essentially "free": money is hoarded instead of being let out into the general population. In this situation, monetary policy is ineffective, and cannot stimulate demand.
2. Because demand is suppressed, the economy can be stimulated by a large injection of demand, i.e. a fiscal stimulus.

It really is that simple. The lack of demand also means that a fiscal stimulus doesn't offset private spending, so you are guaranteed a multiplier greater than one.

Fiscal stimulus will not necessary be an increase in demand in the economy simply due to the complexities and politics of how the money gets spent, and also the fact that the government is too slow to spend it. Unless the government can do the equivalent of literally replace consumers in their purchasing of products and services, it is very tricky. Money can go to worthless projects that do nothing, or to entitlements politicians want to fund, and so forth.

The larger the spending, the more difficult it is to keep track of how the money is spent, which makes more room for corruption. It is virtually impossible to literally "flood" the economy with the demand needed.

 

[Chalnoth]

The multiplier = dY/dG
Y = output (GDP), Y is a function of investment: C+G+I
G = Government spending.

Edit: oh, and Consumption is also dependent on Investment.

And if you increase both C and G without much impacting I, then total GDP rises.

 

[Chalnoth]

Fiscal stimulus will not necessary be an increase in demand in the economy simply due to the complexities and politics of how the money gets spent, and also the fact that the government is too slow to spend it.

Nope, that's pretty much irrelevant. The most important factor in determining the multiplier for fiscal stimulus is the overall status of the economy, not where the money is spent. Basically, as long as you're in a situation where demand is suppressed (i.e. a liquidity trap), then fiscal stimulus doesn't crows out private spending and you end up with a large multiplier.

It doesn't really matter what the stimulus is spent on, because the net effect is just to put people at work who wouldn't be at work otherwise, which means that more people are making a living wage, which means that more people are able to buy things and/or not pull out their investments. The stimulus is net beneficial (i.e. multiplier greater than 1) until you reach full employment (that is, the employment in a healthy economy, usually thought to be around 5% or so).

Now, as I've mentioned before, you don't want to be completely lax in spending: you do want to at least put some effort into spending for projects that will have later returns so as to pay off the debt incurred. But since the multiplier is greater than 1, you don't actually have to even pay that much back. For example, at a multiplier of around 1.5, and an average tax rate of 33%, fully half of the money put into the stimulus spending ends up being paid back as taxes.

In the end, what all this means is that as long as the government isn't really stupidly horrible at allocating funds, and invests in projects that are likely to get at least somewhat close to a 1:1 economic return, there is a net positive economic benefit from going for the stimulus. And since the stimulus is beneficial until full employment is reached, there is no sense in doing anything but going full-bore. And if it turns out that the stimulus package is a bit too big, then the Fed can always raise interest rates to bring inflation under control.

So no, inefficiency isn't a problem at all, because you don't need much efficiency at all to have a net positive economic impact. And even if you don't have a net positive economic impact, bear in mind that some of that debt will get inflated away in the coming years, and we have the added benefit of preventing a lot of children from growing up in poverty (due to their parents being out of work for an extended period of time: without stimulus, we're looking at around a decade of severe unemployment).

 

[Al68]

Uh, this is at the foundation of the entire argument for a fiscal stimulus. The argument goes like this:

1. Under conditions of a liquidity trap, everybody wants to save, and the supply of money is essentially "free": money is hoarded instead of being let out into the general population.

What does "let out into the general population mean? What money is being hoarded by who, if not the general population? What is a "free" supply of money?

That sounds like a pretty twisted misconception of this: http://en.wikipedia.org/wiki/Liquidity_trap

 

[Chalnoth]

What does "let out into the general population mean? What money is being hoarded by who, if not the general population? What is a "free" supply of money?

The point is that the money is not being used to buy and sell goods. This is the essence of the liquidity trap: the most lucrative investment available seems to be simply money (or its equivalents), and so people invest in money: it's the equivalent of taking your savings and putting it in a box in the ground.

And when it appears that money is the most sanguine investment people can have, then the government can put out as much money into the economy as it pleases, but it won't matter, because people, effectively, just put it in boxes and bury it in the ground. It isn't used to buy and sell goods. This is why monetary policy is almost completely useless during a liquidity trap.

That sounds like a pretty twisted misconception of this: http://en.wikipedia.org/wiki/Liquidity_trap

You can read a perhaps better description of the liquidity trap here:
http://en.wikipedia.org/wiki/Keynesian_economics#Excessive_saving

 

[Al68]

What does "let out into the general population mean? What money is being hoarded by who, if not the general population? What is a "free" supply of money?

The point is that the money is not being used to buy and sell goods.

Yeah, I get that point. The way you worded it implied that "the money" in question was the government's money, or being hoarded by government, instead of by the general population.

 

[mheslep]

And if you increase both C and G without much impacting I, then total GDP rises.

Yep, that's the magic trick. Easy to write down, hard to do.

 

[Nebula815]

Nope, that's pretty much irrelevant. The most important factor in determining the multiplier for fiscal stimulus is the overall status of the economy, not where the money is spent. Basically, as long as you're in a situation where demand is suppressed (i.e. a liquidity trap), then fiscal stimulus doesn't crows out private spending and you end up with a large multiplier.

Where the money is spent most certainly will count in determining the multiplier. If the money is spent in very wasteful ways where it does not reach the people it should, then there will be problems.

Also I'm a bit confused here, but if demand is suppressed, then private spending will be lower. The idea of fiscal stimulus is to take the place of that private spending until it returns to its normal level, but in order to do this, the stimulus must be spent properly.

It doesn't really matter what the stimulus is spent on, because the net effect is just to put people at work who wouldn't be at work otherwise, which means that more people are making a living wage, which means that more people are able to buy things and/or not pull out their investments.

But who's to say the stimulus money will put anyone to work? It could be wasted on other things, or it could go into projects where few people are put to work. That is the problem, as no one can keep track of it. If you spend $20 million in stimulus, that doesn't mean it is going to replace $20 million worth of demand in the private economy.

If you just mail the stimulus out to the population in the form of checks, that could work because it means the government temporarily takes the role of employer for people who are unemployed, and the government temporarily runs up debt. But even then, people will likely just hoarde the money, unless the checks will be regular until the economy repairs itself.

Of course then, many people won't look for work (why work when the government is giving free checks?) and thus the economy doesn't recover (it's like welfare trying to fix poverty: you pay people not to work and they won't).

Tax cuts are longer-term and allow people to reap the fruits of their labor, but that's the key word, labor, they have to go out and work.

So if the stimulus is spent on projects, there's a good chance much of the money will be wasted and won't just put people to work

If the money, to avoid the above problem, is directly mailed to the people, they will just hoarde it. If the government decides to provide regular checks until the economy recovers, it will disincentivize working completely.

So I do not see how a high multiplier comes out of this. In fact, the stimulus spending can elongate the recession by crowding out private-sector investment and/or disincentivizing job growth.

The stimulus is net beneficial (i.e. multiplier greater than 1) until you reach full employment (that is, the employment in a healthy economy, usually thought to be around 5% or so).

Now, as I've mentioned before, you don't want to be completely lax in spending: you do want to at least put some effort into spending for projects that will have later returns so as to pay off the debt incurred. But since the multiplier is greater than 1, you don't actually have to even pay that much back. For example, at a multiplier of around 1.5, and an average tax rate of 33%, fully half of the money put into the stimulus spending ends up being paid back as taxes.

It will depend on the projects. Building a road is not going to create any tax revenue, and a lot of the money could be wasted on various issues, for example.

In the end, what all this means is that as long as the government isn't really stupidly horrible at allocating funds,

Yeah, but usually they are. In fact, the government is notoriously inefficient and bad at spending money. The larger the stimulus, the less accountability as well, as no one can keep track of where all the money is going.

and invests in projects that are likely to get at least somewhat close to a 1:1 economic return,

That requires detailed analysis of the project which takes time.

there is a net positive economic benefit from going for the stimulus. And since the stimulus is beneficial until full employment is reached, there is no sense in doing anything but going full-bore. And if it turns out that the stimulus package is a bit too big, then the Fed can always raise interest rates to bring inflation under control.

But then you would completely negate the purpose of the stimulus package in the first place, because raising interest rates will hamstring the economy and drag it back into recession.

I think you are making two mistakes on the stimulus idea:

1) Historically it has never worked, and tends to either elongate a recession (like Japan) or create inflation, which then negated it in the first place because interest rates must then go up, which create another recession. That is the experience the Europeans have had, where it doesn't stimulate, but has resulted in inflation of the economy.

2) The economy is not a machine. "Demand" for example is not a solid thing that just can go up or down and in response one can increase government spending to this or that degree.

So no, inefficiency isn't a problem at all, because you don't need much efficiency at all to have a net positive economic impact.

If all worked perfectly perhaps, but there are other factors that prevent this, as I have listed.

And even if you don't have a net positive economic impact, bear in mind that some of that debt will get inflated away in the coming years, and we have the added benefit of preventing a lot of children from growing up in poverty (due to their parents being out of work for an extended period of time:

They will remain in poverty because likely either the money will not be spent to put a lot of people to work or if sent directly to them, if one check, then they hoarde it, if multiple checks, it kills job growth and lengthens the recession.

without stimulus, we're looking at around a decade of severe unemployment).

Says who though? The economy was in a severe recession back in the early 80s and made a very swift turnaround. We could do absolutely no stimulus, freeze federal spending, leave the economy alone, and it will turn itself around.

Or, we could stimulate it via permanent tax cuts (taxes are high enough to do this), which would incentivize job creation and economic growth.

 

[mheslep]

Or, we could stimulate it via permanent tax cuts (taxes are high enough to do this), which would incentivize job creation and economic growth.

Go tax cuts. Bring on the tax cuts.

 

[Nebula815]

The point is that the money is not being used to buy and sell goods. This is the essence of the liquidity trap: the most lucrative investment available seems to be simply money (or its equivalents), and so people invest in money: it's the equivalent of taking your savings and putting it in a box in the ground.

And when it appears that money is the most sanguine investment people can have, then the government can put out as much money into the economy as it pleases, but it won't matter, because people, effectively, just put it in boxes and bury it in the ground. It isn't used to buy and sell goods. This is why monetary policy is almost completely useless during a liquidity trap.

Confused again here, but what does monetary policy have to do with this? Monetary policy is the control of the money supply in the economy. The Fed has gunned up the money supply to counter the deflation occurring.

The stimulus where the people get put to work or get checks or whatnot is fiscal stimulus, which is what is being attempted.

But provided you could manage to put people to work and they get checks, if they are just going to hide the money in boxes, it won't work. Or if the money is directly sent to them via checks they may do the same, it won't work.

So it means that fiscal stimulus is completely useless in a liquidity trap by your argument.

 

[Chalnoth]

Confused again here, but what does monetary policy have to do with this? Monetary policy is the control of the money supply in the economy. The Fed has gunned up the money supply to counter the deflation occurring.

And you may have noticed that they have pumped out many trillions of dollars, and yet we're still facing the specter of deflation. That's the point of the liquidity trap: the Fed can pump out all the money it likes, but it isn't going to do much good.

The stimulus where the people get put to work or get checks or whatnot is fiscal stimulus, which is what is being attempted.

But provided you could manage to put people to work and they get checks, if they are just going to hide the money in boxes, it won't work. Or if the money is directly sent to them via checks they may do the same, it won't work.

The difference is that you're putting people to work who wouldn't be at work otherwise. Yes, given the status of the economy, they're likely to save as much as possible. But they're still also going to spend more than they would if they had no job at all.

The primary difference here is the vehicle through which the money goes from the government. For monetary policy, the money goes through the banking system. And in a liquidity trap, it just stops there, not making it out to the rest of the economy. With a fiscal stimulus, it goes directly into general circulation, either from wages paid, or from materials purchased (e.g. concrete for a bridge), and thus actually helps to combat deflation. Obviously some of that gets "buried in boxes", but much of it is actually spent.

 

[Nebula815]

The difference is that you're putting people to work who wouldn't be at work otherwise. Yes, given the status of the economy, they're likely to save as much as possible. But they're still also going to spend more than they would if they had no job at all.

Well true, but that's assuming the stimulus is spent efficiently to create jobs (as government is very inefficient at spending it). The jobs must also provide multiple payments, because if the people only get one payment, they will hoarde it.