Re-Stimulating
Unemployment is bad. More fiscal debt might be worse.

Sunday, October 11, 2009

AT 9.8 PERCENT, the unemployment rate is higher than it has been since it hit 10.1 percent in June 1983. Since the recession began 21 months ago, the economy has shed nearly 7 million jobs. Whole industries -- cars, housing, finance -- have been devastated and may never recover fully.

Nevertheless, White House economists reported in September that "employment is estimated to be between 600,000 and 1.1 million higher than it would otherwise have been" because of the Obama administration's stimulus plan and other government policies, especially the Fed's monetary expansion. While no one can prove or disprove that -- much less apportion credit between fiscal and monetary policy -- basic economics suggests that things might have been even worse if the government had done nothing.

It does not necessarily follow, however, that the economy needs more stimulus now. Government has managed to blunt the recession, but at a cost -- a higher national debt burden, which future Americans must pay off by working harder and saving more than they otherwise would have. The real question is whether the benefits of pumping even more government fuel into America's engine outweigh the risks.

We see several reasons to doubt it. The first is the sheer immensity of stimulus policies already in place. The Federal Reserve's policies, including cutting interest rates to near zero and doubling its balance sheet to more than $2 trillion, are unprecedented. Meanwhile, the Congressional Budget Office projects a federal deficit of $1.4 trillion for fiscal 2009, or one-tenth of the country's total economic output. A similar amount of borrowing is on tap for next year, and the government still hasn't run through half of the $787 billion in tax cuts and spending increases enacted this year.

The situation was much different in the early 1980s. Then, double-digit unemployment resulted from the Federal Reserve's tightening of the money supply to crush inflation; even at their high point in 1983, Reagan administration budget deficits reached only 6 percent of GDP. In other words, fiscal and monetary authorities had plenty of room to maneuver. Today, however, the dollar's recent plunge portends the higher interest rates or inflation that could result from a rampant Fed printing press and federal borrowing.

A second reason for skepticism is the intellectual poverty of some policy proposals. One bad idea whose time seems to be coming is a tax credit for companies that create new jobs. President Obama proposed this during the campaign and discarded it after his election, in the face of widespread criticism. It's no easy matter to prove that a new hire is really "new," in the sense that the tax credit caused it. The last time the government tried this, during the Carter administration, economists determined that it actually created just one-third of the 2.1 million jobs for which employers claimed the subsidy. Who's to say tax-subsidized workers won't get laid off after the break expires -- just as auto sales plunged once "Cash for Clunkers" ended? Of course, the jobs tax credit might never end, if employers lobby for an extension, just as the real estate industry has fought for extended home-buying tax credits.

It might make sense to move some already-approved stimulus dollars from long-term programs (such as digitizing medical records) to short-term needs such as food stamps or unemployment benefits. But borrowing new money to move demand from the future to the present -- whether it's demand for houses, cars, or workers -- is a dubious proposition.

Any concern about the stimulus burdening future generations with debt, or about deficit or debt versus GDP, now or in the future, is foolish unless it acknowledges the GREATER danger of deflation, a concept that will become more widely discussed by those in the know (except for the intellectual whores) in the ensuing months. Since the debt and the trade deficit are both denominated in dollars, a lower dollar will not cause inflation, but it will (a) reduce the trade deficit and (b) more importantly, put Americans to work.

Here is another approach from Krugman, with the same conclusion:
http://krugman.blogs.nytimes.com/2009/10/11/when-should-the-fed-raise-rates-even-more-wonkish/

"The stimulus is already being disbursed at its maximum rate and therefore having its full impact on the economy. The additional spending will provide no further boost.

"To see this point, imagine my rich uncle promises to give me $2,400 over two years in installments of $100 a month. I may originally be slow to change my consumption, but after 3 or 4 months I will likely have fully adjusted my spending in accordance with this monthly gift of $100. Once I have reached the 8th month, I will almost certainly be at my maximum spending rate, even though two thirds of the gift is yet to come."

Can all of the beneficiaries of stimulus be lumped together? Isn't the situation more akin to something like this? My rich Uncle Sam gave $1,000 to his children right away, telling me and their other cousins that they would be lending the money to us to help out, but they are just sitting on the money for now. Then a few months later he gave us each $50. Then the next month he gave $100 to some of the cousins to buy new toys. Meanwhile, some of the cousins are getting $200. By now, most of us figure than somebody is getting money in the next year or two, but it isn't going to be us. The only ones we think are going to be taken care of, when push comes to shove, are Uncle's own plump children. What stimulus?

"But borrowing new money to move demand from the future to the present -- whether it's demand for houses, cars, or workers -- is a dubious proposition." Anonymous apparently doesn't understand the recession concept, as explained by Keynes !
Shifting demand from the future to the present causes current expenditures and the attendant economic activity (purchase of goods and hiring of labor to provide the demanded goods and services). In turn, the increased economic activity (due to the "invisible hand" of mob psychology) will generate other economic activity and shift people from "hoarding" mode to spending mode and lead the way out of the recession. By the time the originally scheduled date for the shifted expenditure arrives, the increased economic activity will generate other expenditures to replace the shifted expenditure !

Recessions are a breakdown in the circular logic of conventional economics and therefore require a different type of analysis.

Dean,

Re: The Post doesn't want more stimulus and is willing to say anything to push its case.

lol / cough! cough! I'd say that your accusing the Post of presenting disingenuous analysis/arguments to support their policy preferences is is very "glass house" (or, if you prefer, "pot-kettle"), but that would be unfair to the Post, so let's call it "projection" on your part, and probably disingenuous at that, just to note the irony. And although I'm referring to your posts in general, some more so than this one, let's talk about this one...

You write:
Actually, future Americans will own the debt that will be paid off.

As you know, about half of our publicly-held debt is held by foreigners. I assume the same (perhaps more) applies to the incremental debt. HALF.

You continue, as if just adding a slight qualifier that just makes your assertion slightly less pure:

There is a point that some of the debt is held by foreigners.

Um no, that's not just "some", it's (I assume) HALF. So what you've done here is:

1. Say something that just isn't true and that you know just isn't true (that "future Americans will own the debt that will be paid off", to which you add that "This is not a generational issue").

2. Acknowledge the fact that makes the preceding assertion untrue, but pretend its some minor qualifier, as opposed to the truth that we are (I assume) talking about HALF the debt being held by foreigners, meaning HALF of it will burden future generations of Americans without being offset by payments on that debt going to Americans. That doesn't even make your assertion half true; it makes it untrue.

You then write...

This will be a burden on the country, but the issue here is the trade deficit, not the budget deficit. If we had no government debt, but foreigners bought up $4 trillion of private capital in the United States, it would pose the same burden on future generations as if foreigners bought up $4 trillion of government debt.

...thereby adding to your misleading language "the ol' switcharoo". After making an assertion that you know is false, then pretending that what makes it false is just a minor qualifier, you then say essentially "Regardless of whether what I just said is bullsh*t, it really doesn't matter, because even if the Post is making a valid assertion and I'm making an invalid assertion, their assertion misses the larger point (that foreign held public debt would impose the same sacrifices on future Americans if it were private sector debt).

That's pretty slippery stuff. You should do talk radio. That's Rushesque.

Lastly, although the impact on Americans in aggregate would indeed be different (and less of an aggregate net burden for future generations) if the debt were all domestically held, it seems to me that even domestically held debt can impose an intergenerational burden (as well as affecting income distribution as you noted) insofar as current bondholders end up using repayment of the debt for their consumption rather than saving it and passing it on to future generations. So domestically-held debt does not seem to me to be mutually exclusive with imposing a burden on future generations. If I'm missing something, let me know.

Brooks: Not that anyone else is still following this post, but you have failed to address my first post, let alone the second. Who holds the debt is not the "major factor," but its relation to GDP is.

Brooks: Not that anyone else is still following this post, but you have failed to address my first post, let alone the second. Who holds the debt is not the "major factor," but its relation to GDP is.

Joe,

I was responding to Dean's post. Didn't read yours. Not interested in trying (yet again) to have an intelligent discussion with you. And just glancing at your comment, it seems not to refute or moot any point I've made, only to present some argument that there are other aspects to this general issue and related considerations, yadda yadda.

Joe,
Can't you see that Brooks has no intellectual equal? He is so far ahead of us all that he can't condescend to anyone's level and acknowledge or respond to their argument. It is only HIS argument that is germane. Wake up and salute him!

Joe,
Can't you see that Brooks has no intellectual equal? He is so far ahead of us all that he can't condescend to anyone's level and acknowledge or respond to their argument. It is only HIS argument that is germane. Wake up and salute him!

Foster's comment (ironically) from a guy who didn't respond to either Joe's comment or mine.

See Joe. He is absolutely brilliant. Knows irony and always gets the last word.

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