Summary: The US economy continues to slow, albeit the rate of decay has slowed. But the net damage is severe and a recovery soon is imperative — or more “black swans” will appear. This is the third in a series of posts about the effects of basic automatic stabilizers on the economy during this recession.
(1) Why has the worst recession since the 1930’s had such a mild effect on America?, 14 July 2009
(2) Economists discuss the impact of the stimulus on our recession, 6 October 2009
Conservative websites are abuzz with comments about the failure of the stimulus programs. It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis. Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.
Of course these programs were mis-sold to the public, since our ruling elites (“both” parties) are compulsive liars. Government aid cannot end recessions. It serves only to mitigate the downturn and reduce the inevitable suffering. The heavy lifting among these tools results from unemployment aid, Medicaid, and food stamps — focused on those that have suffered loss of income. See the above 14 July post for details.
As the following graph shows, the impact of this downturn on US families would have been horrific without government assistance programs — esp as we went into this downturn with record low savings and record high debt. The dotted red line shows BLS’s newly revised job loss estimates (corrections to their inexplicably over-optimistic monthly numbers).
An even broader hard number showing the loss of worker’s income is aggregate hours worked (non-farm private non-superviosory workers). That’s down 8.5% since the recession started in December 2007, larger than the almost 6% loss of jobs. The job market might take many years to recover, as desribed in this report:
- “America’s New Post-Recession Employment Arithmetic“, James W. Hughes and Joseph J. Seneca, Advance & Rutgers Report, 1 September 2009 {update}
Job losses are only one metric describing recessions. Duration of the recession and decline in GDP are also important. By almost every metric this recession will be the worst sinc the 1930’s — worse even than the horrific ones in 1973-75 and 1980-82.
- To compare this with past recessions see Wikipedia’s entry on Recessions in the United States.
To compare this downturn with the 1930’s see:
- “A Tale of Two Depressions“, Barry Eichengreen and Kevin H. O’Rourke, VOX, 1 September 2009
- “The Labor Market during the Great Depression and the Current Recession“, Linda Levine, Congressional Research Service, 19 June 2009
Conclusion
Time and debt are the two major factors ignored by current Keynesian theory, and the econometric models built on it.
- They do not consider aggregate debt levels, a key factor causing both the recession and ecomomists’ collective failure to anticipate it.
- The severity of the second leg down (if it happens) will also surprise them, as they ignore the importance of time.
After two years of recession, many households and businesses have drawn down their cash reserves, max’d out their credit, and cut expenses to the bone. If it continues into a third year — perhaps due to holiday sales worse than last year’s — both business and household bankruptcies might rise even more in 2010. Also, look for still more “black swan” events as key parts of the economic machinery break.
We need a recovery soon. Unfortunately we cannot know what lies ahead. We have no close historical parallels to our situation, and have passed beyond the boundaries of conventional economic theory. In this key respect our leaders are in a situation similar to that of the Hoover Administration in 1930. Let’s pray they respond better.
Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the following:
Reference pages about other topics appear on the right side menu bar, including About the FM website page.
Posts about theft pretending to be solutions
- Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
- The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
- A reminder – the TARP program is just theft, 24 November 2008
- Stand by for action – more theft of our money being planned in Washington, 4 February 2009
- Update: yes, the Paulson Plan was just theft, 14 February 2009
- Now is the time for America to get angry, 24 March 2009
- America on its way from superpower to banana republic, 28 March 2009
- Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
- “The Greatest Swindle Ever Sold”, by Andy Kroll in The Nation, 28 May 2009
- More about “Government Sachs” (they own America; we just live here), 31 July 2009
Some posts on the FM website about solutions to the financial crisis:
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- How should we respond to the crisis?, 24 September 2008
- A solution to our financial crisis, 25 September 2008
- The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
- Dr. Bush, stabilize the economy – stat!, 7 October 2008
- The new President will need new solutions for the economic crisis, 9 October 2008
- New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
- A look ahead to the end of this financial crisis, 30 October 2008
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
You should point out that global warming is responsible for most of the problem. If the government would only fight global warming with the same determination and sense of social justice as the Manhattan Project, we would have no recession. We need to pass the carbon tax and cap and trade bills as soon as possible.
The EPA absolutely must go after all the coal mines and coal burning power plants and shut them all down. The same goes for all domestic oil production and shale gas production. Shut it all down. Finally, nuclear power is destroying the country. Shut it down.
Only by pursuing Obama’s policy of clean air and water can Americans ever walk free again, without worrying about having enough to eat.
.
.
Fabius Maximus replies: These attempts to portray President Obama as an extremsists are without foundation, a low form of political smears. Nothing he has attempted is remotely as radical as you imply. While I consider his cap and trade proposal unnecessary, based on the available information, it is hardy the nightmare your suggest. This tosses chaff into the political discourse, making our problems far more difficult to solve.
Just to make sure your readers understand, aggregate debt is public debt plus private debt. Private debt is consumer debt like credit cards, mortgages, car loans, college loans, etc. but also includes corporate paper, securitized mortgage loans residing on bank balance sheets (many successfully sold off to Japanese housewives), and derivatives based on these assets like credit default swaps. Public debt is mainly Treasury debt issued as Treasury bonds of varying duration.
Private debt is being converted directly to public debt at an astonishing rate, with aggregate debt, and aggregate demand, being largely unaffected. Keynes never advised this, in fact I suspect he would be appalled by it. Almost as an afterthought, tiny by comparison, some new money is being injected into the economy per Keynes, but aggregate demand is not being “goosed” that much. The upshot is huge, indeed Herculean effort is being expended to protect bank owners, and other oligarchs from calamity, combined with meager stimulus. When you hear about trillions moving around here and there, it sounds impressive, but these sums are not entering the economy, not by a long shot, they are simply moving around from private balance sheets to public T-Bills to cover very powerful asses.
.
.
Fabius Maximus replies: Exactly my point about the two-faced nature of the stimulus (see these posts). There is the massive bailout of financial institutions, and a far smaller stimulus to the economy. This post refers to the latter. For analysis of the former see Section 7 (“theft pretending to be solutions”) of Financial crisis – what’s happening? how will this end?
Huh? Black swan events? I must have missed something on your blog, what are those exactly? Current statistics are worse that the initial estimates of what would happen without the stimulus. See here and here.
What’s worse is that over half of this nations youth are unemployed. That number is higher than the number of youth unemployed during the Great Depression. I can only wait and see if crime and “fringe ideologies” will make a greater comeback that before. Typically most of such things come about from frustrated youth.
I wouldn’t say it’s without foundation. More people may have died from coal plant exhaust, or coal ash dam collapses then from nuclear power. But he won’t allow new (and much safer reactors) to be built to replace the current ones, allowing the number of nuclear plants across the country to decline. France has proven the successes of it, exporting electricity to it’s renewable powered neighbors.
.
.
Fabius Maximus replies: For a description of black swan events and their relationship to this downturn, see Causes of the financial crisis (no, its not the usual list), 29 October 2008.
(2) “Current statistics are worse that the initial estimates”
This means nothing. Reliable economic forecasting is beyond the current state of the art. Economists did not see this recession coming, as they (e.g., consensus forecasts) have never successfullly predicted a recession.
(3) “That number is higher than the number of youth unemployed during the Great Depression”
First, the government began collecting employment data only during the 1940’s. Anything before that are guesses, except for the 1930 and 1940 census data. For more about this see “Calculating the Unemployment Rate“, The Liscio Report, 23 Janaury 2009 (They’re among the best in this area). Second, patterns of employment have changed greatly since then. Most male teenagers had paying jobs of necessity; far fewer do today. See below, from the CRS report cited in the post.
Table 1. Employment by Gender and Age, as Percent of Population
……………………1930…..1940
Total……………..50.5%….44.8%
Men……………….77.6%….67.5%
14-19 years……..36.9%….23.7%
20-24 years……..82.5%….69.6%
25-44 years……..91.2%….83.6%
45-64 years……..86.2%….76.7%
65 years+………..51.5%….38.0%
Women…………..22.6%….22.2%
14-19 years……. 20.7%….13.1%
20-24 years……..40.1%….38.4%
25-44 years……..23.8%….27.6%
45-64 years……..17.4%….17.6%
65 years+………..07.2%….05.6%
(4) “I wouldn’t say it’s without foundation.”
Then provide actual foundation, not wild statements. Just because you love nukes does not mean that they are superior, for example, to some combination of natural gas and alternative energy generators. It’s a subject for study, not wild statements.
“That number is higher than the number of youth unemployed during the Great Depression”
Unemployed how? Were farm kids counted as “employed”? Many youths were working on the farm back then. We live in a different world now.
.
.
Fabius Maximus replies: Based on the 1930 census, the US had 48.6 million workers 14+ of age, of whom 10.1 million worked on the farm. For more about this see “The Labor Market during the Great Depression and the Current Recession“, Linda Levine, Congressional Research Service, 19 June 2009.
John Williams over at Shadow Government Statistics notes that the actual rate of unemployment would stand at over 21% if we used the same calculation methods used prior to the accounting scams of the previous maladministration.
.
.
Fabius Maximus replies: It’s not my field. However, I don’t consider Williams a reliable source on such things. In my experience he exagerates and distorts these issues. The folks writing The Liscio Report, among the best at analysis of government stats, say
Pingback: Instapundit » Blog Archive » FABIUS MAXIMUS: Why has the worst recession since the 1930’s had so little impact on the economy?…
FM: Unfortunately we cannot know what lies ahead.
John Mauldin have a somewhat different view on this: Another Finger of Instability Excerpt:
.
.
Fabius Maximus replies: In what sense does this disagree with what I said. He says that various things might happen at some unstated time in the future, unless other things happen. Who can disagree with that?
“Conservative websites are abuzz with comments about the failure of the stimulus programs. It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis. Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.”
Talk about begging the question! Those conservatives believe that the “stimulus” has had negative effects, and that primarily due to insecurity about what the government will do next (cap&trade, health, taxes), the Obama Administration has overall had negative effects, on economic growth. But rather than address such claims, you just make the opposite claim. It isn’t a gimme that Keynesian stimulus will increase growth, especially if the government was already running large deficits.
.
.
Fabius Maximus replies: Did you read the post?
(1) “the Obama Administration has overall had negative effects”
The wider questions you mention (cap&trade, health care, taxes) are beyond the scope of this post, so they are not addressed. This discusses one specific issue.
(1) “isn’t a gimme that Keynesian stimulus will increase growth”
I guess you didn’t read the post, which explciitly says the exact opposite: “Government aid cannot end recessions. It serves only to mitigate the downturn and reduce the inevitable suffering.”
“This means nothing. Reliable economic forecasting is beyond the current state of the art. Economists did not see this recession coming, as they (e.g., consensus forecasts) have never successfullly predicted a recession.”
Wow. With this one sentence response to a comment, you destroyed your entire post.
.
.
Fabius Maximus replies: Please explain. This makes no sense.
Praying our leaders will do better? That’s the best you can come up with? Obama and his administration are incompetent. The best we can hope for is that they stop doing things. They are making the economic crisis worse, not better. The stimulus was a total failure. Nothing has been accomplished except that the rich wall street people have been bailed out. The people that caused the mess are still in business getting bonuses from the taxpayer. Jim Rogers was right. The Goldman Sach’s of the world should have been allowed to fail. Now the taxpayer has the burden of paying for Wall street’s failure.
The bottom line is that you can’t spend your way out of a credit crisis. You cannot spend you way to prosperity. The goverment and Fed is destroying the dollar and creating another bubble. This will be the last bubble. Listen to Marc Faber’s advice when he says to buy a farm and a gun. Now he says get a machine gun: “Leading economist pessimistic on global financial recovery“, Australian Broadcasting Company, 26 August 2009.
.
.
Fabius Maximus replies: So the stimulus was a total failure? So you think that this post is incorrect, that the expanded unemployment benefits (e.g., longer and larger unemployment benefits — cash, food stamps, medicaid) did not “mitigate suffering and limit the downturn.” That’s a remarkable claim. Why not go down to your local claims office and debate it with the people there? You’d hear some interesting stories.
(2) “that the rich wall street people have been bailed out”
Yep. See the posts listed at the end, under “Theft pretending to be solutions.”
(3) “Now he says get a machine gun”
No. Faber said that 5 months ago, not “now” (the headline is wrong). Note his reply when the narrator mentions that is to discuss stock market investing — hardly a reasonable reply if he really thought society was going to crash.
(4) “Fed is destroying the dollar and creating another bubble.”
Perhaps some asset prices are too high (perhaps not). By itself that’s not important. Large-scale malinvestment from too-high asset prices (e.g., building the 18.6 million now-vacant houses) is the bad effect of bubbles; there are few or no signs of that now.
(5) “Leading economist pessimistic on global financial recovery”
Yep. Me, too.
FM NOTE: There is nothing here remotely relevant to anything in this post. Please do not post speeches here about macroeconomics or politics. Comments much be relevant to the post, or they will be deleted. This website has many long discussions in comments, but they are tightly focused on a specific topic.
“Conservative websites are abuzz with comments about the failure of the stimulus programs. It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis.”
Let’s see. You are calling other peoples analysis “dingbat” and yet require your comments to be civil.
It’s actually your analysis which is dingbat, because you don’t comprehend what has happened even after the fact. I knew this kind of train wreck was on it’s way back during Clinton. It was obvious we were already dealing with a sham economy fueled by bailout, and below market interest rates. Greenspan’s continuance of such policies in response to the 2002 downturn were dingbat, and using the same methods now are dingbat.
Austrian economists have been bitching about Greenspan (and Bush) all during the Bush administration too, but mostly Greenspan.
Using aggregate Keynesian economic metrics to guide the economy is like a moth using the flame of a candle as a distant stationary beacon. The problem is that it isn’t distant and therefore will not remain in the same position on the horizon as the moth moves. Therefore it will spiral in. Moth’s navigational biology was evolved to use the moon and therefore has built in assumptions that don’t work with local light sources.
Many of the dingbat solutions coming out of Washington, low interest rates, bailouts, government takeovers, tariffs, cash for clunkers, propping up government sponsored entities, and even FDIC insurance, are based on totally improper assumptions about how the economy works. Yes, certain aggregates will look just fine during the whole process.
For example, since we are guiding this moth of an economy by aggregate price levels, the government will be printing lots of money now to try to keep those price levels up. Well it shouldn’t be doing this, just as it shouldn’t have been basing it’s policies on aggregates during it’s past twenty years in the first place.
Us dingbats who are complaining about Obama are just as mad at Republican politicians. The only difference between the two is that Obama has not only embraced stupid policies that both parties were behind but has thrown in new, far worse ones. Cap and trade is a stupid idea, based on very speculative climate science, and absolutely wrong economics.
Aggregate prices cannot be used to guide and economy. It is the individual price signals on individual goods that is important. That is how we coordinate our plans. Interest rates are a price (actually many prices for the different regions, and different sectors.) Putting a price ceiling on interest rates is the height of stupidity.
It’s many of the very features of our economy that are supposedly helping to make this downturn be less harsh that are the very causes of the downturn, like FDIC insurance. Unemployment insurance will tend to increase unemployment during a deflationary period. It’s a positive feedback loop. Try making unemployment insurance permanent and see what happens. Just try making it so that it never runs out.
Read what Henry Hazlitt had to say about FDIC and other schemes 60 years ago.
FM note: I will start deleting comments that don’t relate to this post. This is not the place to post speeches about your beliefs concerning economics and politics, esp (like this and the ones above), citing no evidence.
sadly, the stimulus has made things worse. as did C4C. as did the first bailouts. as has the “monetarization” of the debt.
What got us here was the bursting of the bubbles the Fed created. What was needed was a liquidation. It would have been painful but short, as it was in 20-21. But instead, all the intervention has prolonged and deepened the recession.
We will not begin to recover until business investment picks up. saying “we need a recovery” is like saying “we need to fly”. go ahead, flap your arms all you want, not gonna happen. investment has plummeted. In fact, why the recession is so severe has to do with something that few economists seemingly have written about.
Take a look at the data, Capital Consumption vs. Investment. For the first time in 40 years, we’ve consumed more capital than we’ve created. Even in the previous few recessions, we’ve always invested more than we depleted. Not this time, and this time it’s huge. We are now down to 1999 levels of capital stock. We are absolutely poorer this recession. Hasn’t happened in a long, long time. And that’s why we haven’t recovered, won’t for a long time, and when we do, it’ll be anemic. At best.
Nothing the gov’t does is going to help, it’ll only slow the recovery.
.
.
Fabius Maximus replies: Please read the post. We do need a recovery. That does not imply that it will happen, just that the alternative will be unpleasant. As for the government aid described here (cash, food stamps, medicaid to the unemployed), I suggest you find some unemployed families and discuss it with them.
Only the foolish believers repeat mistakes over and over. JFK had the right idea – cut taxes “targeted” at those that create jobs and add to consumer spending and private capital.Worked for him. Mostly worked whenever it’s been tried. Doh! All this talk about how good the stimulus is is simply dreaming.
Sadly, it appears we will drift back into the dream of proven failures with unemployment persisting, as it did during the depression, due to many of the same approaches the government is using today.
Everything indicates, with the current policies of the White House, that we will stablize at 10+% unemployment. What Obama and his party will need is a really good world war. Unfortunately, for Knian-folks, there doesn’t appear to be one on the horizon. Iran is just not big enough (yet).
The stimulus was, and is, an obvious political ploy to pay off Congressional folks and their supporters. The very fact that most of it is timed for an election year shows anyone defending it to be politically partisan (possibly pollitical hacks) at the worst and naive at the best.
.
.
Fabius Maximus replies: Why not go to the unemployment claims office and preach your “tickle down theory.” No aid to those folks, just tax cuts to the employed! Report back on their reaction.
As for your confident forecasts, were your past forecasts more accurate than those of mainstream economists? If so, you must be rich — from your consulting and investing!
“We have no close historical parallels to our situation, and have passed beyond the boundaries of conventional economic theory. In this key respect our leaders are in a situation similar to that of the Hoover Administration in 1930.”
Total absolute ahistorical nonsense. Hoover had the example of the depression of 1921. The start of the 1921 downturn was more severe than the 1929 crash by many metrics. The governments response was to cut spending, with none of the other interventions, and it only lasted a 18 months.
Hoovers, the “Great Engineer” decided that a free market response was not appropriate this time around. He in fact planned for a massive and immediate response, which he took. That response included, bailouts, government money pumping, increased government spending, public works projects, etc. FDR ran on the platform that Hoover was spending like a drunk sailor and that he would reign it in. Once FDR got into office he did a 360, and ramped up Hoovers policies to even greater heights. Hoover and FDR prolonged what should have lasted less than 18 months to ten years.
Bush=Hoover, Obama=FDR, get ready for a very very very long depression.
One thing to remember is that aggregate numbers do not give as false a signal in a free market system than in a planned economy. Planned economies include a lot of government spending which always shows as a positive on things like GDP now matter how wasteful or destructive that spending is. The government could tear down the Rocky Mountains to fill in the Grand Canyon and that would show as a boost to GDP.
What’s happening right now (and was happening during Bush too) is that the government is diverting economic activity to unproductive plans via it’s interventionist policies, and direct spending. This mess was caused by the government, is being continued by the government, and will lead to a further contraction in our true prosperity.
You claim we do not have any precedent but we do. We have the example of exactly how bad this kind of government intervention can cause things to get from the examples of the Great Depression, John Law, the Roman Empire, several failed central banks here in the US. We also non that the problem is due to fractional reserve banking and fiat currencies, both of which should be outlawed as the fraud they are, not propped up by the government.
.
.
Fabius Maximus replies: Yes, there were downturns before. But the specifics are different, as is both the global and national economic structure. Lots of things have changed since 1921 or 1930.
Important note!
The post says the following about government programs during a downturn:
Posts going off on other tangets, ignoring this subject, will be deleted. The site’s comment policy requires that comments be relevant to the post.
If you have a rebuttal, please make it to something actually in the post — don’t make something up and reply to that.
FM: “These attempts to portray President Obama as an extremsists are without foundation, a low form of political smears. Nothing he has attempted is remotely as radical as you imply.”
Obama is not an extremist? His stimulus, bailouts, healthcare, climate and energy solutions are not extreme? Really? Wow, just your typical moderate leader and solutions that we’ve seen sooo many times in the past.
As a frame of reference for your readers, why don’t you list the current U.S. political leaders who you think are more “extreme” than Obama? To make this simple for your readers, keep your list to those current American political leaders who are more to the left (more “extreme”) than Obama (no fair listing Maxine Waters, she’s not a leader).
It’s not a “political smear” when it’s a fact. In the context of American political leaders, he’s on the extreme left fringe.
.
.
Fabius Maximus replies: This makes no sense to me.
* The Obama stimulus and bailout policies are broadly similar to those of Bush.
* Obama’s foreign policy is almost identical to Bush’s (see this Stratfor analysis).
* His cap/trade and health care proposals may be wrong, but are mainline proposals of the Democratic Party, which is not an extemist group and has broad support.
* Does Obama have any energy “solutions”?
FM: “We have no close historical parallels to our situation, and have passed beyond the boundaries of conventional economic theory.”
I totally agree, and reiterate that when entering uncharted waters the numbers, and formulas/theories based upon them, lose their predictive power. It’s time to fall back on what little we actually know to be true (with attributions omitted for brevity).
1. People will tend to their individual/family interests first. Actions taken thus may not be “rational” when viewed in a macro sense.
2. In the long run, we are all dead.
3. Debts that cannot be repaid will not be repaid – whether individual, corporate, or sovereign.
4. Investors and businessmen avoid risk more than they seek gain.
Economically we have entered Hobbes’ state of nature – nasty, poor, brutish and short. Why? The social contract has been broken by the governing elites (yes, both parties and other “elites”). In trade for a pittance of social safety net transfers our ability to invest and create has been curtailed. Individuals and investors are making personally rational decisions that hurt in the long-run, macro sense. Trust is gone.
Between deflation or inflation leading to social unrest I believe inflation will win out. It allows the political elites to scapegoat “unknown forces” and, in their calculus, leads to THIER survival. Just like Weimar’s Bruening/et.al. believed.
Interesting times, indeed.
.
.
Fabius Maximsus replies: I agree. For more on this see the posts listed under America – how can we reform it? More specifically, we’ve entered the era of the State’s decline, esp its legitimacy. I recommend reading Martin van Creveld’s “Rise and Decline of the State.”
FM: “Conservative websites are abuzz with comments about the failure of the stimulus programs. It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis.”
Calling someone a dingbat or a partisan… lets find the words. Ah yes, in #1, here we are: These attempts to portray critics as an dingbat partisans are without foundation, a low form of political smears.
.
.
Fabius Maximus replies: Please read more carefully. To call something a “dingbat analysis” does not mean the writer is a dingbat. Everybody who writes a lot, writes foolish things sometimes. Each of us have some beliefs that cannot withstand scrutiny. It’s the human condition.
(2) “are without foundation”
Did you notice the thousand words following that statement, providing a foundation for it?
Conservative websites are abuzz with comments about the failure of the stimulus programs. It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis.
I thought this comment on conservatives was pretty broad. I was addressing it.
To address the post as a whole. What is happening is we are kicking the can down the road. You could have said the same about the incredible bubble blown during the Clinton administration. Why was the recession of 2002 so mild. They you could write a glowing analysis of the Bush bubble, another sham economy, which added to the Clinton mess, and resulted in this mess.
The reason we don’t see soup kitchens (which you don’t mention explicitly) is because they are now hidden. We give people money directly. They are still there, the handouts, and are evidenced by an increase in national debt. Which kicks the problem down the road, without restricting people to necessities like food. Also unlike FDR we are not trying to prop up farm prices by slaughtering pigs and burying them in the fields, and destroying other crops. There is plenty of existing history to base our judgments as to what is happening upon. That if you interpret events with proper theory and not nonsense, like Keynesianism, or Monetarism.
The reason things seem so mild is for the same reasons that the 2002 recession seemed so mild. We will pay, and at that point, again everyone will fail to understand and will blame it on something else. I predict the claim made in the future for the failures of these policies will be that the government did not do enough.
.
.
Fabius Maximus replies: I don’t see what you are attempting to say. The decline in aggregate demand and assorted follow-on effects (bankruptcies, unemployment, etc) has been mitigated by government spending to help the unemployed. There is a vast body of evidence and research supporting this statement. Your comment seems to disagree with that, although its unclear why.
FM: “Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.”
I think the issue is that while the programs may have mitigated the suffering, as you call it, they have in fact also dug more of hole in the process, although the floor on which we stand has not fallen out from under us completely. When the floor does eventually give way, the drop will be that much farther, and thus more painful when we hit bottom, if not lethal.
So, perhaps the people you refer to as having dingbat analysis are looking at the bigger picture, at the long-term effects of this Stimulus/Bail-out strategy of Bush’s and Obama’s, the prolifrigate spending mania of Congress, and come the conclusion we’ve only delayed the inevitable at the cost of making it worse. They view it as a failure because it has not addressed the larger issues and threat, but only masked the damage which is actually being made worse.
Yes, pouring money out may have cushioned the crash landing for now, just as a household maxing out its credit cards and taking out second and third mortgages can coast for a while, but what comes next? Spending trillions more dollars in poorly structured Stimulus seems a recipe for disaster, does it not? Especially when we are printing money to cover that spending with nothing really backing it up.
If the economy fails to recover, or does so very slowly, even while the money that people DO have left becomes worth less and less with all those trillions of copies having been printed, this brief respite will be soon forgotten. I guess I don’t understand the idea that delaying the effects of bad policy while continuing the same bad policies (or pursuing worse one) can be counted as something other than failure.
.
.
Fabius Maximus replies: Please do not make stuff up and reply to it. This post does not discuss the Bush-Obama bailout policies. See links at the end for posts about that. This discusses a narrow set of policies, which have a known effect — documented by dozens of studies over many decades. It’s sad to read the comments on this thread (and others like it). I’ve read that economics is the most common undergraduate major; no signs of it in these comments.
So, your argument is that “it’s a dingbat kind of analysis, playing partisan politics during such a severe crisis” to criticize the stimulus because it has failed to meet the stated purpose of saving and creating jobs?
Part of the stimulus package may have had the effect of lessening the impact of the recession on personal finances in the short term by replacing jobs with direct payments from the government to citizens. That’s an interesting point, even if it sounds like an attempt to move the goalposts. However, why would you use it to attack perfectly valid criticism that the stimulus bill has failed to save & create the jobs that it was supposed to? Frankly, it makes you sound like the one with an axe to grind.
.
.
Fabius Maximus replies: Because — as the comments on this and previous posts show — the vital role of these programs (widely accepted since the 1930’s) is not understood by so many people.
“perfectly valid criticism that the stimulus bill has failed to save & create the jobs that it was supposed to”
Please read the first sentence of the 2nd paragraph: “Of course these programs were mis-sold to the public, since our ruling elites (”both” parties) are compulsive liars. Government aid cannot end recessions.”
Every point made by Greg Lanford in comment # 1 is valid. The fact that this slow moving horror is clad in attractive bloomers does not make it any less a horror.
FM: “So the stimulus was a total failure? So you think that this post is incorrect, that the expanded unemployment benefits (e.g., longer and larger unemployment benefits — cash, food stamps, medicaid) did not “mitigate suffering and limit the downturn.””
Likely and likely. What is certain however is that referring to the analysis of others as “dingbat” without then proceeding to do more than simply assert the correctness of your own view is weak and unpersuasive. When you mishandle economic theory, as for instance in your reply @9 (the efficient market hypothesis, which I have seen referred to as one of the best-tested theories in all of social science, says it is impossible to forecast recessions), your credibility is suspect.
Then, when you go on to conclude the quote above by citing the extension of unemployment benefits as having worked and therefor innoculating the Stimulus (and your post) from criticism, you instead invite criticism. Extended benefits hardly reflect the scope of the Stimulus Plan.
.
.
Fabius Maximus replies: First, that consesus economic forecasts have not successfully forecast recessions is a fact. Second, the efficient market hypothesis does not say it is impossible to predict recessions. It says (broadly speaking) your cannot outperform the market by investing based on consensus economic forecasts. That is, the market is informationally efficient.
{snip – violation of comment policy}
We were told that the massive pork fest which showered money on liberal special interests was a stimulus despite the fact that the vast majority of the cash won’t be spent for a year or two — when the economy has recovered. Given how little of the money has been spent, there appears to be little support for your claim that things would currently be worse without the stimulus. The massive debt involved, however, did have a very serious negative impact on the expectations of employers, especially small businesses. It is not difficult to make the argument that the bill did more harm than good.
And I don’t see how you can separate the bill from all the other actions taken or proposed by Obama. The takeover of auto companies, the deeper involvement in the financial industry, the blatant abuse of bondholders to favor unions, the explicit threat of tax increases, and the rush to enact cap and trade and healthcare takeovers are all part and parcel of the economic agenda of the Obama administration. Expectations of the future are a critical part of economic behavior. Rational economic actors do not react to a single bill. They react to the entire economic agenda being in put in place by the govt.
This is especially true because of claims being made by the Democrats. The cap and trade bill which passed the House and still hangs over the country was very explicitly pitched as a “jobs” bill. Now health care overhaul is being pitched as a jobs creator. Both claims are ridiculous and rational employers can look at the massive impact such bills will have on the economy, if passed, and react in fear.
The stimulus, by itself, was a negative for the economy. Viewed as part of an overall political agenda (which is how businesses and consumers view it), it is an even bigger disaster for the economy.
.
.
Fabius Maximus replies: The stimulus spending has hit a rate of aprox $100billion (estimates vary), which it will maintain through 2010. The spending todate has been mostly on tax cuts and social services (unemployment, aid to States to maintain social services).
(2) “The massive debt involved did have a very serious negative impact on the expectations of employers, especially small businesses”
I have seen no evidence supporting this theory. It’s not been true in the past, as the US debt has rocketed since 1982.
(3) “I don’t see how you can separate the bill from all the other actions taken or proposed by Obama.”
It’s easy. A comprehensive analysis would be 10,000+ words and few of you would read it. It’s obvious that many of the folks commenting here did not read even this brief post of one thousand words.
In NH they reported that 781 of 786 jobs created by the stimulus funds went to public sector jobs meaning by definition they aren’t self sustaining. I would think many people would not consider that success regardless of ideology.
.
.
Fabius Maximus replies: Why does this not serve to “mitigate the downturn and reduce the inevitable suffering”? I suspect it is a success to the families involved, and the businesses which rely on their spending. This is first aid (as explained at length in previous posts, and basic economics texts), which is by definition non “self-sustaining.” Which is why the 2nd paragraph says “Government aid cannot end recessions.”
FM: “This means nothing. Reliable economic forecasting is beyond the current state of the art. Economists did not see this recession coming, as they (e.g., consensus forecasts) have never successfullly predicted a recession.”
.
Wow. With this one sentence response to a comment, you destroyed your entire post.
.
FM: “Please explain. This makes no sense.”
“”
If reliable economic forecasting is beyond the current state of the art, then there is no way to either predict future economic activity, or compare past economic activity to alternate choices. Your whole post is a discussion of how the government stimulus did X (saved the economy), even if it didn’t do Y (fulfill the predictions of the Obama administration). As you so eloquently put it, both alternatives are impossible to know (the current state of the art…). So, for instance, your statement (“Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.”), is, by your own statement later, impossible to know.
So, we know the economy did what it did with the stimulas that was passed. We have no way of knowing what would have happened without the stimulus, or with a stimulus of a different size, or with an additional stimulus, or what will happen in the future-per your own words (“Reliable economic forecasting is beyond the current state of the art”).
Perhaps you meant something different (maybe you meant “Reliable economic forecasting BY OTHER PEOPLE-BUT NOT BY ME, is beyond the current state of the art”). But I doubt it.
.
.
Fabius Maximus replies: Forecasting the future is far more difficult than analysis of the past. That the former is impossible does not mean the latter is impossible.
(2) “saved the economy”
I never said this. I said it “serves only to mitigate the downturn and reduce the inevitable suffering” — which is quite different.
FM: “Because — as the comments on this and previous posts show — the vital role of these programs (widely accepted since the 1930’s) is not understood by so many people.”
“Please read the first sentence of the 2nd paragraph: “Of course these programs were mis-sold to the public, since our ruling elites (”both” parties) are compulsive liars. Government aid cannot end recessions.””
You don’t seem to grasp that this does not invalidate criticism of the bill on its own merits. It doesn’t matter what you believe was the real purpose of the bill, or that you think it was “mis-sold” to the public. People who criticize a bill passed to create jobs on the basis that it did not actually create any jobs are absolutely correct to do so, and are not “playing partisan politics.”
.
.
Fabius Maximus replies: That’s a powerful and valid point! Still, I don’t see why the exaggerated claims for legislation can be used to discredit its benefits. I suspect almost every bill passed by Congress had exaggerated claims for its effects — and far too low forecasts of its costs.
“why has the worst recession since the 1930’s had so little impact on the economy?”
1) the media is fervently pitching recovery and rallying behind gov’t programs, which dims social unrest
2) food stamps and extended U/E benefits reduce the pain
3) the stock market has rallied (in some quarters, it is believed that this has been accomplished with bailout money), which is gives hope to us masses
4) it’s still early. wait and see. there are a lot more problems coming down the pike–commercial real estate, alt-A and option ARM loan delinquencies, potentially trade war, shooting war(s) and lots more.
What you are describing as unexpectedly low impact is being described elsewhere as “dead man walking”.
.
.
Fabius Maximus replies: I agree with your list of the causes, and that (as I said in this post) another leg down in the recession is possible. IMO, even likely.
FM: “Please do not make stuff up and reply to it. This post does not discuss the Bush-Obama bailout policies. See links at the end for posts about that. This discusses a narrow set of policies, which have a known effect — documented by dozens of studies over many decades. It’s sad to read the comments on this thread (and others like it). I’ve read that economics is the most common undergraduate major; no signs of it in these comments.”
You are, beyond a doubt, one of the most obnoxious people I have encountered on the internet, due in large part your faux civility masking that sneering core. I don’t bother reading you anymore, and stopped commenting as well, and only came here because of link from Instapundit, who usually manages to disagree with dissenters without being insulting. I thought maybe you might have mellowed.
As part of your usual pattern, however, I notice you tend to get insulting and nasty when asked to address potential holes in your arguments and assertions.
FINE. You did not mention bail-outs. Fair enough. I CAN admit when perhaps I am in error.
My basic point still stands, that being that the stimulous spending was merely a placeholder, a sop, and a poorly placed one by your own admission, that is only delaying while exacerbating the larger problem. It being such, considering it a failure MIGHT not be a “dingbat” idea. Something along the lines of Pyrrhic victory; seems like you did well until you count the COST?”
If you don’t want to address that, perhaps you can elaborate on what you hope to accomplish with the website in trying to convince people of what you believe if you modus operandi is to insult and dismiss any questioners, rather than refute them. Or are you only interested in a bunch of lackeys here, who will all bow down and tell you how very wise you are?
In any event, good luck with whatever it is you think you are accomplishing.
.
.
Fabius Maximus replies: It would be nice when making such strong assertions to provide some evidence. Like to this…
(1) “that being that the stimulous spending was merely a placeholder, a sop, and a poorly placed one by your own admission, that is only delaying while exacerbating the larger problem”
Bold words, if somewhat vague. Do you have any evidence that the stimulus is “exacerbating the larger problem”?
(2) “insult and dismiss any questioners, rather than refute them”
Did you ask a question? As to your broader point, this site features long discussions in comments, with vast amounts of evidence fielded on both sides. That’s because the discussions are focused, avoiding debates about quasi-religous economic dogma (common to all sides in these debates). If you are not interested in debating the subject of this post, fine. But I’m not obligated to discuss or refute anything you care to mention.
(3) “from Instapundit, who usually manages to disagree with dissenters without being insulting”
Where does Reynolds reply to comments? I’d like to see that, as I’m certain he’s far better at it than I. However the Instapundit site does not take comments, and he seldom responds to “dissenters.”
(4) “I CAN admit when perhaps I am in error”
It’s good for the soul! This site is littered with my corrections and apologies. It’s inevitable on a website discussing things on the edge of the known.
You are again wrong @23, FM. For example, from John Cochrane, PhD, finance, Booth School, U Chi: “It’s fun to say we didn’t see the crisis coming, but the central prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going — neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics.” –fisking Krugman in yesterday’s NY Post.
If, as you say, you cannot outperform a market, it follows that you cannot then predict it, for, if you could predict it…
.
.
Fabius Maximus replies: We are talking about predicting a recession (an economic event), not market prices (like those of the US stocks). These are very different things, as I explained above. Even if we had the tools to do the former, we probably could not do the latter. For example, US stock prices have a low short-term correlation with next-period GDP.
Pingback: Daily Pundit » Stress Factor
The discussion seems to leave out a very important aspect of the current situation – the role of small business in job creation. Simply put, it is critical. Yet the Administration’s policies seem perfectly tailored to scaring the bejeezus out of small business owners, ensuring that they will not hire. Cap and trade – increased energy costs and more imports since nuclear power here is not going to expand (contrast with China!), and we will not develop our offshore resources (contrast with Brazil!), meanwhile following the chimera of “green energy jobs” (if the idea was viable it would take off on its own). Healthcare “reform” – no real action to slow the growth of costs, just additional mandates and costs to be passed on and greater scope for political meddling. Labor “reform” – like getting rid of secret ballots an making it easier for a few union thugs to show up, unionize your business and demand higher wages and benefits. Huge deficits beyond anything seen since WW2 leading to fears of rampant inflation. Taxes, taxes, taxes – ’nuff said.
So is it any surprise that small business owners are not expanding payrolls? That, it turn, affects consumer spending – and creates more pressure for spendulus-type bills, which, in addition to the income supports you mention, have lots of porkulus in them thus removing even more money from productive investment and diverting it to unproductive investment. Anyone care to guess the economic return from Murtha’s airport? How about that great investment in Government Motors that was a shameless payoff to the UAW? And with more of that kind of spending comes an even greater reticence by small business to risk anything by hiring. No, better to cut payrolls, have everybody work harder, and prepare for a rainy day. Or a deluge.
So my take is that the Obama Administration has made things WORSE than they would have been. This is confirmed by Biden telling us that the stimulus is working as planned. Anything he says is usually off by pi radians.
.
.
Fabius Maximus replies: Well stated and reasoned! You might be right. And this might be a feature, not a bug. Federal policy has been to encourage cartelization of the economy since the New Deal. Small businesses feature in a Jeffersonian State, with economically independent citizens. For a century or more generations America has gone down a different path, more Hamiltonian in nature. A oligarchial state with economically dependent citizens — employees, not owners.
You write “Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.”
You also write in your comments “Reliable economic forecasting is beyond the current state of the art.” But your posting seem to say that you can step backwards and forecast what would have happened had something not happened. Isn’t just as complicated as straight forecasting? How do you know? Do you have an alternative universe machine? If so could you model what is going to happen in the next year if I don’t read your blog anymore?
.
.
Fabius Maximus replies: Economists believe that can analyze past events and draw useful conclusions. If you disagreee, fine. I recommend going to a website focused on economics and debating it there.
You continue to be wrong @31, made more egregious by your gratuitous swipe at your commenters for not knowing their economics theory. The efficient market hypothesis pertains to financial markets of all types, including, as one example, stocks, but also mortgage, jobs, capital… If you could predict a recession (a prolonged contraction in markets), you could predict markets, a feat you seem to agree is not being accomplished (apart from the obvious that with predictions all over the map, a few are bound to be proved “right” after the fact).
.
.
Fabius Maximus replies: You don’t say why I am wrong in comment #11, so I cannot reply.
“The efficient market hypothesis pertains to financial markets of all types, including, as one example, stocks, but also mortgage, jobs, capital”
No it does not. First, not all financial markets are informationally efficient. There are necessary conditions, which many markets do not meet. Second, many (most?) non-financial markets (e.g., jobs) are not informationally efficient.
Also, there is not one “efficient market hypothesis”. There are forms or levels. One schema for describing these is as follows, stated in simple terms about systems for forecasting:
* the weak form — past prices do not work (i.e., technical analysis does not work),
* the medium form — publically available information does not work (i.e., fundamental analysis does not work),
* the strong form — nothing works (i.e, insider information does not work).
Many investing professionals pay for and rely on technical analysis, so there is some basis for questioning even the weak form. Many economists and some financial professionals agree with the medium form. Only true believers like the strong form. Anyway, this is off-topic. Please go to Wikipedia or an economics website to discuss this further.
Update: Also, the events of the past year have raised more doubts about the efficient market hypothesis. For one example, see “Capital market theory after the efficient market hypothesis“, Dimitri Vayanos and Paul Woolley (both London School of Economics), Economist’s View, 5 October 2009.
The thing that makes FM a stand out IMO is his observation that the problem is AGGREGATE debt. In the Great Depression, 1929 saw aggregate debt at a little over 2.5 times GDP. By the end of WWII aggregate debt was half of GDP and the depression was over. Now, we are at four times GDP. Economists don’t watch aggregate debt, but they damn well should.
If aggregate debt is the real problem, then unwinding same is the solution. N. N. Taleb advises aggressive conversion of private debt to equity. This will hurt our banking class and so is resisted. We are aggressively shifting these private debts onto the public ledger right now. I suspect we will soon reduce aggregate debt by then repudiating our sovereign debts (which used to reside on our bank’s balance sheets). We need to facilitate private debt repudiation, weaken proscriptions against bankruptcy (recently strengthened by our banking class), facilitate/induce conversion of debt (e.g. mortgages) to equity, (opposed by guess who?), and generally “euthanize the rentiers” as so aptly noted by Keynes.
.
.
Fabius Maximus replies: All interesting points. So far we are following Japan’s footsteps, reducing private debt while increasing government debt. It did not work well for them, although it provided stability through a 20-year long battle with deflation. Their per capital real GDP increased at a similar rate as ours during the past decade (from memory).
FM: “Forecasting the future is far more difficult than analysis of the past. That the former is impossible does not mean the latter is impossible.”
But you aren’t analyzing the past. You are studying hypotheticals about the past. I would counter: “hypotheticals about the past are no more understandable than hypotheticals about the future.” Thus, we can analyze the actual past. But when you argue that ‘had the past been different, then we know that X would result” is conceptually no different from “if we do A in the future, we know B will result”-i.e. Your inadquate state of the art argument.
Why? The weakness of predicting the future is that we can’t predict individual behavior. The same problem with predicting alternate pasts applies: we can’t predict how changes in the past (say, stimulus of 1/2, or 1/4, or 2, or 4 x the actual) would impact individual behavior (different from actual past behavior).
Note that there is simply no way to prove either of us right: you can’t study a hypothetical about the past (‘If the stimulus were 1/2 of the actual size, the economy would be in state X’) and prove its validity, anymore than you can create a hypthetical about the future (‘If a second stimulus is passes of size A, the economy will be in state B’). Neither hypothetical can be proven right or wrong, or more or less accurate.
What we can do is be consistent. If you believe the state of the art is such that predictions of future behavior are not attainable, I’m afraid you are compelled to believe the same about your ‘what if’ scenarios concerning the past.
.
.
Fabius Maximus replies: Economists believe that can analyze past events and draw useful conclusions. If you disagreee, fine. I recommend going to a website focused on economics and debating it with them.
Of course, the major presumption here is that stimulus in all it’s forms is ok. I don’t think it is, I think it’s completely immoral and unethical. The only ethical thing to do is let the whole mess implode, whatever rises out of the ashes will be better with time. Otherwise, who learns from this? Yes people will starve, yes people will suffer. We’ll never learn anything though if we keep adding to the debt and keep letting the banksters and lazy, greedy slothful politicians who got us here off the hook.
And let’s face it, there really is no amount of money printing and growth that will save us, we will never see 10% growth anytime soon. We’re screwed.
.
.
Fabius Maximus replies: There is nothing here to suggest that “the major presumption here is that stimulus in all it’s forms is ok.” This post discusses one narrow part of the stimulus package — social welfare system. Also, the fiscal stimulus to date has been almost entirely tax cuts and social welfare expenditures (most of the aid to States maintained such spending). Spending on infrastructure has not yet hit in substantial numbers. For a broader discussion of this see Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009.
FM: “Why not go to the unemployment claims office and preach your “tickle down theory.” No aid to those folks, just tax cuts to the employed! Report back on their reaction.”
are you suggesting we set economic policy on the wisdom of those in the unemployment line?
.
.
Fabius Maximus replies: No. But this might awaken you to a sense of our shared humanity and participation in America. Also, belief in the value of aid to the unemployed is not only one of the best-established economic policies, but justified to provide social stability.
FM: “Bold words, if somewhat vague. Do you have any evidence that the stimulus is “exacerbating the larger problem”?”
Yes, the chart that shows the predictions for unemployment without the stimulus with the actual unemployment overlayed. It clearly shows that the stimulus has increased unemployment. For another angle, look at the national debt and add $800 Billion to it – the stimulus also clearly exacerbated that problem as well.
It would seem that the burden of proof should lie on those who have advocated spending $800 billion dollars of other people’s money to prove that the spending was necessary, not on others to prove that it was not. Especially given the predictions and what has actually come to pass. As near as I can tell, your argument seems to be that the spending had some benefit (fair enough) while entirely disregarding the cost. Unsurprisingly, everything comes out net-positive with that sort of analysis.
.
.
Fabius Maximus replies: Putting such weight on forecasts is absurd. There is no history of economic forecasts being accurate in the past, and hence they provide no useful yardstick to evaluate economic policy.
“It clearly shows that the stimulus has increased unemployment.”
That’s a logical fallacy. Correlation does not imply causation.