How Washington's Policymakers Are Damaging the U.S. Economy 57 comments
October 18, 2009
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On his blog recently, Paul Krugman has a post on how we are doing in our effort to increase current GDP. It seems, the target of Keynesians, ever and always, is raising GDP a bit more, in both good times and bad times. In fact, I believe that effort goes a long way toward creating an on-going boom and bust cycle and asset bubbles in the U.S. One problem, not well understood, is that policy has serious implications for the longer run welfare of the U.S. economy.
This fetish to maximize the current flow variable GDP is becoming very expensive to the American people. Not only are huge deficits, swings in asset valuations and periods of boom and bust incurred to try to do it, but it creates an even bigger problem. It undermines the formation of wealth in America. I explain.
Chap08 has the essence of an excellent observation. It is to observe that what I have suggested on SA regarding the maximization of household net wealth as being the proper economic goal, where it is the maximization of the present value of additional potential consumption either now or in the future, subject to the restraint of current consumption expenditures from income, is what matters — “it’s all about consumption, but is it consumption now or consumption later? To me, this is a valuable way of looking at it because I think that human beings, in general, are bad at predicting the future. We “discount” the future excessively, and this is a major reason for over prioritizing current consumption.”
But why do we discount the future excessively and over prioritize current consumption?
Milton Friedman once remarked in class: ‘Economic stability and future predictability is what allowed for so much long term investment in the U.S. which in turn was what really made America such an economic powerhouse in the world economy.’ In the absence of a stable economic environment, with stable tax laws, stable federal policies that reduce market uncertainty to the greatest extent possible and good regulation of primary and secondary financial markets to avoid instability and games there as well, the outlook for productive investment is badly compromised and wealth formation in the U.S. is impaired. ‘Get it now, while the gettin’ is good’ becomes the rule for consumption, even if you have to borrow and go in debt over your head to do it.
The more federal policy causes economic instability, swings in asset valuations, periods of too low interest rates, boom and bust cycles, the more uncertainty and risk there is in the economic environment and the more we will spend on current consumption and the less we will save, invest and try to build wealth. They increase our internal rate of discount. Do policy makers know this and unwittingly use this idea to increase aggregate demand? I doubt that they understand. Their economic framework is too narrow. But generating instability and uncertainty is what they are doing, whether they know it or not. (Interestingly, Krugman has written on his blog that the “bottom of the class” guys in economics go to Wall Street and the top of the class guys get good academic positions. If that is so, how come the Wall Street group seems to understand these notions intuitively, but apparently, the academic types from the top of the class don’t. It is an odd twist I mention in passing.)
The Taylor rule, which derives from earlier efforts along the same lines by Milton Friedman, implicitly recognizes what I am saying here and seeks a stability for monetary policy we have been too much lacking. The idea of a rule is to remove discretion so that it may not be abused. I contend we have had abuse of the very kind the Taylor rule seeks to block, among other policy abuses.
In aggregate, what I observe, within the framework of the new macro economic model I am developing, is the impairment or destruction of those stability and future predictability conditions in the U.S. economy too largely by U.S. economic policy makers. Their actions generate additional risk and uncertainty in too many instances. It may be argued from this analysis that America’s economy and capacity to build wealth is being sabotaged and slowly, but surely destroyed by Washington.
Disclosure: No relevant positions
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This article has 57 comments:
In addition to policies that amplify instability which increases the implicit discount rate, thereby stimulating immediate consumption, low interest rate policies discourage savings and encourage consumption. And through the identity that savings must equal investment, investments are reduced when savings are reduced. Taken to together all of these policies encourage consumption and discourage investment and savings; this is exactly the opposite of how long term wealth is created.
I don't think this is terribly well understood but comports with congress and election cycle economics. For them, wealth is winning the next election.
oh well.
maybe government that governs least governs best.
Agreed. I would add only that which in my opinion, has the largest bearing upon this destruction. Fraud. Malfeasance. Misuse and abuse of trust. All of these unconscionable acts and more committed by the financial sector and in collusion with the very body politic that have been elected to protect the citizenry.
This must stop and prosecution must begin.
If overleverage, derivatives and speculation was the root cause of the crisis then none has been solved....It has only increased...Which effectively means that the crisis is not over...it has just been postponed...
In my opinion, the best thing was to let the economy go through a deep long recession and let the system clean out its excesses...That how a stronger economy emerges...For now this temporary solution will just make things worst in the long term...
Couldn't agree more. We think that by 'fight, fight, fighting death' we save ourselves, when, in fact, 'death' (or recession or deep recession or depression) is what gives us eventually rebirth. We need to let go, sink, unwind our debt, allow creative destruction to occur, and then rise again from the ashes.
We cannot avoid pain, no matter what we do. We can drag the pain out for a long time, building up more debt, cheering upticks in gdp....but we're stagnant, we need to clear out books, get rid of bad debt, and start over again, I hope, this time, with smaller banks that have MUCH LESS political power. The bankers will cheat, steal and lie every time if we let them.
On Oct 18 01:04 PM Donald Ingram wrote:
> "America's economy and capacity to build wealth is being sabotaged
> and slowly, but surely destroyed by Washington."
>
> Agreed. I would add only that which in my opinion, has the largest
> bearing upon this destruction. Fraud. Malfeasance. Misuse and abuse
> of trust. All of these unconscionable acts and more committed by
> the financial sector and in collusion with the very body politic
> that have been elected to protect the citizenry.
>
> This must stop and prosecution must begin.
The American economy has, time and again, adapted to the non-predictable, volatile upheavals. It's the adaptability to change (for example, Federal policy changes) that has made us wealthy, not some sort of monetary single state fantasized by these theorists.
Are you referring to the economy on a nominal or a real basis? Are you considering the hugh multi-trillion unfunded liabilites that exist at the federal, state, local, and even corporate level?
One really has to question whether or not, in real not nominal terms, whether the US really is more wealthy now than they were in say 1985 or 1990. One can certaintly make the case that the US is totally bankrupt today and will not be able to meet their future obligations. If that is wealthy, then what do you mean by wealth? Certainly a far different situation today, both at the macro and well as individual level, than it was say in 1985 or 1990. Of course government may devalue some of it away, or they may significantly mandate lower obligations/benefits (social security, medicare, pensions, etc) but those all reduce wealth as well as obligations as well as standard of living for the many.
Of course that is not to say that a relatively tiny handful of Americans, from the political, lobbyists, oligarchical elite are not infinitely wealthier now, because clearly there are some that are. But that is much different from the average American or even America as a whole.
On Oct 18 02:48 PM VennData wrote:
> Prove ‘Economic stability and future predictability is what allowed
> for so much long term investment in the U.S. which in turn was what
> really made America such an economic powerhouse in the world economy.’
>
>
> The American economy has, time and again, adapted to the non-predictable,
> volatile upheavals. It's the adaptability to change (for example,
> Federal policy changes) that has made us wealthy, not some sort of
> monetary single state fantasized by these theorists.
Today, we have a fragile economic recovery that faces extraordinary and powerful long-term headwinds. We have a surfeit of unused resources. We have a federal government headed by politicians who can barely disguise their contempt for Constitutional restraints on their power and their determination to redistribute wealth. These politicians have created huge uncertainty as to how healthcare will be financed. They have proposed extreme caps on emissions that make it almost impossible to gauge future rates of returns on investment. It is only a matter of time before we follow Europe's lead and begin imposing restraints on the ability of companies to terminate employment. We are creating obstacles to growth that will haunt America for a very long time.
Not since the Thirties have we faced comparable circumstances. Back then, a severely depressed economy was steadily strangled by that era's political "progressives." Somehow the country was able to survive that era of progressive politics, which gives me the hope we can do so again.
James Kwak had a great article here on Seeking Alpha, that repeats a Calvin Trillin opinion piece in the New York Times, on Friday, that puts some actual numbers to this concept. In fact he shows that, since 1990, it's just the opposite. The smart guys around then started going to Wall Street and developing products that their bosses, the dumb guys from an earlier generation, didn't really understand. See the link:
seekingalpha.com/artic...
Excellent points/excellent article.
Agree with your following observation:
“(Interestingly, Krugman has written on his blog that the “bottom of the class” guys in economics go to Wall Street and the top of the class guys get good academic positions. If that is so, how come the Wall Street group seems to understand these notions intuitively, but apparently, the academic types from the top of the class don’t. It is an odd twist I mention in passing.)”
Krugman, as usual, expresses a pure opinion. His opinion and his opinion only. Of course, in Krugman’s world, his opinion is fact.
Many business school graduates are risk takers. Some graduates seek to teach and/or do not want to be part of a competitive environment. There are plenty of top Economics Graduates in the Private Sector. Further, if entering academia produces Krugman Style Strictly-Opinion-Econo... then “good academic positions” are being filled by people that will be teaching opinion-economics rather than economic theory to future graduates.
Also agree with this observation:
“The Taylor rule, which derives from earlier efforts along the same lines by Milton Friedman, implicitly recognizes what I am saying here and seeks a stability for monetary policy we have been too much lacking. The idea of a rule is to remove discretion so that it may not be abused. I contend we have had abuse of the very kind the Taylor rule seeks to block, among other policy abuses.”
John B. Taylor got right to the point on page 3 of his book Getting Off Track. He clearly shows the indiscretion of creating a cheap money bubble from 2002 to 2004. The time lag to recover back to the Taylor Rule from 2004-2006 added to the problem. Taylor argues that the cheap money bubble was the root cause that lead to cascading unintended consequences that we call The Financial Crisis.
Ever-changing, lawmaking has become nothing but a scam for politicians with sticky fingers, lawyers, accountants and cronies. How most economists can routinely miss how the quality of the business environment for prosperity is bled by insane rules, taxes, steps and procedures, is beyond me.
If the events of the last two years don't reveal to enough Americans that we are clearly on the wrong course and in accelerating decline, and if that isn't important to enough to vote out most incumbents at least, we can look forward only to ever-more blatant tyranny and impoverishment.
But to your specific question, is federal policy discretion and instability making things worse? Probably.
I was always impressed by papers that looked at the policy discretion decision from a control systems perspective. If you assume that the policy maker sees the actual outcome of their policy choices with at least a one or more month lag, and with significant sampling and revision error, it's not hard to argue that rules trump discretion.
I agree. Since the Latin debt crisis in 1982 when, as a retired Fed official recently admitted, 7 of the 8 largest US banks were insolvent due to overexposure to Latin debt, capital destruction has never been allowed to occur as "capitalism" requires. So we have seen a constant buildup of capital rather than a buildup to a small excess that is destroyed by malinvestment when too much capital is competing for too few truly profitable investments. After a sufficient quantity of capital is destroyed, and the price of inflated assets brought back down to reality, the remaining capital can then be profitably invested and the economy starts up again from an overall lower price structure. Until after some years or decades excessive capital accumulation again reduces returns on capital to the point that wild speculations seek fantasy returns, the bad capital is destroyed, and we begin another round.
But when the bad capital never gets destroyed we end up where we are now, with an ocean of capital sloshing around the globe inflating everything it touches. There are not enough economically profitable investments to absorb that much capital so all it can do is drive out good money wherever it goes and leave financial dislocation and destruction in its aftermath. Capitalism works, if it is allowed to. Losers need to lose their money, period.
Unfortunately, government is making it more expensive to produce, and it seems inevitable taxes need to rise. Consequently, the U.S. will be a weaker engine of global growth. Government has been spending money faster than Americans can earn it. Now, it's a runaway train, and it'll be U.S. households who'll be railroaded. It won't be long before the typical middle class worker finds half of his payroll check withheld by the government, while consumption taxes continue to increase.
We do not discount the future "excessively," or "over"prioritize. The reason we discount the future and prioritize current consumption is people are rational.
The U.S. had a virtuous cycle of consumption and investment. Export-led economies sold their goods too cheaply and lent their dollars too cheaply, which induced U.S. demand.
I so agree.. It will happen!
On Oct 18 02:20 PM Michael Clark wrote:
> Yes. There is much we SHOULD NOT forget and forgive. The longer this
> charade drags on, the more a dangerous, violent social revolt becomes
> possible.
I apologize for the length of this response and have no doubt that someone with greater facility with this topic could have made these points better and more succinctly.
While the issues you raise have economic roots, they appear to be more political than economic in nature. By this I mean that you identify some policy goals (maximization of household net wealth, end accumulation of inappropriate government and private sector debt etc.) but it is neither clear (a) that those goals could not be adequately pursued politically within the framework of some current version of either Keynesian, Monetarist or other economic analysis nor (b) that some new system of economic analysis is needed to better facilitate the implementation of these political goals. You are right to argue that the mere maintenance of full employment by monetary and fiscal fine-tuning in accordance with some limited Keynesian tool bag (as was done during the 30 years after WW II) or the mere maintenance of a low interest, low tax and low inflation environment by purporting to be applying a selection from the Monetarist tool bag (as has been done over the past 30 or so years) have over time promoted unhealthy investment, consumption, balance of trade and savings patterns and practices. Does it not follow, however, that these dangerous practices could have been addressed in a timely fashion without a basic change of prevailing economic assumptions if only there had been the political will to do so? In other words, wasn’t the real error one of political expediency; that is to say the adoption and maintenance of a cartoon a version of the politically attractive parts of an economic policy well beyond the time when there was economic utility in continuing down this restricted path?
Others can argue how a more sophisticated and politically responsible application of Monetarist precepts would have avoided the current crisis; I’ll take a stab at the Keynesian route. Lord Keynes in the “General Theory” advocated that governments increase expenditure (i.e. consumption) to off-set decreases in private sector expenditure whenever the economy was functioning at less than full employment. He argued that, in the absence of such an off-set, the economy
(a) would generate less than optimum income and therefore less than optimum savings and therefore less than optimum investment (i.e. expenditure generates income which generates savings which generates investment and therefore maintaining expenditure at an appropriate level was the key to both current and near term future economic health) and
(b) could well settle into equilibrium at less than full employment.
He argued that, better than what he described as classical economics, his new system of macroeconomic analysis described the real economy which was only incidentally and rarely in equilibrium at full employment but he also asserted that classical economics functioned well to describe an economy operating in equilibrium at full employment which strongly implied that investment decisions in the short term could be best left to the private sector provided such equilibrium was achieved and maintained. Arguably, if Monetarism had existed in his time he would have asserted that it was simply a refinement of classical economics.
He also asserted that equilibrium at full employment could and should be maintained by appropriate adjustments in monetary policy by the central bank and/or taxation adjustments (probably adequate if pre-existing consumption and investment intentions in the private sector are not significantly reduced by an unexpected increase in public apprehension) or by those adjustments plus direct government expenditure and/or investment (necessary if an unexpected rise in public apprehension significantly reduces consumption and investment plans). In fact, in the case where a change in circumstances induces the public to reduce spending and investment dramatically, Keynes argued that monetary and tax changes were unlikely in the short run to result in anything other than hording. A good case can be made that Keynes had too great a faith in the capacity of economic planners and the political will of politicians to make his system work in an optimum manner. That optimism was re-enforced by the experience of organizing the UK WW II economy (during which Keynesian methods were often successfully but not exclusively employed to suppress demand and reallocate resources to the war effort) and in designing the Bretton Woods system. Once the high drama of the war and its immediate aftermath passed however, political expediency and lazy economic thinking undercut the application of Keynesianism.
Minsky built upon the Keynesian foundation and inserted to it concepts from Marx and Schumpeter concerning the nature and function of the business cycle. Whereas Keynes assumed that governments and central banks, if they acted wisely and boldly as circumstances changed, could maintain full employment and effectively end the business cycle, Minsky argued that the very maintenance of long term equilibrium at or near full employment was itself inducing unwarranted speculation and risk taking in the private sector creating the potential for major financial and general economic crises. Minsky did not reject Schumpeter’s notion of constructive destruction in moderation but argued that central banks and governments must be vigilant as economic danger signs arose and mitigate the harmful effects at various stages of the business cycle in appropriate ways. In other words, measures to counterbalance downturns in the private sector were appropriate provided that they did not maintain an artificial stability in the private sector over the longer term thereby preventing necessary constructive destruction of inefficiency and set the stage for an even deeper and unnecessarily destructive crisis at some later date.
These measures were not taken and the current crisis resulted. Those that draw their economic analysis from Minsky would generally argue that the co-ordinated G20 stimulus measures taken to date were necessary and appropriate to stabilize the global economy and prevent a deflationary depression. They would argue that stimulus is merely a tool to be employed at the initial phase in responding to the crisis and is definitely not alone the solution to that crisis. Because we are not dealing with mild recession, there must be several further stages in the recovery process, some quite difficult and painful, covering several years in order that, among other things, the debt bubble can be resolved, international trade placed on a sound footing and consumption and investment rationally reordered.
Hopefully, the goals (maximization of household net wealth, end accumulation of inappropriate government and private sector debt etc) that you espouse, Kimball, can be adequately addressed during these later stages of recovery. Arguably they can not be the primary front and centre focus at this time and, in particular, simply allowing a deflationary collapse to occur now would lead nowhere useful and would simply cause great chaos and harm.
"Hopefully, the goals (maximization of household net wealth, end accumulation of inappropriate government and private sector debt etc) that you espouse, Kimball, can be adequately addressed during these later stages of recovery. Arguably they can not be the primary front and centre focus at this time and, in particular, simply allowing a deflationary collapse to occur now would lead nowhere useful and would simply cause great chaos and harm."
Bob is basically correct, although in my heart of hearts, I would love to see some money-centered banks shoved through FDIC insolvency proceedings. We do need higher GDP now. We need economic and price stability. If we tried presently to better build wealth by more saving, that would be depressive and damaging. We need to move there gradually. My thinking has been more focused on how we got into the mess we are in. In substantial measure, I think it is because policy makers focus too much on current GDP all the time, to the exclusion of too much else. Politically, that is the easiest thing to do, because all most politicians have to work with is the short time they are in office. Only a few who consistently bring home the pork have greater longevity and their focus is on doing that.
Later, I think the focus instead should be not on maximizing current consumption or income per se, but on maximizing household net wealth instead, where the wealth side of the balance sheet may be viewed as nothing more than the present value of additional potiental present or future consumption possiblities, subject to the restraint of present consumption expenditures from from current income. Viewing matters this way would force us to consider asset valuations and what policies impact them and how, what policies are best to maximize household net wealth, what the impact is of deficits on household balance sheets, why people save and what determines savings vs. consumption, what kind of economic environment best aids the formation of wealth, and a range of important macroeconomic topics that do not now fall within the perview of the shorter run only, less macro and more flow variable oriented Keynesian models.
But for now, we need to rebalance, address our macro problems and get some stability and viability into the macro economy. Unfortunately, I fear we will lean on pushing consumption too much to do that and sow the seeds for another boom and bust cycle, while still not addressing other more structural problems that have reduced aggregate demand and increased unemployment such as the skewed distribution of income, our trade deficits, the employment disaster in or from our manufacturing sector and some other similar fundamental problems. We have our heads in the sand on too much here and it is never too soon to pull them out and look around.
I agree that much more should have been done (including selective bank and near bank insolvency proceedings well before 2008) much earlier to forestall the creation of the debt bubble and the development of unsustainable trade and balance of payment patterns. I also agree that the resolution of the current debt bubble will entail painful aspects and significant time. Governments must assume and carry part of this load and this will involve both monetization and refinancing with all that entails for public finances and exchange rates. Defaults and discounting by financial institutions (banks, near banks etc.) through bankruptcy, reorganization etc. will also address another part of the debt. The balance of the debt bubble will remain on the books of the financial institutions and act as a drag on their capacity to serve their clients. My key point is that all this must be done through an orderly process.
I’m sure the details about the stages that must to be gone through and the measures that should occur at each stage are matters for much debate. It would be a great mistake, however, to assume that some grand and simple solution (recreation of the economic situation as of 2004 through massive government stimulus alone, on the one hand, or massive default and foreclosure of all debt that can not be managed on a day to day basis, on the other) can be triggered successfully now in the teeth of the crisis.
It is quite possible, even probable that at least some of them know exactly what they are doing, Krugman (and oh, yes, he is a policy maker too) among them. They know full well that the kind of "change" they envision cannot occur in an environment of economic stability.
As the president's resident policy czar Rahm Emanuel said last year: "Never waste a crisis, it might provide an opportunity."
Interesting line, first used by Vladamir Lenin.
Well, who is running and has run governmental fiscal policies for the past many years? Those formerly of Wall Street and GS in particular. What else do you expect?
I wrote a paper in 1994 that Wall Street's myopic and near-sighted obsession with profits will be the undoing of America and American companies. We see that all the time and the recession is a result of that limited vision. That, and the obsession of money and GREED at all costs.
Unfortunately the Wall Street of today is not the Wall Street of 30 years ago and so is our government.
Our motto to live by for the past 30 years or so has been 'Carpe Diem' at the government level and on Wall Street, with no long strategic outlook or plan.
It seems our new administration has surrounded itself with MARXISTS, SOCIALISTS, FASCISTS , and other undesirable elements that our boys and girls fought against all these.
On Oct 18 10:33 PM Alphameister wrote:
> I wonder if Krugman has evidence to support his self-serving assertion
> that the best economic students take jobs in academia while the worst
> of such students go to work on Wall Street. Such a glib assertion
> would seem to fly in the face of basic economics since Wall Street
> clearly has superior resources with which to bid for "the best and
> the brightest." Is his comment symptomatic of the animus toward
> business that is so typical of academia and which, I suspect, is
> often born of envy.
This is an interesting discussion, but framed in the Keynesian mode good policy options are impossible to fashion. Government action to spur or retard consumption tends to create misallocation of resources and extra costs that burden all. Ludwig von Mises advocated what he called an "evenly rotating economy" where prices, output and investment changed in response to individual rather than collective actions. Booms and busts are rooted in governmental interventions, not free markets.
By the way, this article wouldn't make economic sense in a store-front university. The simple fact of the matter is that since Ben and Larry are going to save the U.S. economy, the Obama haters start talking about the 'long run'.
Now that there are no more all that you want. The free dole and the credit bubble system bankrupted itself when the day they are no longer spreading the wealth but buying the debt can no longer be sold. To Peking and Tokyo you are junk bond. Borrowing and spending money are like living on loaned time. All the sand run out and then all the blind fools die the deficit death.
These measures were not taken and the current crisis resulted. "
--from Mr. Adamson's analysis above.
Whatever all that means--and it sounds mostly like nonsense-- the plain fact is that our government ITSELF actually CAUSED the crisis by forcing a social policy,( CRA, etc.) onto its huge agencies (FHA) and quasi-agencies (FNM, FMAC,GINMA) causing them to completely abandon sound lending practices and hand out loans to people who everybody with a brain knew could not pay them back.
This resulted in the housing boom, and bust, and consequent crash of stock market after GOVERNMENT agencies sold these bad loans to the thieves/fools on Wall Street, who packaged them into "derivative investments," hedged them with insurance from other Wall Street type thieves/fools, and look what happened--the whole damn economy tanked.
All BECAUSE of a do-goody social policy instigated by the FEDERAL GOVERNMENT. None of this would have happened otherwise--NONE of IT! A president of a good sized bank remarked to me shortly after the crash, "We know good and well those loans weren't going to perform any better for Fannie Mae than they would for us, and of course we'd never have made them if they (the GOVERNMENT) hadn't wanted us to."
www.tnr.com/blog/the-s...
It's not important whether the Fed Funds Rate is 10% or 0%, the money supply is high or low, or how many booms and busts take place in asset markets. What's important is maintaining sustainable growth, which is optimal growth.
I suspect, if the Fed targeted the money supply, that would lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run. Asset prices are residuals of monetary policy. So, price stability (of goods & services) is the Fed's best choice, although it also attempts to keep inflation expectations low, i.e. a cautious stance.
Also, many shocks take place, e.g. Y2K (when the money supply spiked higher and then lower around 2000), 9-11, an oil shock (or commodities in general, e.g. gold, copper, and steel), minor technology shocks in the '80s and '90s, and the quick and massive
"Creative-Destruction" process in the early '00s,
U.S. Economy Expanded 1.3% in 2008
How to prevent an economic contraction in 2009 (currently, roughly a 2% contraction is projected in 2009): Update: The contraction will be over 2.5%
1. Obama should change his stimulus plan to a $2,000 tax cut per worker, along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.
2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.
3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
Update: The government had the Cash-for-Clunkers program, which destroyed billions of dollars of real assets worth up to $4,500 each. It would have been better to give away those used autos, e.g. to college students, rather than destroy them.
Using final sales and GDP data show tax cuts have a powerful effect. Households save to pay-down high interest rate debt, which frees-up more money than the initial tax cut, leading to greater consumption and stronger household balance sheets. For example, $1,000 from the government can eliminate $1,400 in high interest rate borrowing, to increase consumption by $1,400.
The U.S. allowed Lehman to fail, in Sep '08, which froze the credit market and caused the economy to fall off a cliff. However, it was inevitable global imbalances would correct. The question was would they correct slowly or suddenly. Global imblances were caused by governments of export-led economies. The U.S. government responded appropriately, until Lehman's collapse.
If you know where everything is, it's not a mess :)
We are run by two ruling parties who would like us to believe that they are different. But at their very core, not one of the current 535 "fools on the hill" - with the possible exception of Ron Paul -or any of this or any previous administration believe that we will EVER have to repay our national debt. The operative assumption is that somehow we can continue to borrow and spend with no need to repay it, EVER. Thus, the underlying assumption of ALL federal policy results in unsustainability.
Worse, the tactics that people believe can be used to "solve" the neverending debt accumulation problem are based on the kind of logic that would get one a failing grade in every Logic class. "We can grow our way out of the problem" - yes, TEMPORARILY. Not forever. Spending more that one's income eventually results in insolvency, bankruptcy.
"We can inflate our way out of it" no, not really. Inflating the currency changes its RELATIVE value - against other currencies. Make the dollar ten times cheaper than other currencies and they will buy us out. They're already doing it. Foreign ownership of productive US assets is ongoing. It will continue to accelerate as our currency fades.
Invalid assumptions result in unsustainable policies. The idea that we can forever spend more than our income by borrowing forever is ludicrous and illogical. What we are left with is a Washington bureaucracy that has only two things it can do - determine how fast and how far down the rabbit hole they will take us.
Nonsense. The proper question is, WHY did Lehman fail?
Answer: Because it owned a huge inventory of real estate "derivatives," (i.e. paper based on bad home mortages) that never should have been made into loans in the first place! Except the GOVERNMENT--OUR GOVERNMENT--not only permitted it, they actively encouraged it, and in fact MANDATED it!
Had the government not done this (in the name of do-good social policy) NONE of this would have happened, and Lehman would be with us today!
Unfortunately it is probably too late to turn the situation around because the political power now rests firmly with the debtors. Everyone from big corporations to big government to individuals have become addicted to cheap borrowed money. Therefore all government policy tends to be to the advantage of the debtors at the expense of savers.
As savers continue to be penalized and debtors rewarded through tax policy, inflation, bailouts and eligibility rules for entitlements, each generation has fewer savers and more big users of debt than the last.
With that in mind, the boom - bush cycles and bubbles should continue. Federal deficits will continue to worsen. High inflation will eventually become the new norm, as big debtors (including the government) welcome inflation to devalue their burgeoning debt.
Therefore as investors we need to accept this fact and try to educate ourselves on how best to profit from it or at least not be devastated by it. Of course this is difficult because as investors we are also part of the dwindling "savers" group and are swimming upstream against government policy.
If a house falls 40% in price, that doesn't mean the real value of the house falls 40%. It could mean there are too many houses, i.e. too many real assets.
Americans may work harder or longer to pay-down debt, which will add to future economic growth.
There's been an enormous shift of real wealth from savers, including foreigners, to borrowers, including lower income Americans.
Also, I may add:
Many have been brainwashed into believing Social Security is a Godsend. However, if you invested your Social Security money in an individual account instead, over 30 or 40 years (e.g. in mutual funds or ETFs), you'd retire with a monthly check several times larger than what you'll get from the government (which could be taxed to help the poor).
From article:
"Social Security does not make any real investments -- it just takes money from later "investors," or taxpayers, to pay benefits to earlier, now retired, taxpayers. Like Ponzi, Social Security will not be able to recruit new "investors" fast enough to continue paying promised benefits to previous investors. Because each year there are fewer young workers relative to the number of retirees, Social Security will eventually collapse, just like Ponzi's scheme."
That's why we need large numbers of immigrants. To keep Social Security going.
Global imbalances began to correct slowly in 2007, until Lehman was allowed to fail, in September 2008, which froze the credit market, and caused the correction to accelerate. Nonetheless, the correction was inevitable. There was diminishing U.S. marginal utility, since Americans bought too many goods, and would buy more goods only if prices fell further. Export-led economies had production strains, while lending their dollars to the U.S. more cheaply. They exchanged their goods for U.S. dollars instead of U.S. goods, and received increasingly smaller gains-of-trade through inflation (e.g. postponing or never buying U.S. goods), received negative real interest rates (e.g. low long-term and short-term bond yields), and lost in the foreign exchange market (receiving fewer units of their currencies per dollar). Export-led economies lost up to 10% a year either holding worth less U.S. paper assets, or through importing U.S. inputs (e.g. capital goods rather than consumer goods) for their output.
Restrictive monetary policy and contractionary fiscal policy (the budget deficit shrunk to $162 billion in 2007, or roughly 1% of GDP) slowed U.S. economic growth. U.S. consumers paid export-led economies dollars for their goods, and then those dollars were exchanged for mostly U.S. Treasury bonds. Utlimately, dollars flowed from U.S. consumers to the U.S. government. However, the "excess" capital flowed to borrowers who weren't creditworthy, through U.S. financial firms, to clear the market. So, the U.S. government needed to refund U.S. consumers and financial firms. The Bernanke Fed kept a restrictive monetary stance for too long (i.e. the Fed Funds Rate at 5 1/4% from June 2006 to September 2007), and fell behind the curve easing the money supply. The Bush tax cut in early 2008 gave the Fed time to catch-up. The Fed eased the money supply, although commodity prices reached new highs till mid-2008.
It's difficult to be optimistic about the U.S. economy. Reagan became president at the right time, just before the 80 million Baby-Boomers (born between 1946-64) entered "prime-age" (35-54), accelerating the Information Revolution. Afterall, economies are made up of people.
The last of the Baby-Boomers will leave prime-age in 2019, and all of the Boomers will be over 65 in 2029. In a few decades, half of the U.S. population will be Third World immigrants and their offspring. They will generally have a lower skill level than the Baby-Boomers, unlike immigrants a hundred years ago, who had the same general skill level as the domestic population.
It will be expensive to raise skills of poor Third World immigrants, and they will receive other social services. Moreover, they will work harder and longer to support the retired Baby-Boom generation, not only with Social Security and healthcare, but with other goods and services.
U.S. households should have received a $700 billion tax cut to complement the $700 billion in TARP, to accelerate economic growth. Household balance sheets should have been strengthened, to spur demand of existing assets and goods rather than create new ones (e.g. concrete, shovels, and hard hats). The U.S. government has chosen to destroy excess assets, goods, and capital rather than induce households to consume them. Over the past year, there has been massive inefficiencies placed into the system. So, we can expect slower real growth for decades, since the U.S. economy peaked in 2007.
Now if you want to argue that they had so much money they were bound to screw up and go bankrupt, okay, that's another story. But the reason everything crashed last fall was because the U.S. government permitted, encouraged, and even mandated lenders to write mortgages they knew were probably gonna go bad; especially if there was any downturn in the economy.
Economic tinkering, even with the best of intentions always makes for negative inintended consequenses that hurt the ordinary people while helping limited special interests. You cannot abuse the economic laws and get away with it, even if you have 10 PhDs in economics. We keep proving it over and over.
The lesson is to get the government out of the economy and quit spending our money to buy votes.
American Prosperity and Price Deflation
Written by Richard M. Ebeling
Friday, 09 May 2008
The decades between 1865 and 1900 were the years of America’s industrial revolution. Before this time, America had an economy of primarily light industry and farming. By the beginning of the 20th century, however, the United States had surpassed all of the European nations in manufacturing, including Great Britain and Imperial Germany, the industrial giants of the time.
Mass immigration from Europe, huge capital investments, and technological improvements provided the means for America’s growth and rising standards of living that soon became the envy of the rest of the world.
During the years after 1865 prices in general slowly fell from their Civil War highs. A Consumer Price Index that stood at 100 in 1865 had declined to 57 by 1900, or a 43 percent decrease in prices over a 35 year period. On average prices went down around 1.2 percent each year over three and a half decades.
At the same time, indices of money wages in agricultural and manufacturing employment both rose during this period as labor was becoming more productive due to capital investments, even with a rising population resulting from millions of immigrants joining the American work force.
The index of money wages in agriculture rose by almost 40 percent between 1866 and 1900, while money wages in manufacturing went up 20 percent during this period. Thus, on average, money wages in general increased by about 30 percent for workers as a whole.
In combination with the productivity gains and the capital investments that resulted in the 43 percent decrease in the price level, this meant that in the last 35 years of the 19th century the real standard of living of the American people increased by almost 75 percent as measured by the positive change in the average American’s buying power in the market place.
My comment:
A 1% per year difference in real GDP growth makes a big difference after and over 10 or 20 years. Using a scientific calculator, a 2% real GDP growth rate will increase real GDP from $14 trillion to $17.1 trillion in 10 years (type 1.02, then hit the y^x key, then type 10, then hit = then hit X or the times key, and type $14 trillion or 14,000 for a smaller number). However, a 3% real growth rate will be $18.8 trillion after 10 years, or a difference of $1.7 trillion after 10 years. The difference is about $4 1/2 trillion after 20 years.
However, I believe, there are good, roughly neutral, and bad economic policies.
I think the first thing to help you understand the logic about going through with the "pain" is to first stop the melodrama about mother starving and dieing because she is too poor to pay bills. Bad times mean pain but also coming together to survive. Lose a house = move in with family, lose job = reduce spending to the point that only the essentials must be paid i.e., food, utilities, can't even afford that, churches and charities can assist. Pain means less comfort than what we were used to. I was a teenager when the aerospace industry went down in the 90's. My father was laid off out of work for 2 years after we went through every last cent of his severance pay. We sold one car and relied on just having one to carpool with, cut the cable, painted the house ourself instead of hiring someone, I worked two jobs to get through school (without any loans I might add). It can be done!
On Oct 18 09:26 PM olbol wrote:
> I'm really not sure how you can with conscience say that we should
> just go through a deep long recession depression because that is
> what is good for us? I mean I understand it logically but how can
> you tell mom and pop and joe that? I mean really? What if it's you
> and your mother who have to starve? or become homeless? Or die because
> they are too poor to pay their bills. I'm curious. I'm a joe blo
> who stumbled onto this website. Somebody help me out here.
if the govt that governs least is the best govt, then maybe the french monarchy in 1788 was the best in history.
on the other hand they all had their heads removed.
they "governed" a country of great physical wealth but had no revenue @ their disposal because the nobles paid no taxes, the clergy paid no taxes @ the common folk had no money to pay taxes with.
> jack