Deadman's picture

    The problem, DF, is you haven't really learned to love the recession

    OK, so I don't know proper protocol on this, but I read with interest DF's latest post 'Macroeconomics 101: Spending versus Stimulus, or 'How I learned to stop worrying and love recession'' and responded with a rather lengthy comment of my own. I realized afterward that my comment probably would stand on its own for a separate post as well. So I am doing just that by reposting the comment here with some editing, but i encourage everyone to read DF's original post and continue the dialogue there.

    Now, DF did a stellar job of getting to the heart of our economic crisis and the current debate over Obama's planned stimulus package and spelling it out simply and effectively. I do, however, have some issues with his thesis.

    Unlike DF, I believe there IS a difference between stimulus and pure spending, although where and how you draw that line is admittedly a subjective process. Stimulus is government spending that then encourages corporations and/or individuals to spend money of their own as well. Government spending by itself will certainly add to GDP, but without a stimulative component, it will have very little notable impact (the Consumer 'C' in GDP is almost 2/3ds of the total in the US) and certainly will be unlikely to reverse a recession.

    Now you can have a legitimate debate about what types of policies are more stimulative than others, and that's where things get subjective (for instance, giving people money, or tax refunds, would seem by its nature to be stimulative but that stimulus package last year ended up being nothing more than an ineffective short-term stopgap with most of the money going to shore up corroded balance sheets - not the worst thing in the world but not necessarily stimulative).

    And where I really disagree with you is that you seem to think government is in a better position to spend than consumers or corporations. With consumers, maybe you could argue the point, given how badly household balance sheets have gotten, but aside from the financial industry, corporate balance sheets are actually in very good health and they could probably invest a lot more capital in the system if they had confidence (and arguably lower tax rates).

    Of course, any significant corporate investment also requires a free flowing credit system, which has been dramatically imparied because of our financial crisis. Resolving our toxic asset problem is at least as important as the passage of any stimulus package because not only would it allow credit to flow again (although hopefully in a more rational manner) it would also restore a bit of the confidence that is a necessary prerequisite for any lasting spending by consumers OR corporation.

    But getting back to the government and its ability to help us spend our way out of this mess .... they're in the worst shape of anybody to do the work! Obviously, the government CAN spend the money since they control the printing press, but that won't mean it's a good idea. At $1.2 trillion dollars (prior to any stimulus plan being passed), the U.S. deficit equates to over $4000 per person in this country, and that exceeds the average credit card household debt of $3,235 (which you can easily argue is too high as well).

    Increasing the deficit will only place a bigger burden on this country's future generations - at some point, guess what, the Chinese and other foreign governments will stop wanting our debt because they'll wake up and notice the crappy state of the balance sheet, and at that point, you will see and feel pain like you've never experienced.

    If we are spending money on things that are needed, like long-decaying infrastructure or intriguing alternative energy technologies, then perhaps the additional onus on the country's balance sheet will make sense. But I am very skeptical that we'll be able to spend $800 billion without seeing much of it going to waste.

    I guess when you get down to it, I have a problem with your main thesis

    First, we all have to agree that a recession is what I've stated it is above and that this is an undesirable condition in which we all have a vested interest of avoiding.

    Recessions are necessary parts of the free market business cycle. Sure, we'd love to avoid or shorten them, but it's my belief that without them you can't have the good times. The key in my opinion is to pursure policies and regulations that limit the extremes on both sides of the cycles, but unfortunately, we threw ourselves one big consumption and credit orgy over the past decade, and we must pay the piper.

    We need to be very careful we don't throw good money after bad, and make the problem even worse by sapping oomph from any eventual recovery or setting us up for a bigger, more painful fall later.



    And right after I finish responding to you no less!

    D, I really enjoyed both DF's post and your response. But could you please clarify your position for me? It sounds like you're saying that the government should do nothing while we take our recession medicine. But what if we're on verge of falling off a cliff of depression? Hoover's inaction, caused by his concern for deficits, contributed to the Great Depression. It would be nice to rely on the private sector avoid a depression, but you can't fiat consumer spending. The government is the only single entity with the will and power to spend right now.

    And if you're not suggesting that the government do nothing, what do you propose that the government do?

    dammit, i've been caught. I have no idea what the right thing to do is. i realize if for no other reason than political expediency that something will be done now, and I guess I'm just saying we should be very careful about what we do and how much we spend doing it.

    honestly, i think if we solved the financial crisis (again, don't ask me how, as I truly don't know the best way, tho i have some opinions on some of the current proposals being floated) then some much-needed confidence would return, at least to the point where the markets could do the rest of the work.

    It would still be painful - it could in fact lead to a depression, depending on your definition of the word - but i think i've stated often enough here that the only way to avoid extreme economic downturns is to avoid bubbles and it's too late for that.

    i know this is talking out of the rearview mirror now, but the most important and meaningful decisions are made by the government and the Fed in good times - by decreasing deficits, increasing interest rates, regulating undue speculative behavior, encouraging transparency - so that we are better able to control events when the market eventually gets overheated and turns down. unfortunately, the political system is such that few have or are willing to spend the political capital to pursue these kind of antigrowth policies (maybe better name would be 'prudent growth' or ''antibubble' policies) during good times.

    i believe the only thing we can really do now (barring reigniting some other bubble that just postpones the inevitable crash) is try our best to make sure the worst-hit in our society manages through this period with as much dignity and comfort as possible, mostly through rather generous entitlement programs (econ. conservatives won't be fan of this suggestion, but i think we have a moral obligation to ensure no one suffers unduly from market dislocations if enough wealth is being created by the rest of the market. plus i think a capitalist system that does not look after its 'losers' is destined to fall, a la marxist theory).

    So in sum, I'd like the government to figure out how to handle the toxic assets once and for all (and don't ask me how), spend a reasonable sum of money on needed infrastructure investments and other potentially wise long-term initiatives (but don't mislead the market by calling it stimulative or overstating the productive jobs that can be created), perhaps pursue some targeted tax cuts to grease the economy's wheels, and then let the market do the rest (while mitigating the concomitant pain through social welfare programs). eventually, after a period of retrenchment, balance sheets will improve, resources will be underutilized, and the recovery period will begin. And when it does, here's hoping we address some of those long-term issues that will still be looming overhead.


    I agree with your concern about the deficit, the importance of avoiding bubbles, and the need to address fiscal flaws when the economy is booming. But...your proposed pallitives for our current malaise are tepid gestures. If it's a run-of-the-mill recession, such pallitives may be sufficient, but there are signs that the crisis may be much worse than that. That's why the government has been pulling out all the stops. We cannot risk a severe depression.

    But I suspect that our core difference is your fatalistic view that the depth of a recession must correspond to the height of a preceding bubble. I do not disagree that recessions offer necessary corrections to economic bubbles. But there is no law to keep an economic decline from being much deeper than its preceding bubble. The Great Depression was no mere correction to the excesses of the Gilded Age. While a recession was certainly unavoidable in 1929, the depression was worse than it might have been had the government acted sooner and more decisively.

    Back to the present, Obama obviously does not think that we can avoid recession. We're in a recession; it's too late to avoid it. But this recession could get much worse, and it could last a very long time. If we sit back and quietly mutter, "For every excess, a reckoning," we could well be reckoning for the next decade.

    PS I also note that if higher deficits in the short run help us to avoid a deep depression, then our debt will be in much better shape in the long run. It would be tough for the government to balance the budget when a depression has undercut the tax base.

    i think it's still debatable how much impact Hoover's policies had on extending the length of The Great Depression - I'm not a historian or an expert on that era by any means, however, and i know the prevailing wisdom is that his beggar-thy-neighbor trade policies, his tax increases and hawkish deficit views exacerbated the problems. I'm not favoring any of those things in my proposed remedies, but that doesn't mean engaging in reckless spending, untargeted tax relief, and accomodating monetary policy will lead to the exact opposite result, either.

    The main thing I'm saying is we have spent well over a trillion dollars already to 'bail out' or otherwise stimulate or economy and it is very difficult to see what if anything has been accomplished with all that money. Before we spend another trillion, let's resolve the underlying toxic asset mess to the best of our ability, so that some level of confidence will be restored to the market, and any spending we end up doing can actually have an impact. And just as important, let's keep a detailed, transparent record of every dollar the federal government spends - as well any spent by state and local goverments - so we can determine, even if its in hindsight, how effectively that money was deployed.

    Remember, the bigger hole we dig today by spending more and taxing our resources more, the more we are taking away the oomph from an eventual recovery.


    The money spent so far was mainly to avoid a chain reaction of collapsing banks. Of course we can't measure the effectiveness of the action b/c we don't know what would have happened if the government hadn't acted. As for where we are now: could be better, could be worse. The banks haven't collapsed like dominoes, but the credit markets are still frozen.

    Stimulus and resolution for the toxic assets aren't mutually exclusive; we should pursue both. If the economy is still tumbling, stimulus later will be less effective and cost more than stimulus today.

    Remember, the bigger hole we dig today by spending more and taxing our resources more, the more we are taking away the oomph from an eventual recovery.

    D, I'm no economist, but this line of thinking runs counter to everything I know about economics. It's pre-Keynes thinking: tighten your belt when the economy stinks b/c you can't afford to spend. But that's literally the kind of thinking that encouraged the Great Depression, and it's precisely backward. You need to spend like crazy when the economy stinks to stimulate growth and tighten your belt when the economy booms to control inflation. If you disagree with that, you're going against longstanding conventional wisdom.

    In other words, you should have been shouting like crazy at G.W.'s profligate spending and tax cuts. And once we come out of this thing, you should shout like crazy again. But now is the worst possible time since 1981 to be shouting about deficit reduction.

    Sorry D, Genghis is smacking you around here - Defend yourself!

    it's quite simple. if we spend money to stimulate the economy before confidence is stabilized, before consumers can retrench and liquify their balance sheets, before bloated inventories and capacity gets sufficiently worn down, we are pissing away money, and when the economy does recover, we will have less flexibility in terms of monetary and fiscal policy because our deficits will be too large, inflation will be too threatening.

    as far as pointing out that our system hasn't yet collapsed so the trillion dollars we've spent must have done some good, that's a straw man argument. i can't argue either way, obviously. I do know however our financial situation is still very precarious and the stimulus aspect of our policies haven't worked one whit.

    really, all I'm trying to say boils down to this:

    1) We need to realize that we enjoyed an extended and prolonged boom in our economy, particularly with regard to credit and consumption, and we are now dealing with the resultant structural and psychological issues from that bubble popping. There is a limit to what we can do to stimulate our economy while those issues persist - some of these things we can address (such as a toxic asset plan that makes sense and speeds the healing process along); some of these will just take time to work themselves out (in a painful and unpleasant way perhaps, but that's just the market working - we should address and mitigate some of the effects from that pain, but not kid ourselves in thinking we can totally stop it).

    2) Government will need to spend and stimulate (and there is a distinction between the two) but it should do in a manner that is well-thought out, transparent, detailed and analytical. I havent seen much of that so far in the past year.

    This debt is real money and it's going to have to be repaid, and it's increasingly going to have to be repaid to foreign governments, including some that aren't democratic. this is something i am not comfortable with.

    i admit, there's a part of me deep down that may be a gold standard guy who worries that our whole credit system is just one large ponzi scheme, so i'm sure that colors some of my thinking on our current crisis and potential solutions.

    but i don't consider myself pre-keynesian and i am not screaming about deficit reduction. i am worried about extreme deficit expansion. i do think it is awfully dangerous to believe we know everything there is to know about economics because we've got the math to prove it, or that we know how to avoid the Great Depression because we're just going to do everything opposite of what we did back then and we'll be fine.

    The only sentences I disagree with are the first two:

    1. it's quite simple.

    If only.

    2. if we spend money to stimulate the economy before confidence is stabilized, before consumers can retrench and liquify their balance sheets, before bloated inventories and capacity gets sufficiently worn down, we are pissing away money, and when the economy does recover, we will have less flexibility in terms of monetary and fiscal policy because our deficits will be too large, inflation will be too threatening.

    Lack of confidence, aka "fear itself," is the problem that could turn this recession into a depression. Confidence must be restored for the credit markets to loosen, for stock markets to revive, for companies to begin reinvesting. Once confidence is restored, we won't need the stimulus; confidence engenders growth.

    Lenders and investors lack confidence because they're afraid that the economy will get worse, perhaps much worse, that their loans won't be repaid and their investments will fail. You're telling us that confidence will return once inventories are purged and capacity is worn down. It might happen. Investors might decide that the companies have become undervalued, that the economy has bottomed out, and start to put their money back in. might not happen. Bankruptcy could beget bankruptcy, and anxiety could become full-fledged panic, so that we're faced with the exact opposite of a bubble, the dreaded downward spiral. The government is the only entity with the clout to reverse such a spiral and restore confidence when nothing else can--by guaranteeing loans, encouraging consumption, and spending money when no else is willing to spend. In a sense, the government has to "piss away money" to restore confidence. If the spending weren't perceived as poor investment, companies would do it themselves.

    We could bide our time and only act aggressively once the economy is really in the shitter and ten times as much spending is necessary to restore confidence, or we could act now to avoid getting there. Acting now does not mean erasing the recession and whistling a happy tune; it means avoiding the risk of a panicked downward spiral which would cost far more in lost revenue and than the stimulus plan under consideration today.

    If you believe that there's no risk of such a panic, then your argument is sensible. But I'm told that we have good reason to be very nervous right now. I, for one, am willing to sacrifice some "flexibility in terms of monetary and fiscal policy" after we recover in order to mitigate the risk of economic disaster today.

    PS "Extreme deficit expansion" is Keynes' prescription for escaping depression.

    All fair points. I suppose you're right about Keynes. And for now, he's all we got to go on. Let's hope he's as smart as we think he is!

    I am reading more and more that it is very likely we will not be repaying all of our debts anyway. we just will not be able to do it without killing the currency and the world economy (it's not just our current debt we have to worry about but also the trillions in future obligations we will need to pay out more aggressively as the baby boomers begin retiring) - and will likely have to renegotiate the terms with the foreign governments who own the debt. It will likely lead to the end of U.S. hegemony, the end of the dollar's reign as the world's exclusive reserve currency, and some political concessions, but we'll survive. So maybe all this hand-wringing over trillion-dollar deficits is unwarranted..


    Milton Friedman might be rolling in his grave, but from what I hear, Keynes is back in favor. Nothing like a failure of free market principles to spur a resurgence of interventionist fervor.

    You should blog about the future of the U.S. debt. We'll survive for sure, but the end of U.S. hegemony won't be much fun. My argument notwithstanding, I'm actually a huge deficit hawk. Deficit spending is useful in difficult times, but permanent deficits are moronic. I'm furious with our dear former President for increasing the deficit during boom times. I don't know if his budget policy was any dumber than his other idiotic policies, but it really sticks in my craw, especially the tax cut. The only thing that I like about Republican idealogy is its emphasis on deficit reduction, and G.W. didn't even get that right.


    yeah, clearly 1990s Japan and now our current situation proves that monetary policy alone is not always capable of reviving economic growth. far from it.

    my fear is that the implementation of the obama plan will prove keynes wrong in a similar manner - that there is perhaps a limit to the effectiveness of keynesian philosophy, particularly when the aggregate amount of government debt is so high to begin with. we shall see, but i do know that economic theory seems to be at least as much art as science, and trusting it as gospel is very dangerous. It certainly did an awful job at predicting or preventing our current mess.

    I would love to hear what old Milty would have to say right about now.

    The TARP was not a stimulus package.  It was supposedly meant to fix the mess in the financial sector.  No one wanted to act like a grown-up on that one, so we've pissed away a good chunk of change.  You're absolutely right that this portion has to be fixed, the problem is that "fixed" can't be left to mean what we've let it mean - issuing a blank check to the financiers who screwed all of this up in the first place and trusting them to fix it themselves.

    Also, I don't think that your portrayal of the credit relationship is quite correct.  Banks are given license to print money by creating credit.  That's inflationary just as the government printing money for infrastructure projects is.  The government can still put people to work in a crappy credit market.  Perhaps this doesn't multiply into the investment share like it would under more amenable credit conditions, but to say that it's entirely contingent on a full-recovery of credit markets isn't accurate.

    Finally, how do you justify your last statement?  We're not talking about a static fund, where a withdrawal today means less funds in the future.  I get the feeling that this is the sense that you have, but is it based on some model or historical precedent?  I don't think it's at all clear that this correlation exists or is as absolute as you've described it.  Isn't it also possible that we screw ourselves by being too tight-fisted?  What about deflation?

    BTW, Obama took care of the tracking of federal spending as a Senator.

    *TARP not a stimulus package - agreed. But we did have a stimulus package last year, and what good did that do, beside give us one quarter of isolated GDP growth.

    *Govt can do good in a crappy credit market - agreed, though i don't think i said government investment would be a total waste in terms of aiding the economy until credit market improves. if i did, i misspoke. But clearly, its effectiveness (the velocity of which you speak) will be vastly hampered and I believe private industry will almost always be much better at allocating resources and stimulating investment than the government.

    *I addressed the last statement in my response to genghis. It's not less funds for the future - I've already admitted we have limitless funds. But any money we spend now is debt that will have to be repaid or refinanced at a later date. If we spend our wad before the time is right, before the market has had time to work its magic, then that's a poor use of our capital. And when we do finally recover, our debts will be so large that it will severly limit our flexibility in allowing us to enjoy the other side of the business cycle. The recovery will be muted.

    Look, I'm not saying doing nothing is a solution. Though the market would eventually work our issues out, it would likely do so in a prolonged, very painful way (just as letting the market do its thing led to an extended, way-too-good-for-our-own-good credit bubble). Deflation is a real concern. It's pernicious, it's certainly not good news for our indebted nation, and i agree that government has a role in battling it. But I don't believe that merely spending money just to spend it, 'dropping money from helicopters', is the wisest path either.

    the other thing i forgot to mention is that while we're not talking about a static fund, fair amount of Obama's stimulus package involves the creation of new social programs and new outlays that will be very difficult to remove from the budget when the economy turn around. most of the stimulus package should be directed toward short-term investments that don't further add to the enormous burden of trillions and trillions in future obligations coming due at an accelerated pace as the baby boomer generation retires en masse.

    I see a lot about credit in banks, what companies should do and bailing out institutions.  What is happening with consumer thinking?  I am starting to feel a little stunned and a little pissed when I hear some commentator saying the consumer needs to buy more.  I don't know what is going to happen next month so I am not spending money today - to hell with what the economy needs or any promise of government money.  My friends are talking the same way.  Remember how our grandparents and some of our parents talked about the depression and how they hung on to everything?  Are people looking around thier houses and saying 'I have Enough Stuff' and stop buying?  I think if the stimulus package in any form isn't passed soon consumers will dig in. 

    The other consumer problem is credit cards being maxed out.  Buying things with a credit card is like magic to a lot of consumers - not like real cash.  It is easy to spend $200 dollars at Walmart (or Macy's) when it is put on the credit card.  When it is bills out of the wallet $100 looks like a lot.

    Then we have the boomers getting ready to retire with all the money they were told to put into 401s, hedge funds, IRAs and portfolios with high returns and all of sudden they have lost 30% of the income they were planning on having.  So they work longer at jobs they may be losing AND they can't sell that second home for more than they paid for it to make up the difference.  Big numbers those boomers.

    The reason I am posting here is if the consumer doesn't start spending soon doesn't that prolong the problem? And the longer the 'crisis' the longer the consumer puts off spending until they get out of the habit.  When does it get to a point were the social norm is changed and shopping is out the door?

    Are the banks holding on to money because they see something coming with all the credit cards they have out?  Banks now earn more of their income from fees instead of interest and if the consumer stops with the credit card spending where are banks picking the difference? 

    It's funny, because it's the one thing I forgot to mention in my argument advising care being taken in any stimulus plan: Just logically speaking, I find it quite difficult to believe that the solution to a crisis caused by a consumption/credit binge is to encourage more consumption. that's why i'm very skeptical that any plan to revive the housing market or increase consumer consumption will have the desired stimulative effect. Consumers only spent 17% of the $150 billion stimulus package given last spring. The rest went to pay down debt or for savings, which while not the worst thing in the world was certainly not stimulative.

    The tricky thing, of course, is that as the economy hits the skids and unemployment rises, Americans will find it increasingly difficult to manage their debts and improve their balance sheets. They will have to spend their savings and go into more debt (if they can find it) just in order to live day-to-day, which I suppose is the argument for a comprehensive stimulus plan.

    But I still feel that the economy got overheated and needs some time to work off the excess which developed over the past decade. I dont think there's a danger of American's consumption habits changing materially even if there's a period of necessary retrenchment. We are and will always be a nation of conspicuous consumers.

    President Barack Obama and his cash advances are potentially very important because economic recovery, as we all know is very hard to achieve. This cash advance can somehow sustain economic activities of one nation. The good news is that the stimulus does seem to be working.  The Commerce Department recently released its report, one of the features of which is a rise in manufactured goods, a key economic indicator.   A lot of signs point to the stimulus working thus far and a quicker recovery than previously thought, which is good news.  A little debt relief can help the nation with its recovery.

    FAKE BLOG SPAMMER! You're a slick li'l bastard. I'll let you post one more link b/c your contentless conments amuse me. But then you're banned.

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