We're doomed master Luke! Doomed!

The lead in, from an article in the Nation

...While he was in China, Barack Obama made a bizarre declaration that the US government must reduce its budget deficits in order to avoid "a double-dip recession." The remark was alarming because it suggests the president may not fully understand the country's economic predicament. Deficit spending is a cure for our troubles, not the cause. If Obama follows through and actually reduces the red ink, the Great Recession could be born again with new fury....

Here's a link to the whole schmozz

http://www.thenation.com/doc/20091207/greider2

"The remark was alarming because it suggests the president may not fully understand the country's economic predicament. Deficit spending is a cure for our troubles, not the cause."

How oxymoronic. If I had not known the source, I would have attributed it to The Nation 3rd, DailyKos 2nd, and The Onion 1st.

ref #2
OK, I'm not an economist and I can be fooled; but I have read the usual suspects from Samuelson's textbook to Milton Friedman's "Capitalism and Freedom" , to Galbraith to Krugman's popularizations, plus various "This one or that one explains economics to the unwashed masses (That would be me)".

The take away message seems to be that Keynes got macroeconomics mostly right and that markets can and do fall into liquidity traps and other hassles.

There are people who dont want to hear it, and if thats you, well, good luck with that; but I'll put my bets on the guys with the PhD's who hang out at Columbia and Princeton. Snobby of me, I guess.

Maybe those guys are all mislead, maybe they're all fools, maybe they're all evil. They've fooled me.

Well, it's not so much whether they've got the PhD... It's whether they got it in Jersey or Illinois.

hehe

ref #4
Have you seen Krugman's characterization of "Fresh water" vs "Salt water" economists?

No. Off to Google.

#3: Let's boil it down to an analogy that's closer to the individual level. If someone is personally in economic hardship, that's the worst time for them to start breaking out the credit cards. Deficit spending, like relying on credit, is the kind of thing you should only do when you have a reasonable expectation of financial security.

I personally think the greatest barrier to understanding modern financial policy is that people don't understand what money is. When government steps in to "stimulate" the economy with a rush of money, they are distracted by all the dollar signs and think that people are gaining in "wealth" to set themselves back on their feet. But money and wealth are not the same thing. What they don't see is that money is being diverted to people in jobs that don't necessarily maximise value for the products and services they provide, especially if you're talking about bailing out failing businesses. Businesses fail because they are not effective at maximising value for consumers.

When people choose to engage in an economic transaction, it's because both parties each feel that they are benefitting from the trade. The entire economy is largely a series of exchanges in which each member of a transaction is better off than they were before. But when you introduce people who do not maximise value but are being awarded money anyway by the government, you have created a segment of the economy which is using that money to access wealth (such as food, shelter, and other lifestyle needs or wants) while contributing little or nothing in return for the kind of work they themselves perform. Sure, the money is flowing back and forth throughout the economy. But not the wealth. This is what your government has been breaking out the credit cards for.

ref #8

#3: Let's boil it down to an analogy that's closer to the individual level. If someone is personally in economic hardship, that's the worst time for them to start breaking out the credit cards. Deficit spending, like relying on credit, is the kind of thing you should only do when you have a reasonable expectation of financial security.

Google "economic fallacy of composition"

http://en.wikibooks.org/wiki/Macroeconomics/Economics#Fallacy_of_composition

For the individual, of course you are correct, but for the economy as a whole, maybe not so much.

Under the proper conditions (first studied by Keynes, if I'm not mistaken) what would be a wise policy of thrift for the individual becomes a disaster of insufficient effective demand for the nation.

You need an actual real economist to explain that in a credible way. Try Samuelson, or if he's too old fashioned, Krugman has some popularizations out. I'm sure there are no end of non political economics professors who can sort that out for you.

#9: Assuming the fallacy is even valid, how do you even knnow that it applies? Surely you're not saying that any analogy between individuals and groups are fallacious? If one person blowing their brains out is a bad thing, is it fallacious to say that whole groups of people blowing their brains out is a bad thing?

Of course, nevermind that I have two parapgraphs of exposition about why decifit spending on bailouts is a bad thing without resorting to analogy.

ref #10

I'm uncomfortable talking too technically about economics, a subject in which I have no particular training or experience.

I have however, read a few of those "Macroeconics 101" texts and some popularizations.

I suppose I could have got it wrong, or been reading the "wrong" guys, but the take away messages seems to be:

1. Sometimes we need deficit spending to boost aggregate demand

2. That's not a controversial matter, all PhD economists agree in general.

They differ only in specific cases (are we really seeing a demand deficit, or is it something else?) and about how much is enough.

Pick up a sampling of textbooks, look through them, and tell me where I've messed up.

Your number 2 is incorrect. Then again, pretty much any time you use "all" it's bound to be.

The problem isn't bail outs, but who we are bailing out. Individuals are indeed highly over-leveraged (indebted) in this country. But the bail outs have (incorrectly) been focused on over-leveraged institutions rather than households.

modalursine, you might try this for an up-to-date version of the post-Keynesian (but not neo-liberal-classicism) take on the mess we are in now:

http://www.levy.org/pubs/hili_105a.pdf

The Levy Economics Institute folks correctly sized up the housing bubble and the over-leveraged households threat well before the crack-up that began in summer 2007.

Another very cogent source is the Financial Times Economists Forum. E.g., here, a discussion of the need to reduce government debt -- but not prematurely:

http://blogs.ft.com/economistsforum/2009/11/give-us-fiscal-austerity-but-not-qui...

There really are macro problems, such as the paradox of thrift, that focusing on best practices for individuals will not solve. Ultimately, household, business, government, and external (foreign trade) accounts need to be brought into balance. How to do that without a downward spiral when macro instability has become a crisis is the real issue.

One more link: Keynes' biographer Robert Skidelsky, whose political trajectory has something to offend everyone, but who is a very interesting writer, a Keynsian but strongly pro-capitalist.

ref #13

Thanx for the link to the Levy Economics Institute; just took a quick read. There are a few things I dont understand (to put it mildly)...I am unfortunetely totally innocent of basic accounting (After "credits to the door, debits to the window", I'm out) so I don't understand and am not even aware of, the basic accounting invariants by which we can conclude that private deleveraging must as a matter of those basic invariants, come from the public sector.

Maybe you can sort me out on that.

But in general, and unless something subtle got by me on first reading, what I see there is broadly consistent with what I think I've been reading from Krugman, Simon Johnson, and (Grump. Seem to be blocking on his name) the Nobel prize winner at Columbia.

>15 modalursine:: The fundamental macro accounting identity is this:

(private sector investment - private sector saving) + (government expenditure - government receipts) + (exports - imports) = 0

Two examples, roughly -- very roughly, hypothetically, and not to scale -- illustrative of where we were in 2006 and where we are now:

2006: (1000 - 800) + (300 - 200) + (100 - 200) = 0; 200 - 100 - 100 = 0
In this example, the private sector has invested more than it has saved; the shortfall has been financed by borrowing. Government has spent more than it has taken in; the shortfall has been financed by borrowing. Foreign trade balance is in deficit; imports exceed exports; excess of imports has been financed by borrowing. Domestic financing is subsumed within these numbers, and the net financing comes from foreign sources (e.g., those huge Chinese holdings of U.S. debt instruments, foreign holdings of U.S. corporate bonds).

2009: (800 - 1000) + (300 - 100) + (150 - 150) = 0; -200 + 200 - 0 = 0
In this example, the private sector has shifted dramatically, in response to the financial panic. Businesses and households hunker down and save more than they invest, fearing further negative shocks. Exports vs imports has improved, but not enough to balance out everything else. There is then a shift that shows up, structurally and wthout any deliberate stimulus effort, as an increase in the government deficit, here hypothesized as a bigger shortfall in government receipts (as economic activity stalls, tax collections decline).

Government could (attempt to) avoid that structural deficit, by sharply increasing its receipts, through taxation. I.e., governmentd could 'sop up' the excess private savings by taxing more heavily. Post-Keynes, governments (mostly) realize that is folly in the short term. Since businesses and households want to save more than they invest during a financial crisis, taxing them more heavily to take the 'excess' saving into the government account will only cause them to invest even less as they attempt to get to the saving level that the panic has caused them to want. Result would be a downward spiral in which the investment level continued downward as governments and private sector each tried to avoid losing their desired saving margin. (A new equilibrium would eventually be reached, but at a drastically lower level of investment, output, and employment.) Government can improve its balance sheet, without doing harm, only after financial stability and economic growth have resumed, removing the pressure on the private sector to defensively save much more than it invests.

Hope that helps. I am not an economist. Like you, I am striving to make sense out of what has happened during this period of financial crisis.

What we do is go to Wall Street and tell them to start lending the money we gave them to lend, or give it all back. Their choice.

This is after we've put a few head tipped spikes up at the entrance to the NYSE.

(private sector investment - private sector saving) + (government expenditure - government receipts) + (exports - imports) = 0

Oy! Suppose I'm a farming community in an isolated valley. No government, no imports or exports.

I can see that I cant invest anything next year unless I save something (i.e. dont consume) from what was produced this year. The MOST I can invest next year is everything I've saved this year. By why does investment and savings have to be equal? Maybe my surplus is "Seed". I plant half (it was a bumper crop last year, wheee!) and a put half in the granary because somebody had a dream about fat cows and lean cows.

In other words, I can see a fundamental inequality relation, but I dont understand the equal sign.

I also dont see household consumption and saving in there. Is that not relevant?

This kind of model is precisely useful for the kind of modern economy we actually live in, with money flows, a sovereign government that can run a deficit, private parties who can borrow money, foreign trade, etc. When you encounter a difficulty in understanding some of it, you can't retreat to the analytical level of that isolated farming community. (You showed above that you understand that point generally.)

The particular formula that I referenced above is one of several national accounting identities. Others involve income and consumption, etc. Others deal with monetary aggregates such as interest rates and currency exchange rates. But the one that I referenced is relevant to showing that a crisis-driven jump in the private saving rate will tend to cause a corresponding decrease in the public saving rate (i.e. greater government deficit). (We aren't used to our U.S. government saving by actually running a surplus, but it did happen during some of the Clinton years.)

I'm not familiar enough with the currently available economics textbooks to recommend one that would give you a run through of macroeconomics that includes a good discussion of post-Keynesian structuralism, such as is practiced by Krugman and Simon Johnson.