Summary: In his first speech about solutions to the crisis, President-elect Obama gave the usual jumble of ideas, as if produced by taking notes from the sophomore’s conversations at any college town pub.
We are in this fix because we have followed Japan’s path of slow, incoherent response to debt deflation. This speech is a tentative sign that we are following Japan’s phase two plan: burn money on poorly concieved projects. Not all spending provides equal (or any ) stimulus to the economy. Nor is a recession Christmas, an opportunity to fund every special interest groups’ wish list.
From what little we see in this first speech, Obama’s program offers…
- Too little short-term benefit (these seem far too small in scale).
- Too little long-term benefit (in cash or improved productivity) to help repay the debt.
- If we spend the money on consumption (not true investment), afterwards only the debt will remain.
Let’s hope they use the next two months for clearer thought about ways to wisely spend our money on the necessary large fiscal surplus. It’s still early days for the Obama Administration, and for this struggle against debt deflation and recession. This is just the first speech; much more government action is coming.
The following is an excerpt from the transcript of President-elect Obama’s weekly radio address on 6 December 2008 (source). My comments are in bold italic.
… we need action – and action now. That is why I have asked my economic team to develop an economic recovery plan for both Wall Street and Main Street that will help save or create at least two and a half million jobs, while rebuilding our infrastructure, improving our schools, reducing our dependence on oil, and saving billions of dollars.
We wont do it the old Washington way. We wont just throw money at the problem. Well measure progress by the reforms we make and the results we achieve — by the jobs we create, by the energy we save, by whether America is more competitive in the world.
Today, I am announcing a few key parts of my plan.
First, we will launch a massive effort to make public buildings more energy-efficient.
Good idea, if done right it might even generate a positive return on investment.
Second, we will create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s. Well invest your precious tax dollars in new and smarter ways …
This could mean almost anything. A consensus is forming that transportation should be the focus — offering productivity gains, improved energy efficiency, and perhaps even revenue to help repay the debt.
Third, my economic recovery plan will launch the most sweeping effort to modernize and upgrade school buildings that this country has ever seen.
- We will repair broken schools, {could mean anything, useful or just pork}
- make them energy-efficient, and (as with #2 above, sensible if done right}
- put new computers in our classrooms. {probably wasted money (see this study); perhaps more of a stimulus to Taiwan’s industry than ours; certainly will generate few US jobs}
As we renew our schools and highways, well also renew our information superhighway. It is unacceptable that the United States ranks 15th in the world in broadband adoption. Here, in the country that invented the Internet, every child should have the chance to get online, and they’ll get that chance when I’m President – because that’s how well strengthen Americas competitiveness in the world.
This could mean almost anything, from a give-away to the big telecom companies to a self-financing investment in useful infrastructure. But buying high-tech equipment generates few jobs.
In addition to connecting our libraries and schools to the Internet, we must also ensure that our hospitals are connected to each other through the Internet. That is why the economic recovery plan Im proposing will help modernize our health care system – and that wont just save jobs, it will save lives. We will make sure that every doctors office and hospital in this country is using cutting edge technology and electronic medical records so that we can cut red tape, prevent medical mistakes, and help save billions of dollars each year.
No matter how useful — the “saving lives” goal is absurdly exaggerated — this probably will not generate many jobs.
How large should this plan be?
From economist David Rosenberg, 8 December 2008:
Just to offset the withdrawal in private sector spending we expect to see in 2009, the government needs to come up with at least a $600 billion stimulus package, and in one year, not two. To just prevent the unemployment rate from rising any more than it already has – to nearly a 15-year high of 6.7% – then we would need to see a plan closer to $1 trillion in size for next year. Since prior commitments, the automatic stabilizers and the recession’s impact on tax revenues meant the deficit was already set to rise to a record $1.5 trillion in the coming year, the stimulus plan that would be big enough to stop the recession in its tracks would approximate 14% of GDP.
By way of comparison, the highest the deficit-to-GDP ratio ever got to in the 1930s was 6% (but there were no automatic stabilizers back then such as jobless benefits or welfare), in WWII it reached 30%, and in Japan it topped 10% by the mid-1990s.
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 words 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 FM reference page on the right side menu bar. Of esp relevance to this topic:
Forecasts on the FM site about solutions to the 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
- Prof Roubini prescribes first aid for America’s economy, 4 October 2008
- 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
- Expect little or nothing from meetings like the G20 – or the Obama Administration, 18 November 2008
I suspect that the precedent that Obama will use once in office is that of Peru, and not that of Japan. The macroeconomic situation is similar, and President Alberto Fujimori‘s ‘Fujishock’ worked.
.
.
Fabius Maximus replies: In what way is our situation similar to Peru circa 1990? They had hyperinflation; we have debt deflation.
From the Wikipedia about Peru’s history:
From the entry about the “Fugishock“:
Let’s hope the Obama Administration does not follow Fugimori’s path (from Wikipedia):
We will make sure that every doctors office and hospital in this country is using cutting edge technology and electronic medical records so that we can cut red tape, prevent medical mistakes, and help save billions of dollars each year.
This gives rise to multiple medical privacy issues. Computer security expert Ross Anderson has worked extensively on this subject.
Actually, probably one of the most effective ones would be a BIG solar tax credit:
100% refundable tax CREDIT for individual homeowners and landlords, for a maximum credit of $1.50/W (power figure based on local conditions) and up to $10K for houses and $10K per unit for apartments with a max of $100K, for solar electrical system installations.
Yeah, solar is not the solution to more than 10% of our power problem, but as kenseyan stimulus goes, this has several very useful features:
a) Its a private/public match. So its not just government spending.
b) It encourages innovation in an area where the US has a technological lead already, but could do significantly better. And it creates a market.
c) It produces infrastructure that is productive for the next 20+ years.
d) It really drives towards a goal of $1.50/W installed which gets very economically interesting even when the tax credit goes away.
e) If you phrase it RIGHT, it is hard to game.
The big disadvantage: its a credit which would only be usable in the sunnier areas of the US.
They could better coordinate long and short term, but I doubt this can happen immediately.
For example, school computers could be manufactured Stateside.
Transportation initiatives in urban areas could be electric-powered only along with upgrade of national electrical grid so that electric cars become viable far more rapidly.
Solar initiatives could be US-manufactured only (and/or via licenses from the more advanced Japanese and European versions but still locally manufactured).
I suspect, however, that until the collapse of the top-heavy financial architecture via which most net income ends up in computer terminals in international cyberspace, that it will be very hard to turn anything around. There has to be a way for better wages going into local economies. Right now, esp. in the US, most local economies are vehicles for wealth transfer from the ground to cyberspace via box stores, corporate employers and so forth. The trajectory of the economy is away from ordinary people on earth. It needs to be turned around. That sort of macro-level dynamic is far from being addressed. Big thinking is not the same as throwing big numbers. The result is just more zeros.
“If we spend the money on consumption (not true investment), afterwards only the debt will remain.”
I highly recommend the Fisher script booklet linked in other thread. Here we see many examples of how increasing velocity of money via ordinary consumption worked wonders. However, the ultimate source of that consumption was productivity, aka work, aka making and doing things. Consumption derived from productivity works. Consumption derived from services alone does not.
Again and again any stimulus comes down to: how to choose between the winners and losers for ‘free’ gov’t cash? Who gets bailed out and who doesn’t.
Instead of adding to the JM Keynes thread again, let’s see if Obama is doing anything paradigm changing … nope, don’t think so. Probably all of the above are positives.
FM (on Keynes): “We have just reached the limits of its operating envelope, esp with regard to aggregate debt. Just a Newtonian theory no longer works at relativistic speeds.”
The paradigm shift should be this: try PRINTING money, now, for common folk. Not tax, not borrow, just print it. Let the common folk, in their consumption/ investment decisions, shape the future by their expressed monetary purchases now.
On gas, there should be a $1000 monthly rebate to all workers, and an revenue-neutral increase in oil taxes so that gas taxes go up (with higher pay at the pump), but offset by cash back. Most of which will be spent on gas BUT an unknown large amount will be spent on other ways to save gas money, and reduce gas use.
The construction programs will help construction workers. What jobs will be available for the overpaid Lehman bankers? There are maybe some 500 000 too many bankers (same as construction)? I don’t even know how many financial services workers there are; but I know its’ too many. Part of the length of the Great Depression was due to farmers leaving farming, and being unskilled at anything else.
There should also be fast track construction for nukes.
I found myself reading Spengler(East Asia Times); and in aposition to this discussion, it left me profoundly depressed. (It could be fairly asserted reading Spengler should cause rational beings to grow depressed). It left me wondering less about size and scope and more about the philosophical so-whatness of the whole exercise. Has Barack Obama grabbed his bucket and commenced to bailing the Titanic?
Spengler argues that a flawed society is typified by the failure of its institutions. In particular, its economy. An economy relies on some pretty basic assumptions to function. Property rights, cheap information, ethical rule of law, et al… But the failure occurs because an unethical society will ultimately fail to guaruntee at least one of these necessary assumptions. (See Kelo Vs. New London, CT).
In the face of that, Obama needs a wee bit more than a spending plan. What? heck if I now, I just leive here and feed the chickens…..
Fabius Maximus replies: In what way is our situation similar to Peru circa 1990? They had hyperinflation; we have debt deflation.
Argentina’s case may be more relevant.
De-industrialization and trade imbalances caused largely by an unsound currency policy; astronomic levels of public and corporate indebtness; a collapse of the banking sector, wiping out the assets of the population; an economic depression; the State defaulting; huge losses (up to 75%) on Argentinian debt held by foreign creditors.
The characteristics of Argentina’s economy and the circumstances of its financial ruin are peculiar — but there are no examples that will match closely what other countries are experiencing now. One must work with whatever available points there are in the observable space, and recent cases of financial meltdowns are few (Japan, Argentina, Iceland).
So perhaps Japan gives a very rough idea of what might happen to countries such as Taiwan or Germany, whereas Argentina gives a very coarse idea of what could happen to New-Zealand or Hungary.
There is one striking similarity between the unfolding of the Japanese and the Argentinian woes: both countries held their head above water (macro-economically) thanks to massive trade surpluses. Japan with its electronic and engineering products, Argentina with its agricultural, oil, gas, and automobile products. This occurred in a period of sustained growth worldwide, when demand for the exports of both countries was strong — and prices even increasing. In a global depression, the way out through trade becomes considerably less feasible.
I agree with Erasmus on the need to reign in our “top heavy financial architecture.” Someone today remarked eventually we may have to nationalize the banking system. I dont know how this would come about, since money in mass is so much more complex and potent than mere political agency, but the goal makes sense. Europe seems to be moving more aggressively in this direction.
FM’s comments on the weakness of Obama’s proposals are right on, but his objections (failing to balance the budget, and not discouraging consumption) are side issues.
.
.
Fabius Maximus replies: Where did I say anything like the following?
Peru had a situation where fail government policy was pushed to the absolute breaking point, and a sudden, massive shock in the opposite direction was implemented. They had hyperinflation and massive government expansion into the private sector, we have debt deflation, and massive expansion of the private sector. The US sees Peru when it looks into a mirror (ie, the left and right hands are reversed). In a state of hyperinflation, the consumer shows up with a wheelbarrow of money and cannot buy bread and gas. In a state of debt deflation with a debt-addicted consumer, the consumer cannot get credit, and cannot buy bread and gas. When you push to the outer edges, as we have, worthless money, and nonexistent money are functionally identical, the numbers are just reversed. Obama will implement a massive ‘obamashock’ that shoves the economy hard in the opposite direction, leading to hardship in the short-term, growth in the medium-term, and expansion of government power in the long term. Perhaps by hyperinflation and aggressive government buying up of assets (as opposed to drastically reducing inflation, and selling off government assets directly).
In both situations, the government went from pushing the economy in one direction, to suddenly and massively shoving it in the other direction, which led to immediate hardship, medium-term prosperity, and in the long-term, a return to the original problem because the fundamentals remained unchanged.
Update: about Obama’s proposal #3c to “put new computers in our classrooms.”
This illustrates a great danger of the coming fiscal stimulus: spending money according to what are little more than “urban legends”. That is obvious needs that match our dreams and preconceptions, but have little empirical support. Or often, a large body of evidence showing these to be wasted efforts.
Education is perhaps the field most subject to these. Smaller class sizes. Paying teachers more. Better facilities. More and better computers. All of these have been tested at great length, and shown to have at best marginal benefits (except in special situations).
For example, consider computers. Here is one of the many studies: “Do Computers in the Classroom Boost Academic Achievement?“, by Dr. Kirk A. Johnson, Center for Data Analysis of the Heritage Foundation, 14 June 2000.
Well, I agree about computers. In fact, I think they should be discouraged until around 14+ so that root education is without technological appendages. I think it is much better to learn math, for example, by actually doing it manually than with a calculator. At least at first. Similarly, best to learn how to write manually, not on keyboard. But that’s a side issue since the subject here is stimulus and to what degree it relates to long-term improvement.
It seems apparent that there is actually a taboo in effect viz. any paradigmatic contemplation. Indeed, FM himself only a few weeks ago was arguing that now was not the time to get into long-term structural considerations; now is the time to stop the boat from sinking. It is a valid and reasonable point, however it is not necessarily the right approach.
Surely it is no less reasonable at the very LEAST to strive NOW to come to a better understanding of the underlying structure? Without doing so we cannot possibly come up with meaningful adjustments, either in the short or long term. If there are fundamental structural problems, which I believe, the only way short term solutions will prove successful is if they reinforce those same flaws, which is no more than propping up a house that by nature is doomed to collapse because it is built on fault lines that sooner or later are guaranteed to bring it down. Or, perhaps the fundamental structure is indeed excellent and we only need to return to it in order re-balance the situation. But in either case, over-arching analysis of the entire system is required.
This is not what is being discussed, rather lurching from one thing to another, like throwing mud-packs of dollar bills at fissures appearing in the dam without looking behind the wall to see what’s going on with all that water in the first place.
.
.
Fabius Maximus replies: A correction.
(1) “FM himself only a few weeks ago was arguing that now was not the time to get into long-term structural considerations; now is the time to stop the boat from sinking.”
I said we should delay massive regulatory action until emotions had cooled and research had determined what happened and why.
(2) “Surely it is no less reasonable at the very LEAST to strive NOW to come to a better understanding of the underlying structure?”
Exactly. It will take time, but at the very least data collection and preliminary analysis should start now.
(3) “I agree about computers. In fact, I think they…”
There are few fields where this sort of guessing makes a positive contribution. Testing of new drugs IMO should be the paradigm, the gold standard. Careful data collection, thorough analysis, and 3rd party expert reviews. That would provide a basis for determining how to educate our children and what tools are needed.
Are they worth this effort, or should we continue slipshod experiements on them — like white rats (e.g., “whole language” instruction, which reduced literacy for several generations).
Part of this ‘field’ is input from the population at large of which I am one, but yr point is well taken!
More on short-term fixes within context of longer term. Good piece by Brooks who has been maturing significantly of late as national op-ed writer with a surprisingly eclectic perspective: “This old house“, David Brooks, op-ed in the NY Times, 9 December 2008 — Excerpt:
This is why I think the immediate emergency solution is not in applying trillion-dollar dyke-plugging mud packs, but – especially now during the inter-regnum between old and new US administrations – a substantive national conversation along with high-level think tank studies. This is really where Obama and the national punditry could have been taking the lead but now, with Christmas and New Year almost upon us, it seems too late.
Pity. The timing would have been perfect and rarely does such an opportunity present itself.
.
.
Fabius Maximus replies: Assign a team to do the study in December. Done by March. Convert to legislation, hold hearings, passed by Congress, and signed by Obama in June. Significant effect on payrolls in June 2010. If we still need a big stimulus then we are in big big trouble — far bigger than anyone in DC is probably planning for now.
The crisis started in December 2006, with the collapse of the mortgage brokers. The response at every step has been thoughtless, reactive, incremental, and ad hoc. That’s they way our government works, apparently.
This article is both revealing and frightening. About the car industry.
This graph tells a vivid tale. . U.S. Could Take Stakes in Big 3, Greg Hitt, WSH, 9 December 2008 — “U.S. Could Take Stakes in Big 3”
This little paragraph highlights many other examples of petty-minded inanity going on here:
But that steadily-descending manufacturing jobs graph from 2000 on tells the whole story essentially putting into stark context the enormity of the situation viz. the car industry in particular and therefore the utter uselessness of the level of discussion and legislation currently engaged to deal with this.
More and more, it seems like America is indeed functioning as a ‘failed state’. This does not bode well.
.
.
Fabius Maximus replies: This is silly. There is nothing frightening here, let alone deserving heavy breathing about the US being a “failed state.” Just the normal flow of business life. What about a graph of employment in the carriage and buggy industry, farming (it was 90% of US workers — where will they all find jobs!) or toy manufacturing?