What is wrong with the US economy? Part 2

[mheslep]

Even if EU would assume more responsibility in NATO, what would prevent the US of claiming that NATO was not doing it's duties and campaigning on it's own?

Because, I assert, the US people don't want a large military if its not necessary. We're not Rome.

 

[Astronuc]

Dow 30 is down about 800 pts so far this year

More job cuts are on the way

Motorola to cut 4,000 more jobs in 2009
http://news.yahoo.com/s/ap/20090115/ap_on_bi_ge/motorola_cuts

Microsoft may lay off as many as 15,000
http://news.yahoo.com/s/ap/20090115/bs_nm/us_microsoft

 

[misgfool]

Because, I assert, the US people don't want a large military if its not necessary. We're not Rome.

You didn't answer my question. The way I see it stepping up in NATO would only bring costs to EU while the US would operate in the world as usual. So why bother?

I agree that the US is not Rome, although a part of it is inherited. However, in practice the US has a large military. What evidence do you have to back you assertion?

 

[mheslep]

You didn't answer my question.

Yes I did, directly, though it was just an assertion on my part, just as you are doing here w/ 'the way I see it'

The way I see it stepping up in NATO would only bring costs to EU while the US would operate in the world as usual. So why bother?

Even if you are correct about US intentions, the EU&Canada still have an obligation to meet for NATO in areas like Afghanistan, as Sec. Gates makes clear, diplomatically, nearly every time he speaks on the subject.

What evidence do you have to back you assertion?

The US military and its industry have always lobbied to increase themselves in size and budget, but historically the US electorate has repeatedly demonstrated a wariness of its military. In the 20th century the US government drastically and repeatedly cut the size of its armed forces after the public concluded some threat or other was essentially vanquished or contained. In the first month after WWI the Army released 650k personnel and 3.25 million within nine months. The Army again became a volunteer force at a little over 5% of its WWI peak. In the 1920s Congress cut the small volunteer force by a third again. After WWII military spending was cut seven fold, as a percent of GDP, and the peak of nearly 10 million personnel in the WWII armed services was cut within a year to several hundred thousand; similar but smaller reductions were made after the Korean conflict in ~1955-56, after the Vietnam war, and again in the early 1990s (the 'peace dividend') after the collapse of the Soviet Union. The US has cut its nuclear arsenal by more than half of its cold war peak.
There has been a security cost to most of these sharp reductions, as the US military was clearly outmatched at the beginning of WWII by the far better equipped and trained Nazi Germany, began the Korean conflict with rusting WWII equipment, and so on. Still my view is that the sense of the US people to reduce the military was wise, even if the execution of those reductions was poor.
http://www.truthandpolitics.org/military-relative-size.php#gdp-graph
http://www.history.army.mil/books/amh/amh-19.htm
http://www.history.army.mil/books/amh/AMH-20.htm

 

[misgfool]

Yes I did, directly, though it was just an assertion on my part, just as you are doing here w/ 'the way I see it'

I have no problems with assertions, but you do have to provide some reasoning that lead you to that conclusion.

Even if you are correct about US intentions, the EU&Canada still have an obligation to meet for NATO in areas like Afghanistan, as Sec. Gates makes clear, diplomatically, nearly every time he speaks on the subject.

The US still has the option to do as it pleases whether EU/Canada likes it or not. So I can't see any reason to invest more resources than "necessary" to NATO.

The US military and its industry have always lobbied to increase themselves in size and budget, but historically the US electorate has repeatedly demonstrated a wariness of its military.

US military spending as a proportion of the global military spending is substantial (47% 2003 [1]). Still you may be right, I guess we will just have to wait and see.

In the 20th century the US government drastically and repeatedly cut the size of its armed forces after the public concluded some threat or other was essentially vanquished or contained.

However, you don't seem to be too concerned of the endless supply of threats or others which require military solutions.

[1] http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

 

[Astronuc]

Stock rallied during the afternoon as the next installment of $350 billion was approved, and the Congress seemed to have reached some agreement on the next bailout package, which is somewhere between $775-825 Billion.


Meanwhile - Band of America (B of A) looks to be in some trouble too
http://marketplace.publicradio.org/display/web/2009/01/15/pm_b_of_a/

KAI RYSSDAL: Bank of America. For the past couple of months it's been one of the good banks. In good enough shape to buy the failed mortgage lender Countrywide last summer. Big enough to not need money from the TARP.

But CEO Ken Lewis took $15 billion anyway just to make everybody else feel OK about it. Healthy enough to buy Merrill Lynch when it was going under back in September. And oh, by the way, getting Merrill's $10 billion in TARP money as a sweetener.

Now we know all was not as it seemed. Even before the books were closed on 2008, B of A went back to the Treasury to report problems with that Merrill deal.

From New York, Ashley Milne-Tyte reports.

. . . .

Christopher Whalen: Primarily it's been used for absorbing losses. You know, all three of the top banks have different problems but they all are seeing loss rates for both securities and loans going up.

He says the government shouldn't extend any further largesse to the bank.

Whalen: If we keep putting money into big banks where we're essentially just covering operating losses, but we're not dealing with the solvency issue, we're just buying time.

But Jamie Peters, an equity analyst at Morningstar, says the government will pony up the extra funds.

Jamie Peters: We've seen in this series of bailouts that the government doesn't want these too-large-to-fail institutions to actually fail. And so stepping in and bailing out Bank of America is pretty much the only option.

. . . .
Peters: Bank of America's dividend, probably going to go away, . . . .

Bitter cold hits hard because of economic meltdown
http://news.yahoo.com/s/ap/20090115/ap_on_re_us/winter_weather

ST. LOUIS – William Davis has lived on the streets since the recession cost him his job as a commercial painter. Over the last eight months, he's made it through heat waves, wind storms, rain, snow and ice.

But the 51-year-old finally sought help at a homeless shelter Thursday after enduring a night shivering alongside a downtown wall in temperatures that bottomed out at zero — the coldest reading here in eight years.
. . . .
Ray Redlich, assistant director of New Life Evangelistic Center in St. Louis, said the homeless population has changed as the financial crisis has grown worse. Now it includes more people like Davis who just months ago were working for a living.
. . . .
Matt Ivey, who was driving a AAA tow truck to jump start stalled cars, said many automobiles were in rough shape. "Because of the economy, people don't really have enough money to repair their vehicles," he said.
. . . .

 

[Astronuc]

The economy is still shaky.

Bank of America posts first loss in 17 years
http://news.yahoo.com/s/nm/20090116/bs_nm/us_bankofamerica

NEW YORK (Reuters) – Bank of America Corp (BAC.N), posted its first quarterly loss in 17 years on Friday and slashed its dividend, hours after winning a multibillion-dollar lifeline from the U.S. government to help absorb Merrill Lynch, which lost a record $15.31 billion in the quarter.

The dismal results came as the largest U.S. bank faced mounting pressure from investors who questioned how well it will absorb a tidal wave of soured loans in an economy showing no signs of escaping a deep recession. Bank of America cut its quarterly dividend to a penny from 32 cents.

"It is difficult to focus on what is going right at this time," a clearly downbeat Chief Executive Kenneth Lewis said on a conference call. "The economy and subsequently the credit markets literally hit a wall starting in September and culminating late in December, with the greatest impact of my almost 40 years in banking."

Shares of Bank of America fell 7 cents to $8.25 in morning trading.

Hours after it obtained $20 billion in new capital from the government's $700 billion Troubled Asset Relief Program (TARP), the bank reported a quarterly loss of $1.79 billion, or 48 cents per share, compared with a year-earlier profit of $268 million, or 5 cents.

Lewis sought government help after it became clear that Merrill's credit losses were far higher than expected, and had threatened last month to scrap the $19.4 billion takeover without government help.
. . . .

Absorbing Merrill Lynch wasn't the best for B of A, but it rescued ML.

Citigroup capped a devastating 2008 by announcing Friday that it would split into two entities and that it had posted an $8.29 billion loss for the fourth quarter. Citigroup’s rival, Bank of America, also posted a loss, just hours after receiving a new infusion of government support, The New York Times’s Matthew Saltmarsh and Eric Dash reported.
. . . .
Bank of America’s earnings were released just after the government agreed early Friday to provide an additional $20 billion infusion of capital into the bank and to cover the bulk of up to $118 billion in losses, largely arising from the bank’s Merrill acquistion.

I have to wonder if there is a decimal point (order of magnitude) off here.

Overall for 2008, Bank of America posted a net profit of $4.01 billion compared with net income of $14.98 billion a year earlier.

It said earnings were driven reflected “the deepening economic recession and extremely challenging financial environment, both of which significantly intensified in the last three months of 2008.”

Bank of America’s net revenue during the quarter rose 19 percent to $15.98 billion from $13.45 billion a year earlier. The bank also said it would pay a dividend of just 1 cent for the first quarter.

B of A itself seems to be doing well. I believe the management declared not bonuses for 2008, even though they made a profit.

 

[The Dagda]

Dow 30 is down about 800 pts so far this year

More job cuts are on the way

Motorola to cut 4,000 more jobs in 2009
http://news.yahoo.com/s/ap/20090115/ap_on_bi_ge/motorola_cuts

Microsoft may lay off as many as 15,000
http://news.yahoo.com/s/ap/20090115/bs_nm/us_microsoft

Is that 50,000 Microsoft workers, or 50,000 schlubs they palm off their Vista/7.0 beta versions on because I'm ok with that either way?

 

[Astronuc]

Circuit City to liquidate remaining US stores
http://news.yahoo.com/s/ap/20090116/ap_on_bi_ge/circuit_city_bankruptcy

Bankrupt Circuit City Stores Inc., unable to work out a sale of the company, said Friday it will go out of business — closing its 567 U.S. stores and cutting 30,000 jobs.

The nation's second-biggest consumer electronics retailer is the latest casualty of an unprecedented pullback in consumer spending that has driven other brands such as KB Toys, Mervyns LLC and Linens 'N Things into bankruptcy. Experts believe there will be more to come.

"This is the only possible path for our company," Circuit City's acting Chief Executive James A. Marcum said in a statement. "We are extremely disappointed by this outcome."

The company had been seeking a buyer or a deal to refinance its debt, but the hobbled credit market and consumer worries proved insurmountable. Negotiations for an acquisition went past midnight on Thursday, a Circuit City lawyer said in court.

. . . .
Employees were being notified Friday that they would lose their jobs and, if a judge gives final approval to the liquidation, stores would begin the closing process as early as Saturday.
. . . .

2009 is starting out rather badly.

 

[mgb_phys]

It's tough on the people involved - but a lot of the victims of this recession should have gone under 10years ago, they have just survived because of the boom.
Nortel, Circuit city, Linens 'n things, Woolworths, even chrysler - none of these are exactly best of breed in their markets.

 

[turbo]

It's tough on the people involved - but a lot of the victims of this recession should have gone under 10years ago, they have just survived because of the boom.
Nortel, Circuit city, Linens 'n things, Woolworths, even chrysler - none of these are exactly best of breed in their markets.

I have to agree with all of those choices. Chrysler in particular has been designing body-styles that go 100% against safe engineering. Look at some of their sedans with their high trunk heights and tiny rear windows. How many people are going to back over their own children/grandchildren just because they cannot be seen out the back of the vehicle? My brother-in-law is the chief mechanic for the local Chrysler dealership, and he is really ticked off at some of these design flaws. He has grandchildren that love to play in his gravel driveway with toy trucks and tractors, and he is keenly aware of such shortcomings.

As he puts it "why design poor rear-visibility into a car when you know it will cost lives?" Chrysler's take on "style" sure isn't worth that cost.

 

[OmCheeto]

Circuit City to liquidate remaining US stores
http://news.yahoo.com/s/ap/20090116/ap_on_bi_ge/circuit_city_bankruptcy
2009 is starting out rather badly.

Not if you never shopped there in the first place.

Now when Radio Shack goes under, I'm cutting my wrists.

 

[Count Iblis]

http://americanmemories.us/americanmemories/ebay/MUSIC/supertramp-crisis-1.jpg

 

[Astronuc]

Crime of the Century might have been more appropriate.

Supertramp = Crime of the Century
https://www.youtube.com/watch?v=CVPhVV1dYd0

 

[OmCheeto]

Crime of the Century might have been more appropriate.

Supertramp = Crime of the Century
https://www.youtube.com/watch?v=CVPhVV1dYd0

Hey!

...Who are these men of lust, greed, and glory?
Rip off the masks and let's see.
But that's no right - oh no, what's the story?
There's you and there's me
That can't be right

We are the men of lust, greed, and glory!

I was so impressed with the album that I purchased 3 different pressings, culminating in a MFSL UHQR pressing for $50 back around 1982.

I sold the album about 15 years ago for $10 when my turntable went TU. I see now that it's worth close to $700. Hmmm... Shoulda kept all that old vinyl after all...

I still have a metal cassette tape recording though. It still sounds incredible, even with my hearing loss from having listened to it at well over 120 db about a hundred too many times.

 

[turbo]

I have about 300 albums in my collection. Maybe I can make up for some of my IRA losses and my wife's 401K losses. Nah!

 

[OmCheeto]

I have about 300 albums in my collection. Maybe I can make up for some of my IRA losses and my wife's 401K losses. Nah!

The UHQR's are going for a much as $1700 a piece. You might make up some.

Perhaps this is a new business opportunity for someone. I'd personally like to see them come out with a new format of cd that had a sample rate above the abysmally slow 45kb/sec. I laughed when I heard that. "Oh, but there's no more popping and clicking". Yah right. And there's no more sonic excellence either. A bunch of digital crap as far as I'm concerned. Thank god I'm going deaf, or I'd really be pissed.

No wonder the economy's gone to crap, it's because we've settled for buying it.

 

[turbo]

The UHQR's are going for a much as $1700 a piece. You might make up some.

Perhaps this is a new business opportunity for someone. I'd personally like to see them come out with a new format of cd that had a sample rate above the abysmally slow 45kb/sec. I laughed when I heard that. "Oh, but there's no more popping and clicking". Yah right. And there's no more sonic excellence either. A bunch of digital crap as far as I'm concerned. Thank god I'm going deaf, or I'd really be pissed.

No wonder the economy's gone to crap, it's because we've settled for buying it.

I have quite a number of the remastered high quality pressings, and some rarities like Buckingham and Nicks's first album (before they were assimilated by the remnants of Fleetwood Mac) and a couple of copies of the eponymous "Pure Prairie League" that I don't think have ever been re-released in other formats. Killer album! "Tears" and "Take it Before You Go" are the best road songs ever.

 

[Astronuc]

It will be interesting to see how the US stock indices respond to Obama's inauguration.

The Asian markets are down about 3% in early afternoon trading (Jan 20).


Apparently the additional banking problems are worrisome to the markets:

Banking fears grip European markets despite latest British bailout
http://finance.yahoo.com/news/Banking-fears-grip-European-apf-14096348.html

RBS expects full-year loss up to 28 billion pounds
http://finance.yahoo.com/news/RBS-expects-fullyear-loss-up-apf-14097594.html

Rescue efforts show difficulty of fixing bank woes
US, British rescue plans shows difficulty of forcing banks to lend as credit crisis mushrooms
http://finance.yahoo.com/news/Rescue-efforts-show-apf-14097543.html


Investment Outlook
Bill Gross | January 2009
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/IO+Gross+Jan+09+Andrew+Mellon+vs+Bailout+Nation.htm

Apparently Gross did pretty well in his investing during the 4thQ 2008 - when the markets lost 30+% and some equities lost 90+% of their value.

 

[OmCheeto]

It will be interesting to see how the US stock indices respond to Obama's inauguration.

The Asian markets are down about 3% in early afternoon trading (Jan 20).

Gads! I've never seen a logarithmic scale to measure a stock markets drop.

http://finance.yahoo.com/echarts?s=^N225#symbol=^N225;range=my

35,000 to 8,800. But that's old news I guess. (1990-2009)

But if the Dow had followed the Nikkei over the same period it would be at 2000 instead of 8200.

Wow. Maybe McCain was right. Maybe there is nothing wrong with our economy.

 

[mheslep]

Gads! I've never seen a logarithmic scale to measure a stock markets drop.

http://finance.yahoo.com/echarts?s=^N225#symbol=^N225;range=my

35,000 to 8,800. But that's old news I guess. (1990-2009)

But if the Dow had followed the Nikkei over the same period it would be at 2000 instead of 8200.

Wow. Maybe McCain was right. Maybe there is nothing wrong with our economy.

You know the Japanese have spend the last 10 years doing massive amounts of fiscal spending in attempts to stimulate their economy, similar to what the US is poised to do. Looks like, economically speaking, all they are getting from this spending is a huge pile of debt.

 

[russ_watters]

It will be interesting to see how the US stock indices respond to Obama's inauguration.

The Asian markets are down about 3% in early afternoon trading (Jan 20).

Way down today, but I wouldn't read much into it. I was listening to the news during the opening bell and the commentator said it has dropped on 70% of inauguration days. Apparently, the optimistic bulls are watching the inauguration while the pessimistic bears are trading stocks.

 

[Astronuc]

Banks sink deeper into crisis on Obama's first day
Bottom falls out of bank stocks as investors expect need for far more aggressive bailout steps
http://finance.yahoo.com/news/Banks-sink-deeper-into-crisis-apf-14110026.html

So what happened to those free-marketeers on Wall Street?

 

[mgb_phys]

Fiat have bought 35% of Chrysler, which with Mercedes still owning 20% means they are presumably no longer a US bailout candidate.
You know things are bad when Fiat are rescuing you - and Fiat shares actually went UP on this news!

 

[mheslep]

What does this bank stock news:

Banks sink deeper into crisis on Obama's first day
Bottom falls out of bank stocks as investors expect need for far more aggressive bailout steps
http://finance.yahoo.com/news/Banks-sink-deeper-into-crisis-apf-14110026.html

have to do with

those free-marketeers on Wall Street?

?

 

[Astronuc]

Reference to the people who detest government regulation, and who rave about the wonders of free-market and unfettered captialism, who then blow it big time, and run hat in hand for bailouts from Uncle Sam to cover their negligence.


Meanwhile -

Banks battered as sector matches worst day ever

For investors who might have thought the worst was over after the nation's big three banks aired some dirty laundry last week, Tuesday provided clear evidence that the horror show continues, as well over half of the financial stocks in the bellwether S&P 500 Index lost more than 10% of their value.

State Street an ETF that tracks financial stocks in the S&P 500, fell almost 17%, matching its record one day percentage drop of on December 1, 2008.

Most of nation's top banks were trading at levels last seen in the mid-1990's, including Citigroup (C: $2.82, -$0.68, -19.43%), Wells Fargo (WFC: $14.23 -$4.45 -23.82%), and J.P. Morgan Chase (JPM: $18.09, -$4.75, -20.78%).

Bank of America (BAC: $6.00, -$1.18, -16.43%) shares traded at their lowest level since 1986.
. . . .

B. of A. needs more than $80 billion: FBR
Wells Fargo also will likely cut dividend to boost capital, analyst says

And these guys get to keep their jobs?

 

[mheslep]

Reference to the people who detest government regulation, and who rave about the wonders of free-market and unfettered capitalism, who then blow it big time, and run hat in hand for bailouts from Uncle Sam to cover their negligence.

Okay, if we grant all that for a minute, how does that follow from the bank stocks decline link?
As to the details. Two points.
1) Is this free-market raving?

...Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control ...

2) Given the framework the government setup for the TARP money, everybody - banks, auto companies, universities and colleges, porn kings - is dreaming up some tortured rationale to get hold of the money whether or not they had anything at all to do with creating financial instruments.

Meanwhile -

Banks battered as sector matches worst day everB. of A. needs more than $80 billion: FBR
Wells Fargo also will likely cut dividend to boost capital, analyst says

And these guys get to keep their jobs?

Who, BoA execs? TARP Treasury officials? Congressional members that wrote and supported TARP? Merrill Lynch CEO Thain certainly has lost his job as their is (soon anyway) will be no more ML. BoA is looking for more money to cement the huge acquisition of Merrill Lynch, otherwise they're likely fine. Should BoA instead just dump ML and let it disintegrate? I'd have to say no, but I wouldn't give them (BoA) all of the $80B either.

 

[misgfool]

You know the Japanese have spend the last 10 years doing massive amounts of fiscal spending in attempts to stimulate their economy, similar to what the US is poised to do. Looks like, economically speaking, all they are getting from this spending is a huge pile of debt.

It might be easier to let the master explain.

http://web.mit.edu/krugman/www/jpage.html

 

[mheslep]

It might be easier to let the master explain.

Who says in Japan's trap (May 1998):
http://web.mit.edu/krugman/www/japtrap.html

Fiscal policy: ...
While this policy could work, however, is it the right one for Japan? Japan has already engaged in extensive public works spending in an unsuccessful attempt to stimulate its economy. Much of this spending has been notoriously unproductive: bridges more or less to nowhere, airports few people use, etc.. True, since the economy is demand- rather than supply-constrained even wasteful spending is better than none. But there is a government fiscal constraint, even if Japan has probably been too ready to use it as an excuse. And anyway, is it really true that it is impossible to use the economy's resources to produce things people actually want?

Edit: later in 99 he said in
http://web.mit.edu/krugman/www/SCURVE.htm

Japan is currently engaged in the largest peacetime fiscal stimulus in history, with a budget deficit of around 10 percent of GDP. ...

a simple statement of fact, Japan tried fiscal stimulus. Look at results for yourself now and ask: did it work? I have to say no.

From Further Notes:
http://web.mit.edu/krugman/www/liquid.html

4. Isn't fiscal policy an alternative answer?

Fiscal expansion is certainly an alternative way of pumping demand into the economy. And given Japan's grievous plight, coupled with the real uncertainty about what will work, I would advocate fiscal expansion as well as a commitment to inflation.

But I have doubts about fiscal policy's effectiveness on its own, for three reasons.

First, if Japanese consumers really do exhibit something like ARicardian equivalence@, there will be no multiplier effects from government spending. My previous note actually misstates the implication of the model (that's one of the marks of a good model - it is sometimes smarter than you are). The true implication there is that current consumption is completely unresponsive to current government spending (it's tied down by the Euler condition, if you really want to know), so that public works projects will increase spending by exactly the amount the government spends - no more.

Which brings us to the second point: Japan's long-term financial position is a bit worrisome, so keeping the economy afloat with year after year of massive deficits is a problem. And absent powerful multiplier effects, it will take massive deficits to keep the economy from slipping ever deeper into recession, unless a one-time fiscal push has a long-term effect.

And that is the third point. Although serious discussion of the long-term implications of fiscal stimulus is rare, most people probably have in mind some idea about A pump-priming@. (Actually, very few people either in the United States or in Japan have any idea what that means. AJump-start@ is probably a more useful metaphor). The idea is that once the economy is moving again, confidence will return and spending will no longer need to be supported. Now this might be true, but there is not much evidence for it; it is at least possible that Japan has a structural negative real interest rate that will last for a number of years. That means that the economy must either receive continuing massive fiscal stimulus, or have sustained inflation.

That last line in the 2nd point, "absent powerful multiplier effects, it will take massive deficits to keep the economy from slipping ever deeper into recession, unless a one-time fiscal push has a long-term effect". One time fiscal push? What a colossal gamble. Sounds like the advice of a disparate gambler betting the mortgage.

I advise caution with the 'master' outside of the area for which his work was recognized: trade. In 2003 he prophesied deficits running at the time would surely send the US 'off the cliff'. Then in 2007 he says, never mind, forget about deficits, we should go New Deal Two full speed ahead.
http://www.charlierose.com/shows/2003/09/15/2/a-conversation-with-paul-krugman-of-the-new-york-times
http://www.charlierose.com/shows/2007/12/26/1/a-conversation-with-paul-krugman

 

[misgfool]

C'mon, I think you intentionally misunderstood him.

Japan is currently engaged in the largest peacetime fiscal stimulus in history, with a budget deficit of around 10 percent of GDP. ...

a simple statement of fact, Japan tried fiscal stimulus. Look at results for yourself now and ask: did it work? I have to say no.

I believe that actual business cycles aren't always real business cycles, that some (most) recessions happen because of a shortfall in aggregate demand.

When there is a shortfall in aggregate demand, public construction projects are a very efficient way to pump money into the economy.

4. Isn't fiscal policy an alternative answer?

Fiscal expansion is certainly an alternative way of pumping demand into the economy. And given Japan's grievous plight, coupled with the real uncertainty about what will work, I would advocate fiscal expansion as well as a commitment to inflation.

But I have doubts about fiscal policy's effectiveness on its own, for three reasons.

I think you bolded wrong words in the above text. I emphasized my view.

From Further Notes:
http://web.mit.edu/krugman/www/liquid.html
That last line in the 2nd point, "absent powerful multiplier effects, it will take massive deficits to keep the economy from slipping ever deeper into recession, unless a one-time fiscal push has a long-term effect". One time fiscal push? What a colossal gamble. Sounds like the advice of a disparate gambler betting the mortgage.

Again most recessions are caused by a shortfall in aggregate demand. It's really simple, people and corporations have to start spending. If there was no public spending, bankruptcies would increase and unemployment would increase. These events don't increase the confidence of people and corporations. Instead they begin to fear and start saving money, which is bad.

I advise caution with the 'master' outside of the area for which his work was recognized: trade. In 2003 he prophesied deficits running at the time would surely send the US 'off the cliff'. Then in 2007 he says, never mind, forget about deficits, we should go New Deal Two full speed ahead.
http://www.charlierose.com/shows/2003/09/15/2/a-conversation-with-paul-krugman-of-the-new-york-times
http://www.charlierose.com/shows/2007/12/26/1/a-conversation-with-paul-krugman

He is a 'master' when compared to individuals like you. What he says in those documents is that deficits are bad if they don't result in a surplus in the long term. Obama's plan has that potential.

 

[mheslep]

When there is a shortfall in aggregate demand, public construction projects are a very efficient way to pump money into the economy.

That's a simplified version of the Keynesian view; a more complete view would include the stumbling points:
1) As the government attempts to pump demand into the economy it must first take capital out of the economy by taxing or borrowing, or 'crowding out' the private economy. The argument by stimulus advocates would be that in the current economy that there is ample 'idle' capital so that crowding doesn't occur, but that's not clear to me that this is the case. If it is the case, it is certainly a temporary state.
2) 'Efficient' only has meaning in relation to alternatives, i.e. there are areas with better stimulus multipliers than infrastructure (amount of additional GDP for amount of additional government spending). The common numbers in use by advocates cite extending unemployment insurance yielding 1.64, increasing food stamps at 1.73, and infrastructure at 1.59. There are other studies looking at US averages and returning averages of 1.4 [Ramey] and even 1 [Hall/Woodward]
http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
http://www.econbrowser.com/archives/2008/10/pocketfull_of_m.html
3) Inadequate demand may not be due to a lapse of means or will to buy or invest. It may instead be because nobody wants the goods produced by the current system, the same ole same ole; in that case the economy needs to restructure and reinvent itself. I believe this is the case in Japan, where (again) there's a great deal of data on large scale fiscal stimulus:

Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan's government in poor fiscal shape. The "on-budget" government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the "off-budget" sector is included.

http://mises.org/story/1099
Those yen budgets translate to a peak 10% of Japan's GDP.

4. Isn't fiscal policy an alternative answer?
Fiscal expansion is certainly an alternative way of pumping demand into the economy. And given Japan's grievous plight, coupled with the real uncertainty about what will work, I would advocate fiscal expansion as well as a commitment to inflation.
But I have doubts about fiscal policy's effectiveness on its own, for three reasons.

I think you bolded wrong words in the above text. I emphasized my view.

Fine, but I have no interest in what he advocates when trying to get to the fundamentals of the topic. I'm interested in the argument and the data. As I highlighted earlier, Krugman points out several failures with fiscal stimulus in Japan, and in the end hand waves it all away in favor of a what appears to be a personal preference.

..He is a 'master' when compared to individuals like you..

Do you feel that statement bolsters your argument?
http://en.wikipedia.org/wiki/Appeal_to_authority" and
http://en.wikipedia.org/wiki/Ad_hominem"

 

[misgfool]

That's a simplified version of the Keynesian view; a more complete view would include the stumbling points:
1) As the government attempts to pump demand into the economy it must first take capital out of the economy by taxing or borrowing, or 'crowding out' the private economy.
The argument by stimulus advocates would be that in the current economy that there is ample 'idle' capital so that crowding doesn't occur, but that's not clear to me that this is the case.

You have pointed out yourself in this thread that US banks are holding massive amounts of idle capital.

If it is the case, it is certainly a temporary state.

True.

2) 'Efficient' only has meaning in relation to alternatives, i.e. there are areas with better stimulus multipliers than infrastructure (amount of additional GDP for amount of additional government spending). The common numbers in use by advocates cite extending unemployment insurance yielding 1.64, increasing food stamps at 1.73, and infrastructure at 1.59. There are other studies looking at US averages and returning averages of 1.4 [Ramey] and even 1 [Hall/Woodward]
http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
http://www.econbrowser.com/archives/2008/10/pocketfull_of_m.html

All public spending is beneficial if the amount goes back to the economy. So your examples do bring out good points. But again if you build those 100 nuclear plants, they will provide dividends far to the future.

3) Inadequate demand may not be due to a lapse of means or will to buy or invest. It may instead be because nobody wants the goods produced by the current system, the same ole same ole; in that case the economy needs to restructure and reinvent itself. I believe this is the case in Japan, where (again) there's a great deal of data on large scale fiscal stimulus:

That might be believable if it happened gradually, but now the collapse has been almost instantaneous. Are you trying to say that everyone got bored in goods at the same time? I would see that as quite improbable.

Between 1992 and 1995, ... sector is included.

At least we know now that tax cuts are totally useless, right?

Fine, but I have no interest in what he advocates when trying to get to the fundamentals of the topic.

Then why did you point them out in the first place? Still it is good to know we have the same goal.

I'm interested in the argument and the data. As I highlighted earlier, Krugman points out several failures with fiscal stimulus in Japan, and in the end hand waves it all away in favor of a what appears to be a personal preference.

You didn't read or comprehend the content of Krugmans ideas. What he says is that Japan was in a liquidity trap. He thought that what the government did was correct but the central bank should have committed in keeping the inflation at some target level i.e. monetary policy would have been predictable. And stay committed even after prices begin to rise. When the nominal interest rates were at zero with inflation at 5% the real rate would have been -5%. That would have discouraged saving money.

The way I see it, your problem is that you try to separate monetary policy and fiscal policy like only one of the can solve the situation. In my opinion they are like a mother and a father, if either one of them doesn't play along, there will be no kids.

Do you feel that statement bolsters your argument?
http://en.wikipedia.org/wiki/Appeal_to_authority" and
http://en.wikipedia.org/wiki/Ad_hominem"

You pushed me, but I guess I deserved that. Still

http://en.wikipedia.org/wiki/Humor"

 

[mheslep]

... So your examples do bring out good points. But again if you build those 100 nuclear plants, they will provide dividends far to the future.

Agreed. That should be vetting process - traditional cost benefit analysis. Unfortunately I have doubts that Congress can keep its hand out of the pie. Rep Frank was tagged today for rerouting TARP money to his home town bank; he personally called the TARP regulator for the bank.

At least we know now that tax cuts are totally useless, right?

No! If you mean the claim that all tax cuts at any rate pay for themselves - yes that's false (well some types appear to, depending on the tax rate, blah, blah). But there's no question that tax cuts also stimulate GDP, the question is how much? The debate that's raging at the moment between economists is how much stimulus do we get from spending and how much do we get from tax cuts. Pres. Obama's new CEA Chair Christina Romer came out with CEA numbers a couple days ago in a summary of the proposed stimulus plan.
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf
She rates spending (multiplier ~1.5) more effective than tax cuts (~.8). On the other hand in 2007 she published a http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf" showing tax cuts had a multiplier of 3 - the difference is beyond me, I suppose the change in conditions has much to do with it.

http://en.wikipedia.org/wiki/Humor"

Always good advice

 

[misgfool]

Agreed. That should be vetting process - traditional cost benefit analysis. Unfortunately I have doubts that Congress can keep its hand out of the pie. Rep Frank was tagged today for rerouting TARP money to his home town bank; he personally called the TARP regulator for the bank.

That is a bit unfortunate, but if you give all of to the major banks, end result will be a few massive banks and no little or medium sized banks. So in effect the government is creating a monopoly situation to the financial sector. I think that when this crisis is over the government should split the biggest banks at least to five parts.

She rates spending (multiplier ~1.5) more effective than tax cuts (~.8). On the other hand in 2007 she published a http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf" showing tax cuts had a multiplier of 3 - the difference is beyond me, I suppose the change in conditions has much to do with it.

Here is what comes immediately to mind. Tax cuts have two possible ways of generating more growth:

a) people work more.
b) people have more money and they spend it

At the present there is so little work to be done that option a) won't/can't happen. Also when one thinks about a person making say $500000 a year working 60 hours a week, how much more could (s)he really work? Tax cuts might be justifiable in the mid income range, but it's hard to see a benefit from the highest earners.

Also if people get more money they are more likely to save it than spend so option b) won't happen. So in the current situation I can't see any benefit from tax cuts.

 

[mheslep]

Here is what comes immediately to mind. Tax cuts have two possible ways of generating more growth:

a) people work more.
b) people have more money and they spend it

At the present there is so little work to be done that option a) won't/can't happen. Also when one thinks about a person making say $500000 a year working 60 hours a week, how much more could (s)he really work?

Could just as easily cite the person working 40 hours a week now that might pick up to 60 w/ more take home.

Tax cuts might be justifiable in the mid income range, but it's hard to see a benefit from the highest earners.

The tax cuts on the table now are for businesses and middle income.

Also if people get more money they are more likely to save it than spend so option b) won't happen. So in the current situation I can't see any benefit from tax cuts.

There's been a lot of work done on explaining what people are likely to do with increased income. A major contribution is Friedman's http://en.wikipedia.org/wiki/Permanent_income_hypothesis" income theory. The more permanent, the more likely people are to consume or invest. So the more permanent the tax cuts, the more likely people are to spend or invest them rather than bank it. Of course that's a one time shot, and then the tax breaks contribute perhaps to the long term deficit.
Anecdotally there are many areas where tax cuts might help immediately. People are dumping their domestic help with the crunch. A tax break does two things in the first circulation round: gives the employer more income to go back and rehire day care, rehire the gardener, but it also makes the employee cheaper to hire, as their taxes also got cut. That is, tax breaks make labor less expensive. (high labor cost=takehome+taxes_high becomes lower labor cost=takehome+taxes_low). Lower labor costs => higher employment.
Now I don't say necessarily that tax cuts are the best way to go, just that they are far from useless; I favor the whatever policy is the most effective for the recovering the economy. Maybe some govt. spending is the most effective, maybe not.