Bubble Economics
| Wed Dec. 17, 2008 11:34 AM PST
BUBBLE ECONOMICS....Does the economy need a $600 billion stimulus? Think bigger:
A number of economists, including former advisers to Republican presidential candidate John McCain, have suggested to Obama's team that the economy needs a much bigger cash infusion, possibly up to a $1 trillion over two years.
....Obama's economic team believes that to put unemployment on a downward trajectory with a goal of 7.5 percent or less over two years would require a stimulus package of about $850 billion. That would generate about 3.2 million jobs by the first quarter of 2011.
....Among those whose opinions Obama advisers sought were Lawrence B. Lindsey, a top economic adviser to President George W. Bush during his first term, and Harvard professor Martin Feldstein, an informal McCain adviser and former chairman of the Council of Economic Advisors under President Ronald Reagan.
Over at RBC, Jonathan Zasloff poses a few good questions about how to spend this dough. On this very narrow issue, I think my first question would be, how much of this program should be spending and how much should be tax cuts? Can we really spend this much money quickly even if we want to? Would a payroll tax holiday make sense as part of this package?
More broadly — and I know I'm being a bit Chicken Little-ish here — I continue to wonder if a massive stimulus package that spurs domestic consumption means that just as we propped up the economy in 2002 by replacing the dotcom bubble with a housing bubble, we're now propping up the economy in 2008 by replacing the housing bubble with continuing support for our ever-ballooning trade deficit bubble. See Tim Duy for more on this. I don't know if he's right, but I don't feel too bad for bringing this up since no one else really seems to know either.
In any case, I do know that pretty much every economist in the country agrees, in general, that eventually U.S. consumption has to go down, savings have to go up, and we have to start exporting more than we import. It's just a question of whether we can afford to worry about that with the economy collapsing around our heads. Still, here's a thought: if this is a serious long-term concern, shouldn't we at least try to construct a stimulus package that stimulates export industries more than other sectors of the economy? If so, how would we go about doing that? And what else should we be doing to prepare for the day when the current panic subsides, the great T-bill bubble bursts, and the rest of the world decides that 0% yields on treasuries suck and they don't want to buy any more of them? And what they'd really like instead are some tangible goods and services, thankyouverymuch?
I don't know. Maybe we really can't worry too much about this at the moment. But the trade deficit bubble is going to pop eventually just like the dotcom bubble and the housing bubble. We at least ought to be thinking about this a little bit.
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Comments
Can we stimulate (aka subsidize) export industries without running afoul of antidumping and free trade agreements?
It seems like there is no reason for the US to be a wealthy as it is wrt other nations. The gap in productivity isn't large enough.
So maybe our incomes are just going to decrease wrt those other nations. Everybody in the US takes a 30% haircut. That would make us competitive again.
There's more than one way to take a 30% haircut -- if our pay is cut, it sucks to pay the mortgage. If our pay is devalued, we can still pay the mortgage. Further, if our pay goes down, we get deflation, and the corresponding reduction in investment (why invest today, when your dollars gain value sitting in the mattress?), whereas with inflation, you have an incentive to put your money to work.
PS and if mortgages get paid in devalued dollars, that (1) provides mortgage relief to everyone, not just the careless home-buyers and (2) burns the bozos who loaned money to the careless homebuyers, even though their books will balance.
Unfortunately, it also somewhat burns the conservative guys who gave us our loan (at an appraised value that we could probably still meet, even today).
Submitted by Drew Robertson (not verified) on Wed Dec. 17, 2008 12:12 PM PST.
Govt. export promotion rarely works except for industries with the best connections to Congress . Better to target "import substitution". Within the bounds of NAFTA and WTO, that's the way to go. More efficient and less controversial. Also mfg. infrastructure. Railroads, locks, dams and such. Not direct but a prerequisite for a more balanced economy.
Sigh.
We kicked the can down the road, took a few steps, and there was the can, only bigger.
"Huh," we said.
So we did it again.
and again.
Thankfully, though, we are capable of learning and this time, when we see the can, we'll do something different, right?
I share the worry about the speed with which fiscal stimulus in the form of spending can be rolled out. But for several reasons I would want to be strongly on the side of spending over taxes.
1) Tax cuts can have the same non-effect as fed rate cuts or cash infusions for banks. If confidence is low the increased money supply doesn't get utilized. So we need the federal government to do the spending based on a macro economic perspective instead of individuals or businesses which will always act on their individual circumstance and fears.
2) The current massive fiscal stimulus is a perfect time to do things we need to do but which have always been blocked by cries of "liberal tax and spend" and deficit hawking. Now's the time to fix infrastructure, rebuild the medical system and most importantly invest in green technology.
4) The worry about replacing one bubble with another, as with .com / housing, isn't a problem if the money is spent well. We invest in green technology, mass transit, biotech, broadband etc with 10's of billions. This should raise productivity permanently and provide a huge long term return on investment. Its not like the .com bubble, its like the internet revolution which has revolutionized the world economy.
5) I'm worried any tax cut package will require too much in cuts for the wealthy, which just isn't a very effective form of stimulus and isn't fair considering the distribution of wealth in this country.
I don't have a problem with a current account deficit if it is used to fund productivity-enhancing investments. Using it to fund consumption, like the U.S. has done for the past 30 years, is the problem.
Hopefully, the stimulus spending will be used wisely (as if), setting the stage for a more balanced expansion.
The problem with pushing exports is the global economy. Everyone is sick right now, there is no big export market.
One question about the national debt: The Fed is now going to buy long-term govt bonds. Is that the same as monetarizing the debt -- will they print cash to buy back the bonds, wiping away the debt at no cost to the taxpayer?
Submitted by Tom Marchioro (not verified) on Wed Dec. 17, 2008 12:56 PM PST.
There's one place where all these stars align: a significant fraction of the stimulus over the next two years should be put into implementing a new energy grid for the lower 47 states (Texas already has its own grid, and in honor of The Decider I think we should leave them out). A new grid would improve energy efficiency in the long run, create lots of jobs -- both green and in good old fashioned things like construction and stringing wire -- and catalyze the shift to all sorts of alernative and renewable energy sources. That in turn would improve the trade deficit by cutting into oil imports. It's perhaps the only "no brainer" option.
And I agree with Kevin's point about the trade deficit bubble, although it's really more of an international indebtedness bubble. The basic premise of the stimulus package is, "We have to spend a lot of money to make up for the fact we've been spending too much money all these years." Cognitive dissonance writ large.
Adding another $1-2 trillion to the national debt is bad enough when interest rates are scraping the bottom, in a few years, once stability has set in, the rates will rise and we'll learn austerity whether we want to or not.
I think we should consider as much as possible of the stimulus as an investment: not necessarily what does us best now, but what has the best long-term effect.
Payroll tax cuts and such won't have much stimulus effect if people are afraid to spend. So trying to kick the economy out of the recession is not going to work in the short term. Better to set up the environment for a recovery so that it can efficiently happen when it does.
That is not to say, of course, that we should shirk from providing help and aid to those hit by the economy: by extending unemployment benefits, for example.
Anything that encourages people to just go out and buy more stuff is a bad idea, even if those people are in another country. The planet just can't afford it. So beyond meeting basic needs (which can be interpreted fairly liberally and still exclude tons of the stuff people tend to buy if you just give them extra money), spending should be targeted towards infrastructure and greening the planet. Encouraging people to buy services rather than manufactured goods is a more planet-friendly way of sharing the wealth, but it's harder to export services. The idea that has been floating about CA of new sales taxes on services seems to be the wrong incentive though.
dr2chase: There's more than one way to take a 30% haircut -- if our pay is cut, it sucks to pay the mortgage. If our pay is devalued, we can still pay the mortgage. ... whereas with inflation
Good points, but I disagree that inflation is what's needed. The key to reducing the trade deficit is the exchange rate (or is that what you meant?). That may have some inflationary side effects, but not nearly as bad as straight inflating your way out of debt.
Of course the dollar has risen recently with everyone rushing to the safety of treasuries. Strikes me a bit like depositing your money with Willy Sutton because the bank was robbed, but unfortunately that's not what's happening.
Tom,
Do you have more details on the improved electrical grid? Specifically does it require running any new lines over ground not already used?
Cause in my experience getting landowners to allow *any* outside change to their land is an uphill climb.
Shoot - locally some rural residents are trying to torpedo a proposed vineyard which would allow wine tasting because it would attract too much traffic to their slice of heaven.
There would be no new public roads mind you, just those low-life winos driving their cars on the road day and night! They don't want that kind of trouble!!
Improving the grid is a good investment. And yes Tripp, there is a lot of old transformers, etc. that really need to be replaced, and certain regions of the country could use more power goes in corridors.
But what I would ask is that when we improve the grid, we also (where ever possible) put the lines below ground. So as to reduct the power failures that always come with hurricanes, ice storms, etc.
In any case, I do know that pretty much every economist in the country agrees, in general, that eventually U.S. consumption has to go down, savings have to go up, and we have to start exporting more than we import.
Catching up with Pat Buchanan, Ross Perot, and others that retained common sense when others were living fantasies.
For those interested, here is Professor Krugman's Nov 17th blog post on this subject:
http://krugman.blogs.nytimes.com/2008/11/17/after-the-stimulus/
It has a nice chart with GDP shares and a comparison between investment, consumption and net exports.
Personally, I'm pinning my hopes on repressing consumption via lower energy imports - a twofer! But there will be other adjustments as well, generally involving a lower dollar.
Kevin,
A couple of thoughts.
One, this stimulus package is a bandaid on a coratid artery cut.
With world GNP being a total of 54 trillion dollars, and the US debt in toto being 56 trillion dollars no amount of stimulus is going to undo that problem
We're in hock up to our eyeballs.
The US, Europe, and China can dump 20 trillion and it still won't undo the massive black hole the American debt has become.
Sooner or later the world bank is going to tell us to piss off and suffer the consequences.
Second thought,
"In any case, I do know that pretty much every economist in the country agrees, in general, that eventually U.S. consumption has to go down, savings have to go up, and we have to start exporting more than we import."
We first have to have something that everyone else wants, and the only thing we have right now is debt and land...oh wait...sorry, the land bit just sold off...so...yeah, what else do you have in mind?
If Republicans are saying spend more, then I say whoa. Let's look at this carefully.
We pump money into the system and the banks just sit on it. What happens when Obama takes office and they open the flood gates of an inflated financial system?
I like the Bernanke idea of bonds which pumps money into the system, but not cash. Let's look at more things like that.
Enough of this bullshit, already. We CAN'T cut consumption -- either in the short run or the long run. Unless you're talking about the rate of consumption.
Consumption has to INCREASE as fast as possible and STAY at high levels to generate investment, production, and jobs.
The consumption RATE (as a fraction of GDP) can decline somewhat and the saving RATE can increase somewhat BUT ONLY AFTER a very large increase in the level of consumption and investment.
For anyone to suggest that we can get back to a strong productive private sector (let alone rising incomes for the middle class) without huge increases in consumption is nuts. That's what the stimulus is all about. We may not even be able to "shape" what kind of consumption occurs.
Moralizing that "we consume too much" misses the point entirely. And worrying about the possible effects of a large stimulus on the trade deficit is useless at this point.
At this point, the Fed's got nothing. If fiscal policy can't turn this around, we're in for a very long, hard haul.
Well, several thoughts, all echoed above.
The 30% haircut (I don't know what the proper size of it is, but I've been saying for years that it will happen). Presumably via a relative devaluation of the dollar.
As Mcdruid, and others have said. Aside from the cost in imports/export balance energy is a gonna a big big problem. Stimulus superspending may be the only chance we get, to get that right. And even then we shouldn't be cavalier about the efficency of the products funded. In general cutting waste is far more effective than buying sexy new green generation. And of course in terms of balance of trade, cutting oil demand is far more important than electricity...
But as Sheerakhan's thought number one, very loose paraphrase: "the black hole is supermassive, and will easily consume all efforts at containment"......
But at least if we buy stuff we will need anyway, we will be better off for it, even though we are headed for the IMF doghouse.
Submitted by Tom Marchioro (not verified) on Wed Dec. 17, 2008 10:46 PM PST.
Tripp,
I can get more specific about updating the grid, but it hardly rises to the level of "being specific." The basics are pretty simple, we need a way to pull electricity from the areas where it will be generated in the future -- meaning the desert southwest for solar and the upper plains for wind -- and deliver it to where its consumed, itself a moving target thanks to things like Google's data centers, which each consume the electricity of a small city.
But beyond that I can only shrug. The standard number thrown around, $1 Trillion, seems amazingly round to me, suggesting it's nothing more than a wild guess.
What I do know, having grown up in Washington State, is that the lines to and from the Grand Coulee Dam and the other power generation stations on the Columbia and Snake rivers had to get built at some point. Similarly for the TVA. No doubt there will be both hurdles and hurt feelings, particularly (as you note) regarding land rights, but if we really want to
A. Break our dependence on foreign oil
B. Improve our balance of trade
C. Begin to seriously confront global warming
D. Lead the world in green technologies
then this is the place to start.
What do we make here, of an equal or higher quality produced for equal or lesser sums of money, that people in other nations want, need and have the ability to pay for? Also, what subset of that list of goods provide the people here making them with a liveable wage, fair benefits and an opportunity to retire not largely dependent on the state for their end years care?
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