Stimulus spending (split from cap& trade thread)

[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?

 

[Nebula815]

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).

That depends. Wars can do a lot of bad to an economy as well because the government has to run up some very high deficits and debts, which make investors very nervous about holding the bonds of that nation. U.S. bonds have always retained their Triple-A rating, even with two world wars and a depression.

But also remember, the Depression was a result of high interest rates and too much government interference.

Moody's has said they may have to consider downgrading the value of U.S. bonds. If that occurs, any increased "stimulus" will be negated through higher interest rates. Also, stimulus spending itself can create inflation, which can lead to higher interest rates.

Also, stimulus doesn't necessarily mean the government is buying things, and when so, it happens slowly and inefficiently.

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

It could take a fairly short period. Time will tell. Economies go through recessions and recover on their own plenty. Government stimulus tries to make up for the lack of consumer demand when the recession occurs, but historically we have never had a big enough stimulus enacted (except for maybe WWII, and even then, that level of spending was a bad solution for that depression, considering its causes), yet the economy has always pulled itself out of recessions nonetheless.

I do not see why it will not this time either.

 

[Chalnoth]

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?

I wasn't saying anything at all about either of those things in that post. I was talking about what WW2 has to say about the effectiveness of fiscal stimulus.

 

[Chalnoth]

That depends. Wars can do a lot of bad to an economy as well because the government has to run up some very high deficits and debts, which make investors very nervous about holding the bonds of that nation. U.S. bonds have always retained their Triple-A rating, even with two world wars and a depression.

I don't think there's any evidence that it happens this way. As far as I can tell, the only bad that wars can do to the economy is through the destruction of infrastructure. The period immediately following World War II was one of the most prosperous periods in US history, if not the most prosperous.

Now, I'm sure that if our government was unstable or habitually irresponsible, our debt could become a big problem. But there's no evidence of either of those things occurring. After all, more corrupt and less stable governments, such as Italy, have managed to do just fine under even higher debt loads.

And even then, in order to produce an effective fiscal stimulus, we wouldn't need to do nearly as much as was done during WW2: the WW2 spending was completely disproportionate to the size of the economic problem. In fact, they made use of rationing in order to suppress public demand so that resources could be reserved for the war effort. There's no need to go so overboard with the current crisis. We don't need to go into nearly as much debt for the same effect (because engaging in rationing would be silly), and we also aren't at risk of the destruction of our infrastructure, as is often the case during war.

But also remember, the Depression was a result of high interest rates and too much government interference.

This makes no sense to me. Financial malfeasance had far more to do with the Great Depression than interest rates. The much tighter regulation that came out of the Depression on banks and the stock exchanges prevented any recurrences. The US didn't have one single significant recession after the Great Depression until those regulations started to be lifted under Reagan.

Moody's has said they may have to consider downgrading the value of U.S. bonds. If that occurs, any increased "stimulus" will be negated through higher interest rates. Also, stimulus spending itself can create inflation, which can lead to higher interest rates.

That would be great! We're under tremendous risk of deflation right now. Added inflationary pressure would be a significant aid to our economy. The Fed can always increase the base interest rate if we start to get a problem with inflation.

Also, stimulus doesn't necessarily mean the government is buying things, and when so, it happens slowly and inefficiently.

The money doesn't magically disappear into the ether. It's used to pay workers and purchase goods. And for its effect on the economy, the efficiency (or lack thereof) of government spending is completely irrelevant. To take the example of WW2 again, that spending was pretty much 100% inefficient: aside from perhaps a few things that were required to build the US war machine, but also happened to have beneficial side effects for the economy, nearly all of the money and resources spent on the war were effectively dumped in the trash. None of the tanks, guns, bullets, airplanes, military bases, or pretty much anything built for the war was in any way useful for the economy as a whole. The war spending was the economic equivalent of Keynes' example of paying workers to dig ditches then fill them back up.

And despite the complete and utter lack of any efficiency, the WW2 spending provided a massive economic stimulus, completely getting the US out of the Great Depression, all the while building an economy that quite easily got the US out of the debt that it racked up during the war.

It could take a fairly short period. Time will tell. Economies go through recessions and recover on their own plenty. Government stimulus tries to make up for the lack of consumer demand when the recession occurs, but historically we have never had a big enough stimulus enacted (except for maybe WWII, and even then, that level of spending was a bad solution for that depression, considering its causes), yet the economy has always pulled itself out of recessions nonetheless.

I do not see why it will not this time either.

Because we're in a liquidity trap. Name one liquidity trap scenario that resolved itself in such a short time.

 

[Chalnoth]

I think I'll go ahead and take a somewhat different tack on this. Governments are not households, and what entails fiscal responsibility for a household does not directly relate to fiscal responsibility for governments. To attempt to illustrate this, I'm going to try to approach the issue while completely ignoring money.

If we completely ignore money, economies are essentially about the production and consumption of capital. By capital here I mean the raw materials that we use to do various things. Capital includes bricks, food, cloth, etc. The first point here is that capital isn't just something that sits around: capital is produced by human labor. We may use various natural resources to generate said capital, and those resources may or may not be limited, but in the end the capital can only be made available for consumption if human labor is first applied.

So, human labor produces capital. And if we want to maintain a certain standard of living (a nice home, food on the table, running water, a TV), then capital has to be consumed at some rate. We will then assume that whenever anyone person is engaged in the production of capital, the economy will redistribute whatever capital they produce such that they end up consuming capital to do things needed to maintain a decent lifestyle (e.g. eat, have a house, TV, computer, car, etc.).

Now, then, we have entered a massive recession. The unemployment rate has skyrocketed. Suddenly we have a number of people who are no longer producing capital, and so there is much less to go around for everybody to consume. Furthermore those who are not producing capital have lost the ability to trade whatever capital they produce for the capital they need, and so we have a lot of people who have dramatically lowered standards of living.

If we want to fix this situation, the only thing that we need to do is to get people back to producing capital again. If we can do that, then once again the economy will ensure that nearly everybody will be receiving the capital they need to have a decent lifestyle: the economy will have recovered. Any and all actions that we perform to produce an economic recovery are but means to the end of achieving an acceptable unemployment level (say, 4-5%). It doesn't make sense that an action that gets us to that point could be a bad thing for the economy, because then the real goal will have been achieved: the population will once again be operating at near peak output, and thus there will be a maximal amount of capital to spread around, as well as reasonably equitable distribution of said capital.

So, when we sit down and start looking at real proposals that are designed to do exactly this (to achieve full employment), such as a fiscal stimulus, it shouldn't be such a tremendous surprise that certain features of said plains (e.g. debt increase) don't end up being nearly as bad as we might naively think.

 

[Nebula815]

I don't think there's any evidence that it happens this way. As far as I can tell, the only bad that wars can do to the economy is through the destruction of infrastructure. The period immediately following World War II was one of the most prosperous periods in US history, if not the most prosperous.

That's because none of the infrastructure was bombed out in the continental U.S. The economic prosperity occurred because so much of the rest of the world's economies were busy rebuilding and could not compete. By 1960, the economy was stalled again.

Now, I'm sure that if our government was unstable or habitually irresponsible, our debt could become a big problem. But there's no evidence of either of those things occurring.

No evidence? At the current rate of spending, the deficit alone is expected to increase by about $9 trillion over the next decade.

After all, more corrupt and less stable governments, such as Italy, have managed to do just fine under even higher debt loads.

Yes, but America does not want to be Europe.

This makes no sense to me. Financial malfeasance had far more to do with the Great Depression than interest rates.

The Federal Reserve raised interest rates after the 1929 stock market crash. It is one of the main things that drove the economy into the Great Depression, just as raising interest rates also drove it into a major recession in 1981. The other major causes were the Smoot-Hawley tariff and tax increases.

The much tighter regulation that came out of the Depression on banks and the stock exchanges prevented any recurrences.

The Federal Reserve wising up prevented the further recurrences. In the 1929 crash, the markets declined by about 12%. By comparison, in the 1987 crash, they declined by about 24%, and in the 2000 crash, over 50%. But the Fed didn't decide to hike up interest rates with the federal government drastically raising taxes and tariffs in response to those incidences.

Nonetheless, the banks and Wall Street were in need of increased regulation after the 1929 crash. But they became too regulated. The Reagan-era deregulation freed up much of Wall Street and made the way for a great deal of economic recovery and a liberalization of finance, making it much more available overall. The financial system become much more efficient and many big, bloated American corporations became streamlined and much more efficient.

The US didn't have one single significant recession after the Great Depression until those regulations started to be lifted under Reagan.

This is incorrect. Recessions, after Reagan, became shorter and further spread out. We really didn't have any more "real" recessions per se, after Reagan, up until 2009, which itself had much to do with government interference in certain ways.

The economy used to be more recession-prone, but less stock market crash prone. Now, it seems more prone to market crashes (this due to there being far more people participating in the markets these days, along with the tremendous speed the markets operate at now due to the Internet, television, etc...) but less recession-prone.

That would be great! We're under tremendous risk of deflation right now. Added inflationary pressure would be a significant aid to our economy. The Fed can always increase the base interest rate if we start to get a problem with inflation.

Inflation that counters deflation perfectly is fine, but not when the inflation becomes excessive. If interest rates go up, that hamstrings economic growth.

The money doesn't magically disappear into the ether. It's used to pay workers and purchase goods.

Paing workers and funding entitlement programs is not purchasing goods per se.

And for its effect on the economy, the efficiency (or lack thereof) of government spending is completely irrelevant.

When I say inefficient, I'm talking about the government's speed at getting the money out.

To take the example of WW2 again, that spending was pretty much 100% inefficient: aside from perhaps a few things that were required to build the US war machine, but also happened to have beneficial side effects for the economy, nearly all of the money and resources spent on the war were effectively dumped in the trash. None of the tanks, guns, bullets, airplanes, military bases, or pretty much anything built for the war was in any way useful for the economy as a whole. The war spending was the economic equivalent of Keynes' example of paying workers to dig ditches then fill them back up.

I wouldn't say that because digging ditches accomplishes nothing and there is no way to know if the workers will go out and spend the money. Whereas building tanks, guns, airplanes, etc...requires mining for raw materials, constructing things, basically building tools that are then used for fighting the war. It can stimulate a great deal of the overall economy because the government is buying a bunch of stuff, as opposed to the consumer. With a peacetime stimulus, there is no exact way to do this.

Because we're in a liquidity trap. Name one liquidity trap scenario that resolved itself in such a short time.

My point is simply that economics is not an exact science, so no one can know for sure how fast or slow the economy will recover. Remember, a liquidity trap is a Keynesian economic concept. One could also say name one recession which was resolved via deficit spending. The Great Depression I do not think is a very good example because that was an economy that had been dragged down by bad government and monetary policy.

Another to keep in mind regarding WWII is right after WWII, the U.S. government did not yet have the huge entitlement base it has to spend on now, so the debt was paid down fairly quickly. Running up a large debt in modern times I do not think would be nearly so easy to pay down, as the government is running deficits as is to meet the current budget.