Stimulus Plan Stimulates the Economy

[GoodGame]

What's interesting is the projections seemed to have hit the GDP goals but not the employment goals. This is the considerable headwind this administration must contend with.

Does that suggest inflation? Or is the economy issuing new products of higher value (e.g. Androids er. the smart phones) with less needed labor?

 

[Whomp]

Does that suggest inflation? Or is the economy issuing new products of higher value (e.g. Androids er. the smart phones) with less needed labor?

Less labor needed, in my view, however companies are now stretched really thin. There comes a point where you get diminishing returns by loading too much on your best people.

Also, the cratering of the multiplier Integral posted suggests inflation is secondary to deflationary concerns. As Masada said, maybe a liquidity trap instead.

 

[Cutlass]

My memory's hazy but it was something like 1/3 transfers to people, 1/3 direct increases in spending, and 1/3 transfers to the states; all phased in over two years.

@Cutlass: if you accept that this is a 'balance sheet recession' (I don't recall to what extent you do, sorry) then isn't consumers repairing their balance sheets a necessary condition for recovery, and hence stimulative in a weak sense? As in, it won't affect output or spending today (in that you're right) but will boost future expected spending relative to the poor-balance-sheet state?

Yeah, I've largely come to accept that balance sheet recession explains why a near term recovery, the bounce back that follows the typical recession isn't happening. But that doesn't convince me that repairing the balance sheet with tax cuts will have any useful effect.

Consumers owe nearly $2 trillion [credit card and consumer debt]
American consumers owed a grand total of $1.9773 trillion in October 2003, according to the latest statistics on consumer credit from the Federal Reserve. Thats about $18,654 per household, a figure that doesnt include mortgage debt. The number is up more than 41% from the $1.3999 trillion consumers owed in 1998.

http://moneycentral.msn.com/content/savinganddebt/p70581.asp

Total U.S. household debt, including mortgages and credit-card balances, fell 1.7% in 2009 to $13.5 trillion, the Federal Reserve reported Thursday—the first annual drop since records began in 1945. The debt amounts to $43,874 per U.S. resident.

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748703625304575115672827553404.html

So a year managed to trim household debts by 1.7% with tax cut assistance. Total household dept isn't far short of 93% of GDP. How long will it take for tax cuts to carve that down to a manageable number?

People will start spending again when they feel secure in their incomes. And, for the Catch 22, incomes will be secure again when businesses are confident in their consumers.

This is the situation Keynes planned for, had Keynesians kept to the real religion.

But, like the graph I asked you for before, the long term growth trend in the US, recessions and depressions don't tend to take us off the long term trend. That said, why put up with them? The justification for taking more risks was for more growth. Well we didn't get it. So why is the risk justified?

So, the way I see it, what I said elsewhere, I'm pessimistic and think this will drag 5-8 years.

Now, the annual structural deficit is not going to away under those conditions. So the gross accumulated deficit is going to be higher in the long run than it would be to just spend the stimulus needed to end the recession. Have the government employ 10 million people for 5 years.

But target it.

Back in the 90s you frequently people talk about "running government like a business". I never noted that the people who said that either a) had any intention of doing so, or b) knew how to run a business.

Businesses borrow money all the time. But any well run business borrows money to a) cover irregularities in income and outflow, b) invest to lower costs, or c) invest to increase revenues from new products or production capacity (simplified version )

The US government does most of its long term borrowing to cover current consumption of the government and the country.

Spoiler :

But you knew that...

Elect me king, and I'll invest our way out of these doldrums. Government should be spending to cut the costs the economy faces, or improve the economy's productive capacity.

edit:

By Rex Nutting, MarketWatch

WASHINGTON (MarketWatch) -- The net worth of U.S. households fell by $1.3 trillion in the first quarter, a seventh straight decline that has seen household wealth drop by nearly $14 trillion, the Federal Reserve reported Thursday.

Household net worth fell at a 9.9% annual rate in the first three months of the year to $50.4 trillion, the lowest in more than four years. Net worth -- assets minus liabilities -- peaked at $64.4 trillion in the spring of 2007, the Fed said in its quarterly flow of funds report. Read more.

U.S. families have lost 22% of their wealth since the peak. Much of the loss came in the fourth quarter of 2008, when households lost $4.9 trillion.

http://www.marketwatch.com/story/household-wealth-drops-for-7th-straight-quarter-200961112100

That trivial decrease in household debt was accompanied by a vast decrease in household wealth. So the full picture is even worse in that regard.

 

[useless]

I'm no economist, but i dislike this blame on the current POTUS. I don't see people in Britain currently blaming the current government for what Labour had did, economically. (As of yet!)

 

[GoodGame]

I'm no economist, but i dislike this blame on the current POTUS. I don't see people in Britain currently blaming the current government for what Labour had did, economically. (As of yet!)

It's not about blame but about claims of effective economic policy. If one makes a product (e.g. a policy), and sells it to the people, then it's fair game for review.

 

[useless]

No, I understand that, but the quickness to blame a man who didn't actually cause the crisis seems a tad.. irrationale to me.

 

[GoodGame]

No, I understand that, but the quickness to blame a man who didn't actually cause the crisis seems a tad.. irrationale to me.

But at this point its not really about the original roots of the crisis (other than preventing a reoccurence) but the current game state.

 

[Cutlass]

No, I understand that, but the quickness to blame a man who didn't actually cause the crisis seems a tad.. irrationale to me.

welcome to politics, American style. Where all responsibility is assigned by group, not by actions.

But at this point its not really about the original roots of the crisis (other than preventing a reoccurence) but the current game state.

It's not about preventing a reoccurance either. The Republicans would love a reoccurance. They've been fighting to make one a certainty.

 

[useless]

welcome to politics, American style. Where all responsibility is assigned by group, not by actions.

For all it's failings, I shall be grateful for the British style.

 

[GoodGame]

It's not about preventing a reoccurance either. The Republicans would love a reoccurance. They've been fighting to make one a certainty.

Possibly there will always be some political party trying to cash in on inequity/deregulation.
But you're talking partisanship. I'm trying to stay On-topic on the economy and whether or not deficit spending really helped in this case.

I was always taught in school that Economics and Politics are two separate topics.

 

[useless]

Despite them both being linked?

 

[GoodGame]

Despite them both being linked?

But just try to call socialism a form of government and get people jumping on you for being wrong. Regardless there's no reason to color every academic topic with partisanship. In university we don't try such bs.

 

[El_Machinae]

I really "hope" you didn't vote.

I did, but in a different country and for a different government.

So fine, don't connect the dots for me

 

[Cutlass]

Possibly there will always be some political party trying to cash in on inequity/deregulation.
But you're talking partisanship. I'm trying to stay On-topic on the economy and whether or not deficit spending really helped in this case.

I was always taught in school that Economics and Politics are two separate topics.

I, personally, regret the name of the study of economics was ever changed from Political Economy.

But, to try to answer your question objectively: We know why financial meltdowns happen. They happen because the people in the financial services industry who make tons of money do not have a rational analysis of the risks that they are taking. And they do not consider the costs that others will pay for the risks that they take. So we know, with the inevitability of entropy, that financial services people will eventually run risks and take chances that will cause a collapse that everyone will pay for.

And further, we know that we can prevent it. Because we did, from the 1930s until 2008. With the biggest exception being the deregulated S&L industry in the late 80s that cost the US taxpayer a trillion dollars in bailout.

If you choose deregulated finance, you choose periodic financial meltdowns. No ifs, ands, or buts.

And, as I said in my post to Integral, there is no benefit to the economy for going that route. So how can it be justified?

 

[Disgustipated]

No, I understand that, but the quickness to blame a man who didn't actually cause the crisis seems a tad.. irrationale to me.

he didn't cause it, but he signed the Stimulus package that hasn't helped us at all. We are still around the same unemployment as last year with less than 2% GDP.

We just pissed away nearly 1 trillion dollars for nothing.

 

[Quackers]

Stimulus packages just delay the inevitable pain.

 

[GoodGame]

I, personally, regret the name of the study of economics was ever changed from Political Economy.

But, to try to answer your question objectively: We know why financial meltdowns happen. They happen because the people in the financial services industry who make tons of money do not have a rational analysis of the risks that they are taking. And they do not consider the costs that others will pay for the risks that they take. So we know, with the inevitability of entropy, that financial services people will eventually run risks and take chances that will cause a collapse that everyone will pay for.

And further, we know that we can prevent it. Because we did, from the 1930s until 2008. With the biggest exception being the deregulated S&L industry in the late 80s that cost the US taxpayer a trillion dollars in bailout.

If you choose deregulated finance, you choose periodic financial meltdowns. No ifs, ands, or buts.

And, as I said in my post to Integral, there is no benefit to the economy for going that route. So how can it be justified?

I'm not arguing the causes of 2008, and you state it well. I'm still saying that I feel this CBO report hasn't made a successful case that the spending plans did save the economy. I'd like scientific statistic evidence that spending, as the independent variable, did in fact cause the economy, as the dependent variable, to grow.

 

[Integral]

The problem is that virtually everything's endogenous on some level.

It's incredibly hard to just hop off and run the regression (growth) = a + b*(change in Govt spending) + c*controls + error. For one thing, it's hard to ignore that the stimulus was accompanied by aggressive QE by the Fed; disentangling those two effects is a Herculean task. You really can't 'control' for such things in an OLS framework, or even in more complex settings. One approach is to try to find episodes of genuinely exogenous changes in government spending or taxes. Romer's done some of that, if I recall correctly. But you can't say that the rampup in 2009-2010 was exogenous!

About half of macro modeling is econometrics, half calibration. What you're seeing in the CBO report is calibration: they have a model that sorta-kinda looks like the US economy if you drink a little and squint a bit, they fit the various parameters to plausible values, and then run a simulation to see what happens when you ramp up government spending, cut taxes, and transfer some funds from the Federal government to state governments.

@Cutlass: Thanks for the longish reply. I'll get to it soon.

 

[Cutlass]

I'm not arguing the causes of 2008, and you state it well. I'm still saying that I feel this CBO report hasn't made a successful case that the spending plans did save the economy. I'd like scientific statistic evidence that spending, as the independent variable, did in fact cause the economy, as the dependent variable, to grow.

I don't know that I could do that. And I don't know that anyone else could either. And that's because psychology affects the economy as well as more concrete policy. So, not just "what did the stimulus do", but also, "did people change their behaviors because they had some feeling that the government was not going to allow the crisis to deepen"? Would people, in the absence of the stimulus, panicked? And, in doing so, caused the problem to be a whole hell of a lot worse? I don't know that those questions are answerable. I do know that the risk of it just wasn't acceptable. That, and the problems of separating the monetary policy effects from the fiscal policy effects. So,