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Krugman Runs Stimulus Numbers and Finds Obama Plan Wanting

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Many readers are not keen about the idea of a fiscal stimulus program (I presume they are of the Austrian view, that taking the pain, no matter how bad, is the better course of action. And your humble blogger believes that stimulus without cleaning up our broken financial system is likely to have blunted impact). But let’s put that aside for the moment.

If you are going to have a “rescue the economy” plan, particularly on the scale envisaged, one would hope it was efficient, that is, sufficiently well designed and targeted so as to get maximum bang for the buck. But we live in a world of compromise and head fakes.

Paul Krugman has analyzed the stimulus plan as it now stands, using accepted techniques (various multipliers for various types of spending) and finds it falls well short of its objectives. Given the determination of the Obama crowd to jolt the economy into some semblance of life, this strongly suggests that towards the end of the year, more stimulus measures will be on the table, with large dollar figures attached to them.

From Krugman:

Bit by bit we’re getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we’re probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan consensus.

Yves here. To give a sense of how far this falls short, a recent paper by Carmen Reinhart and Kenneth Rogoff analyzed recent financial crises and found that, on average, unemployment increased by 7 percentage points from its previous level,

Krugman next goes through the various elements of the proposal and applies various multipliers to the components. Even though he calls this “wonkish” it’s quite accessible to the lay reader. And he explicitly makes some assumptions that he deems to be optimistic. Here we get to the bottom line discussion (and note that Krugman’s expectations for unemployment are more upbeat than ours and Reinhart/Rogoff’s):

Suppose that we’re looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.

And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Update 2:45 PM: Some confirmation that the Obama team believes that stimulus will be ongoing comes from a Bloomberg article, “Obama Says Deficit Likely to Approach $1 Trillion“. Note the boldfaced section:

A “trillion dollar deficit will be here before we even start the next budget,” Obama said after meeting in Washington with his economic advisers, including Peter Orszag, who has been designated as director of the Office of Management and Budget. “Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery we are working on.”

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61 comments

  1. ndk

    While I appreciate his earnest efforts, I find this totally fruitless. It’s like asking how many fiscal stimulus programs can dance on the head of a Krugman. I have absolutely no faith in the prediction of models that have dramatically diverged from actual results in the past, much less milking from their Ouija board the precise amount of spending that should occur.

    Here’s some further evidence presented recently by John Taylor, arising from analysis of the tax rebates. He also goes into the predictions of models and their detachment from reality, but then trumpets his own as being far better — sigh.

    I find John Taylor to be far too sure of himself and his models, but if the earlier empirical analysis by Blanchard, Uhlig, and others wasn’t convincing, this might help.

    As an NB, I’m definitely not “Austrian” in my views, though there’s some overlap. I also overlap some with Keynesianism. In a notoriously squishy science, I don’t find rigid adherences to a single philosophy to be useful. The shortcomings of present proposals and actions are fully demonstrable through the more mainstream economic theories and the empirical data. Something isn’t aligning right.

  2. Bob_in_MA

    I am not against a stimulus package per se. Bolstering state governments to mitigate their losses of revenue, extending unemployment benefits and funding worthwhile public works projects all make sense.

    But tax cut is all going to be saved. And tax credits for businesses will almost certainly not provide the benefits intended. (Provide a tax credit for companies hiring back laid off workers within 24 months? You just provided an incentive for them to lay people off immediately…)

    My biggest objection is that in calling for sky-is-the-limit spending, Krugman & Co. will get it, in spades. And when it comes time to turn off the spigot? Good luck.

    Here’s a forecast from Mr. Obama: "Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery that we are working on."

  3. baychev

    To be anything else but deadweight for all taxpayers, the stimulus investments should generate positive carry over the t-bills that will fund it (i’m excluding newly printed paper money). Neither bridges, highways, power efficient bulbs (replaced at $50 per hour rate), upgraded school rooms, wifi internet access in libraries etc. Will generate any income. If there is no economic benefit from this exercise, it should rightly be filed in the failure cabinet.

  4. Anonymous

    Being the US is emulating the Japanese model I would have to say he is right it’s ain’t gonna be enough. Fixing the system will not be even considered by the political elite as being far to painful. Years of stagnation and cement lined river bottoms along with massive government deficits for years to come await. Every time they stop stimulating with government spending will lead to another collapse. The currency in the future will be nothing but a carry trade currency perhaps ironically enough with flows into Japan who is near the end of this cycle.

  5. charlie

    What I find interesting is that the politics of the stimulus package are being left out of polite discussion. Regardless of any economic talk, the current stimulus package is designed to pass pork to congressman and local politicians. Pork doesn’t deserve a bad name, but I do worry about it when the only purpose is to buy friends and influence people.

  6. Salvatore M

    Since Krugman is putting the final nail in the coffin of Friedman/Laffer/Wanniski/Reagonomics, then lets go back to 70% top marginal rates like it was in the 60′s and 70′s. Maybe that will finally convince the corporations to invest in plant and capital rather than build their mega-mansions in Greenwich.

  7. Anonymous

    Any “tax cut” from the federal government is simply going to be offset by tax increases at the state and local level. Here in CA, we are almost assured of tax increases within the next few months.

    Our city governments are cutting millions from their budgets as they try to stay ahead of declining revenues…..in turn, the state is reducing revenues allocated to city governments as their tax revenue projections decline on a weekly basis…..

    my, my, my….. what a vicious cycle.

    States needing a “bailout” will be in the headlines shortly.

  8. Viv

    Wheeee, economics is easy.

    The problem was overspending and borrowing.

    Hence, the solution is overspending and borrowing trillions.

    Saving is so pshaw, keeping homes and stocks in check with reality and incomes is so silly. Blow one more bubble I say!

    Wheeee, we’ll save the world economy just like Japan saved it’s economy from stagnation in the 90′s.

    Where’s my nobel prize for presenting such a smart solution?

  9. Anonymous

    As stated:

    “Paul Krugman has analyzed the stimulus plan as it now stands, using accepted techniques (various multipliers for various types of spending)…”

    Three questions for Paul (on behalf of Fat Tony):

    1. How many Bridges To Nowhere, Big Digs and other massive Porkers are in the “stimulus”?
    2. What are the Multipliers for Bridges To Nowhere, Big Digs and other massive Porkers?
    3. Where and when in the economic cycle do you calulate the affects of the Crime, Fraud and Corruption of the “stimulus” on the body politic and the country as a whole?

  10. ThatLeftTurnInABQ

    I think there are two advantages to the stimulus-lite approach that this story implies.

    The first is economic – if we are dealing not just with a deflationary downturn but also are a the same time flirting with a potential dollar devaluation crisis per William Buiter’s critique (as highlighted by Yves earlier this week) then our fiscal policy may need to respect limits on how much we can borrow to finance our stimulus without blowing up the dollar, with no guarantee that the amount needed for an ideal stimulus plan can in fact be obtained at a price we can afford to pay.

    The second is methodological and political – there are administrative limits on how quickly the stimulus can be spent while preserving some degree of control over how well that money is spent and what sort of long term value we get for it in the way of improved infrastructure, given a finite supply of people with the experience and training to design and supervise these projects.

    There is no surer way of destroying the political consensus for Keynesian policy than by spending money too fast and creating numerous examples of waste, fraud and abuse which will garner the lion’s share of media attention.

    If this recession is going to last not months but years (as seems likely given the comparative analysis of past banking crises posted here by Yves), and if a stimulus is the best approach to getting out of it, then it is doubly important to maintain the political environment supportive of a sustained stimulus policy, rather than lurching from one extreme to another. The latter is what will likely happen if Obama’s administration is dogged by stories of wasteful spending and goes down to defeat against a neo-Hooverite candidate in 2012.

    Be careful what you wish for, you may get it.

  11. Waldo

    I think the stimulus idea is plausible. You can shoot holes in it but it is atleast something going forward to clean up the economic mess.

    One strong note of caution. Just like a large firm like Toyota has the engine to make good profits this same complex in a bad economy can turn and “burn” cash quite easily. Consequence of scale.

    In terms of scale the US has loads of it. When doing a stimulus package and putting the funds into anything but physical structure is “burning cash” on a global scale.

    The Boulder (oops Hoover, can’t forget politics) Damn currently has a strong NPV. All that wasted federal money by FDR actually produces $. All the investment funds put into the railroads in the 19th century created allot of wealth, especially in terms of property owners along the rail line (Stanford). How about Lincoln’s Homestead Act.

    To the point, government can create wealth for the population. Been done before. But thinking this will occur with social investment (checks handed to one, I got a $600 check last year from that stimulus, I put it into my checking account, I think it went towards my credit card debt).

    Infrastructure is sound way to put he stimulus to work. One more note, to get the benefit from the dollars you must work for it. Smart. Same idea that Rockefeller did with the University of Chicago endowment. He only put in what the local Chicago wealthy would match. Make them work for the investment money. Good stuff.

    Stimulus package may really work but only with real physical product being produced. If it takes quarters of time to get it into our hands so be it. Pain is always constructive in a free market (actually one of its continual strong suits).

  12. Lord

    It is looking like another depression. In that case, the most important thing is to pave the way for the future. To look over what we will need over the next 25 years and begin plans to build it. To declare war, not against others, but against our ills and shortcomings. Do something small and quick up front while preparing larger plans for ramp up later this year and next. It is more important to head in the right direction than it is to do something overnight.

  13. Anonymous

    Maybe the tactic is to make a small stimulus package and have it fail quickly so you can use the “crisis du jour” to force some structural change.

    Still my beating heart….

  14. Anonymous

    How is the world market going to react to Obama ‘s comment about ongoing trillion dollar deficits?

    Race to the bottom anyone?

  15. Anonymous

    Krugman’s partisanship is shameful. Seems like his article is an attempt to say why a bigger stimulus should go in and how the big bad GOP is once again at fault.

    Also his projection of only 9% unemployment is laughable.

    but I do agree with him one thing, the stimulus won’t do much.

  16. ndk

    I think the stimulus idea is plausible. You can shoot holes in it but it is atleast something going forward to clean up the economic mess.

    Of course it’s plausible, Waldo. It’s clear to see how it could work, albeit temporarily, within the standard macro framework.

    I think the disputes are much more about unintended consequences, whether these macro frameworks adequately capture reality, and whether U.S. stimulus even leads to a desirable outcome if indeed it does work.

  17. Anonymous

    How many times can you tax one dollar?

    Californians have Federal tax, State tax, sales tax, property tax, tax at the pump, DMV tax, capital gains tax, recycling tax, the hidden inflation tax. What did I miss?

  18. Waldo

    “I think the disputes are much more about unintended consequences, whether these macro frameworks adequately capture reality, and whether U.S. stimulus even leads to a desirable outcome if indeed it does work.”

    There are side affects for radiation treatment for cancer but in allot of cases it does work. Side affects are for analysts (flying there desks). We need action and action that is based on historical results.

    One more note about construction of physical product. I am currently (I mean currently) an engineer doing estimates for some NPV projects I hope my firm can be low bid on. And right now the market for new construction work is a buyers market. Very low margins. The tax dollars would get allot of mileage in this market (as long as sole source and under the table dealings are reduced to a minimum).

  19. lineup32

    “I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes.”

    A good political story but Democrats have the votes they simply choose not to use their majority status to provide a specific course of action so blaming Republicans is a good excuse.
    Its another example of D.C. political corruption but the MSM refuses to call out either party for not providing real leadership as they prefer politics as usual.

  20. RPB

    Yves,

    First, what are “accepted” techniques for analyzing the impact of a stimulus? Accepted by whom, everyone but those who subscribe to Austrian or Chicago schools of economics?

    Yes, the stimilus plan will work. . . for a little while. I do not understand why we are trying to prop up high asset, credit tapped consumers to consume more. Its non-sensical. The high asset values and the credit machine that allowed the consumer to magically turn some of those values into a cash machine is dead and gone. Any marginal cash will be allotted to savings and paying off debt. It’ll be a similar result to the TARP programs, only this time with consumers.

    At the end of the day we have had overconsumption made possible through our credit machine. The production (in goods and services) that resulted from that overconsumption will no longer occur. As a result, those marginal jobs made possible by overconsumption will go to.

    This stimulus will not have any positive lasting impact. In fact, I feel Buiter will prove correct in asserting it will hasten panic in the US debt markets by adding more to an already exploding federal balance sheet. He is also correct in asserting the traditional economic environment Keynesian stimili does not reflect our current situation. Add a viscious crowd out affect and mix in a resulting surge in private borrowing rates to this scenario. Not only will the consumer see fiscally induced inflation and monetarily induced inflation, we will also see commodities production destruction. And thus inflation will creep at us from commodities supply issues as well.

    A large, continued stimilus will only add more fury to the perfect storm in which we are caught.

  21. Anonymous

    After this ‘stimulus’ really kicks in the Mafia will be holding massive unionizing meetings at your local Townhall for all the backhoe, asphalt, and concrete workers they’ll need to hire.

    AM

  22. RPB

    Waldo,

    As a commodities trader and a former employee of an Egpytian (also former) cement company, where are you goint to find the clinker, aggregate, rebar, etc to supply all these construction projects? What firms and individuals will game the system and make a killing. I already see Sawiris (CEO of said Egyptian company) increasing his already sizeable stake in Vulcan. He is the master of soveriegn profit taking and he is priming to game the US system. I do not see why we cannot do the same as well.

  23. Anonymous

    “Potentially we’ve got trillion-dollar deficits for years to come”

    In a discussion with Kathleen Hays this afternoon during her “On the Economy” show on Bloomberg Television, Bill Poole took uncharacteristically sharp exception to the latest decisions by the Bernanke FOMC from their December Meeting minutes.

    “The Fed is now expanding its balance sheet by printing money.”

    No problumo, Benny got your back baby.

  24. Anonymous

    «not keen about the idea of a fiscal stimulus program (I presume they are of the Austrian view, that taking the pain, no matter how bad, is the better course of action.»

    But that’s right, only insufficient: the problem is not merely insufficient demand resulting in underused capacity, it is also insufficient capacity due to excessive investment in the wrong things.

    There has to be pain for capital to be written down where it was overinvested (e.g. finance) for one thing.

    But there need not be just pain.

    «And your humble blogger believes that stimulus without cleaning up our broken financial system is likely to have blunted impact)»

    Sure, but what there needs to be is also to decouple the painful adjustements like that from the fate of individuals.

    That is instead of bailing out businesses that have no real reason to continue being, bailing out employees, while the business landscape readjusts.

    The big problem is that employees are dependent on businesses, so if a business goes down it drags down its usually entirely innocent employees. This can be fixed with Danish-style support for employees.

    Unfortunately executives vested in the continued existence of their business are far more politically powerful than employees who just need a job somewhere, so trillions for banking, and not a penny for workers.

    Programs of public works etc. are just hypochrisy to turn recessions insurance into workfare, which is a joke and highly damaging; Japan has paid a colossal ecological and business price for make-believe public works. Direct handouts would have been a lot less damaging, but can’t have that.

  25. Anonymous

    Vinny Goldberg here. Can anyone suggest a way I can get Obama to pave my back yard too? I’m really tired of cutting the grass every month.

    As far as Austrian economics are concerned, are you referring to the fact that most Austrian banks have foolishly expanded wildly into Eastern Europe, which is now in the process of collapsing? Now, there goes the Austrian Empire Part II up in flames…lol

    However, Europe is in far worse shape than the US, and that includes that tiny piece of land inhabited by Nazi-thinking, music-loving, short, and dark (as in “not Arian”) pseudo-emancipated peasants called “Austria.” Besides their proverbial propensity to rip off unsuspecting American tourists, Europeans here have little else to show for except dirty, crowded, and overpriced societies, complete with a socialist-minded, lazy population. Simply put, when America goes into depression, these countries will go into starvation. Take this from me, a European-born American who still thinks the USA is the greatest nation on Earth, and is liable to remain so for the foreseeable future.

    Vinny out.

  26. Anonymous

    If you’ve got the money I’ve got the time we’ll go
    honky tonkin’ and we’ll have a time
    Bring along your Cadillac leave my old wreck behind
    If you’ve got the money honey I’ve got the time

    Yes we’ll go honky tonkin’ make every club in town
    We’ll go to the park where it’s dark we won’t fool around
    But if you run short of money I’ll run short of time
    Cause you with no more money honey I’ve no more time

    If you’ve got the money I’ve got the time we’ll go
    honky tonkin’ and we’ll have a time
    We’ll make all the night spots dance drink beer and wine
    If you’ve got the money honey I’ve got the time

  27. Waldo

    “As a commodities trader and a former employee of an Egpytian (also former) cement company, where are you goint to find the clinker, aggregate, rebar, etc to supply all these construction projects? What firms and individuals will game the system and make a killing. I already see Sawiris (CEO of said Egyptian company) increasing his already sizeable stake in Vulcan. He is the master of soveriegn profit taking and he is priming to game the US system. I do not see why we cannot do the same as well.”

    Are you kidding? Clinker is derived from limestone (billions and billions of tons of that stuff), rebar is supplied by Korea and Mexico (both are good products, really, great quality), most of that rebar is from recycled metal (lots of that stuff).

    Actually gaming the system is hard to do with these Feds. Most of our work is with the Feds. All we can hope for is allot of supply coming to the market and demand not keeping up (pricing power).

    Any $ going to additional military structures is a complete waste. Keep the focus on private sector structures (road, bridges, schools). Another idea I had was for a focus on the “hood”. These areas of Chicago, St. Louis, Cleveland, NYC, Atlanta, Houston, Portland have very poor infrastructure. Better roads and retaining walls, and overpasses would begin a small movement of financial capital to these areas. There will be a lag though due to the real estate developers taking a real beating now.

  28. Anonymous

    Gee, it wasn’t that long ago that Krugman pulled a $600 billion stimulus figure out of ( thin) air.

    That’s a lot of money but Obama’s plan is bigger. So what’s the problem?

    My guess is that Krugman is more concerned about the 2010 and 2012 elections than about the economy and he says as much. Now if he would care to model what having to spend a trillion dollars per year on debt service would do to future government programs he might be willing to accept a bit higher unemployment today rather than have a generation in rags tomorrow.

  29. john bougearel

    @baychev,

    I agree, there will be no engines of economic growth to speak of that I can see that will allow for a sustainable recovery. And the gubmint will soon morph into the zombie banks if the real economy can’t find a little engine that could. There’s poison in dem der zombie hills…

  30. Anonymous

    For all the academic and professional mental meanderings Lady’s and Gents, the truth is we make this stuff up as we go.

    Money and finance are not fixtures of this universe, but verbs and adjectives in the language of economic capture. Which can be invented, modified or thrown into the rubbish bin for any_reason.

    Financiers are the Voodoo priests and priestesses of this monetary religion. Their Tools amount to crystal balls or cold reading of their intended victims and Wall St is their Temple upon which they cut your head off (meso American culture), where their priests bedazzled the masses by their knowledge of the Sky’s (jeez these guys are good so every thing out of their mouths must be true, till they ran out of food and ate them) or is it just a company store to capture back its monies, wages are profit loss, when will the snake eat its own head to feed it self.

    Those that would cry foul to my contention are imprinted mentally, via lifelong education and personal investment, you put garbage in, you get garbage out, no matter how good it smells.

    99.999% of those in power are there for only one reason THEMSELVES, not you or me. They twist history and scientific fact for their own benefit not ours and those that attach them selves to the powerful, do so as a beggar at the lords kitchen door. The Ruling blood line/merchant class marriage is getting a bit old don’t you think.

    The Neo-cons, is it (Horus or Jesus they worship) have just put on a massive example of how BELIEF in non factual ideology’s can destroy a society or diminish it. This has been repeated so many times in human history, it buggers the mind. How many of our leaders use these mumblings to engage the common person in regards to their mental and spiritual fitness and lead us in to the future, then screw us. I hear they teach wealth in religion now lol, Gods gift to the true believers. When we all know you have to stand on top of many heads to get yours and not side by side to enrich mankind. Try telling someone of true faith in America that its baseless and get ready for death threats late at night or a gun in your face.

    Religion and finance exists only as a creation of the human mind and we know how disorderly/dysfunctional that mechanism is. Really folks, to nit pick the little nuances in a failed system is historical mental masturbation. When_the house is on fire and many will suffer (starve, die, be tortured) globally and whilst the priest class consults its devices to figure out a solution (save their social status, not all of us, they will need a few to keep the system rolling).

    Unfortunately I know historically that none of this will change till after total collapse. We really are no different to all the other failed society’s in the past folks, we just have better toys.

    To that I have my popcorn, drink and tissues ready to watch the big show, I hear its going to be EPIC .

    Like doc holiday said, other than that howzit going.

    Skippy

  31. Marlowe

    Waldo said All the investment funds put into the railroads in the 19th century created allot of wealth, especially in terms of property owners along the rail line

    Not true. Stanford (The Big Four)had a monopoly in California, and rate gouging held back economic progress. Also gave Upton Sinclair and Progressives plenty of ammo. Union Pacific and Credit Mobilier was another tragedy. Never recouped its cost, became a scandal of influence peddling, set up Teddy Roosevelt and the yellow press. The single worst thing we can do at the moment is build another Hoover Dam.

  32. doc darkness holiday

    One problem with any forward (or backward looking) stimulus plan is using our bankrupt Treasury. The Treasury is already out of cash and employment is increasing faster than the printing press can print, so the end result will be to watch Treasury yields fall along with the future value of the dollar. Stimulus bailouts will just add fuel to the fire and perhaps expand the black hole and increase the gravity of the dark period we have entered.

  33. john bougearel

    appropriations for schools always seem to go towards building a newer better school, and not towards improving education of our kids which would have far greater bang for the buck if they became a skilled and educated workforce.

    I consider most dollars earmarked to schools a misappropriation resulting from mistaken short term goals yet again. We can’t ever seem to make a long term goal decision with respect to so many mis-appropriations.

  34. john bougearel

    @ NDK,

    the stimulus idea can work “albeit temporarily.” This is precisely the problem. Where is the emphasis on sustainable growth or as put by Lord above “It is more important to head in the right direction than it is to do something overnight.”

    Unintended consequences are what we get when we paper over our “ills and shortcomings” as Lord mentioned.

    It is NOT OKAY to continue papering over our ills and shortcomings, it is okay and high time we did however declare war against them. It is not exactly like these ills are all very well known to us.

  35. Anonymous

    I like you guys’ and gals’ pessimistic mood here – it feeds my addiction to bad news very well. :)

    However, at the risk of being in the minority, I think the US will recover quickly and be a great nation again. What we have over the rest of the world is a vibrant spirit, a true sense of humility, and a proven ability to soul-search ourselves. I am now spending some extended time in Europe, and let me tell you, all I hear here is bitching about how the US got Europe’s economies in this recession. As if they didn’t have any say in their own economic decisions. I never saw a Brit or a Frenchman or a Spaniard do any sincere self analysis of their own failed nations and this joke called the EU, not to mention that nobody here ever admitted that much of their current relative prosperity is primarily due to our allowing them to eat the crumbs that fell off our table. Nonetheless, they’re all just ankle biters (and I include Russia and China in that category). They are irrelevant. If anything, this crisis proved just how dependent the rest of the world is on us.

    (One moment, while I turn down my radio a notch, because the Frenchman next door hates my favorite song, “Proud to be an American,” and as I type this he is banging on the walls with girlish anger and typical French sissy passion…lol)

    Yet, while the ankle biters bitch and moan, we will rebuild, we will close Gitzmo, we will have a new president, and we will regain the high moral ground. We’ll then build the most sci-fi infrastructure on the planet, we’ll put a woman (or possibly a man) on Mars, and finally, annex the Moon as the 51-st state of our great Union. We’ll once again be the envy of the planet. We always did the right thing… in the end… and we are close to the end. I know the US is not perfect, I know this retarded piece of sh** president and his Penis Cheney we’ve had these past 8 years were worse than 730 billion Katrinas, but America is the best embodiment of humanities most noble dreams and hopes, and we will rise again. I was born and raised in a communist nation, and I count my blessing for now being an American (and, when I look at these lazy, pathetic Europeans I feel nothing but contempt for them).

    Vinny Goldberg out.

  36. Edwardo

    As is so often the case, with institutions and individuals alike, the one thing that needs to be done is the one thing that will NOT be done.

    What needs to be done is to NOT spend that which we can only raise via issuing colossal sums of debt.

    To continue:

    Here is the premise, or the raison d’etre upon which the proposed spending program is based.

    1.) A severe economic contraction here in the U.S.

    Question:

    Is this, in fact, true? Try not to laugh, when I suggest that a collapse in the financial services industry (the F in the FIRE economy) may not be be tantamount to a general economic collapse.

    Let us assume a 12% unemployment rate and then let us assume the kind of workers who have lost, or are about to lose their jobs. Putting aside the absolute certainty that we can not pay for this program honestly- (by honestly, I mean without recourse to yet more deficit spending by an economy that looks nothing like America circa 1932), does what we know about Mr. Obama’s program address our primary ills with respect to unemployment?

    Now on to a somewhat different perspective on matters. Government in our time has, by my lights, clearly become an instrument for looting, and while it would be comforting to believe that the Obama Administration will somehow comport itself differently in this regard then its predecessors, experience, to put it gently, lends to skepticism.
    Any proposed massive spending programs ought to be planned and administered in a way that we have not borne witness to for a very long time. This means a sizable government bureaucracy. Oh, dear, we are already behind a big, fat, neo WPA eight ball.

    Another thought: (Oh, please forgive me for not wrapping the various strands of this post into a cohesive, nifty whole). Even if there were no term for what we now know as Keynesian deficit spending, we would have it had it as an accepted staple in our nominal Democracy for generations, because short of making war and taxing the citizenry, governments must always be seen to be doing something productive in times of crisis, even if upon close examination, the activity is demonstrably counterproductive. In short, Liquidationists, however sensible their austere nostrums, need not apply.

    And yet a few more thoughts:

    Expect a lot of shape shifting from the Obama Administration as regards the still murky “stimulus package.” My read of Mr. Obama is that he is, like President Clinton, a thoroughly political animal in the manner of “here are my views, if you don’t like them I’ll amend them…and quickly.

    It is highly likely that Obama’s apparent low balling on the stimulus package numbers is nothing more than a bit of misdirection. I am reminded of some of Clinton’s jiggery pokery with the military budget where he managed to make the Pentagon seem frugal even as their budget was being increased.

    Last thought, I promise. My view is that we will spend money, as we have so far, in epic amounts going forward and dare the rest of the world to do something about it. So far, except for a few rumblings here and there, the rest of the world doesn’t yet look ready to do a damn thing about our atrocious custodianship of the world’s reserve currency.

  37. Anonymous

    Some not-so-idle questions…

    1. Obama “has indicated that there’s at least 20 economists that he’s talked with, and all but one of those believe it should be from $800 billion to $1.2 trillion or $1.3 trillion,” Reid said after the meeting. (http://news.yahoo.com/s/afp/20090105/pl_afp/uspoliticseconomyobama_090105233417)

    Who is that lone maverick?

    2. “We’re very sick, and indeed if we die we won’t be able to pay back anything to anybody,” Rangel said in a Bloomberg Television interview yesterday.

    Do I detect an international threat? Hasn’t the US been playing this bullying game since the 1970s? How sick is this game making all of us?

    3. President-elect Barack Obama said he expects to inherit a $1 trillion budget deficit and that similar shortfalls are in store “for years to come” as the government grapples with a recession and other spending demands. (http://www.bloomberg.com/apps/news?pid=20601070&sid=ahYQ06QfZrzo&refer=politics)

    Is anyone in the media going to ask President-elect Obama to be fully transparent in describing the impact of these long-term deficits on most Americans? Will he disclose the fine print on this NINJA, balloon payment mortgage that he is selling to the American public?

    4. Banking on Becoming President: For the first time ever in U.S. history, the candidates for president raised more than $1 billion. (http://www.opensecrets.org/pres08/)

    Is anyone in the media going to investigate how this feat was made possible while America was in ostensibly in the throes of a severe financial crisis and recession?

  38. Waldo

    “Not true. Stanford (The Big Four)had a monopoly in California, and rate gouging held back economic progress. Also gave Upton Sinclair and Progressives plenty of ammo. Union Pacific and Credit Mobilier was another tragedy. Never recouped its cost, became a scandal of influence peddling, set up Teddy Roosevelt and the yellow press. The single worst thing we can do at the moment is build another Hoover Dam.”

    Great historical recital.

    But in general context when was the last time we had a push to construct economy enhancing product on a large scale.

    Building product leaves a real asset. And in most cases real assets do appreciate.

    We sometimes loose the sight of the mechanism necessary to create this oversupply of housing product. From an economic point of view a miserable
    miss allocation of resources, but from an operational point of view damn impressive.

  39. texasradio

    There is no limit to how many fiscal stimulus programs can dance on the head of a Krugman. This is a guy that accused FDR of being a piker.

    But here is the question: How long does it take to repair bad credit? The govt can spend like mad but, lacking a time machine, they cannot fix a single damaged credit report ahead of its time. Jah?

  40. Anonymous

    I’m sorry, Yves. I don’t usually call people names, but Krugman is an a$$. When has he ever gotten anything right?

  41. ndk

    I’m sorry, Yves. I don’t usually call people names, but Krugman is an a$$. When has he ever gotten anything right?

    I’ve really got to disagree with you there, 1:07. He’s an excellent economist who has had a lot of very good insights in the past. He’s more skeptical than most, and brilliant when he catches hold of something good.

    This is just a particular axe he’s got to grind now, and he’s become increasingly politicized over the years. Take a look back at some of his excellent work from ’99 in pondering Japan’s liquidity trap back when it wasn’t fashionable to do. While I don’t agree with all his conclusions, it’s a remarkably

    In fact, he even stated:

    “Pump-priming” fiscal policy is the conventional answer to a liquidity trap…. So why not consider the problem solved? The answer hinges on the government’s own budget constraint. The problem instead is that deficit spending does lead to a large government debt, which will if large enough start to raise questions about solvency.

    … which sounds a lot like Buiter’s present concerns, which he answered with a half-joking ad-hominem. He muses that there are temporary situations in which it can act as a good bridge, and I suspect he sees us in one now. I strongly disagree, of course, but it’s defensible, even if some of his present actions raise my eyebrows a bit.

  42. john bougearel

    I ought to open up shop, hang a shingle that says something to the effect “Fiscal Crises ‘R US: Soundness Ain’t Our Game”

    might be a good blog name if nuttin else!

  43. Anonymous

    ndk said:

    “I’ve really got to disagree with you there, 1:07. He’s an excellent economist who has had a lot of very good insights in the past. He’s more skeptical than most, and brilliant when he catches hold of something good.”

    thanks ndk, I know that my reaction is juvenile. It’s just born out of frustration from knowing that creating a pool of savings for future investment is the only thing that will get us out of our present quagmire.

    Thank you for the links. I will definitely peruse them when my brain is a bit more fresh.

    BTW, since you bring up the question of solvency (from Krugman’s comments about Japan’s predicament), and there has been a bit of chatter about the dollar, what’s your take on our own government’s ability to borrow, spend, and eventually pay back what Obama calls “many years of trillion dollar deficits”? Do you think we have room to maneuver?

  44. ndk

    BTW, since you bring up the question of solvency (from Krugman’s comments about Japan’s predicament), and there has been a bit of chatter about the dollar, what’s your take on our own government’s ability to borrow, spend, and eventually pay back what Obama calls “many years of trillion dollar deficits”? Do you think we have room to maneuver?

    Generally, no, not really; I’m with Buiter there. I’ve argued rather vocally for awhile(NB: this is before I had a really complete mental picture of debt monetization, so it gets a little tortured and weird by comment 100) that we can’t repay this and there will be significant detrimental impacts on the real economy.

    Indeed, I strongly believe solvency constraints are already affecting us because they introduce another risk premium, and hence raise real interest rates, for all USD-denominated assets.

  45. ndk

    Indeed, I strongly believe solvency constraints are already affecting us because they introduce another risk premium, and hence raise real interest rates, for all USD-denominated assets.

    I should note that if I’m right, the effect of this, perversely, would likely be to strengthen the dollar until it cracks under its own weight.

  46. Anonymous

    ndk said:

    “I should note that if I’m right, the effect of this, perversely, would likely be to strengthen the dollar until it cracks under its own weight.”

    Because higher real interest rates would cause capital to flow back into the U.S.?

    (sorry if this is an obvious question!)

  47. ndk

    Because higher real interest rates would cause capital to flow back into the U.S.?

    It’s not an obvious question; in fact, I’m going against what might be intuitive.

    Generally, yes, higher real interest rates should increase the real exchange rate.

    But if that increase in real interest rates is due to a rising risk premium, it should normally lead to a rise in the sovereign CDS and a decline in the currency(warning: Icelandic PPT). See most particularly slide 3 and slide 7, remembering that our real policy rates are actually quite high despite the nominal being zero.

    Basically, I think the rise in risk will be reflected in real interest rates more than it will be reflected in exchange rates. Investors will apparently underestimate default risks and just grab for the higher return, hedging only after the fact. I think that tendency would be particularly pronounced here because of the perceived safety of the USD.

    But that’s just my gut feeling, and I’m not a currency trader.

  48. Anonymous

    Supposing that the proposed stimulus plans can be afforded and lets not forget that 500billion is needed immediately to limit state job losses, then any stimulus plan needs to be properly timed and specifically targeted.

    The single most important aim of any stimulus should be to create long term jobs. These are jobs in states that have balanced their budgets, in firms which have survived and are now looking to expand as their competitors fall by the wayside. This tells me that stimulus should be applied as the bottom approaches and be targeted at providing extra credit to firms who are unable to meet demand and are looking to aggressively expand. Timing and targeting are of utmost importance and will involve politically difficult choices. My best guess as to timing for stimulus would probably be towards the start of next year.

    On the other hand we can just throw tax payers money at firms which are going to fail anyway and we can throw money at infrastructure without raising taxes, hoping that foreigners will pick up the bill. We can just put everyone deeper in debt without creating any jobs at all and placate all political viewpoints. At the end of the day the politicians can say they tried they threw 4 trillion at the problem.

  49. fresno dan

    I believe professor Krugman is simply setting him self up for “I told you so.”
    Of course, I agree with “texasradio” – Krugman is a guy who thought the new deal didn’t succeed merely because we didn’t spend enough.

  50. M.G.

    “Blogger believes that stimulus without cleaning up our broken financial system is likely to have blunted impact). But let’s put that aside for the moment”.

    Please do not put that aside get macro economists like Krugman to understand it. They need a Weltanschauung not wonkish mathematics of stimuli and spending. As the money flows, there is no point in trying to create wealth in one side while somebody else is destroying it on the other. It will turn to be a zero-sum game. And should that be the case it’s better to talk about distribution of wealth and income rather than stimuli. We will all be better off and on a sustainable path.

  51. Little Voice

    To me the problem is simple.

    Our economy the last 15 years has been based on rising real estate prices, primarily home prices. Buyers have seen their homes as places to live and as investments. They were ok with large monthly mortgage payments until recently. The problem is not the payment. The problem is other bills they have to pay, credit card and health care. One little health problem and the impact on monthly expenses go thru the roof. Due to lack of savings and all the 0% interest for 1 year credit card offers people have burdened themselves with non mortgage debt to the tune of 970 billion dollars. Many people pay on average 600.00 dollars a month just to service their credit cards, not even paying down the balance much. The banks are bracing for card defaults and expect to write off 340 billion dollars in the next 2 years to bad debt.

    Sometime in the course of events bold actions are called for like dynamiting the dam in order to save the town. I propose we take the 350 billion dollars left in the tarp fund and offer the bankers 33 cents on the dollar for all their credit card debt and then write off the rest. This would free up a lot of monthly income and people could actually walk into a store a buy things with cash, apply the funds to their mortgage payments or SAVE IN THE BANK each month. This would require no millions of jobs created and it could be done almost instantly. It must be done behind closed doors and not be proposed in congress before the fact or people might run out and charge up the cards. Also from this point on credit cards could have lower credit limits, say nothing over 2000.00.

  52. Timo

    I’ll tell when things start getting better:

    When a Texas cowboy and a California hippie meet in the United Nation World Summit (New York) and the cowboy says, “I’ll piss on your new flag, you traitor!” :)

  53. Elliott Middleton

    What are people like Krugman targeting, a return to previous unsustainable levels of consumption? Or an unemployment rate in an economy undergoing a massive structural adjustment? (Krugman wouldn’t publish this comment at his blog.)

    The economy has gotten way out of balance with excessive consumption spending. Pure G or T “stimulus” doesn’t address this adjustment problem except by throwing money at it that will be going down the wrong tracks.

    Moreover, the economy is about to turn. See my yield curve/”animal spirits” forecast at http://home.comcast.net/~elliott.middleton/forecast/. This model was cited in Nature in 2001 when it was forecasting recession well ahead of consensus, and also saw the current slump well before consensus. It is forecasting that the “animal spirits” are about to revive, even if unemployment goes up.

    What is needed is a reasonable dole and access to health care for the unemployed to help them, many innocent victims of a systemic event, through the transition to a lower consumption, higher saving and investing economy. These dollars, unlike infrastructure investment, will go immediately into the spending stream.

    Can Americans look social justice in the face, or do we need to make this a competition of economic theories none of which has ever worked as promised?

    Advice to President Obama: Help the American people, and take all economists with a shaker of salt.

  54. Timo

    Could you extend that animal spirits curve to cover 1920-1955? This might be something bigger than just another post-WWII good times recession….

  55. www.gregor.us

    The new weighting towards tax cuts is a Fail. *At this particular juncture* tax cuts are the fiscal equivalent of lowering interest rates. They will do nothing but sate ideological hunger.

    One either sets in motion a Keynesian plan, or one doesn’t. Half-way doesn’t cut it.

    Worse, Obama is not even talking about public transport in the physical infrastructure portion of the plan.

    What have they chopped actual infrastructure spending down to now? 25 billion out of 700 billion?

    Absurd.

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