Opinion

Gregg Easterbrook

How to fix the flatline economy

September 29, 2011

The global economy doggedly refuses to re-start. Employment is flat, demand is flat, prices are flat, housing sales are flat, growth is nearly flat.

Stagflation and inflation, the old fears, have given way to the flatline economy. Sometimes flatlined patients can be revived. Clear! But what should the therapy be?

Republicans are responding to the flatline economy by demanding what they are programmed to demand — tax cuts for the upper class. Democrats are responding to it by demanding what they are programmed to demand — more government spending.

Both approaches have already been tried, and both don’t work. Only a gridlocked partisan political system would keep demanding more nostrums.

Federal income taxes were cut significantly in 2001 and again in 2003. The recession of 2008 began under a regime of tax cuts. The tax cuts probably did not cause the recession, but they obviously did not stop it either. Federal taxes were cut again in 2010, this time both income and payroll taxes were reduced. No response from the flatline economy.

Lower taxes are nice, of course. But when an idea – tax cuts to spur the economy — has been tried three times, at the cost of trillions of dollars in national debt, and it hasn’t worked, it is time to accept that tax cuts are not the solution.

Stimulus spending has been enacted twice, in 2008 and again in 2009. Lack of reduction in government spending despite declining government receipts is a Keynesian response. Since the 2008 recession began, no federal spending program has known any meaningful reduction, while many have been pumped full of funny-money. Since 2008, the United States has borrowed and spent $5.5 trillion, and is on track to borrow another $1.2 trillion in 2012. Another  $450 billion in borrowing will be added if President Barack Obama’s latest stimulus bill is enacted.

That means more than $7 trillion in borrowing for the economy in just five years, roughly the amount per capita, in today’s dollars, the United States borrowed during World War II. Amazingly, some commentators call this “austerity.” Whatever the label, the Keynesian borrow-to-spark-demand formula has not worked. It is time to accept that more government spending is not the solution.

If more borrowing or more tax cutting aren’t what the economy needs, what is? Optimism. Human psychology is a bigger force in economics than current policy debate acknowledges.

In 2005, many fundamentals of the economy were worrisome – a housing bubble, highly leveraged banks and investment banks, a profusion of liars’ loans. Yet the economy boomed, partly because optimism was universal.

In 2011, many fundamentals of the economy are sanguine – high corporate profits, no resource shortages, low interest rates, ample money supply, low international tensions. Yet the economy is flatlined, partly because there is little optimism.

Consumers make decisions about whether to spend, and corporations make decisions about whether to invest, based mainly on whether they are optimistic. Psychological research shows expectations about the near future to be a more powerful motivator than circumstances of today.

As social scientist Carol Graham of the Brookings Institution noted in her 2009 book “Happiness Around the World“: “In economics, individuals’ expectations about the future are as important as objective trends in the present.”

In his 1995 book “Demosclerosis”, Jonathan Rauch warned that “the rise of entrenched interest groups” using ever-improving lobbying tools would slow economic growth by “locking in subsidies, rewarding political bickering and discouraging concern for the greater good.” Rauch argued that use of government to channel favors to campaign donors and voter blocs will grow steadily worse until government enters gridlock. That, it turn, will cause economic growth to stagnate, while reducing optimism about the American prospect. Rauch’s book, sadly out of print, seems eerily word-for-word a forecast of 2011.

Gridlock prevails in Washington, with politicians of both parties acting like spoiled crybabies, instead of leaders. This causes pessimism regarding the future – which is likely a larger factor in the flatline economy than government spending levels or tax policy.

Footnote: Don’t like my theory that lack of optimism is the core economic problem? Then check Jeremy Rifkin’s new book “The Third Industrial Revolution”, which offers a different explanation.

Rifkin has a reputation as a goofy futurist, but often his analysis is astute. The book argues that recent economic turbulence syncs less with financial shenanigans than with the price of oil. When the U.S. economy begins to grow, oil prices shoot up; that makes demand fall, dampening expansion; lower demand causes oil prices to decline, and growth resumes; oil prices then rise, dampening growth. Rifkin shows that the less oil-addicted an economy is, the more consistent its economic expansion. This is a disturbing message at a time when the same forces causing gridlock in politics are resisting attempts to move the United States beyond oil.

 

Comments
36 comments so far | RSS Comments RSS

People aren’t optimistic, but why aren’t they optimistic? The problem with Keynesian economic theory is that the things that government does don’t occur in a vacuum. We see the government increasing spending by over a trillion dollars per year in a four year period. We understand the consequences of it AND we recognize that we have little to show for all of that spending. Think about what that says for our leadership. That is what is the most troubling and what destroys any confidence people have. We know how corrupt the system has to be for that much money to have to make no real difference.

We have a down economy and we have political leaders who have elected to use that as an excuse to funnel money to political donors. The arrogance of a group of people to do that is beyond what most people can comprehend. Turning the economy around isn’t that difficult. Knock down barriers to job creation where they exist. If you have government projects make them highly visible and transparent. Make the projects tangible things that people can see. What have those in office done? I find it hard to believe that they had any belief that their actions would turn things around.

Posted by AustinG | Report as abusive
 

Very insightful, well-written post.

Posted by skullduggery | Report as abusive
 

I must have been away … tell me … why is Greg Easterbrook writing about economics … ???

Posted by cunn9305 | Report as abusive
 

WEll I have to disagree with the commenters, Optimism is what Tax Cuts and increased government spending is aimed to do. they are both to get people trusting in the system, and be optimistic that it IS getting better (not it will) and get people spending.

It’s the economy stupid

Posted by stupidity | Report as abusive
 

The historical cure to such times has been war. The problem is directing the conflict outward rather than having a rising tide of domestic violence. Such an outcome is not in anyone’s best interest. Yet there seems no other way change can happen here.

The USA has a serious problem.

Posted by txgadfly | Report as abusive
 

Optomism fails when there is no substance to back it up. The recession never ended.

We need action, not false hope. The US has lost 50,000 factories in the last 10 years. We need a fair trade policy, tariffs on cheap chinese imports, and a Value Added Tax to take away the incentive for business to outsource work to slave-wage countries.

You want optomism? Give people a job. You will then see optomism.

Posted by LordCavendish | Report as abusive
 

I don’t recall saying anything about the Great Depression. Leading indicators were mainly negative in much of that period. They aren’t now.

Posted by Gregg Easterbrook | Report as abusive
 

The US economy is a snake eating its tail. In very short, the market is made of people (and the people make the demography)and people buy at different phases of their life and the economy as we know it, the baby boomers economy is aging… dying… the government pumps money into the monster they created and need to maintain, the is no kickstarting the economy, there can only be the next economy and adjust all spending according to reality not hopes and optimism or wishful thinking. It will get better but a better as we dont know it from the future not as we know it from the past.

Posted by Ovecap | Report as abusive
 

No quick fix folks! Solutions: More PT/Temp workers in government like the 20% in the private sector, 4 day (32hr) work week for non essential government (saves jobs & it’s green), role Back Bush tax cuts and increase tax on rich a bit more, stop all aid to Pakistan, faze out of middle east wars in a hurry regardless of anarchy (it’s destined with these small brains), raise sin taxes on alcohol, porn and gambling (the industries we could never tax enough for the harm they do) and let states take care of their own dang problems ( no bail outs for falke states-CA, etc) Deflation of at least a decade folks-bank on it! Government is 40% of GDP and our debt has supassed 100% of GDP! Takes a crisis for people to chnage-we’re there!

Posted by DrJJJJ | Report as abusive
 

It’s somewhat odd to claim that Keynesian stimulus was ineffective when it demonstrably had a positive effect on the economy. The stimulus accounted for approximately twice its cost in economic growth, effectively ending the downswing in the economy and paving the way for an admittedly anemic recovery. But it’s irresponsible to claim that the stimulus didn’t work just because it didn’t work as effectively as it could have (due in large part to the fact that the economy was contracting at about twice the rate that economists thought when the stimulus was being crafted).

Posted by dyrnych | Report as abusive
 

When I read this article I fear that the writer is looking in a rain barrel and expecting to see the ocean. We have what we built. Increased taxes will not fix the country. We have a corrupt political system run by puppits. Do not look for change from Washington. They could not find their way out of a paper bag. The system and people running it are corrupt, and like a corrupted computer or garbage disposal you have to stop and clean out the junk.

Posted by fred5407 | Report as abusive
 

Hi, I am disappointed with Reuters that they allow such blogs. I am aware, blogs offer different perspectives over an issue, BUT this one is beyond ridiculous.

Posted by jay_tee | Report as abusive
 

U cannot be “optimistic” if the reality around u is no good.

With Asia eating away our salaries and jobs where can we find optimism?

U can create false illusions to move forward, but u cannot compete with cheap labor working for $200/month.

Perhaps is time to curb outsourcing and tax import goods manufactured with underpaid labor.

Are our politicians ready to do that?

Posted by robb1 | Report as abusive
 

Actually, Keynes himself was the first economist of note to emphasize the critical importance of mood to economic performance. Remember ‘animal spirits’? Have a look at Chapter 12 of the General Theory, titled ‘The State of Long Term Expectations.’ It’s a masterpiece that one must wish the regulators had read during the bubble years.

Please note also that (1) Keynes himself was no ‘Keynesian’ in today’s terms, and (2) tax-cutting is as ‘Keynesian’ as stimulus spending is, when ‘Keynesian’ be understood in today’s, rather than Keynes’s own, terms. The reason that tax cuts do not work, incidentally, is because we’re currently in the thoes of a debt deflation. Individuals hoard and pay down debt rather than spend to stimulate production and employment. Give ‘em tax cuts and they hoard that too. We’re in the midst of a collective action problem. Only a collective agent — a government, able to borrow at record low interest as ours now can, and to concentrate resultant spending power on real employment-boosting projects like public infrastructure — can solve that kind of problem. It’s what government is for.

Finally and relatedly, it is not strictly correct to say that stimulus spending has not worked thus far. Strictly speaking, inadequate stimulus failed to work adequately. The demand hole with which we’re faced in the present private debt deflation is on the order of several trillions of dollars. Hence the mere $800 or $900 billion stimulus of 2009 (much of which took the form of tax cuts, btw), while it seems to have kept things from growing even worse, did not take us out of debt deflation. Only real infrastructure spending on a massive scale, combined with post-bubble private debt restructuring on a similarly massive scale, will do that.

Posted by RobertHockett | Report as abusive
 

On the face of it, the title of Easterbrook’s column suggests policy prescriptions that would be grounded in the “bounded rationality” concepts of Herbert Simon and formalised and popularized by Daniel Kahneman. But there is nothing of the sort in the argument of the column itself. I am not surprised. When the current economic meltdown started to show signs of emerging — relatively soon after the Long Term Capital Management debacle and long before the Bear Sterns firesale and the Lehman crash of September 2008 – Paul Krugman, who had, to his credit, predicted the then-looming crash and resulting ‘long recession’ earlier than most others, asked the question “What happened to the Game Theoretic approach to Macro-economic and International Trade/International Finance policy analysis and policy prescriptions?” I smiled when I read that comment, knowing that Krugman’s Ph.D. thesis was precisely on the Game Theoretic approach to “managed trade” economic analysis. Easterbrook is well-trained in the use of “bounded rationality” analytical tools, but it’s just that breakthroughs in practical policy prescriptions for macroeconomic stabilization or structural adjustment have not yet reached a critical mass to make a difference. By contrast, when a very bright scholar like Easterbrook argues that “Amazingly, some commentators call this ‘austerity’. Whatever the label, the Keynesian borrow-to-spark-demand formula has not worked. It is time to accept that more government spending is not the solution”, I am left speechless. The Keynesian concept of fiscal, as distinct from monetary, stimulus focuses even more on the QUALITY of public spending – that is, the composition of a total quantum of public spending, among other parameters — than on a given level of public spending. The phrase “borrow-to-spark-demand formula” used by Easterbrook to shoot down Keynesain policies amounts to a strawman that Easterbrook sets up in order to make a cheap argument against monetary stimulus. Joseph Stglitz 1960’s professional-economist article (which, in the 1970’s was THE basic post-graduate required introduction to “‘micro-economic foundations of disequilirium macroeconomics” theory) is what informs the policy prescriptions of those who, like Stiglitz himself and Paul Krugman and Alan Blinder and others, still rightly push for fiscal spending as the best policy to stimulate the economy. What these opinion-leaders do not emphasise strongly enough in their popularizer columns is that, a sustained current high level of public spending in the short and possibly medium term (say 3 years), if recalibrated to focus more on manpower-intensive public works such as infrastructure upgrading (which is sorely needed, anyway) and the provision of stimulus to medium enterprise instead of bailouts to banks and military/defence spending that give sky-high bonuses to arms-manufacturing and financial industry CEOs, would go a very appreciable way towards easing the unemployment problem and revive growth.

Posted by MohamedMalleck | Report as abusive
 

Everything you wrote is essentially true. However, what you’ve left out is significant. Under the helm of Valerie Jarrett, the Obama Administration has long held the belief that perception is everything, so talking up the economy and its soon recovery was seen as the appropriate strategy – EGBOK.

That’s a good strategy in a normal business cycle, but not in a downturn of this magnitude. The problem is that not reacting to the protracted recession has delayed serious discussion of appropriate corrective action.

We should also point out that economists who perform modelling of the American economy all recognize that the breakeven point defining a recession or depression is not zero, but somewhere between three to five percent growth to compensate for population growth and increase in the labor pool. Even the NABE has recently defined the breakeven point as 2.75%. This means that not only are we still in a recession, but we are now clearly in a depression, as Paul Krugman has been saying for over a year.

Denial of the true severe state of our economy has prevented us from exploring the root causes and taking the kind of actions needed to cure the problems.

We need a vision for a new American Dream that is not so dependent on consumerism and home ownership. This is a new direction for the American psyche.

Posted by ptiffany | Report as abusive
 

Outsourcing:
This business model was invented by Ross Perot and his EDS and was very successful at managing critical, specialized components of business such as information technology, similar to medicinal specialists. Outsourcing then (and now) used domestic American employees.

Then, along came John Kerry and Fereed Zakaria who began using the term outsourcing when they meant offshoring, a whole different issue with respect to the American economy and its workforce. Offshoring is a significant problem with respect to the future of our economy as other countries develop white-collar workforces that directly compete with the United States. In fact, many of those in this workforce are better educated and better trained than their American counterparts.

Outsourcing businesses require highly-compensated employees, therefore is highly desirable as a future mode of business for Americans.

Posted by ptiffany | Report as abusive
 

Most posters here as well as Mr. Easterbrook fail to recognize the extent to which excess regulation has slowed our economy. Regulatory legislation such as Sarbanes Oxley, enacted as an answer to Enron, has greatly increased the compliance cost of small companies. While large companies also have increased cost they are easier for them to manage because of an economies of scale type of effect. The effect on small businesses though is crippling. There has been a dramatic decrease in the number of IPOs since that time.

Its not just that though. Bail outs and other things have given advantages again to the huge corporations. Corporations that are so large that they don’t serve customers well, but they are insulated from competition and bailed out when they are in the red so the problems continue. Then you have “Obamacare” and other legislation which is so burdensome that the administration has issued thousands of waivers to different companies and even states in some circumstances. What about those companies that don’t have the political clout to get a waiver? What happens when those waivers expire? In a situation like we are in politicians should be making it easier for businesses to start and grow and for people to be hired. Those in power have done the exact opposite.

Posted by AustinG | Report as abusive
 

The entire problem is oil price instability. It hurts consumers, demand, and business. Its too volatile and the valuations are not reflective of true supply and demand. Until they get gamers to cede control of the commodities markets, no recovery.

Posted by sorestloser | Report as abusive
 

Thank u “ptiffany”… indeed I intended off-shoring, that is using out of US labor force, to perform a variety of jobs, from drafting to customer service.

And of course some off-shore company employees might be better trained than our US counterpart, just because we only focus on the bottom line without considering that over time the “cheap” offshore guy might learn and outsmart the US domestic worker. In the past 20 years this process has constantly impoverished different levels of professional and semi-professional jobs, depressing the morale of our domestic work force.

If we would tax or make not 100% deductible (i.e. penalizing) the off-shoring job practice, we would lift our morale creating more domestic jobs. And when we talk about training and re-training the out-of-work Americans, then they would have a real chance to be put them back in the productive environment and out of the subsidies.

Posted by robb1 | Report as abusive
 

Re: Optimism; a solution: Obama must communicate better with the public. He did a fine enough job of persuading people to vote for him and his plans for medical insurance three years ago. Why didn’t he come out with a persuasive speech outlining his vision, when the medical insurance lobby started with their astro-turf “anti-socialism” campaign? Why isn’t he getting more people on-side? Why was he instead stuck in Washington talking day and night to other politicians who in reality did not want the negotiations to progress too soon?

How can Americans have hope for the future if they don’t see their President publicly backing the core programs in his own economic vision? Fortitude at the top, is what is required. Instead, Obama’s office is letting itself appear to be controlled from the outside. The tail is wagging the dog. Why doesn’t Obama play hard-ball and appeal his case to the voters like Clinton always did? Government shut-down? Bring it on! But don’t tell the public that we did it to them… Holding America to ransom? Your decision – but we’ll make sure they know what’s really going on. The Republicans would soon back down if they felt they had more to lose politically, than still-shrinking middle America had to lose from their dinner-tables.

Where is Obama now, when his Buffett Tax plans are being mocked by Republican presidential candidates? Is he saving all his best arguments for the election campaign trail next year? Why so, when he could explain his vision now (perfect opportunity to do this right now “from the oval office” without appearing to be abusing his position for campaign purposes); and when he could fix the economy now and get a year’s positive track-record to his name before the election.

We need vision and leadership. We don’t need marathon broadcasts or reality TV shows from the Oval Office. We need short, punchy statements that even a child can understand. Diagrams too if you please. Reagan might have been dead wrong about supply-side economics, and tax-reduction (deficit) stimulus; but he knew how to make a presentation…
http://www.slyman.org/blog/2011/07/reaga nomics-and-prudent-taxation/

Posted by matthewslyman | Report as abusive
 

When you make a mistake, and the Government leadership and Corporate leadership surely did in this instance, you connot continue in denial. The outsourcing of jobs to other countries was a mistake, and has to be reversed now, or like a bleeding person, we become a corpse. We are in a bad place in that we have no congressional leadership or white house leadership that knows anything about leadership, except how to be a cheerleader. We cannot get our Congress or President to listen because they are too busy collecting contributions. A Bad Spot…

Posted by fred5407 | Report as abusive
 

OK Easterbook, judging by the comments here, you’ve got a lot of your poor readers agreeing with you. So I’ll do a quick point-by-point fisking of your article instead of reducing myself to ad hominem attacks and acting like a troll.

First of all, you say the stimulus didn’t work. But if you’re going to claim that, then you have to (absolutely HAVE TO!!!) have a baseline to compare it to. In the absence of the government hiring all those people and spending all that money to build bridges and roads etc, then what would have happened? Is your baseline projecting that they would have found gainful employment elsewhere? Are you claiming that the government was crowding out the employment market? Really???

Secondly, is it at all possible that the stimulus was too small? Does that possibility even enter the discussion? After all, when the CBO projected a $3 trillion shortfall in 2008, isn’t it possible that a $700 billion stimulus didn’t sufficiently close the gap?

Thirdly, your point about austerity makes absolutely no sense. Here’s what you said, in a nutshell, “Federal government spending has increased dramatically since the stimulus, but Paul Krugman is an idiot for pointing out that TOTAL goverment spending has actually contracted.”

Um, you do realize that the states are part of the government as well, don’t you? I mean, you do right? Please tell me you at least understand that.

Posted by Sprizouse | Report as abusive
 

Of course, if the the REAL, BASIC ECONOMIC FACTORS involved are -
1) Declining Demand, due to Demographics (Baby Boomer Ageing & Job losses) and the Public anticipating a poor Economic future, due to Debt problems in the US & Europe.
2) Peak Energy & related issues.
3) Neither side of the Economic divide (Keynesians Vs Austrians) can magically solve the current Global Economic dilemma’s.
4) Bernanke & the FED are Impotent.
5) Obama can not stimulate the US Economy, as US Debt is already far too high, so any possible stimulus measures can only be mild and that is, IF any measures can get past the Republicans & the Tea Party.

Then, I WOULD SUGGEST, THE TRUTH IS, THAT EQUITIES ARE GOING TO TAKE A HAMMERING for quite some time and given these circumstances and the history of past October events, there may be even greater volatility over the next 30 days?

Good luck & watch the Debt!

Posted by perceptions_now | Report as abusive
 

Easterbrook seems to share a similar ideology as David Brooks of the New York Times and other so called moderates. They occasionally make an accurate insight that government is going in the wrong direction. But rather take the analysis to the next step to discover what why these errors are occurring and what governing philosophies are most responsible for them both Easterbrook and Brooks cut the baby in half and say the blame is bipartisan.

No, the blame lies with every politician who bargains away responsibility today for the promise of responsibility in the future. There is a faction of federal politicians who are willing to make government responsibility. But rather than getting support from the Brooks and Easterbrooks of our country they are ignored or treated as part of the problem.

It is just as easy to be a bipartisan critic as it is to be a partisan one. What takes real courage is to identify those ideologies that are valid and to stick with them and to offer them one’s personal support. Obviously, Easterbrook lacks this courage. If he were to stand with those challenging Big Government corruption and cronyism he would lose friends and important people would associate him with the Tea Party and other “fringe” interests impugned by political and media insiders.

Fact is, it is oxymoronic for Easterbrook to observe government is consumed and corrupted by special interest groups and then argue that we need a special interest group to promote better energy policy. This, gets to the root of the problem that plagues so called political moderates. They don’t like what government has become but they are unable to accept the logical conclusion that this corruption is a direct consequence of government being too big.

A government that claims the power to tell individuals what foods they can eat or how much health care they can consume or what type of energy they can use will invariably be or will become corrupt. Such is the nature of power.

The US Constitution was established to minimize the powers of the federal government. It was designed to lessen the risk that our government and its politicians would become as corrupt and tyrannical as the British government whose influence the Patriots sought to flee. Any who cannot recognize there are limits to what our federal government should tax, spend or regulate or who lack the courage to admit this is the case are part of the problem and stand in the way of the solution.

Posted by danwut | Report as abusive
 

Easterbrook seems to share a similar ideology as David Brooks of the New York Times and other so called moderates. They occasionally make an accurate insight that government is going in the wrong direction. But rather take the analysis to the next step to discover why these errors are occurring and what governing philosophies are most responsible for them both Easterbrook and Brooks cut the baby in half and say the blame is bipartisan.

No, the blame lies with every politician who bargains away responsibility today for the promise of responsibility in the future. There is a faction of federal politicians who are willing to make government responsibility. But rather than getting support from the Brooks and Easterbrooks of our country they are ignored or treated as part of the problem.

It is just as easy to be a bipartisan critic as it is to be a partisan one. What takes real courage is to identify those ideologies that are valid and to stick with them and to offer them one’s personal support. Obviously, Easterbrook lacks this courage. If he were to stand with those challenging Big Government corruption and cronyism he would lose friends and important people would associate him with the Tea Party and other “fringe” interests impugned by political and media insiders.

Fact is, it is oxymoronic for Easterbrook to observe government is consumed and corrupted by special interest groups and then argue that we need a special interest group to promote better energy policy. This gets to the root of the problem that plagues so called political moderates. They don’t like what government has become but they are unable to accept the logical conclusion that this corruption is a direct consequence of government being too big.

A government that claims the power to tell individuals what foods they can eat or how much health care they can consume or what type of energy they can use will invariably be or will become corrupt. Such is the nature of power.

The US Constitution was established to minimize the powers of the federal government. It was designed to lessen the risk that our government and its politicians would become as corrupt and tyrannical as the British government whose influence the Patriots sought to flee. Any who cannot recognize there are limits to what our federal government should tax, spend or regulate or who lack the courage to admit this is the case are part of the problem and stand in the way of the solution.

Posted by danwut | Report as abusive
 

Spriz,

The White House had projections before the stimulus was voted on. The actual economy after the stimulus was worse than their projections of doing nothing. We have been running deficits in excess of a trillion dollars per year. That doesn’t have a negative effect on growth in the private sector? You want to argue that in theory a stimulus bill could help. While reality deals with an actual bill put together by politicians for their own political(non-economic) reasons. Your $3 trillion shortfall claim seemed strange, especially for 2008. In 2007 the federal government didn’t even spend that much per year. A google search for that returned nothing.

State governments were going bankrupt. They are and were waisting obscene amounts of money. Spending greater than a half a million per year on city managers of tiny towns in CA. Cutting waste and abuse while returning spending to sustainable levels is now “austerity”? You seem to fail to grasp enough to even explain everything that you mention that is wrong.

Posted by AustinG | Report as abusive
 

Oil is a nice place to start.. but “bubble” is better. A “bubble” is needed=opposite of Flagnation. Energy as a whole, including Oil, would be my guess as a “only bubble strong enough”, via reducing costs dramaticly enough to get another 20 year+ expansion.

A truely remarkable.. marketable sector is needed or costs to produce drop heavily.

Since obstruction to any sector seems inevitable, an Energy policy getting Fusion or huge improvements in Solar effeciency seems to be out of the question. I keep my fingers crossed though and pray, for something in Americas future, other than a new FASB standard, new Dirivitives, War, massive inflation, new currency ect..

Need something bigger than optimism, something Infrasturally obviously a game changer.. adding value inherent. And not 100 year payment plans for home loans Briton, or doubling ratio of of debt to GDP Japan.

Pray folks, pray. Other wise look forward to the North American new currency.

Posted by Chivelry | Report as abusive
 

@AustinG, Easterbrook:

Welcome to class. I will try to educate you both at the same time. Let’s not waste any time.

Obama had the CBO projections before crafting the stimulus bill, but he chose to understate the projections handed to him. He said, in speeches, that we might fall short of potential output by $1 trillion. What the CBO said was that output in 2009 and 2010 would be 6.8% below potential which equals $1.93 trillion ($14.2T economy x .068 x 2 years = $1.93 trillion shortfall). The CBO also gave a range and said the worst case scenario could be three years and a $3T (or more) shortfall).

All of this was written in early 2009 and all of it was given to Obama. So why he believed the economy might fall $1 trillion short is strange and why he thought a GOP-shrunk $700B, tax-cut-heavy stimulus would be enough to solve a $2 trillion (or potentially $3 trillion problem) is just really hard to fathom. Here’s your evidence, by the way:

http://www.cbo.gov/ftpdocs/99xx/doc9957/ 01-07-Outlook.pdf

As for your second point about growth and government spending? Well I think you lack the rudimentary understanding of output and GDP (don’t worry, so does Easterbook… a few posts back he stupidly tried to make a case that government spending doesn’t translate to GDP when, in fact, government spending is PART of the GDP equation). To wit: Y = G+I+C+NX where:

Y = GDP
G = GOVERNMENT SPENDING!!!
I = Investment
C = Consumption (or consumer spending)
NX = Net Exports

Now then, let’s examine why your pathological government hatred is misplaced shall we?

The G in the GDP equation above AUTOMATICALLY runs counter cyclical to investment and consumer spending (meaning, basically, the “private economy” as you put it).

But why does government spending automatically run counter cyclical to the private economy? Because when the “private economy” goes into a recession, tax receipts (government income) automatically falls because everyone’s making less money (and some unlucky souls aren’t making any money at all). BUT, government expenditures AUTOMATICALLY rise to handle things like unemployment insurance and the concurrent increased demands made on public institutions by the newly out of work and the poor (who are always more adversely affected in any recession). All of this is fact. All of this is smart. And all of this is something that all responsible governments have understood and have done for nearly a century to offset the naturally cyclical nature of capitalism.

So now that you understand that government spending automatically runs counter cyclical to the “private economy”, doesn’t it follow that when the “private economy” tanks to such a remarkable degree as it has in this recession that the government should spend equally to meet the shortfall? Of course it does! Thanks for playing…
The Fed always tries to pump vast amounts of money into the economy via the fed funds rate during every recession and, since the 1940s, this policy has usually been sufficient to bring us out. But now that the fed funds rate has been at zero for three years shouldn’t the government spend more money since we’re clearly facing extraordinary circumstances? I’ll answer that question for you AustinG; Yes. Yes, the government should spend even more money.

Now I can hear you and Easterbrook going insane on the whole “wasteful government spending” line of wingnut baloney after reading that last paragraph, but please remember that standard economics says it really doesn’t matter where the money goes when you’re in a depression and monetary policy (the fed funds rate) has proven ineffective… hence John Maynard Keynes’ money hole theory. Look it up.

However, even if we accept that I think I can fisk your “wasteful government” spending line of baloney anyway.

The federal government spends 70% of its money on Medicare, Medicaid, Social Security and the Military (again, look it up). The first three are enormously popular programs that everyone loves and that will never be cut. The last one is an enormously popular program that conservatives love that will never be cut either.

But what this means is that the federal government is not comprised of an army of bureaucrats stealing your money (like wingnuts would have you believe). Instead the federal government is basically an insurance company with an army attached to it. Try to remember that before penning anti-government screeds in the future. There is simply very little available to be cut from federal government spending. Very little. And right now you should WANT them to spend as much as possible on anything they can, wasteful or not.

Finally, as for the state governments going bankrupt thing you talked about? Now that I’ve educated you to the “counter-cyclical” thing, maybe you see that the state governments’ tax receipts fell precipitously at the same time that they needed to take care of an army of newly poor?

But I don’t think your argument holds water even with that. So now I think now it’s your turn to provide proof that the state governments were horribly mismanaged and were going bankrupt. As a person very familiar with municipal bonds I can tell you that you’re going to have trouble supporting your thesis about widespread local and state municipality bankruptcies. And that should be impressive in and of itself no? That even in the worst recession you or I will ever see in our lifetimes (fingers crossed) the states haven’t gone bankrupt. I think that’s impressive.

Posted by Sprizouse | Report as abusive
 

Spriz,

Where to start. As much as I can appreciate you trying to educate me with your limited knowledge there are many things that you do not understand. You have to go beyond Eco 101. While deficit spending may technically keep GDP higher it is something that provides no real value to the economy. As Mr. Easterbrook showed in another article many of the local projects that are funded with federal tax dollars are done with an amazing lack of efficiency.

Paying $1 billion for a $1 million bridge doesn’t make the country better off. It makes the country worse off. We could pay people to break windows each night and others to create and install new ones each morning. GDP would go up, but we would be worse off(though you seem to think otherwise). The resources used for that fruitless activity could have been used to do almost anything that would provide a benefit for the citizens of the country. Instead we devalue the work that is done by those who citizens willingly pay in exchange for that work.

Social Security and Medicare are popular? It depends on how the question is asked in polling. In a question asking whether people would opt out of paying payroll taxes if they also would never get benefits, 60% said they would opt out. Social Security and Medicare are as popular as any program that you will go to jail if you don’t pay into. Seniors rely on those programs in part because they have been forced to contribute to them their whole lives. We do owe the people who contributed to those programs. This doesn’t mean that a tremendous amount of waste does not exist in the programs or in the military. They admit to over $100 billion in waste in Medicare every year. Can’t touch that though right.

Thanks for the “education” by the way. I would take your argument apart more if I had the time or felt the need.

Posted by AustinG | Report as abusive
 

AustinG,

You couldn’t be more wrong, or put out more fallacies, or attribute a bunch of things I didn’t say to me.

First of all, did I say we need to “break windows” and fix them? Where on Earth did you come up with this nonsense? Destroying infrastructure and rebuilding it would absolutely be a waste of resources. Keynes’ money hole advocates no such thing and neither did I. Stop making up things whole cloth please.

Secondly, paying $1 billion for a $1 million bridge could make sense if the bridge lasts long enough. Have you heard of the time value of money? For goodness sakes, there are New Deal-era bridges and infrastructure still in use all over the place. Paying $1 Billion for a bridge that will provide economic benefit to people for 70 years is a no-brainer.

But beyond that, once again, you link to no facts on anything you’ve said but demand that I do the same. Where is your “PROOF” that we spent a $1 billion on a bridge that should have cost only $1 million??? Where is your proof for ANY of the wingnut b.s. you spewed about Medicare and Social Security? Can’t provide it can you?

Typical wingnut liar.

Posted by Sprizouse | Report as abusive
 

Oh, and still waiting for the evidence of widespread municipal bankruptcies that you lied about earlier…

Posted by Sprizouse | Report as abusive
 

Sorry, Spriz

I was referencing arguments that have been made on both sides of this line of thought that are a little farther down the road. Spending $1 billion on a $1 million item is NEVER a good deal. They aren’t getting a suped up bridge that will last longer or allow more cars to cross at once for the $1 billion. They are getting the same bridge for 1,000 times as much money. Educate yourself on the rest. I have spent enough time on someone who calls people names and claims that they are lying simply because he can’t dispute what they are saying. Your lack of knowledge does not make me a liar. (The bridge mentioned above is a theoretical based on the inefficient manner in which government spends money. If you want some evidence of that scan back a few weeks and Mr. Easterbrook wrote about some real examples)

Posted by AustinG | Report as abusive
 

I wonder if that 700 billion had been spent solely on infrastructure what the effect on unemployment/optimism had been.

Posted by 99percent | Report as abusive
 

EDT in the depression the prevailing theory was that consumer refusal to buy new things was the problem. In fact this was the beginning of manufacturing things to last just long enough to keep the cycle of purchasing going.

Anyone that doesnt’ think the consumer psychological state is a major portion of our economic recovery is not being a rational person.

Now the question should be is consumer optimism down for valid reasons or has it become a self reinforcing thing.

I think it’s still stuck down for a lot of reasons.

Debt is high, Medical Costs are eating up wages faster than they are going up, Government programs to help people are being underfunded or just turned off, Local agencies like churches and non-profits that step in to fill the gap are overwhelmed, more than 1/4 of the working age people in the economy are unemployed or underemployed, a college education is far pricier and delivers less return for the money, our government is deadlocked so badly the simplist issues are DOA, people are stuck in houses that are worth less than thier mortgages, more and more jobs at higher and higher levels are being outsourced.

The Carter years are beginning to look pretty damned good right now.

I could probably go on with valid reasons for the downturn in optimism for another paragraph or two without even trying. The consumers aren’t the ones who are wrong. The economists trying to figure out why thier model doesn’t work as expected are the wrong ones.

Posted by samuel_c | Report as abusive
 

The last president that gave us real numbers and asked for sacrifice was Carter. We ran him out of office and are still bashing him for it.

Obama tweaked the numbers in his favor. So has every other president since 1980. Reagan went so far as to change the way we calculate inflation to make things look better. Clinton talked about the “imaginary” budget surplus that was actually a smaller deficit than projected.

If we’d do a better job of calling our politicians on things like this at election time we’d be better off. Instead we complain when the opposition massages the numbers but ignore it when it’s our side.

EDT is correct that most states run their budgets far better than the Fed. Most of them because thier state constitutions require them too.

Posted by samuel_c | Report as abusive
 

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