the things people say
Riffing off my last post, I’d like to take on two thoughts. First, here’s Yglesias:
Like Brad DeLong, I’m a bit puzzled by Bill Galston’s theory that adopting “a meaningful shift toward fiscal restraint” would be a good strategy for the midterms. People say they want this, but I can only assume that’s because people think such a shift would improve the economy. In fact, it wouldn’t. If Democrats implement policies that tank the economy, running around the country saying “well it polled well a year ago!” isn’t going to help them.
People are fickle creatures, to be sure. Most people urge fiscal restraint but love the entitlements that big government programs afford them. The reason for this paradox, though, is that people don’t understand the cost of these programs so everything remains in the abstract. It’s something for nothing, or near-to-nothing, for much of the country. People might actually mean it when asked if we should have more fiscal restraint if they really felt the tax-man in their pocket-books. So we borrow instead of tax. Democrats and Republicans alike.
Also, just a quick note on the stimulus and deficits. Try thinking about the stimulus as a bubble – that same dreadful thing that caused the current collapse. When the housing bubble burst we found ourselves in our current dire straights. So what happens when the stimulus money dries up? What happens to the million jobs it purportedly saved? What makes that any different from any other bursting bubble?
I’d rather think about it as a cranberry turkey sandwich. Because. . mmm. . cranberries.
Seriously, that’s just not what a bubble is: trade in high volumes at prices that are considerably at variance with intrinsic values. It might be something else unsustainable, but it isn’t a bubble.
The argument for it is that a current economic shock and retrenchment has created a temporary depression in demand, and the stimulus is designed to. . uh. . stimulate. . demand temporarily until (presumably) the underlying economic adjustments have time to complete. Arguments against it include: it’s not big enough to matter, it won’t last long enough to matter, putting government at the helm makes it poorly targeted, and OH MY GOD COMMUFASCISM KENYA KENYA DITTO!
Take your pick.Report
Arguments against it include: it’s not big enough to matter, it won’t last long enough to matter, putting government at the helm makes it poorly targeted, and OH MY GOD COMMUFASCISM KENYA KENYA DITTO!
Are you sure you aren’t forgetting the real arguments against it?Report
By ‘real’ do you mean that the 4 exemplar arguments I offered were not actually made? Because that would make you wrong in a really big way.Report
I think he was more referring to arguments that couldn’t be accurately described as “weak-manning” the opposition.Report
Fun. I think you’re (both?) overly focusing on the capitalized argument, which was exaggerated for effect (and giggles!), but doesn’t differ in substance from a lot of the actual criticism. The other three are quite reasonable (and very possibly correct). Also, as far as ‘opposition’ you’re assuming too much about what I think about the stimulus. My current sense is mildly opposed based mostly on the argument that government money is poorly and inefficiently targeted.Report
For starters, to the extent that I misimplied or misrepresented your position, I apologize. That was not my intent.
Rest assured, I spent no time focusing on your capitalized argument. I do, on occasion recognize jokes that are neither dirty nor perverted in nature. I may not say anything about them, but it doesn’t mean that I’m not paying attention.
I would have responded to you anyway, since some of my other concerns about stimulus involve:
1. Uncertainty about the output gap. With consumers overleveraged with historically low savings rates, this trend has to reverse itself. given that the flow of easy money has dried up (at least for consumers), I don’t expect to see consumer spending increase by any meaningful amount not only until the unemployment situation reverses itself (a problem too widespread for any government intervention IMO) and even then, household debt levels have to drop and savings rates have to increase. People will spend less going forward. The previous consumption patterns were unsustainable.
Sure, you can get incentive programs like Cash for Clunkers to spur consumption but there’s a lot of disagreement as to how much new demand such programs generate (as opposed to accelerating future sales to the present). If we are borrowing from future periods, the numbers will show that in the 4th Quarter and subsequent quarters as well. I’m not sure where that’s going to shake out.
I’m not sure where jobs are going to come from. Easy money in the last cycle misallocated a lot of jobs in real estate, finance and construction and many of those jobs may not come back this time around (we won’t see a construction boom like the one we saw again for a long time).
2. My concern about deficits and debts is that the old Keynsian adage of “owing it to ourselves” (i.e. the liability on the government side of the equation is offset by the fact that the assets (Treasury bonds) are held domestically) doesn’t apply when dealing with foreign bondholders. While I don’t worry about the Chinese engaging in a mass sell-off of Treasuries (which would screw them in a big way), the political ramifications of dealing with this situation is sticky. It hasn’t happened yet but at some point, foreign investors in bonds may not have the same enthusiasm for our bonds as they do today and would require higher interest rates. I don’t see this as an immediate term problem but if something like this were to happen around the time when a recovery was taking hold, rising interest rates (which would reverberate through the private sector as well) would dampen that recovery in a big way.
That doesn’t even address the structural shortcomings in the financial markets and the banking industry. No amount of government stimulus is going to make those problem loans go away any time soon.Report
By ‘real’ do you mean that the 4 exemplar arguments I offered were not actually made? Because that would make you wrong in a really big way.
Try again.Report
No, thanks.
See how well non-comments continue the conversation?Report
Keynesian economics ain’t that complicated. GDP is Consumption + Investment + Government Spending + Net Exports. In a recession like ours, consumption shoots downward as people start saving more, investment plummets since the banks are ailing, and while exports seem to be increasing they’re not enough alone to save us. Hence, pump-priming by increasing government spending. After the other measures of income increase, you can cut down on government spending. Simple.
The alternatives to Keynesian economics are basically classical economics–i.e. do nothing and let the market work itself out–and monetarism, which says to do everything by manipulating the money supply. In the case of the current recession, we did everything we could with monetary policy and it wasn’t enough. Hence a stimulus.
This is not a bubble–it’s a time-tested, proven solution for picking up the slack during economic downturns. The main concern is that we don’t end government spending too quickly and try to balance the budget before the market can pick up the slack–FDR did this in 1937, and unemployment increased again, from 10% to 18% I believe (it was 25% in 1932).
The bubble analogy is an interesting take on the matter, and there are some parallels, but it’s not really the right frame for this. And while I do agree that the costs of, say, maintaining a global empire or fighting a drug war are not known to the public in such a way that they’d probably say “Why bother?” if they knew, I think the real problem is that many people don’t really see benefits for a lot of the programs they’re funding.Report
Seconded. This is pretty basic macroeconomics here.Report
If we take the Keynesian argument to heart then we should never, ever cut back on defense spending because my God what would that do to the economy???Report
That’s different.
Unless you *WANT* the (group) to kill our children.
Hey, perhaps we could work out a compromise: They could kill our children by forcing them to work in textile factories.Report
Actually Keynesian economics posits that you raise taxes and cut government spending during boom times to level out growth. The point of Keynesian macroeconomics is to smooth the economic process, not just continue growing. So no, if we actually DID take Keynesian arguments to heart, we’d have a tax process that was counter-cyclical to prevent bubbles from emerging and making up for lost consumption when things are in a down turn.Report
Yeah, this part of Keynesian economics tends to get forgotten about (by all sides of the debate), probably because it’s politically inconvenient for everyone.Report
What about Clinton in the 1990’s, mixed with Bush Elder’s tax increases? Did we not see increased tax revenues and decreased spending that led to surpluses, which could have (in theory) been used to pay for stimulus when the economy inevitably turned south?Report
I think it could more accurately have been characterized as holding spending in check while GDP grew. But frankly in an economy as big as the ours is it may be that deficit spending during downturns and holding spending back during boom times are sufficient (and sadly that’s about as good as politicians can manage dumb spineless things that they are).Report
Lord, I love me some Keynes!Report