End This Depression… How?

A while back, prompted by a comment on this blog, I read the Paul Krugman book, End This Depression Now!  He argues that a large Federal stimulus is needed to push the economy out of the doldrums and get people working again.

Well, maybe.

I agree with some of his premises:

  • The economy is in a liquidity trap: even after driving interest rates to zero, there is insufficient demand to support full employment.
  • One of the immediate causes of this liquidity trap is that everyone is trying to save and get out of debt at once.  Production, in and of itself, is pointless without consumption.
  • The Federal government has room for more deficit spending before the danger of inflation sets in.
  • A small amount of inflation might actually be a good thing, as it means that debts would be repaid with cheaper dollars.

So let’s borrow (it’s OK, it’s from the Federal Reserve, who will never ask to be repaid) and spend a couple of trillion dollars to boost the economy!  Right?

Alas, I don’t think so.

  • Between existing government programs and the Federal Reserve’s ongoing quantitative easing, we’re already loosing trillions of dollars into the system, with nothing useful to show for it.
  • A Keynesian government stimulus is supposed to vary with the overall state of the economy, to fill in for ‘missing’ consumer and industrial demand.  But we’ve had the spigots stuck on ‘wide open’ for years, blunting the effect of additional stimulus.
  • Historically, before we tried to regulate the economy, we had cycles of boom and bust.  The busts, although painful, served a necessary purpose, as they forced people to reallocate resources from useless endeavors into useful ones.  But our economy has gotten to the point where it runs on useless endeavors.  Republicans rail at pointless government regulation, and to some extent they’re right.  But millions of jobs and billions of dollars are invested in such pointlessness.  (Not that all government regulations are pointless: one of the further difficulties is recognizing the pointless ones.)  Reallocating away from such efforts will require an agonizing re-appraisal, which will get worse the longer we put it off.
  • One of the main causes of our employment problems is that employers, in the name of cost-cutting, have turned away from actually employing people, as far as possible.  If you can get a machine to do the work, so much the better.  Failing that, outsource it, leaving the dirty work of actually hiring people to others.  (And if those people are outside the US, it doesn’t matter.)  I can’t see how a renewed government stimulus will change this trend.
  • One of the practical purposes of deficit spending is to tide people over until the economy begins to grow again.  It’s not clear when, or if, that will actually happen.  There is no job fairy waiting for us to change policies.

Alas, I’m back where I started.  I don’t believe the government can ‘fix’ the economy.  The best it can do is to invest in infrastructure, but this will not magically get the rest of the economy buzzing.  Under these circumstances, the best thing for the government to do is to try to moderate its deficits by raising taxes and cutting spending, to prepare for a future eventuality more dire than our current circumstances.

15 thoughts on “End This Depression… How?”

  1. FULL employment is the only way to ascertain full consumerism.

    Without full employment we will never have full consumerism.

    And that’s full employment at livable wage.

  2. Well, yes.

    But how do we achieve full employment–or even a reasonable approximation–when business would rather do anything–anything at all!–rather than hire actual employees?

  3. Your analysis ignores the model of how the economy really works. Basically it is an ecosystem. If one part of the ecosystem has a lot of the wealth (nutrients), and the rest has very little, the whole system under-produces. What we have to do is take a lot of the wealth from the top, as we did to fund WW2, and redistribute it throughout the economy. Think about a farmer’s field, and you will get my model. Dr. Krugman assumes most people understand this, but most (including politicians) do not. If we had paid for the wars in Afghanistan, and Iraq, at the time by taxing the top 2% at the effective tax rate President Reagan did to end the cold war, we would not have run any deficits. Also, the Fed would not have had to monetize the debt by allowing the market price of gold to go from about $300 an ounce, to about $1700 and ounce over about 6 years. This then created the ‘Bubble” economy, and the housing crisis. To fix this one will need to raise taxes to cover the complete amount of the wars, and repairing the USA’s infrastructure. This should be done over ten years. $2 trillion for the wars, and $2 trillion for the infrastructure should just about do it, I think. On second thought, lets make it $6 trillion. So, we should raise about $600 billion more a year in taxes to balance the budget. The tax could be paid, by rich people, in the form of high quality stocks and bonds. If this does not make sense to you, I will use another model. Imagine a jet airliner with most of its fuel in one wing tank. It would fly very precariously because all the weight would be on one side of the airplane. Now imagine if that fuel was distributed evenly so the plane would have no problem safely flying. The plane had plenty of fuel, in my example, but it was in danger of crashing because the fuel was not distributed properly. This is our economy’s problem. We have plenty of fuel (wealth) but it is not distributed correctly for the economy to work efficiently. We must take it back from the rich to re-balance the economy, just as happened during WW2. It really is that simple.

  4. Barbsright, I believe that your math is wrong. The 2012 budget was $3.59 trillion, and we raised $2.469 trillion in taxes and fees, leaving a deficit of $1.121 trillion. So, your proposal to raise an average of $600 billion per year does not balance the budget. You also double-counted the money for infrastructure improvement, applying the same money to building infrastructure and deficit reduction. We only get to spend it once. Given your underlying assumptions, your best-case scenario is to reduce the deficit by about $300 billion a year by raising $600 billion in taxes. There will be costs to replenish and modernize the military’s equipment even in peacetime, as well as the $200 billion annually for infrastructure improvements. This still leaves a structural deficit in the $800-900 billion dollar range.

  5. But ecosystems, generally, manage to take care of themselves without human intervention. When we’ve had to manage ecosystems, typically because we’ve interfered with them through development, we’ve generally done a mediocre job. For years we tried to prevent forest fires, not understanding that fire is a necessary element of the forest ecosystem.

    All of your analogies are fair descriptions of that’s happening, but in fact, there’s nobody at the top trying to ‘run the economy’ to optimize output. If I may add another analogy to the pile, consider a summertime power shortage: if we all moderate our energy consumption, there will be enough to go around. But if some large users say, ‘You know what? I don’t care if there’s a power shortage. If I’ve got power I’ll use it!’ we can all be plunged into darkness. But since the warnings of a power shortage are merely advisories, with nodoby coming to measure that one is actually moderating one’s consumption, there’s nothing we can do about it.

    The economy, as it stands right now, functions to transfer wealth from everyone else to the top 1%. Raising taxes on the wealthy is a necessary first step to try to restore balance, but we can’t go back to the 90% top rate of the 1940s or 50s, or even the 70% rate of the 1960s and 70s. Back then, there was no substitute for the United States. Today, if you’re rich, there are dozens of countries where you can live in the style to which you’re accustomed.

    So yes, we can and should raise taxes on the rich, but we shouldn’t believe that doing so will solve all our problems. If we were able to raise taxes by $600 billion/year, and didn’t do anything else, the deficit would be aroung $400-500 billion/year. That’s much better. It would calm fears that the economy is about to go off the rails, and in that sense, encourage investment.

    But that still doesn’t change the trend of doing more work with fewer employees.

  6. The simple fact is we need to cut many services. I would start myself with the wars we are fighting, along with welfare for illegals and welfare queens (both serious problems in Illinois). Also cut things like salaries for the top in government and school administration. It is sick that school administrators are paid considerably more than teachers who are generally underpaid. In addition yes I would raise taxes on the wealthy because it is a disgrace that someone like Romney pays less in taxes than many middle income people.

    Here’s the problem though and that is the pay people receive. I couldn’t begin to tell all the jobs I have seen for college educated jobs that were either part time, low wage and usually both. It is a serious problem when someone like me with experience and a masters degree often interviews for $12 hour jobs because that is all I see. I rarely see a $30,000+ job and when I do it is an upper level. What is sick about this is $30,000 is generally an entry level salary but it is what many upper level jobs now pay. We all know why this is happening and most of us are helpless to fix it.

  7. Well, I guess we are generally in agreement. The rich have paid too little in taxes to allow the ‘system’ to stay balanced over the long term. The fact that redistribution is needed in an economy that is ever more automated is undeniable. The fact that it has gone in the wrong direction is criminal (both literally, and figuratively where Wall Street is concerned). My numbers were best estimates, but the salient point was, and remains that President George W. Bush by not paying for the ‘wars’ at the time completely destabilized the USA’s economy and the world economy. Now we have to take the money from the 1%, and pay off those bills. They will not like it, but they are thieves and deserve to suffer for the pain they have caused all over the world, and here in the USA. As for tax reform: I would like the President Reagan tax code, 39.5% on the wealthy (with few deductions). The USA has plenty of wealth to guarantee entitlements to those who are ‘obsolete’, which is (thanks to robots and computers) practically everyone. Because of automation there will be plenty of people available to work in nursing homes, so we will all be fine!!!

  8. Were it only so simple as to blame the economy’s problems on “the wars”, and have that assessment be correct.

    It ought to be fairly straightforward to calculate the marginal cost of the wars in Iraq and Afghanistan. Take the military budget in 2000 and compare it to the military budget in 2002 or whatever subsequent year you choose. You have to include the supplemental appropriations as well. This is a very, very rough measure, and really should include a substantial chunk of the budget of the Veterans Administration to make the comparison more accurate, because much of the cost of fighting those war was shifted onto the VA in the form of disability pensions and ongoing medical care.

    What you are likely to find after you make this comparison is that the costs of maintaining a standing military as large as ours is a larger cost than the marginal fighting those wars. Withdrawing from Iraq and Afghanistan does not make the cost of the military disappear. At best, it drops by a third, presuming that having troops deployed in those regions is twice as expensive as keeping them at their regular bases. There is still the cost of maintaining housing for military dependents even while the troops are deployed, The wife and kids are entitled to a place to live while the husband is deployed. In fact, if a family consists of two military personnel or one is a single parent, they have to have a plan on file for who will take care of the children while they are deployed.

    This neglects the cost of replacing items destroyed during the war and the cost of ongoing medical care and pensions for the disabled. Any money that we give the foreign government for rebuilding should be included in the marginal cost of the war, and it is, because the value of the construction contracts is covered in the military budget or the supplemental appropriations.

    A larger problem is the ongoing deficits that we have endured for over three decades. The $200 billion deficits that David Stockman said would exist “as far as the eye could see” in “The Triumph of Politics” seem like chump change now, don’t they?

    We are also hugely dependent on cheap labor, whether it is in retail or manufacturing so that items can be sold at a cheap enough price. Price, not value, is what drives purchases for most people. We have been trained to wait for “the sale”, which limits the profit that a company can make. The planned obsolecence that our consumer-driven economy depends on needs those cheap goods so that they get sold rather than build up in warehouses. “Black Friday” sales lasted something like two weeks in my area.

    I believe that the financialization of our economy is the larger problem. If a seller has to take a chance that people won’t pay their bills, they will jack up their prices to the extent that they can, and they will accept credit cards in return for paying a fee to make sure that they get paid most of the cost of the item I’d like to see credit cards that base the fees charged to the sellers on the creditworthiness of the buyer. This might kill credit cards as a business, because the cost of the fees will become too high. We see many retailers who won’t accept the American Express card because they charge 5% in fees rather than 3% for Visa and Master Card. The bet that “store-based” credit cards like those at Sears and Lowe’s make, and lose in my case, is that offering me a 5% discount to use their credit card will induce me to spend more than I can pay off without incurring a finance charge. I find it interesting that Sears decided to sell its credit card busoiness to Citibank. This guarantees them some sort of income from the credit card business without the downside risk of not getting paid. The term of the Sears card are as lousy as ever. For a long time, Sears and Target have made more from their store credit cards than they did from actually selling those goods.

    The rise of easy, if not particularly cheap, credit has done wonders to mask the failure of wages to keep up with inflation, and changing the market basket used to measure inflation understates inflation greatly.

  9. <p><p><p><p><p><p><p>I agree that credit cards are a form of redistributive welfare. There can be no denying that. But, I think you mistake the symptoms for the disease when you mention ‘cheap labor’. The reason labor is cheap is because technology has replaced people. At Amazon they now have little box sized robots that go under their pallets, and move them around the warehouse. Amazon has replaced their forklift drivers with these robots. In the December 2012 Atlantic Monthly the GE plant in Louisville Ky is profiled. It makes about the same amount of appliances it did in the 1990’s, but with one third the labor force. We humans are obsolete, but we just do not know it yet. As for the wars, I believe Dr Krugman in one of his blog entries did the math and found out that yes, without the Bush tax cuts and the wars the budget would have been balanced. If we had raised the tax rates to pay for the wars, the same would hold true. You see, the Fed printed money to pay for the wars, but if the wars had been paid for with tax increases we would not have had a housing bubble, and therefore The Great Recession which has lead to trillion dollar deficits. Basically, it is analogous to drinking too much, and getting a hangover. If you do not over indulge, you do not suffer. With the Fed having gold go from $300 an ounce to $1700 an ounce, the USA was on a total bender. And we are still suffering from the hangover. The only way to fix this problem is to take the total amount of wealth from the 1% that they should have surrendered, during the last decade, to pay for the wars at the time the bills came due. This is how we paid for WWII. The USA has a lot of wealth, so it can easily be taken from the wealthy and put on the credits side of the Federal Government’s balance sheet. Problem solved!</p></p></p></p></p></p></p

  10. Well, maybe.

    Madness is right that easy credit effectively papered over the hardships that te economy has inflicted on us that started well before the 2008 ‘crisis.’ But I can’t call it ‘redistributive welfare:’ there is no redistribution (the money is created by the credit card issuer at the time of sale) and it isn’t welfare (it’s run by the banks for themselves, not under contract to the governmnet like EBT).

    It isn’t hard to believe that tf there had been no Bush tax cuts andno Iraq/Afghanistan wars–i.e. if we had stayed on the same course as under the Clinton administration–the government would be in much better shape. If wwe had raised taxes to pay for the wars, as we’ve done in the past, that would have helped, too. But none of that would have prevented the housing bubble. The bubble was fueled with private debt, and the factors that led to its buildup would not have substantially changed. But if the government was not already drowning in debt in 2008, there could have been a more thoughtful response than what actually happened.

    Barbsright seems to be suggesting an asset tax on the rich, taking not just their current income from this year, but accumulated wealth from before then. David Stockman, Reagan’s budget director, suggested the same thing on 60 Minutes a while back. I could see it as a one-time event, prompted by our current circumstances. The danger is that the politicians will realize that they don’t really need to cut spending, and go back to the well again, and again, to the point where those who have assets will either pull them out of the country or abandon them.

    But none of this addresses the long-term ternd of businesses doing more with fewer employees. Barbsright seems to believe that the answer is to use the wealth taxed from the rich to provide benefits to those of us who have been made ‘obsolete.’ I’m not sure I want to go there: I grew up in NYC in the 1970s, and saw firsthand the effects of welfare dependency. Idle hands are still the devil’s workshop.

  11. I’m used to looking at lifecycle costs. It may well prove cheaper to make an initial investment in equipment with fewer people to run the equipment. We’ve been fighting that battle since the Industrial Revolution. It is nothing new.

    Where I have to disagree with Barbsright is that there is not necessarily a link between the housing bubble and the tax cut. For the people who had no business buying a house, which I define as those who couldn’t make a 20% CASH down payment and a mortgage payment of 30% or so of their after-tax income. Interest-only and 80/20 mortgages where they loaned you your down payment, so you had two loans rather than just one, had a lot more to do with qualifying people to buy homes than the relatively tiny tax cut that they received under either round of Bush’s tax cuts.

    The fact that many banks were immediately selling the mortgages to be bundled into securities led them to be less cautious in making loan because they did not have to live with their bad decisions. The rewards were on the side of making the loan, collecting the fees, and selling the note.

    A factor that hurt a lot of people is having both people in a couple work, and making spending decisions based on both incomes. We’ve had really lousy saving rates for about three decades, so most households have been stretched that whole time. There are things that you buy when no one is at home taking care of the home. Convenience takes on a certain value. However, if one person loses their job, they are in a world of hurt fairly quickly. They might be able to retrench by taking children out of day care and cutting back in other ways, but the real solution is to get another job, which might not happen very fast.

    I collect coins. The 1993 American Eagle Proof set with 1.85 troy ounces of gold was $999. I remember this because I bought this set, and have the packing slip from the Mint in the box. This included about $200 in premium over the spot price of gold at the time. Gold got sold off seriously in the latter part of the 1990s, as people preferred equities to precious metals. The bottom may well have been marked by the Chancellor of the Exchequer’s sale of much of England’s gold reserves. Gold is a store of value. There is a decent speculation premium built into the price right now. One thing that makes it difficult to make money on gold is that you can expect to pay about 8% commission on buying bullion and do well to get the spot price when you sell, and can expect to pay fairly substantial shipping fees because the seller will require that you ship the coins via registered mail . This presumes that you know what you are doing and are not buying the rip-off coins advertised in magazines.

    Gold started to look better in 2000 or so because price had fallen so far from its highs that there was very little downside risk of the price falling further. There was still a market for jewelry, which gave some downside protection as well. Buying jewelry as an investment is a mistake, because jewelers will price the jewelry at at least 100% markup to the gold content. Go with 22K or higher coins (American Eagle (22K), Canadian maple Leaf (24K), American Buffalo, (24K)).

    I would argue against pensioning off the obsolete for a less savory reason: no matter how much they got, it wouldn’t be enough. When there is no link between earning the money and spending it, it is way too easy to spend money.

    Rather than a wealth tax, I would prefer a transaction tax. When we buy stock, we already pay a few cents per trade to the SEC. Having a transaction tax of around 1% of the value of the trade would have the side benefit of killing high-frequency trading or at least reducing it substantially.

  12. I have to agree about the housing bubble and those who couldn’t afford. I have known people who either bought or were going to buy houses they knew they couldn’t afford. Yet in this society we live with instant gratification where you have to have the latest gizmo. I had a friend who couldn’t afford a house yet the banks where going to give her a loan and likely figured she would be evicted eventually anyway, which means they would make money.

  13. Banks don’t necessarily make money on foreclosures even when you include interest paid while the mortgage was current because they have to take the risk that the house will decline in value and there are certain costs that have to be borne in a foreclosure. A house that has been foreclosed upon is seen as damaged goods, so people don’t want to pay full price for it. They want a hefty discount to compensate them for unseen defects or bad maintenance or other potential problems.

    We also forget that making a double-digit profit on one’s house in a year or two was limited to certain areas. I bought and paid off three different houses over 25 years, and I sold two of them by 2005, and live in the third. I always had the bad luck to buy a house after prices had run up, so the sale of my houses was a break-even deal after I took out sales costs. I can’t complain, because I lived in both of the houses that I sold for three years after I paid off the mortgage for only the cost of upkeep, property taxes, and utilities.

    It’s hard to watch prices increase and feel like you will never have anything, much less do as well as people around you are seeming to do. I took comfort in that commercial from about a decade ago where a guy recounted all the things that he had and asked, “How do I do it?”, and answered his own question by saying, “I’m in debt up to my eyeballs!”

  14. If the only thing that had happened was that some people who were unqualified got mortgages, we would not have had a housing bubble. What happened was that enough people–even otherwise sane businessmen–bought into the notion that real estate prices were on an eternal upward spiral, even though the real estate in question did not magically grow additional bedrooms or move itself to a nicer part of town.

    But there’s another factor. Imagine, for a moment, that there had been no housing bubble. In that case, there would not have been the glut of new construction mid-decade. All those construction workers would not have had work. And instead of a ‘prosperous’ mid-decade, we would have been on the ragged edge of recession all that time. (Indeed, it was in this time frame that Barbara Ehrenreich wrote Bait and Switch, the story of a nominally prosperous economy with no jobs.) You could say the same thing about health care: if health care reform had included something that would really contain costs, it would provoke its own recession. Likewise all of the moaning about the ‘fiscal cliff:’ so much of the economy is dependent on government spending that cutting it will bring its own problems.

  15. What you are addressing is the idea of sustainability. With wages flat to declining, it did not seem reasonable that there would be an unending supply of buyers at ever-higher prices. Eventually, the supply of greater fools had to run out. I expected the housing bubble to burst by 2006.

    Mortgage lenders did go out of their way to qualify lenders who did not have a down payment through “stated income” mortgages and other devices. There was a concerted effort to make people feel like they would never own a home if they didn’t buy now.

    The rental market might well be in healthier condition without the housing bubble, because one way that apartment complex owners cash out is to convert the complex to condos, reducing the rental supply. Many of those condos are held up in foreclosure, and with fewer people paying the common costs of the condo complex, their individual payment for those costs increase.

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