A warning from Paul Krugman of what should be blindingly obvious (but is not obvious to many experts)

Pluto asks here:  “what does Fabius think of Paul Krugman’s article in the NYT?”

Here is the article he mentions:  “Fighting Off Depression“, Paul Krugman, op-ed in the New York Times, 4 January 2009 — Excerpt:

“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

… Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy – well, you can see where this is going.

It’s not a bad article, as a statement of the by-now blindingly obvious (about which Krugman has repeatedly warned).  Readers of this site knew this several months ago.  Here are excerpts from posts on the FM site, which new readers might find of interest.

The US economy at Defcon 2, 11 March 2008   {Note:  we did almost nothing}:

As a result of #1 (deleveraging}, our financial fabric is ripping. Weak links have been breaking one by one over the past year or so. As each link breaks, there is more stress on the remaining links. The tear is getting longer and wider due to several positive feedback loops. In general, everybody’s (households’, businesses’, investors’ and creditors’) tolerance for risk decreases, and the inevitable reactions slow the economy.

… Massive government intervention must occur soon, or the eventual cost of mitigation will rise several fold. The current tools of fiscal and monetary stimulus plus mild intervention (the “super SIV’ and “Hope Now” plans) are grossly inadequate to the scale of the problem. But this downturn may be evolution in action, the consequences of our past actions. If so, what damage will the government do attempting to prevent the inevitable?

A solution to our financial crisis, 25 September 2008   {Note:  we did almost nothing}:

The policy response of our leaders has been inadequate, up to and including the Paulson Plan. Their actions have been incremental and reactive in nature. While each step has been larger than its predecessor, all have been reactions to the past dimension of the crisis — not the future. That is, our leaders have been “behind the curve.”

Paulson and Bernanke have taken actions that would have been effective if applied 2 or 3 quarters earlier. Borrowing a metaphor from emergency medicine, they have squandered the “golden hour“, since the crisis started with the collapse of the mortgage brokers in December 2006.

Correcting this flawed procedure is the first step. Doing so at this late date will require immediate and drastic actions. The severe effects of the recession — now affecting the developed nations, perhaps soon the entire world — will soon be felt, further destabilizing the economy and the financial system.

Recommendations (click links for more information about each)

  1. Stabilize the financial system.  (first aid)
  2. Stabilize the economy.   (emergency medicine)
  3. Arrange long-term financing for steps #1 and #2 with our foreign creditors.  (finance the treatment)

The last opportunity for effective action before disaster strikes, 3 October 2008    {Note:  we did almost nothing}:

The end of the post-WWII debt supercycle started with the collapse of the mortgage brokers in December 2006. Since then the government has made aprox 15 initiatives to stop the deterioration of our financial system. The super SIV, 3.25% in cuts to the federal funds rate, FHA Secure, Hope Now, a $120 billion tax rebate, massive expansion of access to the Fed’s discount “window”, TAF auction, TSLF, PDCF, the Bear Stearns bailout, the nationalization of the GSE’s and AIG … and now the TARP (aka the Paulson Plan). Don’t bother looking up the acronyms, they will all soon be forgotten.

All too small, too late. Incremental and reactive, responding to critical problems of last month — irrelevant to the current situation. This is a recipe for disaster. Like in the US 1929-1933 and Japan 1989-1996 — delaying the necessary large-scale response until the problem was no longer manageable.

Now the US financial system is seizing up. The machinery remains, but the gears no longer turn. Most of you have no idea to what I am referring, but you will learn over the next few weeks. To use a bad medical analogy, the financial system has had a cardiac arrest.

The new President will need new solutions for the economic crisis, 9 October 2008:

However, we must prepare for the possibility that the economy will be in a severe recession — or even depression — when the new President takes office in January. A depression does not mean like the 1930’s — the Great Depression. There is a large gap — usually ignored by analysts — between the severe post-WWII recessions (1973-75 and 1980-82) and the horror of the 1930’s. The frequent depressions of the late 1800’s lie in that gap, and for various technical reasons we may now be experiencing one of those.

… The new President must be prepared to immediately take action after inauguration. There is no time for the usual drill: search for staff, redecorate the Oval Office, have meet-and-greets so the new officials get to know each other, schedule meetings to formulate a plan and build support. The damage to the economy will be terrible by that time these things are completed, and (worst case) the economy still might be sliding downwards. Also, any plans will require time for Congressional approval and implementation, and plus lag times until results appear.

Then there is is the bad news. The conventional solutions which the new Administration could easily put into effect — fiscal and monetary stimuli, plus devaluation of the dollar to stimulate exports — probably will not work (in the sense of sparking a recovery of the economy). Let’s defer the reasons why until a later post, and consider the implications.

… These are {recommendations for President Obama} to do, not arranged in a sequential order. … We do not know if these things are even possible, esp (2). An unprecedented crisis requires extraordinary responses.

Status report on the financial crisis: we’re at a critical point in time, 10 October 2008    {Note:  we did almost nothing}:

An economic downturn has 3 stages, each with a different goal.

  1. First Aid — Stabilize the financial system to avoid a depression.  {UPDATE: TOO LATE; WE MISSED THIS WINDOW}
  2. Treatment — apply fiscal and monetary stimuli to mitigate suffering during the recession and get a global recovery in 2010.
  3. Recovery — restructuring and reforms to prepare for the expansion after 2010, and the new world beyond that.

Yes, 2010 is the earliest reasonable date for a recovery IMO from the most severe global downturn since WWII. Policy errors could length the downturn, of course.

The economy is in shock. The effects of this will soon become visible, 11 October 2008    {Note:  we did almost nothing}:

This is like Cardiogenic shock, caused by the failure of the heart to pump effectively. The US economy went into cardiac arrest early last week, as the flow of money (the blood” of the economy) slowed due to a near-collapse of the financial system (its “heart”, but not its soul). If not restarted, the economy will slide into a depression (GDP decline of 10% or more) in a few weeks (perhaps months).

The coming collapse in business spending – made visible today, 15 October 2008:

Smart managers react quickly and strongly to changed conditions. Unfortunately, when those conditions are a systemic event visible and affecting everyone their actions re-enforce the event. Positive feedback. This creates much of the business cycle’s volatility, the big swings. The “dampeners” of Keynesian economics, contra-cyclical monetary and fiscal policy, fight these in order to maintain equilibrium.

The US economy must go to Defcon 1, 13 November 2008  {Note:  we did almost nothing}:

Summary: We are on the brink of an economic disaster like nothing since the 1930’s. Here is a sketches (nothing more), of guesses as to what we can look forward to. While the past guesses on this site have proven accurate, these might prove too pessimistic. Or too optimistic.

… {After the financial crisis} the effects ripple from the virtual economy (financial markets) to the real economy. Americans have reduced their spending. Hundreds of companies around the world have announced falling revenue — and responded with cutbacks in employment and capital expenditures. Tens of thousands are doing the same, but outside the media spotlight. Most of this will hit in the early months of 2009. We must move the US to Defcon One, a war-like mobilization of resources.

Situation report: global economy, December 2008, 19 December 2008:

Viewpoints about the crisis have coalesced into three camps.

  1. The “normal global recession” camp. Just another cycle, US GDP down perhaps -3% peak to trough.
  2. The “worst recession since the 1930’s” camp. A bad scene, but the world’s governments are now on the job. Fiscal and monetary policy will do the job, again. US GDP down 5% or so. See this example.
  3. The “worse than worst” scenario. Government policy might not work — or it might work but only with long lags. Uncertainty rules; the outcome is unknowable.

Those in the first two camps believe that the worst of the crisis has passed in that its course now runs in familiar channels. The small minority in the third camp believes that the world has changed. The post-WWII is ending.

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:

Post on the FM site discussing solutions to this crisis:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. How should we respond to the crisis?, 24 September 2008
  3. A solution to our financial crisis, 25 September 2008
  4. The last opportunity for effective action before disaster strikes, 3 October 2008
  5. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  6. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  7. The new President will need new solutions for the economic crisis, 9 October 2008
  8. A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
  9. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  10. A look ahead to the end of this financial crisis, 30 October 2008

27 thoughts on “A warning from Paul Krugman of what should be blindingly obvious (but is not obvious to many experts)

  1. Or just look on the bright side…

    In the world I see – you are stalking elk through the damp canyon forests around the ruins of Rockefeller Center. You’ll wear leather clothes that will last you the rest of your life. You’ll climb the wrist-thick kudzu vines that wrap the Sears Tower. And when you look down, you’ll see tiny figures pounding corn, laying strips of venison on the empty car pool lane of some abandoned superhighway. … Tyler Durden.

    Actually, I don’t quite buy the argument that the actions haven’t been big enough. There’s been a vast money pumped into the banking system, but it just sits there because nobody wants to borrow. Banks hold onto the money because, well, they are probably holding vast worthless investments that will continue to collapse throughout 2009 requiring even more and more money to bailout. In this economy, banks no longer have a business plan other than sitting around waiting for the bombs to go off and then begging to the government for bailouts. So much for the ‘service economy.’

    What I don’t get is why this all has to be so complicated. The problem is that consumers have stopped spending. If people were buying, then even though the banks are already practically dead, there would still be value in those companies still selling things. The solution is obvious. Just give me lots of cash, and I’ll buy stuff for me! I promise to buy lots of cool interesting stuff for me creating many jobs.

  2. Wall Street wants to carry on. The politics wants to carry on. Unfortunately the deleveraging, the peak oil, demographics etc. also “want” to carry on. Something must give. I could do without Wall Street, discard the world dominance, see where do we go from there. But allmighty, gently, no crash landing, please!

  3. Good examples. I would emphasize four points from prior FM posts, points also highlighted by Nouriel Roubini.

    1. Size alone is insufficient, as Prez Bush and Henry Pauson have now reproven. Effectiveness is equally as important as dollar volume.
    2. Providing lending capacity when consumers and businesses want to borrow less won’t be sufficient. Fiscal policy will be more effective in the near term, 2009 & perhaps even 2010, than currently overemphasized monetary tools. Similarly, tax cuts will be less effective than govt. spending as much of rebates would go to savings and imported goods while properly targeted govt. spending more often goes to domestic services.
    3. Fiscal stimulus programs will have to be paid for later and spending must be focused where it can actually increase later tax revenues or decrease future national (not just govt.) costs, such as repairing needed roads & bridges, qualitatively better education, more cost-effective healthcare, etc. A good example of this would be extending unemployment benefits but requiring a quality, enforced remedial math/reading education component.
    4. To both improve cost-effectiveness and lower inflation side-effect risks, the spending must be spread over a broad range of otherwise under-utilized resources (ie spending too much on bridge repairs would cause too many projects to all need the same specialized people, materials & equipment). For example, the NIH is expecting to reduce support for vetted healrhcare R&D in 2009, at the same time that big Pharma is cutting R&D staff, and should instead expand any cost-efective R&D investments.

    This isn’t rocket science. And politicians will continue to proclaim the above principles. But the results will likely prove otherwise.

  4. I feel like I am trapped inside a Patrick O’Brien novel. We are in a brig being chased by a French 74. It is gaining. We now have to toss our guns overboard to gain speed. Will that be enough…

  5. “We are in a brig being chased by a French 74. It is gaining. We now have to toss our guns overboard to gain speed. Will that be enough…”

    Hmmm. Right now would be the time to invent the outboard motor, I’d say. If ever there was a time for American ingenuity to come to the rescue, this would likely be it.
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    Fabius Maximus replies: That’s a powerful insight, one which I have discussed several times.

    (I.) Expect little or nothing from meetings like the G20 – or the Obama Administration, 18 November 2008:

    The easy analysis is to blame Ben Bernanke and Hank Paulson for their in adequate or wrong response to the crisis. This site has many posts doing exactly that. While justified, there is (as always) another perspective.

    Bernanke and Paulson were the A-team, by any objective criteria. Their failure indicates more than two individuals pushed beyond their limits. This is a systematic failure, much like the Hoover Administration’s failure — and that of FDR’s Administration (they mitigated the downturn, but only WWII ended it). The economic paradigm of 1929 was inadequate (Keynes published The General Theory of Employment, Interest, and Money in 1936). Almost anyone in their chairs might have failed. Even FDR — as seen in his warnings about inflation during the 1932 election and attempts to balance the budget during 1933-1938.

    (II.) The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008

    I believe this crisis results from a paradigm crisis in Keynesian economics, as we reach the boundaries of his vision — specifically, the point at which aggregate private sector debt becomes a limiting factor for the economy’s growth. But however inadequate, Keynesian theory is all we have until another such genius comes along.

    (III.) The new President will need new solutions for the economic crisis, 9 October 2008:

    New Recommendations for the new President:

    (2) Get a small team searching for solutions outside the conventional beltway consensus. This is America, the brainstorming center of the world. There are new ideas out there. … An unprecedented crisis requires extraordinary responses.

  6. FM repeatedly observes that the second task is to “stabilize the economy”. He just doesn’t say how. Hendrik and Cathryn (above) sketch out the answer, the same one pronounced by Henry Ford — if you want people to buy your cars, you have to pay them a wage that allows them to.

    In the recent global economy, American businesses have found a way around this step by finding workers and customers for their products overseas, leaving American workers to scrape by on borrowed money from second mortgages. Reviving the American economy will take a complete refocusing of American business on its domestic base, and that may be harder than changing the spinning of the globe.
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    Fabius Maximus replies: This is wrong on two levels.

    (1) “FM repeatedly observes that the second task is to “stabilize the economy”. He just doesn’t say how.”

    The blue underlined letters are links. They go to other posts! If you re-read the post you will see the following:
    * “Stabilize the economy“, and
    * “Treatment — apply fiscal and monetary stimuli to mitigate suffering during the recession and get a global recovery in 2010.”

    Those links go to “Dr. Bush, stabilize the economy – stat!” (7 October 2008), which also appears in the “for more information” section at the end of the post. It explains “how”, and links to more detailed descriptions.

    (2) You misunderstand the meaning of “stabilize the economy.” As is described several times in this post (and at length in other posts), it means emergency treatment. Fast action to prevent further deterioration and minimize suffering. It is a palliative: “treatment to alleviate symptoms without curing the disease.”

    You are talking about a “cure”, restructuring the economy. That takes time to implement, and then additional time to take effect. If you have a heart attack, you don’t want the paramedics to advise that you should stop smoking and lose weight — then leave.

  7. To a hammer everything else looks like a nail. To Keynesian hammer, this economy looks like a big fat nail. No understanding of what lies beneath the surface. Too sad.

  8. All this talk of bandaids, perhaps it is time to question the basic Ricardo economic model we have been following. Labor is treated as just another commodity, like wheat or soybeans. So we get into wage arbitrage etc., or the race to the bottom. When labor makes a productivity gain, labor does not reap the profit. The profit goes to owners and stockholders, who are a useless class of parasites. They suck the wealth out of corporate entities but have nothing to do with generating it. They takes their riches and build singularity after singularity only to watch the bubbles pop. Then they come running to the people who generated the wealth, labor, for a bailout, claiming it will be different this time. I don’t see this changing anytime soon.

    I think the only economic model that will work in the long run is the Henry Ford model. Hank paid his workers well enough that they could afford to buy the cars they made. It was a win-win situation. In the 90’s, there was all this talk of overproduction. Overproduction is a polite way of saying labor needs a raise. Pay the sweatshoppers enough to buy the sneakers they make and there will be no overproduction. Labor will consume it.
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    Fabius Maximus replies: Agreed. The basic assumptions of modern economics are just first steps toward a better and more comprehensive analysis. Unfortunately, this is what we have today.

  9. From comment #3: “Similarly, tax cuts will be less effective than govt. spending as much of rebates would go to savings and imported goods…”

    In this economy, a lot of the tax cuts would end up paying down debt, which wouldn’t help the GDP much. But, I don’t know, is this so bad? If the problem is that we’re going to spend a few years paying down debt, why not pay it down faster and get out of the hole more quickly. If we want to get creative, we might go to across the board negative income tax rates for all the lower income brackets. Negative sales tax?

    Maybe the future is starting to clarify in my mind’s eye. As we’ve observed, the USG has already handed out a few tril’ to the super-rich bankers, and then was subsequently baffled why no one else was spending (hint, they were broke.). (Monetary policy) Next, they’ll hand out another few tril’ to government employees, and again they’ll continue to be baffled why the remaining Americans aren’t spending (hint, they’ll still be broke). (Fiscal policy.)

  10. Seneca’s #6 above is on the right track. However, there are deep, structural reasons why wages have been depressed lower and lower, relatively speaking, for many decades. Addressing such things is the greatest challenge to any society, especially since such structure is now intertwined with every major ‘developed’ society worldwide and therefore also the ‘undeveloped’ ones whose resources often provide the basic ‘stuff’ for the former.

    Seemingly, the USG is basically doing what FM has been recommending, just that they are about a year or more late. If they fail to resuscitate the national patient from economic cardiac arrest, then Scenario #3 becomes more probable. At which point, the fault lines in the underlying system will become more of a focus of attention, quite possibly in the form of a return to so-called ‘class war’. Although unpleasant, it is the sort of thing that might well be needed as part of an overall restructuring of the underlying economic architecture.

    At which point relatively speaking wages along with the percentage of cream skimmed from the top by the wealthy elites might well have to come back into line with gross domestic product. This will further necessitate a return to ‘real’ productivity versus positive investment returns, the desire for which latter has largely fueled the credit boom which is now busting.
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    Fabius Maximus replies: Agreed! We need to think both about short-term paliatives and longer-term cures. Structural changes are needed, and a long downturn is the time to make them. We do not want to be in the mode of “can’t fix the roof while it’s raining; and it does not leak after the rain stops.”

  11. From comment #5: Hmmm. Right now would be the time to invent the outboard motor, I’d say. If ever there was a time for American ingenuity to come to the rescue, this would likely be it.

    It’s one thing to get inside the other fellow’s OODA loops; it’s another altogether to rip it apart with a rotor blade!

    J.M.W. Turner illustrates the basic objection to your point in “The Fighting Temeraire tugged to her last Berth to be Broken up, 1838“, painting by J. M. W. Turner.
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    Fabius Maximus replies: Can you elaborate on your point? I suspect many of us will need some explanation of this. From Wikipedia:

    It depicts one of the last second-rate ships of the line which played a distinguished role in the Battle of Trafalgar in 1805, the 98-gun ship HMS Temeraire, being towed towards its final berth in East London in 1838 to be broken up for scrap.

  12. In this economy, a lot of the tax cuts would end up paying down debt, which wouldn’t help the GDP much. But, I don’t know, is this so bad?

    I think this is a critical consideration. The best route, I think, would be to have government act not to “revive” the economy, but “sustain” it while ordinary folks and businesses reset to more reasonable levels of spending, leverage and savings.

    I feel a blog post coming on!

  13. The economy may soon have yet another problem that Paul Krugman would probably be loathe to acknowledge. It’s hard for a financially broke government to stimulate an economy if no one wants to buy their debt. According to The Financial Times, the Germans may be a canary in the coal mine which we would do well to observe.

    It seems the German Parliament gave the treasury authority to auction off a lot of bonds. The bids were low ball, and Germany didn’t get the amount of finance that they intended to buy. Sordid details follow below.

    Meyrick Chapman, a fixed-income strategist at UBS, said: “When a German bond auction fails, then that does suggest there is trouble ahead for governments wanting to raise money in the debt markets.

    “There was certainly a supply/demand imbalance because of the large amount of issuance in the last quarter of 2008 and the large amount due in the coming months. Before the financial crisis, German

    This is troublesome to us and others because, as the FT goes on to point out, sovereign entities have planned on selling 3 times as much debt as they did in 2008. It would not help stimulate much of anything if this debt fell conspicuously short of raising three times as much actual cash to finance Keynesian stimulus.

    It seems a lot of governments, not just ours or Germany’s, have forgotten that governments don’t actually create much in the way of wealth. They can only redistribute that which belongs to citizens. A failed government bond auction is one way in which those citizens who have wealth can tell a sovereign entity “No.”
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    Fabius Maximus replies: I believe this analysis is wrong on two levels.

    (1) These are rare events, but not extraordinary. Per the Financial Times:
    “Before the seven that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash.”

    (2) It indicates a glitch in the capital flows of the economy — national, or global — but not necessarily a serious glitch. This is just another aspect of the severe torgue on the economic appartus of the world, and not the worst such.

    This has been extensively discussed in the large literature about deflation, esp debt deflation. Governments borrow to the extent they can, but in severe cases they must just print money. As Japan’s experience shows, government’s fighting deflation can print extraordinary amounts of money — and neither defeat deflation or cause inflation (the two contradictory results so confidently predicted by economists).

  14. Greg L

    Agree. That was supposed to be one of the the points of 401Ks — if the workers are also the shareholders (i.e., owners) they WOULD gain when the company increases in value. The enlightened capitalist is supposed to pay the highest wages possible.

    Not sure how many corporate bad actors there actually are – you hear about the bad ones in the news, and it’s easy to scapegoat.

    Part of the problem is overall moral decline and values-free education. If there is no God, to whom is one accountable? And don’t say the SEC. There is not enough fear in the world to take the place of governing one’s own passions.

  15. A failed government bond auction is one way in which those citizens who have wealth can tell a sovereign entity “No.”

    So, what do they do with it?

    – Convert it into gold and bury it in the ground?
    – Have a big party like the Russian aristocracy did before the Revolution?
    – Do something spectacular so – like Alcibiades – they will have a big reputation?

  16. To #15. They may simply invest it elsewhere. Or hold on to it until another time. The government in question has to act in an intelligent fashion to justify continued receipt of the funding. You wouldn’t buy the securities of a corporate entity that behaved in wastrel fashion. A logical individual shouldn’t buy the securities of a government that can’t do any better.

  17. “The auction of 10-year bonds failed to attract enough bids to reach the €6bn the government wanted to raise.”

    Inflation or no inflation? I’m guessing no inflation, but on a 10 year time frame? Who would make such a bet? Besides, the bond market can do the math. If every government around the world rushes over to massive fiscal stimulus and increased government payroll at the same time, well, you know, conventional wisdom this may be so it’s obvious to fans of such things, specifically reporters. It is still, by any measure, a massive experiment.

    Also, consider that 8.5T of bailouts that went to banks and other companies is floating around who knows where. I assume that’s mostly sucked up by the negative of bad investments in banks, but still, that’s a whole lot of money. It dwarfs all US taxes collected in a year by maybe 3-4x. Could some of that bubble up somewhere and restart inflation?

    Smart to be a little wary of any predictions beyond a year, I think.

  18. To #17. I’d say very few people would.

    1) A lot of what we have wrong right now came from spending too much in the first place.

    2) A lot of what these stimulus plans involve factors that really don’t do much to address the fundamental failures of the economies in question. (e.g. from the US of A. One of FM’s links includes a chart that shows Medicare and Social Security running a projected $40.6Tr long-term deficit. This is up 212% from 2000. If it goes up another 212% by 2018; we’re talking something in the ballpark of $130Tr. Nothing explicit in President-Elect obama’s economic strategy heretofore addresses this problem.

    I doubt Germany even stinks this badly.

    3) The upshot is that an organization with a poor track record now wants to borrow collossal sums of cash to spend on projects which fail to actually attack the fundamental problems on hand. You’re right. No one in their right mind wants let someone like that hold their cash for 10 years.

  19. Luckily, governments also act for political reasons, even in the midst of an economic crisis. Hence, any “admustments” to Social Security and Medicare are likely to be cosmetic, and stimulus programs immediately visible in local areas, labelled with positive-sounding names (“Operation Re-train”, e.g.) will be funded whether they solve any real economic problems or not. More seriously, when/if the social misery index reaches levels comparable to those of the Great Depression, govenments will act to stave off revolution. However, it’s not clear whether this one will act progressively or repressively.

  20. Fox News has an interesting article that strongly suggests that Obama’s economic plans are not likely to survive Congress without serious changes. Martin Feldstein and Mark Zandi are quoted. “Economists Warn Against Feeding ‘Trillion-Dollar Deficits’“, Fox News, 7 January 2009.
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    Fabius Maximus replies: Did anyone believe that a $700 billion spending bill would travel thru Congress without alterations, skimming off some for politically powerful interest groups?

  21. You wouldn’t buy the securities of a corporate entity that behaved in wastrel fashion.

    I bite my tongue. Personally, if I won the lottery – while I would indeed throw a big party – I’d also try to get hold of the Turner I referenced above.
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    Fabius Maximus replies: As the classic advice goes, I would blow most of it on wine and women. The rest I’d waste.

  22. Here’s an interesting video from Jim Jubak, I can’t confirm any of his facts.

    Fabius Maximus replies: Did anyone believe that a $700 billion spending bill would travel thru Congress without alterations, skimming off some for politically powerful interest groups?

    Nope, not in the slightest. But I’m interested to note that quite a few groups are still trying to substantially reduce the size of the stimulus package. That seems to me like cutting off the water just as the fire trucks are arriving at the scene of the blaze.
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    Fabius Maximus replies: Hoover lives! Or rather, neo-Hooverism.

    Bad economic theory is rooted in basic worldviews, and so never go away. The experiences of the USSR, China, Albania, etc do not disprove Communism as an wonderful theory (or dream). True believers find excuses. Ditto for Christian theory (turn the other cheek as a national security doctrine, redemption as an insurance policy against sin, etc). Ditto for free-market and libertarian theory.

  23. “Bad economic theory is rooted in basic worldviews, and so never go away?”

    Even the much respected ‘conventional wisdom’ is based on narrative. Bush was Hoover, Obama is Roosevelt… Me, I’m just thinking through some basic arithmetic on this. Let me think. Obama claims he wants to create 3 Million jobs. 3 Million jobs at $50K/year comes out around $300B total for the two years. These jobs are only temporarily created — in 2011 they’ll need another $300B to keep the 3M jobs going for another 2 years.

    A cnbc story I read says $310B for tax cuts. That’s about a $500 per head for two years. Would about pay my health insurance bill for a month or so.

    “Here’s an interesting video from Jim Jubak, I can’t confirm any of his facts.”

    He makes an interesting point about M0 going up — it’s all that monetary policy just sitting there growing moss. If inflation does come, here’s where it is born. I googled M0 and found a few stories about M0 doubling, but I wasn’t really able to duplicate what he says here. Maybe he dug through the actual data.

    What I wonder, when the bottom does hit, what stops the banks from using this money to simply buy everything. Is that what we want here?

  24. Fabius Maximus replies: As the classic advice goes, I would blow most of it on wine and women. The rest I’d waste.

    Further considering the conundrum of what are the rich going to do with their money, perhaps we might adopt a potlatch culture. This would be something of a hybrid of my “Throw a Big Party” and “Do Something Spectacular” options which I listed above:

    he potlatch is a festival or ceremony practiced among Indigenous peoples of the Pacific Northwest Coast. At these gatherings a family or hereditary leader hosts guests in their family’s house and hold a feast for their guests. The main purpose of the potlatch is the re-distribution and reciprocity of wealth.

    During the event, different events take place, like either singing and dances, sometimes with masks or regalia, the barter of wealth through gifts, such as dried foods, sugar, flour, or other material things, and sometimes money. For many potlatches, spiritual ceremonies take place for different occasions. This is either through material wealth like foods and goods or immaterial things like songs, dances and such. For some cultures, like Kwakwaka’wakw, elaborate and theatrical dances are performed reflecting the hosts’ genealogy and cultural wealth they possess. Many of these dances are also sacred ceremonies of secret societies like the hamatsa, or display of family origin from supernatural creatures like the dzunukwa. Typically the potlatching is practiced more in the winter seasons as historically the warmer months were for procuring wealth for the family, clan, or village, then coming home and sharing that with neighbors and friends.

    Within it, hierarchical relations within and between clans, villages, and nations, are observed and reinforced through the distribution or sometimes destruction of wealth, dance performances, and other ceremonies. The status of any given family is raised not by who has the most resources, but by who distributes the most resources. The hosts demonstrate their wealth and prominence through giving away goods. Chief O’wax̱a̱laga̱lis of the Kwagu’ł describes the potlatch in his famous speech to anthropologist Franz Boas, “We will dance when our laws command us to dance, and we will feast when our hearts desire to feast. Do we ask the white man, ‘Do as the Indian does?’ It is a strict law that bids us dance. It is a strict law that bids us distribute our property among our friends and neighbors. It is a good law. Let the white man observe his law; we shall observe ours. And now, if you come to forbid us dance, be gone. If not, you will be welcome to us.”

    Celebration of births, rites of passages, weddings, funerals, namings, and honoring of the deceased are some of the many forms the potlatch occurs under. Although protocol differs among the Indigenous nations, the potlatch will usually involve a feast, with music, dance, theatricality and spiritual ceremonies. The most sacred ceremonies are usually observed in the winter.

  25. What is a house in the USA worth? What is the labor work of Detroit auto-worker worth?

    Either it is ‘worth what the market will pay’, or else there is some other better theory of value (which I don’t know about).

    Houses were overproduced, and overpriced for the time.
    The financial system will NOT be stablized until house prices are stable; bailouts for redundant millionaire bankers is not as useful/ needed as policies to get more houses off the market.

    #8: US labor, of the ‘human robot’ menial type, is over-paid in global competitive terms. Detroit far worse than Tennessee, but even there I’m pretty Toyota pays more to get a car built than they would pay in China. The Globalized Market HAS, in fact, spread higher wages to the poor (in China and India), far more than any ‘aid’ program or non-market theory.
    House construction workers have lost jobs — about 500 000.
    Financial companies are shedding jobs (Citi’s letting 50 000 go?); there are too many bankers.
    There are too many over-paid Americans making too-expensive cars.
    I doubt that the UAW would accept working for McDonald’s wages, but that might be what is needed to keep as many jobs as there are now. (wage price stickiness-downward).
    Part of the pain is the reduction of wages that Americans will go thru — unless inflation comes back to make it easier to accept.

    Minimizing the harm now? — print money until inflation is positive. Best if given away thru tax cuts, or low interest loans direct to taxpayers (the $10 000 1% IRS tax rebate card, borrow now, re-pay later!)

  26. “as policies to get more houses off the market.”

    I suppose the value of a house is determined by the income of the potential home buyers. Around here, (SF Bay area) this has been out of wack for a long time with ordinary houses going for $700K and many people eeking out minimal income.

    I’m thinking any attempt to prop up housing prices will just lead to a long slow decline in housing prices, and falling real estate will kill any development because you can’t invest in something that’s declining in value. I’d rather we hit the real-estate bottom fast, and let houses become as affordable as possible as soon as possible. Then the opportunity of these cheap, but rising houses will rebuild the economy as people purchase them to live in or use them for rental income.

  27. Re #23: Let us assume your 300B per annum estimate for all those jobs is correct. That would be a small price to pay because each job maintains overall ‘velocity’ of national money flow as it passes from hand to hand throughout the community. I can’t remember the typical number on this, but I believe it is between 10 and 30 times it passes around, so each dollar invested in wages packs a far greater ‘bang for the buck’ than anything else govt funds can be spent on. Without income earned by the ‘masses’ there is no national economy to support basic commerce and maintain food, shelter etc. Ultimately we have to have work that produces needed goods and services which is why infrastructure initiatives cannot be overplayed; however they can help to maintain the wage/income basis, and thus velocity, until new longer-term employment comes online.

    Although there is virtually no limit to the natural world’s underlying abundance, we also need to move more towards a ‘sustainable’ model, both in terms of using renewable resources (aka husbanding skills), but more importantly in terms of creating vibrant economies that are not dependent upon arbitrage of continuous growth by wealthy elites, rather underlying, authentic productivity.

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