... why is that the same fucking people derail this thread into god knows where...

Let's try to consolidate and simplify the discussion as it is:

Me: Monetary policy is useless at the momment, since we're already at or near 0%. The Fed can't lower the interest rate to -1%. Therefore Fiscal Policy is the only viable option in order to fight the recession.

I believe that fighting the recession, counter-cyclical policy, is good. Ignoring the moral aspects, it's economically bad to allow deflation to occur (1). Nobody will loan any money, if they can simply gain more value by hoarding it. Nobody will buy anything, if goods will become cheaper. Ignoring the impact a great recession will have on future employment via education and depressed workers, we will have a reduction in long term output. Long term recovery, won't be just an shift in expectation, reduciton in price levels and wages, but a reduction in actual potential output.

(1) I believe deflation will occur, because I believe we are suffering from a demand shock. People are not spending as much as their income as they used to. The aggregate price will go down. Disinflation has been happening, we had a brief period of tiny deflation, and here is the proof:

Current Inflation Rate

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave 2010 2.63% 2.14% 2.31% 2.24% 2.02% NA NA NA NA NA NA NA NA 2009 0.03% 0.24% -0.38% -0.74% -1.28% -1.43% -2.10% -1.48% -1.29% -0.18% 1.84% 2.72% -0.34% 2008 4.28% 4.03% 3.98% 3.94% 4.18% 5.02% 5.60% 5.37% 4.94% 3.66% 1.07% 0.09% 3.85% 2007 2.08% 2.42% 2.78% 2.57% 2.69% 2.69% 2.36% 1.97% 2.76% 3.54% 4.31% 4.08% 2.85% 2006 3.99% 3.60% 3.36% 3.55% 4.17% 4.32% 4.15% 3.82% 2.06% 1.31% 1.97% 2.54% 3.24% 2005 2.97% 3.01% 3.15% 3.51% 2.80% 2.53% 3.17% 3.64% 4.69% 4.35% 3.46% 3.42% 3.39% 2004 1.93% 1.69% 1.74% 2.29% 3.05% 3.27% 2.99% 2.65% 2.54% 3.19% 3.52% 3.26% 2.68% 2003 2.60% 2.98% 3.02% 2.22% 2.06% 2.11% 2.11% 2.16% 2.32% 2.04% 1.77% 1.88% 2.27% 2002 1.14% 1.14% 1.48% 1.64% 1.18% 1.07% 1.46% 1.80% 1.51% 2.03% 2.20% 2.38% 1.59% 2001 3.73% 3.53% 2.92% 3.27% 3.62% 3.25% 2.72% 2.72% 2.65% 2.13% 1.90% 1.55% 2.83% 2000 2.74% 3.22% 3.76% 3.07% 3.19% 3.73% 3.66% 3.41% 3.45% 3.45% 3.45% 3.39% 3.38% Note: Red indicates Deflation, NA indicates data not yet released. Get more Historical Data from InflationData.com

July 11, 2010, 6:25 pm

What Have We Learned?

Sometimes it’s useful to step back slightly from the current fray and ask what we’ve really learned about macroeconomics over, say, the past year and a half. Here’s how I see it: in early 2009 there was a broad divide between two policy factions. One, of which I was part, declared that we were in a liquidity trap, which meant that some of the usual rules no longer applied: the expansion of the Fed’s balance sheet wouldn’t be inflationary — in fact the danger was a slide toward deflation; the government’s borrowing would not lead to a spike in interest rates. The other side declared that we were in imminent danger of runaway inflation, and that federal borrowing would lead to very high interest rates.

What actually happened?

 

 

(The dip and rise in the interest rate represents the rise and fall of oh-god-we’re-all-gonna-die fears).

Now, the guys who got it all wrong are winning the political argument, in large part because the Obama administration went for half-measures, and is now being punished for a weak economy — which people like me predicted would happen.

But never forget that as far as the facts go, the Keynesians won this hands down.

 

 

Legal Krugman: Lost Decade Looming? May 21, 2010, 7:49 am

From Paul Krugman on The New York Times’s Op-Ed Page:

Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

For the last few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates. 

And what about near-record unemployment, with long-term unemployment worse than at any time since the 1930s? What about the fact that the employment gains of the last few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

Let’s talk first about those interest rates. On several occasions over the last year, we’ve been told, after some modest rise in rates, that the bond vigilantes had arrived, that America had better slash its deficit right away or else. Each time, rates soon slid back down. Most recently, in March, there was much ado about the interest rate on U.S. 10-year bonds, which had risen from 3.6 percent to almost 4 percent. “Debt fears send rates up” was the headline at The Wall Street Journal, although there wasn’t actually any evidence that debt fears were responsible.

Since then, however, rates have retraced that rise and then some. As of Thursday, the 10-year rate was below 3.3 percent. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.

What’s behind this new pessimism? It partly reflects the troubles in Europe, which have less to do with government debt than you’ve heard; the real problem is that by creating the euro, Europe’s leaders imposed a single currency on economies that weren’t ready for such a move. But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing.

It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

Will the worst happen? Not necessarily. Maybe the economic measures already taken will end up doing the trick, jump-starting a self-sustaining recovery. Certainly, that’s what we’re all hoping. But hope is not a plan.

 

 

 

What happens when you shift the yellow line to the left? What happens to output? What happens to price level?

What happens when you shift the blue line left? What can cause a supply shock (hint: an increase in the price of production factors). When did this famously happen, and what did we call it?

 

 

 

 

My assumptions on what anti-Keynesians are trying to say are:

1) Because Greece, and other countries in Europe are in danger of defaulting, the restof the world must stop borrowing money.

2) Borrowing money reduces investment, because of the crowding out effect.

3) The last two stimulusis didn't work. Keyensians are cheap because they retroactively claim that "government didn't spend enough", which makes me feel like it's a continual upward spiral of spend, spend, spend.

4) We will suffer from inflation, because we're printing money (hence the ocnversation about commodity money???)

5) Unemployment benefits and government spending only causes inefficiency, because people will not look for work when they're given money.

 

Did I assume correctly?

So, Akvod -

How much money should of the US spent during the initial stages of the recession. You argue Obama didn't do enough, so I am curious what would be 'enough'.

Increase taxes and pay off the  national debt. No more deficits. Stop the government mismanagement and stop the wasteful public spending. Economic Austerity programs are needed to get the budget back into Surplus. Follow David Cameron's lead. 

It's not just the ammount of money, but WHERE you allocate it. I'll post the article again, since nobody seems to read anything I post, but just talk pseudo-economics >.<

Summary: Poor people spend a greater percentage of money. Give 10 bucks to a poorer person, and they'll probably buy candy, drinks, etc. Give 10 bucks to a rich person, they'll put it in their wallet, maybe spend 1 dollar on  a bottle of water, but save the rest.

Krugman: Stimulus gone bad By Paul Krugman Published: Friday, January 25, 2008 <script type="text/javascript">//

PRINCETON, New Jersey — The White House and House Democrats have reached an agreement on an economic stimulus plan. Unfortunately, the plan - which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape - looks like a lemon.

Specifically, the Democrats appear to have buckled in the face of the Bush administration's ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective.

Those are harsh words, so let me explain what's going on.

Aside from business tax breaks - which are an unhappy story for another column - the plan gives each worker making less than $75,000 a $300 check, plus additional amounts to people who make enough to pay substantial sums in income tax. This ensures that the bulk of the money would go to people who are doing O.K. financially - which misses the whole point.

The goal of a stimulus plan should be to support overall spending, so as to avert or limit the depth of a recession. If the money that the government lays out doesn't get spent - if it just gets added to people's bank accounts or used to pay off debts - the plan will have failed.

And sending checks to people in good financial shape does little or nothing to increase overall spending. People who have good incomes, good credit and secure employment make spending decisions based on their long-term earning power rather than the size of their latest paycheck. Give such people a few hundred extra dollars, and they'll just put it in the bank.

In fact, that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001.

On the other hand, money delivered to people who aren't in good financial shape - who are short on cash and living check to check - does double duty: It alleviates hardship and also pumps up consumer spending.

That's why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office.

There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy. Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.

But the Bush administration has apparently succeeded in killing all of these ideas, in favor of a plan that mainly gives money to those least likely to spend it.

Why would the administration want to do this? It has nothing to do with economic efficacy: No economic theory or evidence I know of says that upper-middle-class families are more likely to spend rebate checks than the poor and unemployed. Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can't call a "tax cut."

Behind that refusal, in turn, lies the administration's commitment to slashing tax rates on the affluent while blocking aid for families in trouble - a commitment that requires maintaining the pretense that government spending is always bad. And the result is a plan that not only fails to deliver help where it's most needed, but is likely to fail as an economic measure.

The words of Franklin Delano Roosevelt come to mind: "We have always known that heedless self-interest was bad morals; we know now that it is bad economics."

And the worst of it is that the Democrats, who should have been in a strong position - does this administration have any credibility left on economic policy? - appear to have caved in almost completely.

Yes, they extracted some concessions, increasing rebates for people with low income while reducing giveaways to the affluent. But basically they allowed themselves to be bullied into doing things the Bush administration's way.

And that could turn out to be a very bad thing.

We don't know for sure how deep the coming slump will be, or even whether it will meet the technical definition of a recession. But there's a real chance not just that it will be a major downturn, but that the usual response to recession - interest rate cuts by the Federal Reserve - won't be sufficient to turn the economy around. (For more on this, see my blog at krugman.blogs.nytimes.com.)

And if that happens, we'll deeply regret the fact that the Bush administration insisted on, and Democrats accepted, a so-called stimulus plan that just won't do the job.

Extra article, (2 years later)

July 9, 2010, 8:50 am

What Went Wrong?

 

The Obama administration is in a difficult spot. It’s now obvious that the stimulus was much too small; yet there’s virtually no chance of getting additional measures out of Congress. The administration has chosen to deal with this by trying to have it both ways — condemning Republicans, rightly, for obstructionism, while at the same time claiming, falsely, that we’re still on the right track.

How did things end up this way? We’ll never know whether the administration could have passed a bigger plan; we do know that it didn’t try.

Now, I don’t have any inside information on what really happened; I do talk to WH economists, but they don’t offer — and I don’t ask for — any information on internal wrangling. But based on public reporting, like the Ryan Lizza article on Larry Summers — which reads rather differently now that we know how things are really working out, or more accurately not working out — it looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long. That’s the assumption embedded in the now infamous Romer-Bernstein chart, above. So all policy needed to do was meliorate the worst, while we waited for the economy to recover spontaneously. From the Lizza article:

Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.”

I don’t know why Summers etc. believed this. Even before the severity of the financial crisis was fully apparent, the recent history of recessions suggested that the jobs picture would continue to worsen long after the recession was technically over. And by the winter of 2008-2009, it was obvious that this was the Big One — which, if the aftermath of previous major crises was any guide, would be followed by multiple years of high unemployment.

Those concerns were what had me fairly frantic in early 2009: I was terribly afraid that the failure of an inadequate stimulus to bring unemployment down would end up being seen as a refutation of the whole idea of stimulus — which is exactly what happened. And by the way, the reason I was for temporary bank nationalization was that it would make it possible to recapitalize banks quickly, and get them lending, which would help make up for the weak stimulus; what happened instead, of course, was gradual recapitalization through profits, with banks not doing much lending along the way.

And here we are. From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy. But politically, we’re stuck: even if the Democrats hold the House in November, they won’t have the votes to do anything major.

I’d like to say something uplifting here; but right now I’m feeling pretty bleak.

Have fun trying to balance the budget when tax revenue PLUMMETS when GDP is going down.

Bonus article:

January 21, 2008, 9:47 am

Stimulus issues

Now, as for a response to anti-Keynesian. I will provide my view:

The reason I am anti-Keynesian is as follows:

In order for a government to prop up the economy, it must use money. If it does not create the money (quantitative easing), it must either borrow the money (deficits) or earn the money (taxes).

When the government takes on this role, the tax payer suffers, as his money will invariably go to these spending projects. Therefore, private capital is taken away for the good of public usage. The problem with this is 2 fold:

1) It reduces private capital that could be spent, or moved to projects that may have produced solid, tangible economic results.

2) It assumes that the government will spend it properly. More often than not, this is not the case.

So in the end, Keynesian policies are, at worst, very inefficient (just ask me about my local stimulus project that the feds have spent millions on), and at best, improve the situation slightly (at the expense of further taxation either now, or down the road, reducing any period of economic boom).

In the end, Keynesian economics are the inferior path of economic growth. The government rarely puts money into projects that will see a large return on investment, which is what you want in a recession - the ability to create new jobs that are stable and will continue even after the initial funding period is over. Unfortunately, most jobs created by the government are short-term fixes on a problem that needs dealt with over the long term.

Is it possible that the government can create long term jobs, and help fix a recession? Yes. Is it likely? Absolutely not. The government rarely has the flexibility needed to ensure that jobs go to the right areas...Even if the reasons are harmless, its still there.

Also, you have to deal with the aspect of deficit spending. Obviously, in the US, this is a huge problem. We pay interest on our debt, to the tune of 9.1% of our entire federal budget. This costs Americans about $250 billion a year...That $250 billion/yr is lost money that could be in the hands of people to create jobs, but it is not. If we ever have austerity to help with the $13 trillion deficit, any money we spend on such will be 'wasted' (that is, spend on something we should not of had, as opposed to using it for job creation). Imagine the trillions of dollars we would of saved had we not of deficit-spent as madly as we have.....The trillions could of been spent on new jobs in the US, but was not.

That is why I'm against Keynsian ideas. Its great in theory, but so is communism. The human aspects of government spending make it very unattractive.

@Akvod - you said you 'posted the article again', but posted completely different articles. You know, your not really discussing the issues...Only posting what Krugman thinks. Are you wanting us to discuss economics with you, or Krugman? Your arguments are very confusing, as I don't know which to respond to. Maybe that is why the thread is getting de-railed?

*edit*

Also, your summary is way off base. Your summary was about how poor people spent more. None of the articles you posted by Krugman talk about that...Or am I missing an entire article you posted?

I've posted the Stimulus Gone Bad article, which is complaining that the last stimuluses were directed toward the middle class who will most likely save the money, rather than spend it. The other articles are new, hence why I said "Extra" and "Bonus" before them.

I've already said my share in the very first few pages, but you guys ignore them. Therefore, I figured that since I'm not a good writer/arguer, I'll just bring in Krugman, whose saying the same exact thing to do it.

Me and Krugman's argument is quite simple... Spend now, save later

---------------------------------

You're obviously not reading anything I posted. Here's a quote from the article I posted twice: Stimulus Gone Bad

... And sending checks to people in good financial shape does little or nothing to increase overall spending. People who have good incomes, good credit and secure employment make spending decisions based on their long-term earning power rather than the size of their latest paycheck. Give such people a few hundred extra dollars, and they'll just put it in the bank.

-----------------------------------

http://en.wikipedia.org/wiki/Marginal_propensity_to_consume

People who are in good shape have a small MPC

People in bad shape have a big MPC

-----------------------------------

And you're clearly not addressing anything I said.

Can't you see the graphs and statistics? They're not rocket science. The negative inflation rate were in red >.< The price levels have gone down, along with the rates of bonds >.<

Do you at least concede that inflation and high borrowing costs are absolutely not an issue?