MacroScope

Spend more now, save more later. It may sound somewhat counterintuitive, but it’s the best prescription for getting out of deep economic ruts, according to a new paper from Bradford DeLong and Lawrence Summers, former economic policymakers now in academia.

In particular, the economists focus on the notion of hysteresis, which is a state where a prolonged period of economic retrenchment and high long-term unemployment creates new types of structural barriers to reintegrating the jobless back into the labor market. It thereby does lasting damage to the economy’s potential rate of growth.

Against this backdrop, DeLong and Summers argue a highly stimulative fiscal policy can actually reduce the long-term debt burden. They argue vigorously against policies of austerity, saying they are self-defeating and ultimately may actually worsen a country’s debt profile.

Our analysis simply demonstrates that additional fiscal stimulus, maintained during a period when economic circumstances are such that multiplier and hysteresis effects are significant and then removed, will ease rather than exacerbate the government’s long run budget constraint. […]

While our analysis underscores the importance of governments pursuing sustainable long run fiscal policies, it suggests the need for considerable caution regarding the pace of fiscal consolidation in depressed economies where interest rates are constrained by a zero lower bound.

The speed of the backlash building against Russia's paramount leader Vladimir Putin following this week's parliamentary elections has taken investors by surprise and sent the country's shares and rouble down sharply lower.

Comparisons to the Arab Spring may be tempting, given that the demonstrations in Russia are also spearheaded by Internet-savvy youth organising via social networks.

But Russia's economic and demographic profiles suggest quite different outcomes from those in the Middle East and North Africa. The gathering unrest may, in fact, signal a reversal of fortunes for the stock market, down 18 percent this year, argue  Renaissance Capital analysts Ivan Tchakarov, Mert Yildiz and Mert Yildiz.

The Federal Reserve should not interpret signs of moderation in the U.S. recession as a reason to stop its emergency measures to heal the economy and financial markets, according to Payden & Rygel economist Thomas Higgins.

“An often overlooked danger is that policymakers may cut back on monetary and  fiscal stimulus too soon. This is what happened in Japan in the mid-1990s and in the United States during the Great Depression of the 1930s,” he wrote in a research note.

In that context, Higgins said the Fed missed a chance to stay ahead of the curve by not announcing an increase in its purchase of Treasuries, thereby allowing benchmark bond yields to climb above 3 percent.

Thirty-first U.S. President Herbert Clark Hoover once said: "Blessed are the young, for they shall inherit the national debt."

Governments around the world are borrowing heavily to finance their fiscal expansion – unprecedented in size and scale – to prevent severe economic downturn.

However, outspoken independent economist Roger Nightingale thinks fiscal stimulus will not work.

How’s this for a merry little Christmas?

Before the U.S. holiday shopping season even begins, Morgan Stanley’s chief U.S. economist has given up on consumer spending — not only through Christmas ’08 but all the way until next summer at the earliest.

“As we see it, the current collapse in consumer spending likely will be the most severe and longest in the postwar (World War Two) period,” economist Richard Berner wrote in a note to clients. ”The recovery in consumer spending likely will be moderate as consumers embark on a long period of rebuilding thrift.

Why so grim? Well, between the 1.2 million jobs lost since the beginning of the year and the downdraft in the housing and stock markets, income is taking a hit and household wealth is down about $7 trillion. Yes, trillion with a ‘T.’ Oh yeah, and there’s that credit crunch.