News Stimulus spending (split from cap& trade thread)

[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.

 

[Nebula815]

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.

Fewer people producing capital doesn't mean less capital will be produced per se, as companies can figure out how to produce the same amount with fewer people (this is a concern right now, that companies that have gotten comfortable doing more with less in this recession won't hire back previous numbers).

Also, assuming capital production will lower as fewer people produce it, those people no longer producing it will not be consuming it nearly as much either. So even if there is less to go around, there is also less consumption overall.

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.

I am a bit confused here, you said those not producing capital have lost the ability to trade whatever capital they produce...? How are they producing it if they are not?

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,

The problem is the action that is to get us to that point but does not have that effect.

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.

If fiscal stimulus could be guaranteed to, fine, but I get really queasy over the idea of trusting $1 trillion+ dollars to the U.S. government to spend it properly to recover the economy.

 

[Chalnoth]

Fewer people producing capital doesn't mean less capital will be produced per se, as companies can figure out how to produce the same amount with fewer people (this is a concern right now, that companies that have gotten comfortable doing more with less in this recession won't hire back previous numbers).

No matter what, that still means less capital produced than possible. If you can produce more capital with fewer people, then that means that more total capital can be produced.

Also, assuming capital production will lower as fewer people produce it, those people no longer producing it will not be consuming it nearly as much either. So even if there is less to go around, there is also less consumption overall.

Perhaps if they're unemployed and destitute. That's not a situation we want.

I am a bit confused here, you said those not producing capital have lost the ability to trade whatever capital they produce...? How are they producing it if they are not?

If they're not producing it, they don't have capital to trade.

If fiscal stimulus could be guaranteed to, fine, but I get really queasy over the idea of trusting $1 trillion+ dollars to the U.S. government to spend it properly to recover the economy.

Like I said, just look at the example of WW2. We spent far, far more (as a fraction of GDP), and came out of it wonderfully. The added debt was no problem to pay off because the economy had recovered.

 

[mugaliens]

Like I said, just look at the example of WW2. We spent far, far more (as a fraction of GDP), and came out of it wonderfully. The added debt was no problem to pay off because the economy had recovered.

While true, War economies have other costs which make waging war unacceptible as a means of economic recovery.

 

[Chalnoth]

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.

By what measure? Grabbing GDP data from here:
http://research.stlouisfed.org/fred2/categories/18/downloaddata

I produced this plot of real GDP quarterly growth:
http://people.sissa.it/~dick/gdp_growth.png

I see no significant drop in increase of the real GDP in the 60's. In fact, the growth seems extremely consistent between 0-5% the whole way through. Note that the data end before the current crisis.

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.

Well, that's part of it. But if it was just a matter of the Fed wising up and not doing destructive things, then we wouldn't be in the current mess. The Fed's actions may have deepened the depression, but they certainly didn't cause it.

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.

It directly led to the Savings and Loan crisis in the 80's, and basically every crisis since then.

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

Yes, which was the basic cause of a number of recessions. It's not an ideal situation, of course, but it does stop inflation.

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

That's not a serious argument against the stimulus, considering that without one we'll be in a prolonged slump that will last many years.

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.

Things that are then sent off and blown up, or at least put to no economic use. The only difference is complexity: there's a few more steps involved before the ditch is filled back in, per se, than with the simple ditch digging scenario. But it's still the same, because the end product is precisely as useless.

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.

What do you mean no exact way? They should basically do the same thing, but just dedicate it to reasonable peacetime purposes. For example, they could do many of the things that the stimulus went to: build bridges, fix roads, insulate buildings, purchase more energy-efficient machinery and appliances, build solar and wind power plants, upgrade the electric grid, and so on and so forth. If they increased the scale of these projects and didn't worry too much about efficiency in the long run, it would work just fine, provided the total magnitude was large enough.

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.

Er, that's because of Bush's irresponsible wars and tax cuts. Get rid of those, and we won't have much of a problem.

 

[Chalnoth]

While true, War economies have other costs which make waging war unacceptible as a means of economic recovery.

Haha, I'm certainly not suggesting waging war. I'm suggesting that we sort of 'simulate' a part of that: the part where the government buys lots of stuff. As war shows pretty well, we really don't need to be too concerned about what the government buys, as long as the magnitude is large enough to close the output gap.

 

[Nebula815]

Like I said, just look at the example of WW2. We spent far, far more (as a fraction of GDP), and came out of it wonderfully. The added debt was no problem to pay off because the economy had recovered.

We didn't have the huge entitlement burden then that we do now.

I see no significant drop in increase of the real GDP in the 60's. In fact, the growth seems extremely consistent between 0-5% the whole way through. Note that the data end before the current crisis.

One of the reasons Kennedy sought to cut taxes at the time was to help stimulate the stalled economy. GDP growth isn't the sole factor for determining the health of the economy. The GDP grew more during the 1930s then in the 1990s, b/c the economy was younger at the time.

Well, that's part of it. But if it was just a matter of the Fed wising up and not doing destructive things, then we wouldn't be in the current mess.

Yes we would because this crises was caused by a real-estate bubble bursting, which is an extreme blow to an economy. In 1929, the Fed took what should have been an ordinary recession and turned it into a depression.

The Fed's actions may have deepened the depression, but they certainly didn't cause it.

They were one of the primary causes by cutting the money supply.

It directly led to the Savings and Loan crisis in the 80's, and basically every crisis since then.

To some degree perhaps. The only other real crises since then was the Dot Com bubble, which was a speculative technology bubble, and then the real-estate crises of now, which I would not blame on deregulation but Fannie/Freddie and a lack of oversight (regulation does not necessarily equate to oversight).

That's not a serious argument against the stimulus, considering that without one we'll be in a prolonged slump that will last many years.

Maybe, maybe not. I don't see how a stimulus makes a difference either way when the government doesn't spend the money quickly, and when it can end up going to things like funding of research or entitlement programs.

Things that are then sent off and blown up, or at least put to no economic use. The only difference is complexity: there's a few more steps involved before the ditch is filled back in, per se, than with the simple ditch digging scenario. But it's still the same, because the end product is precisely as useless.

But a ditch requires nothing from the overall economy. With producing military products, all sorts of companies are involved.

What do you mean no exact way? They should basically do the same thing, but just dedicate it to reasonable peacetime purposes.

How do you define "reasonable peacetime purposes?" That could be funding entitlement programs, funding research programs on things, all sorts of things that do not stimulate the economy. Even infrastructure programs can get caught with delays and so forth.

With a war, you put up the factories and then start producing the goods. Most industries become involved in some manner.

For example, they could do many of the things that the stimulus went to: build bridges, fix roads, insulate buildings, purchase more energy-efficient machinery and appliances, build solar and wind power plants, upgrade the electric grid, and so on and so forth. If they increased the scale of these projects and didn't worry too much about efficiency in the long run, it would work just fine, provided the total magnitude was large enough.

Too much corruption I think occurs in trying to get the money to all of those things and not into people's pockets. Look at how much money disappeared that was sent to aid New Orleans after Katrina for example.

Also politics. For example, Los Angelos seriously needs more highway lanes. That could be a perfect way to stimulate that local economy, building more roads and highways. The LA traffic gridlock occurs because the highway system was built to handle 1960s traffic.

But then the environmentalists went and basically banned any further highway construction. Or you could end up with worthless infrastructure (everyone has heard of Sarah Palin's "Bridge to Nowhere" for example. Solar and wind power plants are not viable right now. And so forth.

With a war, you just put up the factories and start producing the products.

Er, that's because of Bush's irresponsible wars

There was nothing "irresponsible" about going into Afghanistan and as for Iraq, at the time, they believed it was a serious threat. Either way, the combined wars cost thus far about $600 billion or so. By comparison, Bush and the Republicans enacted a $400 billion expansion of Medicare, and that was just one of the big spending things the Republicans did.

So I wouldn't blame the deficit much on the wars but more on the entitlement spending, as the government won't spend less money unless forced.

and tax cuts.

Nothing wrong with these either. We are a country of lower taxes, not high taxes. Cutting taxes isn't what blows up the deficit, it is spending too much. For example, California, New York, and New Jersey all have among the highest taxes in the nation. They also have among the largest budget deficits. They keep raising taxes higher and then spending even more.

Get rid of those, and we won't have much of a problem.

Yes we will, because the government will replace the wars with more entitlement spending, and any increased revenue from tax increases they will find ways to spend.

 

[Chalnoth]

Maybe, maybe not. I don't see how a stimulus makes a difference either way when the government doesn't spend the money quickly, and when it can end up going to things like funding of research or entitlement programs.

Uh, what? We're talking a duration for nearly all of it to be spent of ~2 years. Sure, for a normal recession, that wouldn't be so great, because most recessions are over by then. But for the mess we're in, it's not a significant issue.

The effect it will have on the economy is basically the same. Happening later doesn't make one whit of difference, except for the fact that the positive impact is delayed. There is also basically no economic difference between the government directly buying things (e.g. bridges) and funding entitlement programs to make it so that the public can buy things.

But a ditch requires nothing from the overall economy. With producing military products, all sorts of companies are involved.

Which is only a difference in complexity. It's still the same thing as all those workers being paid to dig ditches and fill them back up. With the only possible difference that the factories remain in operation, and can thus be more readily put to use to other purposes once the economy has recovered. As far as that part is concerned, though, nobody need worry: anything the government buys now for recovery would require similar infrastructure, so this part would not be different.

The only difference is that the end product of a modern stimulus package actually has a chance of being economically useful. Tanks, guns, bullets, bombs, warplanes, etc. just are of no use whatsoever to the economy. So we still have a much better chance of getting a big recovery with a strong economy to follow if we provide a big enough stimulus.

How do you define "reasonable peacetime purposes?" That could be funding entitlement programs, funding research programs on things, all sorts of things that do not stimulate the economy. Even infrastructure programs can get caught with delays and so forth.

You keep harping on against entitlement programs. I can only think that you have this deep-seated belief that poor people should suffer and we shouldn't do anything to help them.

Because the fact remains that these activities are very stimulating, because the money ends up going directly to buying goods and services (e.g. prescription drugs, doctor's visits, food).

Too much corruption I think occurs in trying to get the money to all of those things and not into people's pockets. Look at how much money disappeared that was sent to aid New Orleans after Katrina for example.

Once again, it doesn't matter. It can be wildly inefficient, and it's still horrifyingly better than doing nothing.

Nothing wrong with these either.

You don't see anything wrong with dramatically increasing spending while at the same time reducing revenue while the economy is on otherwise reasonably good ground?

 

[mheslep]

Because the fact remains that these activities are very stimulating,

Please don't use that term 'fact' in this context. It is has not been demonstrated as such here. It may be correct, but it is your opinion, and not one of an expert unless you'd care to claim that background. The forum rules require sources for assertions of fact.

 

[Nebula815]

Uh, what? We're talking a duration for nearly all of it to be spent of ~2 years. Sure, for a normal recession, that wouldn't be so great, because most recessions are over by then. But for the mess we're in, it's not a significant issue.

Two years is a fairly long time to try to stimulate the economy with the necessary money required. No one knows how exactly long the current crises will last, Christina Rhomer had made some very optimistic predictions for economic growth by now.

The effect it will have on the economy is basically the same. Happening later doesn't make one whit of difference, except for the fact that the positive impact is delayed. There is also basically no economic difference between the government directly buying things (e.g. bridges) and funding entitlement programs to make it so that the public can buy things

Depends on what the entitlement program is for. And if the money goes into funding research into certain things, well that can be nice from a research standpoint, but there is no way to know if it will stimulate the economy or not.

Which is only a difference in complexity. It's still the same thing as all those workers being paid to dig ditches and fill them back up. With the only possible difference that the factories remain in operation, and can thus be more readily put to use to other purposes once the economy has recovered. As far as that part is concerned, though, nobody need worry: anything the government buys now for recovery would require similar infrastructure, so this part would not be different.

Actual stimulation of the economy will create wealth though, even if the government is the customer for the various products and services by taking on debt temporarily. Just paying people to dig ditches will produce nothing of value. No wealth is created. Wealth could be created as those people are essentially being given checks which they will then go out and spend (hopefully), but then in that case, you might as well just give the money directly to the people, no need to have them dig any ditches at all. Just pay them and hope they spend the money.

Problem is maybe they won't, because they do not know how long the checks will last and how long the economic situation will remain sour, so they made hoarde the money, thus negating any economic effect.

The government directly buying the stuff will work better in theory thus, problem is that no one can keep proper track of the money and it may not go towards buying stuff.

The only difference is that the end product of a modern stimulus package actually has a chance of being economically useful. Tanks, guns, bullets, bombs, warplanes, etc. just are of no use whatsoever to the economy. So we still have a much better chance of getting a big recovery with a strong economy to follow if we provide a big enough stimulus.

Well the products need not be "useful," I mean a whole bunch of the economy is based on things that are technically worthless, they are just fun. If the government could figure out how to order enough cars, SUVs, snacks, DVDs, electronics, apparel, etc...from each and every manufacturer at a level to literally take the place of the consumer, then the economy would recover fine. The government could just then take all of that stuff and burn it or scrap it somehow.

The big problem again is trusting government to know how to do this efficiently.

You keep harping on against entitlement programs. I can only think that you have this deep-seated belief that poor people should suffer and we shouldn't do anything to help them.

Has it ever occurred to you that quite a few entitlement programs do not, in fact, help the poor, but increase the levels of poverty and destroy communities? It depends on the entitlement program. We saw poverty skyrocket when welfare roles and entitlements were greatly upped in the mid-1960s, for example.

Furthermore, we are talking about ways to stimulate the economy here. But I should have been more clear. When I said entitlement programs, I mean the pet projects various politicians come up with essentially to redistribute wealth and to buy votes from the public.

Because the fact remains that these activities are very stimulating, because the money ends up going directly to buying goods and services (e.g. prescription drugs, doctor's visits, food).

A great deal of the money goes into waste, fraud, corruption, etc...just look at Medicaid or Medicare. Again, it depends.

Once again, it doesn't matter.

Why wouldn't it matter? If money is spent to stimulate the economy, by saying going into infrastructure projects, it needs to fund those projects, not go into areas it shouldn't.

It can be wildly inefficient, and it's still horrifyingly better than doing nothing.

It depends.

You don't see anything wrong with dramatically increasing spending while at the same time reducing revenue while the economy is on otherwise reasonably good ground?

Of course I do. You are supposed to cut spending when you cut taxes. That's one of the reasons to keep them low. To force the government to remain fiscally responsible. If the tax cuts happen to increase revenue, as they occasionally can depending on certain factors, then the government needs to remain fiscally conservative nonetheless.

 

[Chalnoth]

Please don't use that term 'fact' in this context. It is has not been demonstrated as such here. It may be correct, but it is your opinion, and not one of an expert unless you'd care to claim that background. The forum rules require sources for assertions of fact.

I already presented the argument above. It's not very difficult. It's just a statement that the money that goes to entitlement programs is spent on goods and services in the economy.

 

[Chalnoth]

Two years is a fairly long time to try to stimulate the economy with the necessary money required. No one knows how exactly long the current crises will last, Christina Rhomer had made some very optimistic predictions for economic growth by now.

Optimistic in what sense? We're so far down now that we would need to have many years of very strong sustained growth just to get back to 'normal'. Are you saying that Romer has presented evidence that we're going have a massive spike in growth, far beyond some of the more prosperous years in our history, such as during Clinton's presidency? Or are you just suggesting that 7%-10% unemployment is now okay?

Depends on what the entitlement program is for. And if the money goes into funding research into certain things, well that can be nice from a research standpoint, but there is no way to know if it will stimulate the economy or not.

I'll say it again: the money used on these projects, whether entitlement or research, does not disappear into the ether. It is used to buy goods and services. Researchers may need laboratories, computers, chemicals, lab equipment, measurement devices, etc. And, of course, they also have to hire researchers (though that's a relatively small fraction of the total cost most of the time these days).

You may not think that the products of this research is useful, but it doesn't need to be to be stimulating. Simply because the money is used to purchase goods and services it is necessarily stimulating because it increases demand for those goods and services (and the problem with our economy right now is a lack of demand).

Actual stimulation of the economy will create wealth though, even if the government is the customer for the various products and services by taking on debt temporarily. Just paying people to dig ditches will produce nothing of value.

Making bombs also produces nothing of value to the economy. And yet it worked marvelously to stimulate the economy in WW2. What is the problem here? What part of this do you not understand?

Problem is maybe they won't, because they do not know how long the checks will last and how long the economic situation will remain sour, so they made hoarde the money, thus negating any economic effect.

They at least have to buy the basic necessities of life, and are likely to buy a few things in addition. They can't do that if they're unemployed and destitute.

We are literally talking about the difference here between a homeless person and one being paid a living wage. Do you honestly think that the person being paid a living wage will not spend more money?

Well the products need not be "useful," I mean a whole bunch of the economy is based on things that are technically worthless, they are just fun. If the government could figure out how to order enough cars, SUVs, snacks, DVDs, electronics, apparel, etc...from each and every manufacturer at a level to literally take the place of the consumer, then the economy would recover fine. The government could just then take all of that stuff and burn it or scrap it somehow.

Yes, this would be one option. I think we could do better, though, by not making useless things. The only reason to make this point, again, is that we don't have to be worried about efficiency.

Has it ever occurred to you that quite a few entitlement programs do not, in fact, help the poor, but increase the levels of poverty and destroy communities? It depends on the entitlement program. We saw poverty skyrocket when welfare roles and entitlements were greatly upped in the mid-1960s, for example.

Your assertion appears completely contradicted by the data:
http://en.wikipedia.org/wiki/File:US_poverty_rate_timeline.gif

Entitlement programs, by the way, are largely not about reducing the poverty rate. Most of them are about making it so that if you find yourself in poverty, your life isn't quite so bad. Obviously programs such as educational programs that are about reducing the poverty rate are also a good thing.

Of course I do. You are supposed to cut spending when you cut taxes. That's one of the reasons to keep them low. To force the government to remain fiscally responsible. If the tax cuts happen to increase revenue, as they occasionally can depending on certain factors, then the government needs to remain fiscally conservative nonetheless.

That is completely contrary to the conservative argument. The entire argument for the Reagan (and subsequent conservative) tax cuts is that tax cuts stimulate the economy, which increases total tax revenue, which means that you can have your cake and eat it too: you don't need to lower spending, because tax cuts will increase revenues! So the fact that the national debt has risen quite significantly each time we've had a president in office who has pursued this same tax cut policy should be no surprise whatsoever: the whole thing was based upon wishful thinking.

Finally, let me just close with one final statement: you've claimed many, many times that most of government spending is 'inefficient' in that it goes to fraud and other such things. Demonstrate this.

 

[Nebula815]

Optimistic in what sense? We're so far down now that we would need to have many years of very strong sustained growth just to get back to 'normal'. Are you saying that Romer has presented evidence that we're going have a massive spike in growth, far beyond some of the more prosperous years in our history, such as during Clinton's presidency? Or are you just suggesting that 7%-10% unemployment is now okay?

No. But if you remember, the administration had presented some very optimistic numbers for the economy inititally, saying unemployment would not go above 8% and how they expected the economy would be growing soon.

I'll say it again: the money used on these projects, whether entitlement or research, does not disappear into the ether. It is used to buy goods and services. Researchers may need laboratories, computers, chemicals, lab equipment, measurement devices, etc. And, of course, they also have to hire researchers (though that's a relatively small fraction of the total cost most of the time these days).

They may need to buy certain equipment, or they will buy nothing and just using the funding to gain access to certain scientific equipment. For entitlements, it really depends on the entitlement.

You may not think that the products of this research is useful, but it doesn't need to be to be stimulating. Simply because the money is used to purchase goods and services it is necessarily stimulating because it increases demand for those goods and services (and the problem with our economy right now is a lack of demand).

Yes.

Making bombs also produces nothing of value to the economy. And yet it worked marvelously to stimulate the economy in WW2. What is the problem here? What part of this do you not understand?

Entitlements and research are not making bombs and are not guaranteed to create demand in the same way making bombs will. Again, it depends on the entitlements and research.

They at least have to buy the basic necessities of life, and are likely to buy a few things in addition. They can't do that if they're unemployed and destitute.

If they do not know how many checks they will get, they'll likely only buy the bare necessities.

We are literally talking about the difference here between a homeless person and one being paid a living wage. Do you honestly think that the person being paid a living wage will not spend more money?

How does the person know if they are getting a "wage" though as opposed to just a check for once, twice, or however long? That is the problem.

Yes, this would be one option. I think we could do better, though, by not making useless things. The only reason to make this point, again, is that we don't have to be worried about efficiency.

Efficiency is a concern because it can otherwise require one to enact exorbitant amounts of spending to try and get anything done, and then when completed, the projects may be of low quality.

Your assertion appears completely contradicted by the data:
http://en.wikipedia.org/wiki/File:US_poverty_rate_timeline.gif

The poverty rate has tended to remain the same historically, despite all of the increased spending. But we saw many communities fall prey to the crime, drugs, lack of work ethic, etc...of cradle-to-grave welfare and entitlement spending.

Entitlement programs, by the way, are largely not about reducing the poverty rate. Most of them are about making it so that if you find yourself in poverty, your life isn't quite so bad. Obviously programs such as educational programs that are about reducing the poverty rate are also a good thing.

Yes, such programs are well-meaning, what is bad is if they can become a lifestyle, which is exactly what happened for a quite a few years. A social safety net to help a cushion a person's fall if they get knocked down hard, until they can get back up, one can make an argument for.

That is completely contrary to the conservative argument. The entire argument for the Reagan (and subsequent conservative) tax cuts is that tax cuts stimulate the economy, which increases total tax revenue, which means that you can have your cake and eat it too: you don't need to lower spending, because tax cuts will increase revenues!

That is not the argument Reagan made. In fact, Reagan argued specifically that you cut taxes precisely to force the government to stop spending so much. If taxes are too restrictively high, then yes, cutting them can increase revenues, and historically when you cut the capital-gains tax rate, revenues will increase (at least initially).

Certain conservatives who lack the proper understanding have made the argument that if you lower taxes, you automatically increase revenues. This comes from a misunderstanding of the Laffer Curve (i.e. tax at 0%, get zero revenues, tax at 100%, get zero revenues, or very little).

So the fact that the national debt has risen quite significantly each time we've had a president in office who has pursued this same tax cut policy should be no surprise whatsoever: the whole thing was based upon wishful thinking.

The national debt increasing is not due to tax cuts, it is due to too much government spending, as government never will use increased revenues from taxes to pay down debt, it will simply increase spending even moreso. Reagan cut government spending, but nonetheless had to deal with the initial increased deficit from his tax cuts and defense spending (also the higher interest rates to fix inflation initially). Plus he could not convince the Democrats in Congress to reduce social spending as he wanted.

Nonetheless, the deficit began shrinking around 1985ish. Then there was the market crash in 1987. Then George H. W. Bush became President and began the excessive government spending again. He also enacted a very large tax increase in the hopes that he could make history by closing the deficit and making a surplus, which sent the economy into a recession and did no such thing.

Clinton ran saying "the era of big government was over." Then he gets elected, and immediately the era of big government was back. He said that taxes had to go up because the deficit was there, so he raised them, but then he embarked on trying to spend even more. Then the Congress turned Republican in 1994, so he became pragmatic. He reluctantly agreed to a capital gains tax rate cut in 1997, which increased revenues, and a surplus was achieved in 1998.

The Republican Congress kept Clinton pretty fiscally conservative, that is until George W. Bush became President, then they did a 180 and became big spenders.

Finally, let me just close with one final statement: you've claimed many, many times that most of government spending is 'inefficient' in that it goes to fraud and other such things. Demonstrate this.

Medicare, Medicaid, Social Security, the public school system, the Postal Service, AMTRAK, etc...

It is the nature of a government program or agency. Every government program and agency is given a budget and the job of the person heading that agency/program is to spend every single dime, so that then they can claim they need more money the next time around. Inefficiency also occurs because government employees are notoriously difficult to fire, so they have little incentive to work efficiently.

This is the complete opposite of private enterprise, where the job is to spend the least amount of money possible in getting things done, which leads to far more efficiency and less waste.

Programs can also be plundered due to lax oversight, as occurs with Medicare and Medicaid (http://www.cbsnews.com/stories/2009/10/23/60minutes/main5414390.shtml).

If government could spend efficiently, nationalized enterprises would work just as well as privatized enterprises.

 

[edpell]

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

I thought that was 20 trillion dollars of transaction guaranties in one year! The rich must never lose.

Yes, Bloomberg News, only reported 12.8 trillion but I think it has gone up since that report back in September.

 

[edpell]

said sarcastically "it is only fair that the workers of China use their excess production to support the debt spending of Japan and the US". To each according to their ability to each according to their need. LOL LOL LOL

 

[Chalnoth]

I really really really don't get how you can possibly think, Nebula, that the money spent on entitlement and research programs isn't spent.