News Stimulus spending (split from cap& trade thread)

[Chalnoth]

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.

But again, here's the thing: it doesn't need to be that efficient. The point is that almost no matter what the government does, paying to get stuff done increases the level of demand. And it's that increased level of demand which increases the number of jobs. That is, it's not just the people that are employed by the stimulus that increase the number of jobs, but also the people that are needed to supply the workers with their goods to get their work done, and the people needed to supply the workers with their purchases at home, etc.

Obviously, some expenses will be better than others. But it seems that it actually isn't very hard at all to get a decent multiplier out of stimulus spending.

 

[WhoWee]

But again, here's the thing: it doesn't need to be that efficient. The point is that almost no matter what the government does, paying to get stuff done increases the level of demand. And it's that increased level of demand which increases the number of jobs. That is, it's not just the people that are employed by the stimulus that increase the number of jobs, but also the people that are needed to supply the workers with their goods to get their work done, and the people needed to supply the workers with their purchases at home, etc.

Obviously, some expenses will be better than others. But it seems that it actually isn't very hard at all to get a decent multiplier out of stimulus spending.

A "stimulus" spent on State Gov't job subsidies and the hundreds of pork projects and extended unemployment and COBRA benefits is not "stimulative" - IT'S POLITICAL!

Further, making (500,000 ?) Federal buildings "green" (adding insulation) does very little for long term economic growth.

The problem with this discussion is that "stimulus" is separated from the rest of the Obama/Pelosi/Reid Political Agenda including but not limited to: Cap and Trade, Card Check, Media Regulation, and of course government control of health care leading to a massive expansion of Medicaid (increased State taxes).

But, let's not be too critical - at least Congresspersons are willing to admit they don't even read the Bills, they just do what THEIR (political) leaders tell them to do.

 

[Nebula815]

But again, here's the thing: it doesn't need to be that efficient. The point is that almost no matter what the government does, paying to get stuff done increases the level of demand. And it's that increased level of demand which increases the number of jobs. That is, it's not just the people that are employed by the stimulus that increase the number of jobs, but also the people that are needed to supply the workers with their goods to get their work done, and the people needed to supply the workers with their purchases at home, etc.

Obviously, some expenses will be better than others. But it seems that it actually isn't very hard at all to get a decent multiplier out of stimulus spending.

Again though, the problem is that no one knows if stuff will be bought or not. Money can go to people's pockets that it otherwise should not, and it also can go to funding various entitlements that it should not, neither of which will mean goods are bought, thus increasing demand.

 

[Chalnoth]

Again though, the problem is that no one knows if stuff will be bought or not.

Well, it can definitely be estimated on a population level. You can't honestly be suggesting that people who are employed will buy no more than they would if unemployed. But regardless, a fair amount must be bought, just to supply the particular projects being funded.

Money can go to people's pockets that it otherwise should not, and it also can go to funding various entitlements that it should not, neither of which will mean goods are bought, thus increasing demand.

This is typically a small percentage of such spending.

 

[mheslep]

...This is typically a small percentage of such spending.

The phrasing of that statement implies you've thoroughly reviewed 'such spending'. This is easy to lookup. A large chunk of the current stimulus went to support state Medicaid programs, which were going bust.

 

[Chalnoth]

The phrasing of that statement implies you've thoroughly reviewed 'such spending'. This is easy to lookup. A large chunk of the current stimulus went to support state Medicaid programs, which were going bust.

And this is a problem because?

I thought we were talking about money that went to lining peoples' pockets, not money that went to legitimate stimulus interests, such as medical care.

 

[mheslep]

And this is a problem because?

I thought we were talking about money that went to lining peoples' pockets, not money that went to legitimate stimulus interests, such as medical care.

I was talking about the validity of a statement in this thread. The statement that the funding of entitlements is a small portion of the US stimulus spending is invalid. We can't have useful follow on discussions about the justification of a policy if it is based on quicksand.

 

[Chalnoth]

I was talking about the validity of a statement in this thread. The statement that the funding of entitlements is a small portion of the US stimulus spending is invalid. We can't have useful follow on discussions about the justification of a policy if it is based on quicksand.

Well, I didn't say that. I was reacting to a different part of your statement, that it was going to lining peoples pockets that it should not.

And the statement that the stimulus shouldn't go out to fund state programs to keep people employed seems patently ludicrous to me. Such spending has been estimated as having about the largest multiplier of all of the various proposals in the stimulus package, so I really don't know why you'd pick on that one.

Unless you just think it's disgusting that poor people should get medical care.

 

[WhoWee]

And this is a problem because?

I thought we were talking about money that went to lining peoples' pockets, not money that went to legitimate stimulus interests, such as medical care.

It's a problem because it doesn't "stimulate". All it does is offer a short term cash flow "fix" for the state. Also, how is medical care a "legitimate stimulus" interest?

A legitimate stimulus interest is a guarantee of an asset based private sector business loan that creates permanent jobs.

 

[Chalnoth]

It's a problem because it doesn't "stimulate". All it does is offer a short term cash flow "fix" for the state. Also, how is medical care a "legitimate stimulus" interest?

Why, pray tell, do you think that this sort of spending doesn't stimulate the economy? It keeps people working who would have to be laid off otherwise!

A legitimate stimulus interest is a guarantee of an asset based private sector business loan that creates permanent jobs.

If it's permanent jobs you want, then this sort of spending certainly qualifies, because we're talking about spending to prevent layoffs in a sector where during normal economic times, the states have enough money to pay for the services. In fact, the aid to the states should have been vastly higher.

Do you have some strange idea that medical care doesn't require anybody to put in any work?

 

[WhoWee]

Why, pray tell, do you think that this sort of spending doesn't stimulate the economy? It keeps people working who would have to be laid off otherwise!


If it's permanent jobs you want, then this sort of spending certainly qualifies, because we're talking about spending to prevent layoffs in a sector where during normal economic times, the states have enough money to pay for the services. In fact, the aid to the states should have been vastly higher.

Do you have some strange idea that medical care doesn't require anybody to put in any work?

First, the states had very little discretion over use of funds.
Second, perhaps some of the state jobs should be eliminated - and that should be decided on a state by state basis (it's a sustained tax issue).
Last, government jobs do not make a net contribution to the tax base - they are an expense of tax dollars.
Are YOU willing to pay a state income tax in excess of 10 to 15 percent? The shell game of "tax the rich and spend on the poor" works politically on the national stage - but is ultimately paid by everyone on a local basis. If in doubt, do a little reading on the subject of state responsibility regarding low income Medicare beneficiaries and the planned expansion of Medicaid.
Once a low income person joins Medicare and Medicaid, they are designated Dual Eligible and qualify for Special Needs Plans.
DE-SNP beneficiaries pay for NOTHING except $1 to $6 for prescriptions. Medicaid (mostly a state responsibility) assumes the expense.

 

[Chalnoth]

The jobs that subsidizing programs like Medicaid saves are not, primarily, government jobs. The administrative overhead of government-run health insurance is a very very small, much smaller than private health insurance. The vast majority of that money goes directly towards paying health care professionals, who are the ones whose jobs are primarily saved by such spending.

But regardless of this point of fact, I find your opposition to poor people getting medical care revolting.

 

[mheslep]

The administrative overhead of government-run health insurance is a very very small, much smaller than private health insurance.

Source?

 

[WhoWee]

The jobs that subsidizing programs like Medicaid saves are not, primarily, government jobs. The administrative overhead of government-run health insurance is a very very small, much smaller than private health insurance. The vast majority of that money goes directly towards paying health care professionals, who are the ones whose jobs are primarily saved by such spending.

But regardless of this point of fact, I find your opposition to poor people getting medical care revolting.

I really don't care about your emotional outburst, but you do need to support your claim that Govt operates with less admin exp than the private sector - and please factor out admin exp mandated upon private companies by Govt.

 

[WhoWee]

The threshold for QMB status in 2009 was $908/month per an individual. This person is eligible for free medical (a $400+/ mos benefit + cost of care), does not pay into Medicare Part B ($96.40), is eligible for food stamps and possibly housing.

These programs start in Washington and are dumped upon the states.

 

[Chalnoth]

Source?

http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf

Here's the meat:

These administrative spending numbers have been challenged on the grounds that they exclude some aspects of Medicare’s administrative costs, such as the expenses of collecting Medicare premiums and payroll taxes, and because Medicare’s larger average claims because of its older enrollees make its administrative costs look smaller relative to private plan costs than they really are.

However, the Congressional Budget Office (CBO) has found that administrative costs under the public Medicare plan are less than 2 percent of expenditures, compared with approximately 11 percent of spending by private plans under Medicare Advantage. This is a near perfect “apples to apples” comparison of administrative costs, because the public Medicare plan and Medicare Advantage plans are operating under similar rules and treating the same population.

(And even these numbers may unduly favor private plans: A recent General Accounting Office report found that in 2006 Medicare Advantage plans spent 83.3 percent of their revenue on medical expenses, with 10.1 percent going to non-medical expenses and 6.6 percent to profits—a 16.7 percent administrative share.)

If you look at the variety of estimates of private insurance administrative costs, you'll note that theirs is among the lower estimates:
http://en.wikipedia.org/wiki/Health_care_in_the_United_States#Administrative_costs

Granted, this is private vs. Medicare, but I have no reason to believe that private vs. Medicaid would be any different.

Finally, even in the obscenely unlikely situation that Medicaid actually happened to be on par with private insurance in terms of administrative overhead, it would still be the case that the vast majority of the funds that go to Medicaid would end up directly paying for patient care. So my statement that the jobs saved by funding Medicaid are health care provider jobs stands.

 

[WhoWee]

http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf

Here's the meat:

If you look at the variety of estimates of private insurance administrative costs, you'll note that theirs is among the lower estimates:
http://en.wikipedia.org/wiki/Health_care_in_the_United_States#Administrative_costs

Granted, this is private vs. Medicare, but I have no reason to believe that private vs. Medicaid would be any different.

Finally, even in the obscenely unlikely situation that Medicaid actually happened to be on par with private insurance in terms of administrative overhead, it would still be the case that the vast majority of the funds that go to Medicaid would end up directly paying for patient care. So my statement that the jobs saved by funding Medicaid are health care provider jobs stands.

Do you have a source that adjusts for govt mandated compliance like HIPPA/MIPPA? Also, let's not forget that govt controls ALL pricing models - even commission structures of insurance agents.

 

[Chalnoth]

Do you have a source that adjusts for govt mandated compliance like HIPPA/MIPPA? Also, let's not forget that govt controls ALL pricing models - even commission structures of insurance agents.

There's no possible way that that could change the outcome here. The profits of the private insurance were larger than the total administrative overhead of Medicare.

 

[mheslep]

http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf

Here's the meat: [...]

Then you assert that the 'meat' is, that this poli sci Prof says that the CBO says public overhead is 2% vs 11% for private?

If you look at the variety of estimates of private insurance administrative costs, you'll note that theirs is among the lower estimates..

Aside from purposes of definition, Wiki links don't aid politically controversial discussions, I find.

 

[mheslep]

There's no possible way that that could change the outcome here. The profits of the private insurance were larger than the total administrative overhead of Medicare.

What private insurance? All US private insurance profits > total Medicare admin? Absolute, or percentage?

 

[Chalnoth]

What private insurance? All US private insurance profits > total Medicare admin? Absolute, or percentage?

You can track it down yourself if you want. I don't care to, because this point is largely irrelevant to my original point anyway: the vast majority of the money that goes to Medicaid goes straight to paying medical bills. That means that the people that that money keeps employed are mostly health care providers (and those who make/sell medical equipment/supplies), not government employees.

 

[WhoWee]

Administrative overhead compared to TOTAL profits? What kind of a comparison are you attempting to make - are you talking about ALL of the operations of private insurance companies or their Medicare operating units?

As for tracking it down ourselves, no thanks. Please explain.

 

[WhoWee]

You can track it down yourself if you want. I don't care to, because this point is largely irrelevant to my original point anyway: the vast majority of the money that goes to Medicaid goes straight to paying medical bills. That means that the people that that money keeps employed are mostly health care providers (and those who make/sell medical equipment/supplies), not government employees.

You are aware that Part C - MAPD's are an underwriting of Orig Medicare by private insurance companies?

 

[mheslep]

Part of the argument for effective fiscal stimulus requires that money lenders do not demand high rates for the debt, i.e. they have high confidence in the notes. Geithner's trip to China indicates many do not have high confidence.

China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high.

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, [...]

http://www.reuters.com/article/idUSPEK14475620090601

 

[Chalnoth]

Part of the argument for effective fiscal stimulus requires that money lenders do not demand high rates for the debt, i.e. they have high confidence in the notes.

Those two do not correspond to one another. High confidence in the notes means that the interest rates on government bonds should be extremely low. And they are.

High lending rates are a different issue that is also predicted by the model.

 

[mheslep]

Those two do not correspond to one another. High confidence in the notes means that the interest rates on government bonds should be extremely low. And they are.

Yes, for the moment. The lack of confidence displayed above indicates that they won't stay that way.

High lending rates are a different issue that is also predicted by the model.

High lending rates are predicted by what model, on what set of inputs to that model?

 

[Chalnoth]

Yes, for the moment. The lack of confidence displayed above indicates that they won't stay that way.

Ugh, Geithner's comments make no sense whatsoever. If China started selling off our assets, they'd be doing us a favor: it would increase the value of China's currency while decreasing our own, which would mean that our own goods would become cheaper on the world market, increasing demand, which is exactly what we need right now to boost the economy.

Unless, of course, it's a bit of reverse psychology and he's hoping that the Chinese will start getting worried (contrary to what the market is saying).

High lending rates are predicted by what model, on what set of inputs to that model?

Ugh, it's basic Keynesian economics. Why not read up on it?

 

[mheslep]

Ugh, Geithner's comments make no sense whatsoever. If China started selling off our assets, they'd be doing us a favor: it would increase the value of China's currency while decreasing our own, which would mean that our own goods would become cheaper on the world market, increasing demand, which is exactly what we need right now to boost the economy.

That's not what he means. China is not, can not sell off US securities in any large way with taking massive losses. The US needs China to continue buying future debt, which it clearly indicates it needs when raising the debt ceiling by another http://www.news-herald.com/articles/2009/12/16/opinion/nh1834363.txt"

Ugh, it's basic Keynesian economics. Why not read up on it?

The snark doesn't help your case.

You stated:

High lending rates are a different issue that is also predicted by the model.

Romer assumed interest rates would stay LOW in her fiscal stimulus model, posted up thread. Now it appears they may not stay that way (as predicted in the reference I cited above). If they don't, the classic crowding out problem begins to apply in the competition for money, killing off the effect of the remaining (the majority) of the stimulus spending.

 

[Chalnoth]

That's not what he means. China is not, can not sell off US securities in any large way with taking massive losses. The US needs China to continue buying future debt, which it clearly indicates it needs when raising the debt ceiling by another http://www.news-herald.com/articles/2009/12/16/opinion/nh1834363.txt"

That's not at all necessary. If the US government didn't find buyers for its debt, it would just borrow from itself. It's more inflationary that way, but then that's precisely what we need right now.

You stated:
Romer assumed interest rates would stay LOW in her fiscal stimulus model, posted up thread. Now it appears they may not stay that way (as predicted in the reference I cited above). If they don't, the classic crowding out problem begins to apply in the competition for money, killing off the effect of the remaining (the majority) of the stimulus spending.

Again you have to distinguish between the prime interest rate and the interest rates that lenders are offering. The interest rates that lenders are offering are and will remain quite high because we're in a liquidity trap: lenders are under economic pressure to not lend money.

And if the Fed increases the prime rate any time soon, well, they'd basically just be screwing over the entire economy. I sincerely hope they don't try.

 

[mheslep]

Economist Robert Barro on stimulus spending:
http://online.wsj.com/article/SB10001424052748704471504574440723298786310.html"

[...]The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

 

[Chalnoth]

Economist Robert Barro on stimulus spending:
http://online.wsj.com/article/SB10001424052748704471504574440723298786310.html"

Well, that's because those empirical models had their parameters estimated in situations other than a liquidity trap. A liquidity trap acts something like a phase change in the economy, and that means that attempting to extrapolate the behavior of the economy under liquidity trap conditions would be rather like attempting to extrapolate the behavior of ice by examining liquid water alone.

 

[mheslep]

Well, that's because those empirical models had their parameters estimated in situations other than a liquidity trap. A liquidity trap acts something like a phase change in the economy, and that means that attempting to extrapolate the behavior of the economy under liquidity trap conditions would be rather like attempting to extrapolate the behavior of ice by examining liquid water alone.

I think that analogy is overdrawn. Anyway, let's accept for the moment Barro gathered stimulus data under conditions that are different from now. Barro says the multiplier is less than one under the historical conditions. Now say the only difference between then and now is that now we have a liquidity trap. So? This simply means that lowering interest rates has no further positive effect. It doesn't mean that spending will.

 

[Chalnoth]

I think that analogy is overdrawn. Anyway, let's accept for the moment Barro gathered stimulus data under conditions that are different from now. Barro says the multiplier is less than one under the historical conditions. Now say the only difference between then and now is that now we have a liquidity trap. So? This simply means that lowering interest rates has no further positive effect. It doesn't mean that spending will.

Liquidity trap conditions change everything. For example, this paper looks at the impact of certain types of tax cuts on employment with and without a liquidity trap:
http://www.newyorkfed.org/research/staff_reports/sr402.pdf

Basically, under normal circumstances, if you lower taxes, then you make labor less expensive, which makes goods less expensive to produce, which allows companies to employ more people and produce more goods for the same cost, which increases overall productivity and employment while adding some deflationary pressure to the economy, which can be countered by a drop in interest rates.

But that's not the situation we're in. The situation we're in is different for three main reasons: first, we already have strong deflationary pressure on the economy. Adding more deflationary pressure is a very, very bad thing. Second, the government cannot lower interest rates. Third, the problem with the economy now isn't a lack of supply: it's a lack of demand. If you increase the supply, demand doesn't suddenly increase as a result.

So what happens under a liquidity trap is that if you decrease taxes on wages, then prices of goods declines, which increases deflationary pressures that the government can no longer counter due to the liquidity trap, which places a greater debt burden on the general populace, which causes them to contract spending even further, which lowers employment.

This perverse reversal of the effects of certain types of policy actions during a liquidity trap is precisely why it's so important to only consider liquidity trap conditions when attempting to do any sort of empirical study of such things. Unfortunately, there are basically only three examples: the Great Depression, Japan's lost decade, and our current crisis.

 

[mheslep]

Liquidity trap conditions change everything. For example, this paper looks at the impact of certain types of tax cuts on employment with and without a liquidity trap:
http://www.newyorkfed.org/research/staff_reports/sr402.pdf

Basically, under normal circumstances, if you lower taxes, then you make labor less expensive, which makes goods less expensive to produce, which allows companies to employ more people and produce more goods for the same cost, which increases overall productivity and employment while adding some deflationary pressure to the economy, which can be countered by a drop in interest rates.

But that's not the situation we're in. The situation we're in is different for three main reasons: first, we already have strong deflationary pressure on the economy. Adding more deflationary pressure is a very, very bad thing. Second, the government cannot lower interest rates. Third, the problem with the economy now isn't a lack of supply: it's a lack of demand. If you increase the supply, demand doesn't suddenly increase as a result.

So what happens under a liquidity trap is that if you decrease taxes on wages, then prices of goods declines, which increases deflationary pressures that the government can no longer counter due to the liquidity trap, which places a greater debt burden on the general populace, which causes them to contract spending even further, which lowers employment.

This perverse reversal of the effects of certain types of policy actions during a liquidity trap is precisely why it's so important to only consider liquidity trap conditions when attempting to do any sort of empirical study of such things. Unfortunately, there are basically only three examples: the Great Depression, Japan's lost decade, and our current crisis.

Your post still does not even attempt to argue that fiscal spending will work, only that several other types of remedies won't. I see that Eggertsson in his paper makes a case for govt. spending - there's an argument there. I believe he was one Krugman's students at Princeton? I see Eggestson also argues investment tax cuts would work as opposed to labor. That makes sense to me.

[...]Temporarily cutting sales taxes and implementing an investment tax credit are both examples of effective fiscal policy. These tax cuts are helpful not because of their effect on aggregate supply, but because they directly stimulate aggregate spending.

 

[Chalnoth]

Your post still does not even attempt to argue that fiscal spending will work, only that several other types of remedies won't.

Yes, I was making a different argument, that many fiscal strategies have extremely different effects under liquidity trap conditions, so much so that you cannot expect empirically-estimated models to be valid under liquidity trap conditions unless their parameters were estimated under such conditions.

I see that Eggertsson in his paper makes a case for govt. spending - there's an argument there. I believe he was one Krugman's students at Princeton? I see Eggestson also argues investment tax cuts would work as opposed to labor. That makes sense to me.

Yes, basically. Though I should mention that tax cuts on savings are bad under these circumstances. They have the same basic effect as tax cuts on labor: they add deflationary pressure, which causes people to buy fewer things, further depressing the economy.

 

[mheslep]

Yes, I was making a different argument, that many fiscal strategies have extremely different effects under liquidity trap conditions, so much so that you cannot expect empirically-estimated models to be valid under liquidity trap conditions unless their parameters were estimated under such conditions.


Yes, basically. Though I should mention that tax cuts on savings are bad under these circumstances. They have the same basic effect as tax cuts on labor: they add deflationary pressure, which causes people to buy fewer things, further depressing the economy.

A tax cut on savings? How is that done?

 

[Chalnoth]

A tax cut on savings? How is that done?

Capital gains.

 

[mheslep]

Capital gains.

Ok a that's a tax reduction that would encourage savings, that per Eggertsson is undesirable in a recession. It's not obvious why this is so, as I understood capital gains reductions encouraged more investment in things like stocks and housing, not less. Apparently Marting Feldstein disagrees with Eggertsson.

 

[Chalnoth]

Ok a that's a tax reduction that would encourage savings, that per Eggertsson is undesirable in a recession. It's not obvious why this is so, as I understood capital gains reductions encouraged more investment in things like stocks and housing, not less. Apparently Marting Feldstein disagrees with Eggertsson.

From what I understand, capital gains taxes apply to a wide variety of things, some of which would be classified as investment, some as savings. Given this argument, reducing capital gains taxes across the board would clearly be a bad thing.

That said, I'm not sure right now what the effect of, for instance, reducing capital gains taxes on stocks would be. One potentially nasty effect might be that in an environment of stock market uncertainty it might cause people to want to cash out on their stocks even more, and instead place that money in some non-investment savings.

 

[Nebula815]

Yes, basically. Though I should mention that tax cuts on savings are bad under these circumstances. They have the same basic effect as tax cuts on labor: they add deflationary pressure, which causes people to buy fewer things, further depressing the economy.

I think it depends. When taxes were slashed under Reagan, many economists said they would overwhelm the economy with demand and increase inflation, but it didn't happen.

That said, I'm not sure right now what the effect of, for instance, reducing capital gains taxes on stocks would be. One potentially nasty effect might be that in an environment of stock market uncertainty it might cause people to want to cash out on their stocks even more, and instead place that money in some non-investment savings.

Usually raising taxes on capital gains results in this, as people see that they'd better cash out their stocks, get their money, then move into non-investment savings before the tax increase kicks in. That was one of the problems in the late 1970s. There was no money in the stock and bond markets to fund businesses, as most money was in tax-safe trusts and commodities.

When the capital gains and dividend tax rates were cut, money flooded out of those things and into the stock and bond markets.

 

[Chalnoth]

I think it depends. When taxes were slashed under Reagan, many economists said they would overwhelm the economy with demand and increase inflation, but it didn't happen.

I believe the more significant worry was a monstrous rise in national debt, which the conservatives said wouldn't happen, but nevertheless did.

Usually raising taxes on capital gains results in this, as people see that they'd better cash out their stocks, get their money, then move into non-investment savings before the tax increase kicks in. That was one of the problems in the late 1970s. There was no money in the stock and bond markets to fund businesses, as most money was in tax-safe trusts and commodities.

When the capital gains and dividend tax rates were cut, money flooded out of those things and into the stock and bond markets.

Given how skittish people are about stocks right now, I wouldn't bet on a repeat of this. However, I wouldn't be terribly surprised if it happened to be the case. It doesn't really impact the core of what I'm trying to say here, that you can't use empirically-estimated models outside of liquidity trap conditions to determine behavior during liquidity trap conditions.

 

[mheslep]

... It doesn't really impact the core of what I'm trying to say here, that you can't use empirically-estimated models outside of liquidity trap conditions to determine behavior during liquidity trap conditions.

The other side of that coin is the admission that, due to the claim that there's little or no experience with these kind of conditions, there's also little empirical evidence that fiscal spending works in these conditions either.

 

[Nebula815]

I believe the more significant worry was a monstrous rise in national debt, which the conservatives said wouldn't happen, but nevertheless did.

The debt a little more than doubled, but so did the economy in size by the end of Reagan's administration. Also important to remember is Reagan ran a deficit for his defense spending. What also increased the deficit was the increase in interest rates at the Federal Reserve to kill the double-digit inflation at the time.

 

[Chalnoth]

The other side of that coin is the admission that, due to the claim that there's little or no experience with these kind of conditions, there's also little empirical evidence that fiscal spending works in these conditions either.

And even though we don't have a whole lot of statistical support for what sort of policy is best here, what little evidence we do have is in support of fiscal policy being expansionary during a liquidity trap. For example, the New Deal was basically fiscal policy, and it was quite expansionary (though not nearly enough...it wasn't until WW2 that that was fiscal expansion proportionate to the problem, and that's what finally ended the depression). Japan also tried similar things, off and on, and those years where it tried the most expansionary policy were when there was the most growth.

 

[Nebula815]

And even though we don't have a whole lot of statistical support for what sort of policy is best here, what little evidence we do have is in support of fiscal policy being expansionary during a liquidity trap. For example, the New Deal was basically fiscal policy, and it was quite expansionary (though not nearly enough...it wasn't until WW2 that that was fiscal expansion proportionate to the problem, and that's what finally ended the depression). Japan also tried similar things, off and on, and those years where it tried the most expansionary policy were when there was the most growth.

The thing with the Great Depression is that it wasn't per se just an economic recession caused by a major financial crises, it was basically a minor financial crises in hindsight that was made horrendous by the actions of the Federal Reserve and the federal government. The Fed let the banking system fail and Congress and President Hoover enacted a huge tariff (Smoot-Hawley) and then a massive tax increase.

Then FDR went and raised taxes even further, and did various other things to hamstring the economy.

Some say the Great Depression provided the necessary spending to get us out of the Depression and this is possible, but also to remember is that when the U.S. entered the war, a lot of the workforce (the men) was sent over to fight, which automatically brought down the unemployment rate.

With Japan, I would say one of their main problems was they tried too much to centrally manage their economy, which is what extended their recession, not lack of fiscal stimulus.

 

[mheslep]

And even though we don't have a whole lot of statistical support for what sort of policy is best here, what little evidence we do have is in support of fiscal policy being expansionary during a liquidity trap.

What? When?

For example, the New Deal was basically fiscal policy,

For example? What are you talking about? There was no liquidity trap in the Great Depression, just the opposite. Liquidity was cut to pieces, interest rates high.

and it was quite expansionary (though not nearly enough...it wasn't until WW2 that that was fiscal expansion proportionate to the problem, and that's what finally ended the depression).

Where's the evidence? There's also support for the idea that the military's action of taking 10m men off the labor rolls for several years fixed the Depression.

Japan also tried similar things, off and on, and those years where it tried the most expansionary policy were when there was the most growth.

Anemic, lousy growth despite huge amounts of spending.

 

[Chalnoth]

Some say the Great Depression provided the necessary spending to get us out of the Depression and this is possible, but also to remember is that when the U.S. entered the war, a lot of the workforce (the men) was sent over to fight, which automatically brought down the unemployment rate.

That's not a reasonable analysis. During the war, the workforce expanded dramatically because women were put to work (in many cases for the first time). And also bear in mind that there was no massive unemployment problem when those men got back, as there would have been if this was merely a matter of people going off to war.

With Japan, I would say one of their main problems was they tried too much to centrally manage their economy, which is what extended their recession, not lack of fiscal stimulus.

Over their decade of economic stagnation, they tried a wide variety of things, many of them bad.

The indications right now, by the way, are that we're looking at a similar duration of economic stagnation, unless the government really changes tack and tries some real stimulus.

 

[Nebula815]

That's not a reasonable analysis. During the war, the workforce expanded dramatically because women were put to work (in many cases for the first time). And also bear in mind that there was no massive unemployment problem when those men got back, as there would have been if this was merely a matter of people going off to war.

From 1940 to 1944, unemployment decreased by about seven million while the armed forces increased by about ten million, so there was a large reduction in the unemployment rate. Meanwhile the workforce did expand which women took over for wartime production. After WWII ended, a lot of the New Deal programs were ended as well so the economy was not as hamstrung.

The indications right now, by the way, are that we're looking at a similar duration of economic stagnation, unless the government really changes tack and tries some real stimulus.

Or, the government could do absolutely nothing for the most part and the economy will recover itself (not saying you are flat wrong but not that you are correct either).

 

[Chalnoth]

From 1940 to 1944, unemployment decreased by about seven million while the armed forces increased by about ten million, so there was a large reduction in the unemployment rate. Meanwhile the workforce did expand which women took over for wartime production. After WWII ended, a lot of the New Deal programs were ended as well so the economy was not as hamstrung.

Just goes to show what tremendous good can be done to the economy, under the right conditions, when the government starts buying lots of things (i.e. a fiscal stimulus).

Or, the government could do absolutely nothing for the most part and the economy will recover itself (not saying you are flat wrong but not that you are correct either).

Well, sure, eventually, but it would take one hell of a long time.

 

[WhoWee]

Just goes to show what tremendous good can be done to the economy, under the right conditions, when the government starts buying lots of things (i.e. a fiscal stimulus).


Well, sure, eventually, but it would take one hell of a long time.

I'm a little confused...do you think Obama's stimulus is responsible for significnt economic recovery to date - or are you giving credit to Bush for the bank bailout?