It’s frustrating to see the enduring power of rigid and self-satisfied ideology in the midst of the current economic crisis, especially in the areas of fiscal stimulus and bank nationalization. In each case, the evidence points to a certain course of action, while the laissez-faire ideologues protest (too much). Rather than being good economic stewards, these people will cling to ideological preconceptions like life vests after a shipwreck. Let me briefly discuss.
First, fiscal stimulus. I’ve talked about this before. We all know that large increases in the deficit do not bode well for debt sustainability in the future, with a possible solvency and currency crisis manifesting through rising interest rates and a falling dollar. But there is little evidence of this right now, and with the world in recession, the US can yet again take advantage of its reserve currency status as demand for risk-free dollar assets remains high, allowing the US to borrow far more at cheaper prices than other countries.
As Martin Wolf points out in the Financial Times, households are suffering greatly from impaired balance sheets right now–assets such as housing stock and retirement accounts are falling while liabilities or debt remains at historical highs. This means that the number one preoccupation of households right now is paying down debts and building savings, not spending money. This is exactly what happened in Japan during the 1990s. In such a situation, there are only a limited number of ways to stave off a “downward spiral of mass bankruptcy”: boost exports or boost government spending. A global recession rules out the former (this is what got Asia out of its mess a decade ago). That leaves the government. And indeed, it was Japan’s fiscal stimulus that kept the economy on life support, with growth only collapsing in 1997 when the government tried to reduce the deficit. Others have made a similar argument about the Great Depression, as Roosevelt’s spending successfully reduced unemployment from 25 percent to 10 percent, only to be stalled in the late 1930s as the fiscal conservatives gained influence. Remember, the situation in the financial sector means that monetary policy has limited effect, and indeed has reached the limit of what it can accomplish. Fiscal policy or bust.
Opponents of the fiscal stimulus also concerned with composition, arguing that somehow tax cuts will do the job while government spending is wasteful. While this Reaganist shibboleth has become almost conventional wisdom in some parts, it is also wrong. All of the evidence suggests that Keynesian multipliers are larger on the spending that on the tax side, for a very simple reason: tax cuts are partly saved and partly spent, while when the government purchases something, it adds directly to GDP. And as we have seen, households are extremely unlikely to spend tax cuts in the current situation of balance sheet deflation.
Second, bank nationalization. A growing number of experts support this option (see here for an example), and yet it is dismissed by the predictable ideologues as “socialism”. At this point, even Alan Greenspan (Ayn Rand’s old disciple) has come around to the view that the most effective and prudent way of removing toxic assets from banks’ balance sheets is through a temporary nationalization. In fact, the only option is some kind of government intervention, and the form becomes important. The worst way to do it is the Paulson strategy: effectively guaranteeing banks’ liabilities and providing capital while imposing no restrictions on management and allowing limited taxpayer upside. When Fannie and Freddie were recapitalized, the top management was removed immediately. And yet there was no talk of removing the failed management of the private banks, who continued to operate as usual, mis-using taxpayer money. Nationalization would allow the government to recapitalize the banks, wipe out shareholders, get rid of management, and let taxpayers profit from any upside. It would also be easier to transfer the toxic assets to a government-run bad bank, an issue that bedevils any private sector plan. Owing largely to the enduring power of the banking lobby, Geithner is not quite there yet. But it cannot be far off. The nationalization would be strictly temporary, and would yield the best solution– but will it pass the ideology sniff test?
It’d seem logical that if government bails out a bank, it should take control of it. Else it’s much like giving money to a junkie – he’ll get into a bigger mess and come back for even more.
Socialism is only bad, by the way, if it helps regular people. They ought to make sacrifices, the bastards.
In general, whenever a Republican says anything about economy, taxes, banks, he should be kicked in the nuts. Thrice. You’d think that whole pack would have gone hide in shame by now.
Here in California, where Republicans don’t believe in evolution because they rank low on its scale, the GOP has vowed to oppose any tax increase. How can they have a say in it, being such a small part of the legislature ?
In California,a 2/3 majority is needed to pass a budget, yet amending the constitution to eliminate people’s rights takes a mere 50.1% and millions from Mormon and Catholic church.
It’s heartwarming when your government sends you a letter that says
“You have been designated as surplus.”
If Republicans will not vote to raise taxes, thousands will be fired.
The proposed state income tax raise would cost someone making $200,000 a year $800. Clearly, this is tantamount to murder. Republicans vowed to oppose this.
I do appreciate the civil rights struggle by the Golden State Republicans, don’t get me wrong. After all, someone making $10,000,000 a year would pay $45,000 more in income tax that could be spent on vital goods such as golf clubs. We can’t let the terrorists win. I couldn’t live with myself if someone had to fly first class instead of a Gulfstream jet. Sure, everyone has to make sacrifices, but that’d be too painful.
Republican now, Republican tomorrow, Republican forever.
If this report is accurate, and the goal is to stimulate bank lending, this seems to me to be a rather bad strategy:
http://dealbook.blogs.nytimes.com/2009/02/18/the-bailout-is-robbing-the-banks/
Robert Barro is apparently working on an empirical study now that shows non-defense related government spending to have a multiplier “not significantly different from zero.” That would seem to track the evidence in other areas, such as, for example, government spending on sports stadiums and the like. This isn’t an issue on which I have a firm opinion (though listening to Keynesian apologetics hasn’t filled me with a lot of confidence).
I do have a technical question, though. I know that, with regard to the stimulative effect of tax cuts, supply siders will often point to cases where tax revenues went up after a tax increase as evidence in favor of their theory. That, of course, is a bad argument insofar as revenues are liable to increase over time regardless of whether or not the government lowers tax rates. Similarly, if one were to just look at what happens to GDP after a fiscal stimulus, one shouldn’t be surprised to find that it tends to go up. But that is rather poor evidence of the effectiveness of fiscal stimulus, and for the same reason.
Can I assume that, when people throw around a multiplier for government spending of 1.57 or whatever, that their calculations aren’t simply based on the above sort of post hoc ergo propter hoc reasoning? And if not, how do the calculations try and avoid this problem?
Roosevelt’s spending successfully reduced unemployment from 25 percent to 10 percent, only to be stalled in the late 1930s as the fiscal conservatives gained influence.
The problem with citing the New Deal as an example of successful Keynesian stimulus is that it wasn’t an example of Keynesian stimulus. Granted, government spending increases during the period, but this increased spending was largely offset by tax increases (rather than by running deficits as per Keynes). To quote from Carry Brown’s Fiscal Policy in the ‘Thirties: A Reappraisal:
My understanding is that many economists (including Christina Romer, the head of President Obama’s Council of Economic Advisers), attribute the recovery to monetary rather than fiscal policy. It’s true that once interest rates are near zero they can’t be lowered any more, but it’s also true that it takes a while for the effects of monetary policy to spread through the system, and resorting to a massive increase in government spending as soon as interest rates have been pushed to zero is kind of like pumping a guy full of tranquilizers and then proceeding to bludgeon him unconscious before the drugs have even had time to take effect (actually it’s worse than that; since most of the increased spending in the bill doesn’t occur until after 2009, this is really more like giving a patient lots of tranquilizers, and then instructing the nurse to hit him over the head in a couple of hours).
Blackadder:
First off, Barro is a not one of the leading people working on this area. See Blanchard and Perotti (2002) for an empirical study that shows multipliers of one or higher. However, if you look at the literature, you will find the estimates all over the place, and that is because the methodological issues are really hard to pin down. (One of the reasons is the endogeneity effect you raise above.) So in a sense you are right to douby anybody who says they have a precise estimate of a multiplier. It’s really guesswork, but we hope at least it is educated guesswork.
Second, we need to recognize that the current circumstance is pretty unique. The financial system is frozen, with negative feedback to household balance sheets. Nobody wants to consume. Many of the standard effects that might neutralize a fiscal stimulus are not really in effect, so that should make fiscal policy more effective (but again, we can’t put a number on that, it’s a qualitative assessment). I think the Japan analogy here from Wolf is apt: although Japan has anemic growth for a decade, it could easily have had drops in output, given the persistence of zombie banks and the reluctance of households to spend. What kept the economy afloat (albeit at a low level) was the government.
On the New Deal: it was modest stimulus, around 3 percent of GDP. Sure, you can make the argument (as Krugman has) that this was peanuts given the extent of the output collapse. What is certainly true is hat when Roosevelt was persuaded the balance the budget in 1937, everything fell apart again.
Barro is a not one of the leading people working on this area.
Barro is one of the most influential macroeconomists in the world. His opinion on this subject is entitled to at least as much weight as a journalist for the Financial Times.
if you look at the literature, you will find the estimates all over the place, and that is because the methodological issues are really hard to pin down.
Second, we need to recognize that the current circumstance is pretty unique.
These are both good points. But it’s the case that (1) the evidence regarding stimulus in general is fairly uncertain, and (2) the unique nature of the current situation renders even what evidence we have of little value, then doesn’t this argue for a modest approach, rather than saying that skeptics of the fiscal stimulus are all ideologues who are ignoring the evidence?
What is certainly true is hat when Roosevelt was persuaded the balance the budget in 1937, everything fell apart again.
Right. It’s also true that in 1921, Harding cut taxes and spending, and the economy recovered quite quickly. As you correctly pointed out in my Harding post, simply noting that a collapse or recovery followed a certain policy change doesn’t establish that the collapse or recovery was the result of the change. In the case of 1937, the Fed doubled reserve requirements during the same period it cut back on spending, which I believe is the argument Romer and others give for why there was the recession. If the recession was simply due to spending cuts, then this raises the question of why the depression didn’t return when the government cut spending after the end of WWII.
Two things strike me here:
1) It would be easier for supporters of the stimulus to accuse those against it of lack of prudence if the stimulus were actually composed of immediate government spending. As it is, it could well be that simply giving every man woman and child in the US $3,000 would result in more stimulation because the US residents would likely spend at least half of it during the year, while rather less than half of the government spending will actually go out the door to anyone by the end of 2009.
2) One probably does well to remember that ideological commitments (including your own) come into play not only in what people oppose, but in what they consider to be an acceptible measure to take. Thus, one of the reasons, no doubt, why the stimulus package seems such a good idea to you and Krugman is that both of you already have precommitments to seeing greater government spending as a good thing at most times — and thus one can harldly be surprised if you consider the current spending to have few downsides. Similarly, you have few worries about socializing a great many things, so it should hardly seem surprising that you see it as more good than bad to socialize all the banks for now. However, it should be equally unsurprising that those who generally consider higher government spending to be a bad idea, and who consider nationalization of industries to be a bad idea, would dwell more on the likely negatives and come to different conclusions than you.
Indeed, given all the fuzziness about data (which you rightly pinpoint) it’s honestly unclear to me to what extent Keynsianism is appealing to people because it works, versus to what extent it is appealing to people simply because they already prefer the idea of expanding government. And on the flip side, other economic models may appeal to people primarily because they already have a predisposition against government spending and government intervention.
But it’s the case that (1) the evidence regarding stimulus in general is fairly uncertain, and (2) the unique nature of the current situation renders even what evidence we have of little value, then doesn’t this argue for a modest approach, rather than saying that skeptics of the fiscal stimulus are all ideologues who are ignoring the evidence?
You can make this argument, but I would counter by saying that all of the signs in the current crisis point to increased effectiveness of fiscal policy. Plus, from a risk management perspective, there’s a lot more to lose from doing nothing.
You are also certainly right to look at monetary policy. I’m certainly not an expert on monetary policy during the Great Depression, but I think it’s pretty clear that a more expansionary policy in the early 1930s could have softened the economic collapse. Friedman and Schwarz famously said its all monetary policy. The problem with this hypothesis is, well, the current crisis. For the Fed has expanded the monetary base, blown up its assets, more than ever before, and yet monetary policy remains relatively ineffective. The reason is the classic liquidity trap: the nature of the financial sector crisis means that people are sitting on cash and not lending. Until that is resolved (and that means cleaning up banks’ balance sheets), fiscal policy is really the only tool in town– however imperfect.
Darwin:
I try to take an empirical rather than an ideological approach. I don’t want governments running steel mills, but temporary nationalization of the financial sector makes sense in current circumstances. I fully supported the Rubinesque deficit reduction strategy in the 1990s, because the problem was long-term yields that reflected a lack of credibility; today, I support a massive increase in the deficit because circumstances differ dramatically. I supported Clinton’s welfare room measures (with some caveats) and I support a single-payer health care system– because I believe both represent good policy. What drives me crazy about so many who dub themselves “conservative” today is that they have totally eschewed this very notion of prudence and empiricism and stand behind empty shibboleths.
from a risk management perspective, there’s a lot more to lose from doing nothing.
For me, the worst case scenario is not that we repeat what happened in Japan in the 1990s. The worst case scenario is this or even this.
Note: I’m not saying that the increased deficits due to the recent stimulus bill will be the tipping point into bankruptcy. I think that’s unlikely. But I also think that it’s unlikely the bill is all that’s keeping us from a never ending recession with 500 million lost jobs a month. As Krugman himself notes, to be effective under Keynesian models the stimulus really ought to be twice the size of what it was, and even then all the bill would do in his view is “increase our chances.”
the Fed has expanded the monetary base, blown up its assets, more than ever before, and yet monetary policy remains relatively ineffective.
I’m certainly not an expert in monetary policy either. But I was reading Friedman the other day, and he says that it can take between 6 and 24 months before the effects of a monetary expansion are fully felt. If that’s true, then charts like this and this start to become rather worrying to me.
I also wonder what your opinion is on the New York Times piece Jonathan linked to earlier. Reading it, I want to believe that there was a sensible reason for the Fed acting the way that it did. But it does seem that to the extent the justification for the radical measures now being taken is that banks aren’t lending out the bailout money they’ve received (thus showing that we’re in a liquidity trap), then fact that the banks weren’t actually given the bailout money would seem to undercut that.
I try to take an empirical rather than an ideological approach. I don’t want governments running steel mills, but temporary nationalization of the financial sector makes sense in current circumstances…. …and I support a single-payer health care system– because I believe both represent good policy. What drives me crazy about so many who dub themselves “conservative” today is that they have totally eschewed this very notion of prudence and empiricism and stand behind empty shibboleths.
I certainly understand that you try to take an empirical approach and that you do not universally support centralizing and subsidizing things. However, it must be admitted that you are generally much more supportive of the idea that centralized solutions will work in a given situation than BA or I are. And to that extent, I find the “it’s imprudent of you to question me” argument a little unlikely. All other things being equal, I’d be inclined to think that BA would give the stimulus the best reality check, and you’d be most qualified to voice criticism of some sort of massive spending cutting plan.
For instance, I recall you arguing that building high speed rail and setting up a national health service would be two of the highest return ways to do a Keynsian stimulation of the economy right now. But obviously, your view on this is highly tainted by the fact that you think both of those would be a really good idea _anyway_. By comparison if BA strongly endorsed Mankiw’s suggestion of eliminating the (highly regressive) payroll tax and paying for it a bit down the road with an escallating gas tax, that would strike me as more persuasive because it’s not necessarily something I’d expect him to jump for joy over otherwise.
In that regard, my concern about all the brow beating being handed out by stimulus supporters is that while I’m open to (but not currently convinced by) the idea that it would be necessary or helpful to have some sort of stimulus at this time, it strikes me that if so this one is very poorly set up. Much of the spending is not direct or immediate. And so even if the multipliers are overall better for government spending than giving people money, I have to think that money would probably hit the economy faster if we simply gave this money directly to people (or fairly directly) instead of passing a backlog Democratic Party wish list.
That everyone is _so_ sure this is not the case smacks to me of ideological commitment. And what worries me even more is that if we dig ourselves so much further into debt now and it _doesn’t_ work and we _do_ find ourselves in for a very long downturn, this only impedes our ability to use that money to actually help people who really do need assistance a few years down the line.
Is funding every pet project in sight now on the hopes it will help the economy a good trade-off given the possibility that we may be having to leave real needs unfulfilled under much worse conditions in 2-3 years?
I try to take an empirical rather than an ideological approach.
But if, as you acknowledge, there isn’t really any good evidence on these questions, then shouldn’t you be agnostic, or at least hesitant, in your views here?
Personally, I don’t see anything necessarily wrong with basing one’s position on a given issue on ideology (unless ideology is simply used as a pejorative, in which case I’m totally against it). True, it would be wrong to hold a position based on ideology despite compelling evidence to the contrary. But if there just isn’t any compelling evidence on a question either way, then it’s hard to see what one could base their position on other than ideology, and to the extent that one has good reason to think that one’s ideological views are true, this would seem to be justified.
Certainly this seems to be what has largely happened in the debate among economists over the stimulus. If you look at the different calculations offered here by Kevin Murphy and Brad DeLong, is clear that one of if not the major difference between the two is the value they attach to public spending. DeLong, being a somewhat progressive minded guy, thinks that there’s a lot of low hanging fruit for additional public spending, and so says that the inefficiency from the stimulus spending will be zero (I think that’s absurd, but that may be my ideology showing). Murphy, being a laissez-faire calvinist individualist, thinks that government spending is probably already too high, and therefore says that the inefficiency involved in the stimulus is liable to be much higher. Reverse these numbers in the respective calculations, and the picture in each case starts to look much different.
I take Darwin’s point that much of the spending is backloaded, but (i) it is my understanding that it was simply infeasible to bring forward any more into the next 6 months and that the bill received praise for including far more immediate stuff than many had expected; (ii) nobody expects the crisis to be over in 2010, so the stimulus will be needed next year too. I disagree with the suggestion that direct transfers work best, for the same reason I disagree that tax cuts work best– because the historical multiplers are low, and in the current environment of balance sheet deflation, they would even be lower– people would simply use the money to deleverage (pay down debt, build up savings). Can I prove this? No. But I don’t think it’s a preference for government spending in itself that drives this argument.
On Blackadder’s point: it’s for reasons like this that I don’t like to get into quantitative estimates, but like to look at historical incidents instead with some similiarity (US 1930s, Sweden early 1990s, Japan 1990s). And yes, I do see the stimulus as an excuse to start some worthwhile endeavors, and I’m patricularly partial to universal health care and (for some reason!)fast train– but these are added bonuses, not the main reason for doing the stimulus.
What very few are willing to admit is this:
There simply isn’t anyone left to lend money TO. The American consumer (as a whole) is pretty much maxed out on debt.
Our entire economic model is fatally flawed. We must shift to a model that is sustainable.
I disagree with the suggestion that direct transfers work best, for the same reason I disagree that tax cuts work best– because the historical multiplers are low, and in the current environment of balance sheet deflation, they would even be lower– people would simply use the money to deleverage (pay down debt, build up savings). Can I prove this? No. But I don’t think it’s a preference for government spending in itself that drives this argument.
For what it’s worth, part of the reason I’d tend to see direct transfers as being potentially more immediate is that from where I sit (doing analytics at a large consumer electronics company) we’re still selling more large ticket items like flat panel TVs than this time last year, it’s just that we have to discount more aggressively to do so and people are “only” financing the purchase 60% rather than 80% of the time. So from my own most immediate empirical experiences, my suspicion is that is all US households got a few thousand extra dollars, they’ve pay off some debt, pat themselves on the back for being so fiscally responsible, and then go out and buy a Wii, so they could “save money” by staying home in the evenings.
And given that I think many consumers _have_ been borrowing too much and saving too little, I’m pretty well okay with the sort of results that might have. The spending spree, on the other hand, I’m much more suspicious of. (Overall, I’d lean towards doing nothing other than increasing unemployment and other highly targeted benefits right now.)
But then, I assert my masculine cravings through collecting antique rifles and thus lack the fast train fascination. :-)
nobody expects the crisis to be over in 2010
This isn’t exactly true. For example, a recent survey of professional forecasters by the Philadelphia Federal Reserve projected that GDP growth would be negative for the first two quarters of 2009, but would be positive thereafter. If one wanted to be conspiratorial (which is not my temperment), one might suggest that Obama was in a hurry to pass the stimulus bill before the recovery started so that he could take credit for it.
I take Darwin’s point that much of the spending is backloaded, but (i) it is my understanding that it was simply infeasible to bring forward any more into the next 6 months
But this is precisely why using government spending as a stimulus is problematic. It’s true that if you try to do a stimulus via tax cuts, people will only spend some portion of the money. But the advantage of tax cuts is that they can be delivered much faster than can government spending. I also suspect that tax cuts are much more likely to be temporary, whereas a large portion of the spending in the new stimulus bill will just get build into future government budgets.
Corporations have already gotten billions of dollars in tax cuts. Many individuals have as well. It is the reason why many State budgets are imploding. The tax cuts are the easy ones to make, make less profit and less income respectively, and see your taxes cut.
M.Z.,
I would substantially disagree with your assessment of tax cuts being responsible for current state budget problems.
It has much more to do with revenue forecasts for 2009 being based on “Skittles and Unicorns” economics, instead of reality. Spending was increased, commitments were made, and now the piper has to be paid. The previous 2-3 years had state coffers overflowing with wealth, and our Political Ruling Class, ever ignorant of Economics 101, presumed that tax revenue would magically keep increasing at 9% a year for infinity (AND BEYOND!)
Let’s take California.
The 97-98 budget 68.5 Billion in state spending.
Last year’s budget was 144.8 Billion in state spending.
Tax cut do not appear to be the problem. Our political class is addicting to spending money.
If it’s a contest between Kevin Murphy and Brad DeLong, there’s no question who’s more respected as an economist.
Anyway, it’s debates like this that make me think macroeconomics is about as scientific as astrology. The sheer complexities are so great, and there are so many dissimilarities between now and previous time periods, that only snake oil salesmen would purport to use historical data to predict what the economy will look like in 2010 and on.
Anyway, it’s debates like this that make me think macroeconomics is about as scientific as astrology.
Same here.
It’s all voodoo to me.
This is all about keeping things at the status-quo, keeping this “dirty rotten filthy system” from finally collapsing under its own weight. God help us. We’ve built our houses on sand, and no new sand-plan will save us from the pit. It will only delay the inevitable.
“Anyway, it’s debates like this that make me think macroeconomics is about as scientific as astrology..”
And yet, in this very post, we are assured that it is “the enduring power of rigid and self-satisfied ideology” that is at issue here, rather than different conclusions based on woefully incomplete information. Or am I misreading you, MM?
“Anyway, it’s debates like this that make me think macroeconomics is about as scientific as astrology..”
I’ll go on record as saying unequivocally that I think macroeconomics is in fact about as scientific as astrology. I supported the TARP, to much wailing and gnashing of teeth, not as a macroeconomic measure but as a financial fix for an in process bank panic. But the Porkulus is a joke, every bit as much mumbo-jumbo as the von Misean claim to know that the TARP would, over the course of decades, cause the apocolypse. The more confidence with which these kinds of macro-claims in the context of extraordinary complexity are asserted, the more certain we can be that the person asserting them is full of it.
Astrology, macroeconomics, and the ‘science’ of global ‘climate change’ are all equally snake oil; except that astrology is much less harmful, because everyone knows it is silly and it isn’t serving as a political stalking horse.
Part of my gut reaction is to support the “spend tons of money to avoid another Great Depression” school. But I also wonder if all this talk of stimulus, and getting people to spend again, and trying to get home prices to rise again, means we’re just going to repeat the same problems that got us into this mess. And President Obama’s answer to a question at the press conference last week that suggested the credit crunch and complex financial transactions were the principal source of these problems was not encouraging. It seems to me those were only possible because of the broader issues of our large current account deficit, low savings rate, and huge % of GDP that is consumer spending. I think those need to be addressed, and the short term goals of avoiding worse recession run the risk of perpetuating them.
Of course, my long term policy solutions for addressing them, including ending the mortgage deduction, instituting a VAT, lowering the payroll tax, and eliminating income tax for households earning under $100K ($50K for individuals) could extend recession in the short term by holding consumer spending down. How does one balance?
If it’s a contest between Kevin Murphy and Brad DeLong, there’s no question who’s more respected as an economist.
What an infantile comment. But let me make a serious point, nonetheless. The issue here is not who is the “better economist” in their respective field. The issue is who is more clued into the present crisis. There is a whole branch of macroeconomics, dominant in academia away from the coasts (Chicago and elsewhere) that basically says the economy is always in equilibrium, that unemployment is always voluntary, and that business cycles result from shifts in tastes and technology (since aggregage demand cannot affect output). In the real world, this is ludicious– I think it was Franco Modigliani (or possibly James Tobin, I can’t remember) who once noted that this view interpreted the Great Depression as an outbreak of “contagious laziness”. The people who do this work are all very smart, and the work itself is super-technical. But in my view, it is what gives macroeconomics a really bad name (though you guys are content to give it a bad name anyway!!). Oh, and Nobel prizes have gone to some of these guys, including Robert Lucas.
This is all a rather long introduction to the point that I want to make: the economists I trust most are those who have been right about past crises, or who predicted the current crisis. Chief among these are Paul Krugman and Nouriel Roubini.
And yet, in this very post, we are assured that it is “the enduring power of rigid and self-satisfied ideology” that is at issue here, rather than different conclusions based on woefully incomplete information. Or am I misreading you, MM?
Yes, John, you are. When I wrote gis line, I was thinking of the whole Republican caucus arguing that tax cuts would make for better stimulus, not based on any economic argument (however uncertain), but on the purely ideological position that people, not governments, should be empowed to spend money. This is the very Reaganist shibboleth I was getting at.
Morning Minion
This is the first time I agree with the whole general tone of your post. The economic right is in disgrace but since they have squirreled away cheddar, they still cannot empathize with the devastation that in this case was a right left co-invention: the CDO’s that are destroying the world were created by Wall Street….the licensing of Fannie and Freddie to do the quixotic came from mainly from the left. I’m stunned that there is no talk of Euro nations suing Moody’s and Standard and Poor’s in International Court for marking up the CDO’s at triple A. Perhaps that is next. Woe to the young who are starting off in this broke new world and owe college loans.
Zak,
Yes, I must admit, as I was reading the WSJ this morning about how it was important that the “Making Work Pay” part of the stimulus give people some money, yet make sure it wasn’t enough that they actually pay off debt or save, and how it was an important goal of all this to get the national saving rate back down to zero, I found myself with this very creeped-out feeling. I can’t help thinking that it’s not until people save and pay off debt to a certain reasonable degree that it will be possible for us to see real growth take off again.
Now that is, as MM could certainly point out, an ideological commitment of sorts that I have. But then, that’s one of the things that we mean by that rather loose term “ideology”: how we think the world does or ought to work. And thus since I think that one of the things we need is for people to get their debt levels to a sustainable level, I’m not impressed by a an economic plan which is aimed at keeping people from saving and paying off.
Whether I’m right on that would tend to have to do with whether I’m right on the idea that the levels of debt people were carring got to unsustainable levels over the last few years — and it sounds like from an empirical point of view that judgement is hard to make because it depends on what you think is sustainable.
I forgot to address Jonathan’s point:
It’s an interesting perspective and may have some merit. That people are even asking these questions shows how far we have come into unchartered territory. My quick reaction would be to say that old lines between deposit-taking banks and other financial institutions has been blurred in the world of securitization and CDOs. What we saw this time around was a run on investment banks, and only on commercial banks to a lesser extent. People like Willem Buiter have been stressing the importance of the “shadow banking economy” for quite a while now. I think it was a huge mistake to take a light-touch regulatory approach with this group as they jacked up leverage through the roof without heed of the consequences. But for now, unfortunately, these financial institutions are at the very heart of the financial system, with tentacles everywhere– rememeber the mass panic when Lehman collapsed? (I certainly did not predict this, and was supporting the bankruptcy of Lehman). So, I think the government is right we need to fix this machinery, and that means getting dodgy assets off the books, so that inter-bank and cross-financial-institution lending can start again.
I was thinking of the whole Republican caucus arguing that tax cuts would make for better stimulus, not based on any economic argument …
Well, FWIW I agree that that is also an obvious load of hooey. It was a self-serving adoption of an argument they don’t really believe (like they are Keynsians and just disagree on what tactics have better multiples; oh and I’ve got a bridge to sell you) in order to polemically bolster an ideological position. Rather like the Catholics who support pro-abort Democrats on the supposed ‘theory’ that pro-aborts are better at ‘reducing the number of abortions’. Folks might actually believe this stuff after some serious bouts of willful self-indoctrination, but to anyone even slightly outside the hothouse it is obvious self-serving nonsense.
It’s not an infantile comment at all . . . if you’re asking us to accept arguments from authority, it’s fair to point out that some authorities are known for being geniuses, and some are not.
Anyway, Krugman didn’t predict the current crisis. Roubini, yes. That doesn’t mean Roubini is right about everything, nor does it mean he has a crystal ball.
Have you ever heard of the elementary probability trick that goes as follows: Send 10,000 people a letter “predicting” the movement of the stock market over the next month — half get a letter predicting downward movement, half get a letter predicting a rise. Whatever happens, send another letter to the 5,000 people who got the correct letter, again with half predicting a rise and half predicting a decline. Repeat a few time, and now you have a pool of 625 potential investors who have just seen you “predict” the stock market correctly for five months in a row. They’ll be convinced, but it’s just random chance that you were right.
Same here. There are lots of economists in the world. A few are likely to be pessimists at any given time. Sometimes the pessimists turn out to be right. That doesn’t meant they had a magic ball that let them predict the future.
Moreover, no matter how much you trust Roubini as an “authority” on diagnosing the current problem, there’s absolutely no reason to think that he can predict how the problem might be fixed. Lots of homeopathic doctors can diagnose a case of cancer, but that doesn’t mean they know how to treat it.
In the end, the American system is a combination of Oklahoma Land Rush – plus, of course, the Sooners – and high stakes Vegas gambling. When Republicans run the show, you get a touch of the Huns – rape, pillage and plunder, foreign and domestic. Of course, Huns could be reasoned with.
Darwin:
There is a number of issues involved here. In the medium term, it is absolutely essential that the US savings rate increases. Remember the global imbalances: the US runs huge current account deficits, borrowing money from countries with huge current account surpluses (China). Sooner or later, this borrowing must reach a limit.
But the issue with the stimulus is softening the blow. There is one way to reduce global imbalances: a severe recession. Domestic demand would collapse, and net exports would not be able to make up the loss as the whole world is suffering. Using government borrowing to prop up the economy helps make the adjustment less painful. The result is human misery on a vast scale.
This also explains why stimulus is even more important in surplus countries like China– they can reduce national savings and shift away from exports toward domestic demand, and in the process import more from the US and elsewhere.
Minion, one thing my clueless self noticed is that savings are basically punished in the U.S. 4% interest on a regular savings account without restrictions is apparently unheard of. In addition, everything seems to be tied to the stock market. When my wife told me that her father (747 Pilot for United Airlines at the time) “lost his pension” I asked, “What do you mean, lost his pension ?” United went bankrupt and his pension was gone. How is this possible ? In Austria, the pension is secured by the state, as is health care.
The more I begin to understand how America “works”, the more aghast I am. Maybe it is “Calvinism” after all that makes people here take pride in getting shafted ? Maybe Michael Moore is casting too gentle a light ? Heh.
My doctor-double-degree-wife is quickly losing her faith in her home country. It all started when I, the used-to-benefits-European, asked her, “What do you mean, $150k for a doctorate ?”, followed by, “What do you mean, no paid maternity leave ?” and ended with a letter by the CA government stating “You have been designated as surplus.” (verbatim)
All I know is I’m not trading in my EU citizenship for this (I’m a permanent resident). And it may be time for German lessons ;o)
When I wrote this line, I was thinking of the whole Republican caucus arguing that tax cuts would make for better stimulus, not based on any economic argument (however uncertain), but on the purely ideological position that people, not governments, should be empowered to spend money.
Fair enough. I don’t think either the Congressional Republicans or the Democrats acquitted themselves very well in the passage of the stimulus bill.
Maybe you could do some posts on the fundamental differences between the US and Europe/Canada. I’d like to lose that sheep-in-terror look on my face and settle for a plain “Well, we’re ****ed.” :-)
Gerald:
Over the past quarter century or so, people in the US have been forced to bear more and more risk, and part of this is ideological. So health care is moving from social insurance (young and helthy subdidize old and sick, on the basis that they will eventually be provided for too) to actuarial insurance (you pay premia based on your own risk). The latter is a great deal for some people, but it throws solidarity out the window.
With retirement, there has been a similar shift from defined benefit to defined contribution– the latter means your retirement income depends on the whim of the market. Employers love this, of course.
Over the past quarter century or so, people in the US have been forced to bear more and more risk, and part of this is ideological.
Well, that’s the loaded way of putting it. One might also say that Americans have collectively chosen to accept more risk in return for certain rewards (real or illusory.) So for instance, you say:
With retirement, there has been a similar shift from defined benefit to defined contribution– the latter means your retirement income depends on the whim of the market. Employers love this, of course.
But of course, it was having a defined benefit retirement plan which apparently wiped out Gerald’s father-in-law’s saving when UA went bankrupt. If he’d had a 401k with employer matching instantly vesting, he might be the “victim” of the markets in seeing his savings go down 40% last year as I did, but at least he’d still have savings. I expect that a lot of people with guaranteed benefit GM pensions are really wishing right now that they had a 401k full of mutual funds instead.
Similarly, I sympathize with Gerald’s dismay at the cost of his wife’s education — one of the things to keep in mind with US higher education costs is that US PhDs and MDs are paid a lot more than most European ones, in absolute terms and even more so in buying power. I recall when researching the French health care system a while back reading that MDs there make on average about half what MDs here make. That may be an acceptable trade off, but it’s not the one that thus far the US population has made.
“MDs there make on average about half what MDs here make.”
well, if you factor in paying off student loans for 30 years…if you factor in paying for kids’ college to some degree, if you factor in lack of paid maternity leave etc. etc. A doctorate in Austria is basically free. Of course, it’s easier for a small country to provide for its citizens.
“That may be an acceptable trade off, but it’s not the one that thus far the US population has made.”
The US population knows zilch about life in other countries other than that they are “socialists” and that that is a bad, bad thing.
I think that I am basically correct in this assessment:
The U.S. is great for self-employed people and for the top 10% or so. The average person is far better off in Austria. So much so that it defies belief. Austrians, in turn, have no idea that there could be employment situations like they exist in the USA. My parents continue to be astounded at what is possible here. Health insurance being tied to a job is probably the biggest whopper.
The winners in the US win bigger than anywhere else, but there are far more losers, and they lose a lot more. Las Vegas really epitomizes the country well. Roll high, fall low.
I wonder whether the weird religiosity, the unbelievable violence and the war lust so common in this country is inextricably tied to the economic model. I wonder what, if anything, would shift if variables were changed. There definitely is a connection between the specifically American religiosity and war readiness, if one looks at who supports the military the most, in spirit and bodies.
The lack of solidarity has always been explained with Calvinism, from what I understand. The genocide of “Indians”, the “manifest destiny” etc. is all too recent to not still have an influence.
MM,
Actuarial insurance vs. social insurance does not “throw solidarity out the window.”
You are elevating your prudential judgment on the matter to an authoritative moral position.
A much stronger argument could be made that social insurance throws both solidarity and subsidiarity out the window, since it is both economically unsustainable (witness social security on the current demographic death and dhimmitude of Europe) and done in a way that depersonalizes local communities.
As for defined benefit/contribution issues, you simply don’t know what you’re talking about. If you do, you’re surely not giving any hint of knowing what you’re talking about on the matter by your words.
Gerald – I can see you retracing a lot of the ground I traveled in going from Republican (in the ’80s) to Democrat (now). I’m now actually to the left of a lot of the corporatist wing of the Democratic Party, actually.
The Republicans’ policies made a certain amount of sense to me when I considered as pure abstractions: it is when I saw them operate in the real world that I saw the game for what it is: It is not really about freedom from tyranny and small government. It is really about serving the group of people the Republican Party serves: the economic elites.
GA,
The fundamental difference comes down to the American and French Revolutions.
The pre-Revolutionary era had a unified model, where all persons were either Aristocrats (with the associated rights of freedom of speech, freedom of arms, certain freedoms from certain forms of government interference, and so on, being largely independent of the government, though owing it certain allegiances) or Serfs (who were large dependent upon the government, and could be imposed upon by the government).
This model was no longer sustainable. The French and Americans went down to the Revolution office, filed the appropriate paperwork, and well, you’re familiar with the results.
The Americans chose to eliminate serfdom, making all men Aristocrats.
The French chose to eliminate Aristocrats, making all men serfs.
The differing approaches and cultural models in many ways stem from the above.
DC-
That is a perfectly fair observation that Americans have collectively decided to accept more risk in return for certain rewards. And that would be in line with a moderate liberalism that asks for some social discernment as to the economic risk & reward for the basics of life, with, if there is no consensus, defaulting to private action. Neither socalist, demanding collective action to eliminate all risk, nor conservative, precluding any collective discernment on the degree of risk desired by society.
Matt,
That is why you will find many “Conservatives” very dissatisfied with the Republican party, and accuse it of simply becoming Democrat Light (which serves both the economic and cultural elite, as opposed to just the economic elite).
This country’s Constitution is based around freedom from tyrany and small national government, with rights not clearly given to the Federal Government belonging to the states.
If we wish for a different form of government, then we should be honest and change the Constitution. What we have today is not what was intended or envisioned in any fashion, and honesty demands we return to the intent of the founding document or change it.
Anyone with a defined benefit pension plan should have their plan (or at least part of it) guaranteed by the Pensions Benefit Guarantee Corporation. Granted, it’s underfunded because companies have failed to pay what they need to, but that is one risk that America has socialized.
A much stronger argument could be made that social insurance throws both solidarity and subsidiarity out the window, since it is both economically unsustainable (witness social security on the current demographic death and dhimmitude of Europe) and done in a way that depersonalizes local communities.
Now this is silly. Universal social insurance is actually far more efficient and equitable than the European model. As well as covering evertbody (that solidarity thing), it does so far more cheaply– on a per capita basis, Europeans pay about half what Americans pay for health care. And as for subsidiarity, how in God’s name is a system that relies on individuals standing alone against massive insurance companies with the power to deny claims and coverage at a whim more supportive of subsidiarity than universal care?
As well as covering evertbody (that solidarity thing), it does so far more cheaply– on a per capita basis, Europeans pay about half what Americans pay for health care.
You keep saying the above proposition as if it were a law of nature — single-payer systems just do cost less — rather than what it is: a fact that is entirely contingent on a wide variety of factors peculiar to Europe, including less obesity, much lower pay for doctors, much less overuse of medicine, etc. A single-payer system, if implemented in America, would necessarily be affected by the many things that make America spend more — less healthy lifestyles, more demand for overuse of medicine, higher pay for doctors, etc.
MM,
If Universal social insurance is actually far more efficient and equitable than the European model, then I don’t understand why you are using European information to make a defense of Universal social insurance since Europe doesn’t use it.
Morning’s Minion,
Aren’t we really at nationalization right now? Exactly who would the government bring in to run Citigroup?!?
That is why you will find many “Conservatives” very dissatisfied with the Republican party, and accuse it of simply becoming Democrat Light (which serves both the economic and cultural elite, as opposed to just the economic elite).
The reason I’ve stayed with the Democratic Party (rather than going further left) is that there have been periods in its history when it knew where its success came from: looking out for working people, protecting the non-rich from the rich, and so on.
It does seem like the political battles in this country are often battles between rich people – between the socially “liberal” rich of places like Manhattan and the socially “conservative” rich of the South. I am doing what I can to rally the economic populists within the Democratic Party, but I’m just one guy.
Gerald,
One of the reasons that it’s hard to take your current assessment of world economic affairs seriously is that you’ve in the course of the very short time progressed along the lines of:
-loud-mouthed “conservative” Catholic
-loud-mouthed secular libertarian
-loud-mouthed secular progressive
The main constant is that at all stages you seem addicted to expressing yourself hyperbolically.
That, and the actual economic data doesn’t support your claims of how wonderful it is to live in Europe compared to the US, probably because you’re comparing the experiences of your family in Austria rather than those of others (especially non-white immigrants).
MM, you referenced, Roubini… what do you think of Taleb?
I’m also curious about peoples’ thoughts about the paradox that a higher savings rate is — at least in the short to mid-term — deleterious to our economy, giving that we depend so extensively on consumer spending to maintain high growth rates.
Speaking of which, Daniel Larison & Patrick Deneen have both penned posts of late taking a critical look at the across-the-board assumption that 3+% economic growth is somehow essential.
Chris: I don’t know much about Taleb at all, I’m more familiar with macroeconomists.
That’s a very interesting issue you raise in the last paragraph. Pope JOhn XXIII in Mater et Magistra says that the equitable distrubution of wealth is more important than the accumulation of wealth. Personally, I would rather a growth rate of 1 percent that is shared than a growth rate of 5-10 percent that goes to the wealthiest.
MM, re: Taleb, last week he and Roubini were on CNBC… Rod Dreher drew my attention to the online clip of their appearance… it’s… interesting. (The link is to Dreher’s post — whose comments strike me as apropos — and the link to the clip is in it.)
Pope JOhn XXIII in Mater et Magistra says that the equitable distrubution of wealth is more important than the accumulation of wealth.
At face value, this principle would mean that if everyone lived in the poverty typical of several hundred years ago, that would be preferable to today’s society (in which everyone is unimaginably wealthy by comparison, but some people are even wealthier). Is that what you think?
I guess there’s a good argument (from Christ’s words) that b/c rich people have a hard time going to heaven, a society that has made so many people so rich isn’t ideal; therefore we really would be better off (in a spiritual sense) if we could abolish grocery stores, the modern health care system, cars, computers, manufactured clothing and furniture, etc., and go back to a world in which everyone was really poor. I haven’t seen you or anyone else around here making that argument, however.
Therefore we really would be better off (in a spiritual sense) if we could abolish grocery stores, the modern health care system, cars, computers, manufactured clothing and furniture, etc., and go back to a world in which everyone was really poor.
Man, Straw, etc.
No, just thinking logically.
When I read the opening line, I thought MM was referring to Obama. My mistake.
As for tmeporary nationalization of the banking system, I don’t know the purely economic virtues of such a move, but it seems to me one thing foreign investors have liked about the US is the fact it has rarely nationalized segments of the economy. One of the big risk factors of foreign investment is seeing your investment taken over by the gov’t. What would such a move do to confidence in investing in the US? What industry would be the next for “temporary nationalization”?
“I would prefer 1% growth shared rather than 5-10% that goes to the wealthiest”
If 1% is shared, and the remaining 4-9% go to the wealthiest, would you then be happy?
That brings to mind the parable of the vineyard where the later workers get paid the same as the earlier ones, and the earlier ones grouse about it. Seems if people were more satisfied with what they have, rather than looking at what the other guy is getting, we would also be better off.
On the Euro health care thing – another difference in cost (reflected in pay scales of Drs.) is that the US strictly rations the number of physicians allowed to practice. Not saying that’s better or worse, but it has a direct impact on cost.
Seems if people were more satisfied with what they have, rather than looking at what the other guy is getting, we would also be better off.
The people raking in all the benefits of increases in productivity the last 30 years or so would love it if every stopped complaining about it, yes.
The people raking in all the benefits of increases in productivity the last 30 years or so would love it if every stopped complaining about it, yes.
I suppose there is a sort of Roschart Test element to these sorts of questions. How about this:
Would it be better to have an economy in which everyone enjoyed 1% growth, or one in which the bottom 25% enjoyed 1% growth while the top 25% enjoyed 5% growth?
DC – It would be better to have an economy where gains were shared a lot more equitably than they have been the last 30 years, better to have an economy where rises in productivity were translated into higher paychecks for workers at large, and not into helipads for their bosses’ bosses’ bosses’ yachts.
That doesn’t answer the question I was asking, though…