January 08, 2008
The Call for Keynes
Prof. Roubini reports that the attendees of the recent American Economic Association Meetings finally take a recession in the U.S. as a given. Even Treasury Secretary Paulson has joined the recessionist club. The economic numbers point to a serious one. Recessionary tendencies in the rest of the world will likely follow, though probably not to the depth that is to be expected for the U.S.
What to do about this?
Earlier Roubini called for a serious cut of the central banks' interest rates. But this would again increase the creation of money and risk another bubble. Argueing that too low interest rates have been the cause of the current credit mess and interest cuts would just revive and prolong it, Doug Nolan opposes such reflationary medicine. He sees four risks:
- Uncontrolled dollar devaluing and a possible currency market dislocation
Geopolitical risks caused by inflation of raw goods (hungry people revolting against their governments)
More destabilizing money flow to the BRIC (Brasil, Russia, India, China) countries
Much higher consumer price inflation in the U.S.
While the first three problems are only indirectly effecting the U.S. public, the fourth one is a serious worry even for isolationists. Inflation is already at a multi decade high (Gold today broke another record).
Besides interest rate cuts by the central bank there are other tools available.
The economic standard approach to lessen the effects of a recession is Keynesian deficit spending:
an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the employment of labor, all else constant lowering the unemployment rate. (...) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though most economists would say that such policies have weaker effects on, which method has a better stimulative economic effect is a matter of debate.
The economic discussion in the U.S. now evolves around the last sentence. Should taxes be lowered or should the government spend more on domestic programs?
The Wall Street supply sider side of the discussion and the Bush administration predictably call for further tax cuts. (Times are good, we can cut taxes, times are bad we must cut taxes.)
But as Jared Bernstein points out, a buck spend on tax cuts is not the same than a buck spend elsewhere:
For example, analysis of this point has found that a dollar of revenue sacrificed for a dividend or capital gains tax cut yields a measly [GDP increase of] nine cents.
You get a much better bang-for-the-stimulative-buck from direct spending. A dollar spent shoring up Unemployment Insurance yields $1.73; a dollar spent on fiscal relief to the states yields $1.24. This last idea—ratcheting up state grants from the Feds—is particularly important right now, since many state and city coffers are coming up short due to the local revenue impacts of the housing meltdown.
Dean Baker argues to use a stimulus package to futher green energy and green consumption behaviour. Use the stimulus package to build subsidized wind energy mills and to subsidize public transportation.
The amount talked about (sub.req.) is $75-$100 billion of stimulus package per year over several years, financed by further public debt.
But here's the problem. Keynes concept is based on saving in good times to be able to spend in bad times. The U.S. consumers, as well as the government, has spend far beyond their income throughout the last years. The fed had lowered the interest rate too far and has already created significant inflation. There is not much, if any, room left to now use the standard Keynesian deficit spending medicine without serious negative sideeffects. Exactly the problems Noland points to: (much) higher (global) inflation and further uncontrolled devaluation of the U.S. dollar.
In a just published new piece Roubini comes to the same conclusion:
We did indeed waste all our macro policy bullets in 2001-2004 in “the best recovery that money can buy” and we are now left with relatively limited room for monetary and fiscal policy stimulus. This is one of the main reasons why the 2008 recession will be more severe and protracted than the mild 2001 recession.
In my view any stimulus package to lessen the recession effects has to be within these boundaries:
- The money needs to be spend on local infrastructure investment to decrease unemployment, not to induce larger consumption.
- Public debt is already to high. Further borrowing has serious side effects like higher effective interest rates, a dollar dump and higher inflation. The spending must thereby be financed by tax increases for very high incomes (which would also remove the moral hazard that led to irresponsible behavior of bank CEOs and others.)
Even if such a stimulus is enacted one has to keep in mind that:
- the current recession will be several years long (the housing slump will take years to heal),
- it is needed to cure the U.S. current account deficit and to renew savings,
- any stimulus will not be able to avert the recession - only to lessen its effects.
In the current political constellation it is doubtful that any serious measure will be taken during 2008. The effects of the recession, much higher unemployment and a significant drop in GDP, will thereby become worse.
As the economic mess will turn out to be the primary matter in 2008, it will interesting to see what recipies the candidates will present to heal the economy. Paul and Edwards are the candidates that have the most radical positions here. They could use the trouble to their advantage.
Posted by b on January 8, 2008 at 11:40 AM | Permalink
I remember reading one commenter at some site saying that whenever he saw things like this he went out and bought more ammo.
Posted by: R.L. | Jan 8, 2008 3:27:30 PM | 1
that is probably a wise move. what can we do? learn to garden? have something to barter?
as I approach the age where I had hoped to finally stop working, it appears that I will placed into survival mode and that is more than a little disappointing.
save us Barack!
Posted by: dan of steele | Jan 8, 2008 3:41:41 PM | 2
a certain middle class which has benefited directly from the schemes of shoch capitalism will now found themselves proletarianised or even lumpenproletarianised - that is they will start to feel the burden as the marginalised have felt it over the last thirty years
these are going to be dark times in more ways than one & these times appear to resuccitate newer forms of fascism which mirrors capital rather than a socialism as a hammer with which to change it
Posted by: remembereringgiap | Jan 8, 2008 3:52:29 PM | 3
Thing is b, these are the crucial issues, as Paul and Kucinich as saying.
Media (aka Murdoch) will not give them a hearing.
Posted by: Cloned Poster | Jan 8, 2008 4:55:43 PM | 4
Good analysis! I would only like to add that all of this will be playing against a background of killer oil prices:
Bloomberg, Jan. 7 - The fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by the end of the year.
Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period.
Posted by: Alamet | Jan 8, 2008 5:16:05 PM | 5
Oil could drop too Alamet. Read a few other "experts". This $200/bbl oil thang has been pretty well debunked over at rigint BTW. More are predicting $75/bbl by end of 08.
On methods & policies to bail us out...remember that the capitalist system is built on growing money supply so naturally there is a limit. Cash is still flowing UP into the coffers of the 1%; I see that each snort is longer and deeper than the last. Monetary adjustments do not moderate population growth, provide more arable land, increase fresh water supply, etc.
I'm trying to think outside the box but it is very murky out there.
Posted by: rapt | Jan 8, 2008 5:56:20 PM | 6
Rapt, I know $ 200 is very out there, a long shot, the article is explicit about that. And I agree that the price will fall once recession sets in. But it will never return to a comfortable level. From this point on, it will continue to be a vise (if that is the correct term) on the real economy, stunting growth. And even $ 75 would be pretty constraining in a recessionary environment, wouldn't it?
Posted by: Alamet | Jan 8, 2008 8:03:57 PM | 7
Remembering that the Clintons were the ones who set the China MFN Trade bear trap,
and pandered to the banks when big bankers wanted to get into the mortgage business,
and let Happy Days Al sleep in the backroom while the dot.con was burning the wires,
then seeing Clinton ahead in NH, and "I never met a torturer I didn't like" McCain
ahead for the repugs (which is real Munchausen, since McCain was tortured himself),
with DoD rattling the saber in Iran as Cheney chi-ching's his Halliban money train,
and here we've got oil at $100 and inflation at 13%, just like Reagan did to Carter,
and Bush is doing to Clinton, it was Iran then, it's Iran now, thirty-five f--king
years later, just when I was getting a leg up, back to the 1950's again, jibjab-it!
There's only so much you can stand of this, like being pressed to death by stones.
So here, a little gulag humor among bolshevik (derived from bolshinstvo, "majority") comrades, with a tip of the hat to the Eagles, and maybe better days:
I used to have a woman named Hillary.
Every day I told her that I loved her, that
I needed her, I held her, and squeezed her,
and told her I was never gonna leave her.
I know she loved be too, because, well, you
see, she had this little medical condition,
it's really cute, and she was so embarrassed
that she made me promise never to tell, but
whenever she became emotional, she'd throw
up a little in her mouth. I know, so what?!
So whenever I told her how much I loved her,
I knew she loved me too, because she'd throw
up in her mouth, then wave her hand and run
to the toilet to throw up more. Am I a lucky
guy, or what, to love someone so emotional!!
When she'd finally come out of the bathroom,
I'd run to hold her, but she'd be so ashamed
about it, she'd wave me off, grab her purse,
and tell me she was going to her girlfriends.
My woman had lots of girlfriends! They would
call our house every night, demanding to know
where she was, and refusing to hang up until
they found out! Wow! What great girlfriends!
I felt bad for my guy friends too, because when
I'd call around to see if my woman was calmed
down and ready to come home to some good loving,
one or the other of my guy friends would admit
she was at their house, just talking, you know?
I have such great guy friends! My woman would
come home sometimes 3 or 4 in the morning, with
her makeup all messed up from crying about me,
and my friends would avoid eye contact the next
day, like staying up all night holding my woman's
hand was no big deal. Wow, what great guy friends!
So if you see her, my woman Hillary I mean,
give her a big hug and a kiss for me, and tell
her how much I love her, even with her funny
little medical condition, it's alright with me!
I just love bush so much!!
Posted by: Trepid Alliance | Jan 8, 2008 10:36:59 PM | 9
The obvuios answer is more tax cuts for the rich, so they can invest the money in factories in Bangladesh, Malaysia and the Philippines, thus ensuring a supply of cheap consumer goods for Americans struggling on minimum-wage service jobs.
Posted by: ralphieboy | Jan 9, 2008 3:33:35 AM | 10
Oil could drop temporarily a little bit. The famed demand destruction of the economists (as well as the market so called taking care to put new products on line) will not occur.
Oil is the life blood of the West, of the new industrialisers; it packs such a punch that paying practically anything is worth it, return is always there, or simply essential in the present state of affairs. There are no replacements.
2008 will see an undulating plateau, rising ever higher in starts and jumps. Doubt very much it would hit 200 dollars, though it is possible. It doesn’t matter much - the competition in this case is eg. control of Iraq, Nigeria, etc.
Not cute stuff about exchanging coconuts for hair dye, basking in happy exchanges, chugging the economy and growth along, making everyone a local stellar entrepreneur, with prices shifting here and there..
Nor is it about inflation, the price of credit, etc.
Fierce repression, wars - as we have already seen - will be needed for control. Iraqis have already died in the millions, counting sanctions and oil-for-food. But the wild extravaganza, the energy rich world, 1920>2000 (oil, before that coal, etc.) will come to an end and very soon.
What ppl generally like to ignore is that this competition has been long standing, From ww2 at least, and that the ‘new colonialism’, under the fig leaf of ‘aid’ or ‘promoting democracy,’ ‘development’, etc. has had the aim of extracting and controlling resources. The Congolese use no oil per capita, the US a lot, though they are not the biggest consumers. The past and the present show the future clearly; there is no need to invoke dire new happenings, rising prices, etc.
Posted by: Tangerine | Jan 9, 2008 2:04:04 PM | 11
Yeah, right, blame it on the clintons, tail wagging the dogs again. If I remember it right it was first proposed by the tricky dick team, reinforced thru the team that asked for the hostages to be held till after the the elections(after a summer of negotation), and then resubmitted by the poppy of the one in now. It was approved by Clinton after being pushed thru by a Gringrich congress. Now put those fethers back in your cap and smoke the right stuff not the looney stuff.
Posted by: Buck | Jan 9, 2008 10:10:40 PM | 12
Nobody really likes a budget surplus. To friends of Rush Limbaugh, it means that the government is taking more of your money than it needs to do its job, which should be as limited as possible (except for military spending).
For friends of Al Franken, a surplus means that the governemnt is not spending enough on social programs and education.
But the key to Keynes is to create a surplus tp be laced at the government's disposal to tide the economy over the occasional cyclical dip. Trying to do so by crating more debt can send everything into the kid of tailspin that we are experiencing right now.
Posted by: ralphieboy | Jan 10, 2008 4:08:57 AM | 13
It is so droll when amerikans try to reduce this mess to partisan politics (see the piece alleging 'it wasn't the Clintons, it was the last devil who walked in rethug company - Nixon the burglars' friend). Droll because it has been impossible to slide a cigarette paper between the dems and the rethugs on the issues which have led to the problems.
eg Rampant unregulated usury accompanied by deliberate refusal to properly tax corporate profits and investor gains in the corporate welfare sector known as the defence budget. The ratio of 'intellectual property costs' over wage and salary costs is also too high, meaning that a large proportion of the expenditure doesn't re-enter the economy as consumer spending. It is consumer spending which has the greatest multiplyer effect when "parish pump priming' with government expenditure.
First it was the basic manufacturing work in the defense sector which was 'offshored', then management, info tech, and design positions were moved out.
Pretty soon the last major source of employment for amerikans in 'defense' - the cannon fodder - soldiers, sailors, airmen and marines are being replaced by contractors.
I don't believe most peeps in amerika have caught on that a huge chunk of these contractors are foreigners.
Fijians, Poles, Nepalese, soldiers from all over the world who send their pay back to their home country where the wages enable impoverished families to come up in the world. They buy cars, appliances and the big one a home. little if any of this stuff is made by amerikan corporations, much less made by amerikan workers. To add to the indignity few if any of the foreign recruits pay any income tax to amerika.
In my country we became used to the fact tat thee bulk of manufactured goods we consumed were now made overseas.
One can put forward a valid argument that in the greater scheme of things the nation of manufacture of goods made by private corporations is an irrelevanvcy. That argument does not extend to the distribution of tax revenue. It is vital that tax money collected in an economy is spent in it otherwise taxes will have a much stronger recesionary effect.
The corporate profits and intellectual property royalties are used in speculative markets which put further inflationary pressure in the economy without increasing productivity at all.
Posted by: Debs is dead | Jan 10, 2008 6:08:52 AM | 14
Steven Roach via the FT: America’s inflated asset prices have to fall
Forget central bank intervention, fiscal stimulus and China-bashing - what America needs is a sharp decline in asset prices, and to stand back and let markets do their work, says Stephen Roach, chairman of Morgan Stanley Asia, writing in Tuesday’s FT.
The US has been the main culprit behind the destabilising global imbalances of recent years, he argues. America’s massive current account deficit absorbs about 75 per cent of the world’s surplus saving. Most believe that a weaker US dollar is the best cure for these imbalances. Yet a broad measure of the US dollar has dropped 23 per cent since February 2002 in real terms, with only minimal impact on America’s gaping external imbalance.
Dollar bears argue that more currency depreciation is needed. Protectionists insist that China – which has the largest bilateral trade imbalance with the US – should bear a disproportionate share of the next downleg in the US dollar.
There is good reason to doubt this view, says Roach.
Posted by: b | Jan 10, 2008 8:43:07 AM | 15