Monday, November 2, 2009
We Can't Even BEGIN to Debate Keynesian Stimulus Until We Know the Facts
Keynesians argue that we must increase fiscal stimulus to prevent a full-scale depression.
They argue that "deficit hawks" are wrong when they say that we can't afford any more stimulus, and that worrying about debt in a crisis of this size is penny wise and pound foolish, given the bleak unemployment figures and other fundamentals. They also point out that America's debt as a percentage of GDP is far less than Japan's.
On the other hand, those worried about the giant debt overhang argue that massive debt and the failure to write down worthless assets and "purge malinvestments" from the system are the main problems.
Many also argue that the 1930s Keynesian stimulus programs did not work, and that the Depression did not end until World War II. And they also argue that every dollar in additional debt incurred now is another burden added to our childrens' shoulders.
Who is right?
Before deciding, you might want to look at two pieces of data.
Different Bangs for the Buck
Initially, many Keynesian academics argue that it doesn't matter where the stimulus money is spent, just as long as it is spent on something. However, this is untrue. For example, it should be obvious that spending in some areas will have more and quicker turnover (increasing money velocity) as compared to others. And, in fact, economists have documented that some types of stimulus spending have more bang for the buck than others.
So it is idiotic to talk about "fiscal spending" in the abstract. Without a cost-benefit analysis as to each category of proposed spending, any analysis is hollow.
Aggressive Fiscal Stimulus Only Buys Two Quarters
Moreover, as former chief IMF economist and MIT professor Simon Johnson points out:
Perhaps the best analysis regarding the impact of fiscal policy on recessions was done by the IMF. In their retrospective study of financial crises across countries, they found that nations with “aggressive fiscal stimulus” policies tended to get out of recessions 2 quarters earlier than those without aggressive policies. This is a striking conclusion – should we (or anyone) really increase our deficit further and build up more debt (domestic and foreign) in order to avoid 2 extra quarters of contraction?Indeed, many experts say that continuing to cover-up the fraud which led to the financial crisis will extend the crisis for many years. In other words, failure to investigate and prosecute those responsible for bringing about the crisis may extend the crisis longer than any failure to spend more on stimulus.
(And investigations and prosecutions for fraud - unlike stimulus spending - would not increase America's debt or tax burden.)
A real debate about whether we should spend more on stimulus - and if so, what types of stimulus - cannot even begin unless and until the aforementioned data is considered.
Note: Others have calculated bang for the buck from stimulus packages. For example, here are the Congressional Budget Office's estimates (look for "Estimated Policy Multiplier"):
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"[Some] academics argue that it doesn't matter where the stimulus money is spent, just as long as it is spent on something. [...]"
ReplyDelete"A real debate about whether we should spend more on stimulus - and if so, what types of stimulus - cannot even begin unless [...]"
In the second quote, the "unless" is not even close to setting the parameters of the problem.
From the first quote, one totally insensitive to common mores -might assert we could spend stimulus money on the importation of heroin -and programs designed to addict high school students to the drug.
Well, -no one should doubt this would increase the circulatory flow of money. Heroin addicts, especially young heroin addicts, steal lots of things that would need to be replaced. This is the multiplier effect from heaven, right?
The government could spend stimulus money on spiking gasoline so that the octane levels went through the roof, which would result in motor problems (like blown head gaskets) for many drivers, -who in turn would then be forced to either spend large sums to fix their autos, or buy new ones.
Or the government could spend stimulus money artificially holding up the price of housing, -so that youthful buyers of homes get saddled with mortgages they cannot possibly afford. The resulting social chaos should stimulate the economy quite satisfactorily in an economic sense.
Or stimulus money could be spent (as suggested in the link) on a wider distribution of food stamps and section 8 vouchers, so that the lower classes breed more effectively, and thus create greater demand for fast food, tattoos and cell phones...
My point here is, -I think the notion -government is capable of implementing a stimulus policy that has any real positive value -is a very strange assertion to make, -under any circumstance.
Not only are the scarir permutations of any stimulus approach nearly infinitely-analytically complex when we try and decipher the impact of such a stimulus, the inherent levels of human corruption that seize the instigators of such an absurd stimulus frenzy -are also beyond any human ability to gauge -or- control.
Despite the universal human delusion, -SuperMan we are not. And under those circumstances, even a depression seems likely to be less harmful than any government run stimulus program is going to be.
I will continue to reiterate that this is primarily a forensic problem instead of an economic one. We are dealing with a massive crime scene that stretches from the FIRE sector into the highest levels of government and the Fed. We need a Pecora Commission right now.
ReplyDeleteI also have no doubt that we are caught in a debt deflation trap that is going to be unwinding for some time. This giant Ponzi scheme run over recent decades is going to be affecting the real economy of for years. That means that the output gap will remains for years — uder utilization of capacity and the unemployment and underemployment that goes with it. The chief focus of the president's economic team must shift to closing that gap as soon as possible and in the meanwhile providing relief to the suffering. This is also the most effective stimulus, since the funds flow into the economy at the bottom and percolate up.
L Randall Wray-The Time Has Come for Direct Job Creation
What makes you think a country that issues its own currency (like the US) needs to increase "debt (domestic and foreign)" in order to stimulate its economy? Such a country can simply print money.
ReplyDeleteIndeed this is more or less what the UK has done. The increase in the UK's so called National Debt in 2009 is about equal to the amount quantitatively eased. I.e. the UK has, 1, borrowed £Xbn from the private sector, 2, given the private sector £Xbn of "gilts" in return ("treasuriies" in the US), 3, spent the £Xbn. As to QE, this has reversed items 1 and 2. Hey presto, the only net effect is 3, which amounts to "print money and spend it".
Of course the "debt" still exists in theory: it's a "debt" owed by the government (an entity owned by the people) to the Bank of England (another entity owned by the people). This is a nonsense: it's a bit like saying I'm in debt because my left hand pocket owes my right hand pocket some money.
We live in an interesting world. The combination of trillions of dollars of federal money spent and financial institution guarantees has likely avoided The Great Depression 2.0, but we put near zero odds that a multi-year period of growth has begun.
ReplyDeleteA lengthy period of deleveraging has only just started , and what has been spent to date of the "shovel-ready" fiscal stimulus package, has been mostly wasted, and unlikely to create a positive multiplier or new jobs.
Unfortunately, much of the policy response has been in the wrong direction. We agree with a friend who recently stated that while policy responses needed to be big and fast given the "sudden stop" experienced in the second half of last year . . . they could have also been smart!!
And as David Einhorn recently commented, "An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fallout. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline."
Think happy thoughts . . . think happy thoughts.
Comments on the above IMF report:
ReplyDelete1. It claims that automatic stabilisers have been more effective than deliberate government intervention in previous recessions. This is interesting beceause there is evidence that the same applies to the current recession (at least in the US). In short governments and central banks are hopeless at dealing with recessions.
2. Re the IMF claim that "aggressive fiscal stimulus" shortens a recession by only 6 months, looks to me like they haven't taken into account the extent to which counties that DO aggressively stimulate boost the exports of those that don't. Certainly the word "export" does not appear in this report. If I'm right (a big "if") that weakens their conclusion.
Comment on the above mentioned Galbriath paper: brilliant. If the US government had taken his advice a year ago, there'd be a million fewer unemployed in the US (at a rough guess).
Christopher's above 2nd last para is ludicrously pessimistic. Where, pray, are these mysterious "creditors" who pay for deficits?? In the case of the UK in 2009 they are NON EXISTANT as I point out above. A country, if it is determined to be silly can raise its indebtedness to other countries. But the UK in 2009 has run a big deficit at the same time as REDUCING the amount of UK national debt held by foreigners! (Which is not to suggest the UK always avoids being silly.)