Friday, July 3, 2009

Economists Send Mixed Signals

This is not advocating a position, as much as it is to express how much confusion I have over this whole economics issue.

As you know, many people claim we are spending too much and it will mess us up in the end. I know you know this and you don't need links.

What you may not know is that some major economists, including some Nobel prize winners like Paul Krugman who have predicted this who economic mess with almost exactness over the last few year are actually saying we aren't spending enough.

Again, another post by Krugman, That ’30s Show, where he does math, cites historical precedent for what works and what doesn't in recessions calls for a bigger stimulus. (Which he's done all along, he doesn't flip flop. He calls it like it is and so far he is always right.) He also goes after economists that are not preaching the same message when he knows they know better:
O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that? Let’s do the math.... Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8 ½ million jobs in the hole.... That’s a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets....

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s much better than nothing, but it’s not remotely enough. And there doesn’t seem to be much else going on...

All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. Once again a Democratic president has pushed through job-creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery. Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level...

Just to be clear, I’m well aware of how difficult it will be to get such a plan enacted.

There won’t be any cooperation from Republican leaders, who have settled on a strategy of total opposition, unconstrained by facts or logic. Indeed, these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan. That’s ludicrous, of course.

And as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits....

Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.

So getting another round of stimulus will be difficult. But it’s essential...

So here’s my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don’t, you’ll soon be facing your own personal 1937.

Again, this is not a post saying: embrace Krugman. It is a post to stress why I am very confused right now. Many say we are spending to much, but it seems like some of the best economists with a knack for getting things right seem to support even more stimulus. It's just a mess.


  1. I am no economist, nor did I predict the housing bubble, but there are two problems with his approach that are unrealistic. His approach is classical Keynesian economics. That worked phenomenally well for a number of years, but there was a problem with it, it never worked according to theory (imagine that!). The theory is that during an economic recession the government should increase their spending to compensate for the lack of private investment. Then when private investment picks up, the government should cut back on spending so that they can pay back the debt they own, and so they don't compete with the private sector. The problem is that after the recession is over the government does not cut back spending and does not pay down debt. In short they do the first half and then never follow through with the second half. After a few iterations of deficit government spending they have never paid down the debt and so we are left with massive debt on top of the new debt we are supposed to incur. Keynesian economics does not endorse, allow or deal with this problem. In other words it tells us how to avoid a hole, not how to get out of one. In all his approach fails because it fails to account for the fact that these are politicians making policy and not economists.

    The second problem, and this is another "well that is a very good theory and you are right the numbers would work out" case, but the question is "How will we pay for it?" It is not a matter of saying "Well we now have more money to spend because we do. So we will spend money and get ourselves out of this recession." In order for the government to actually run a deficit they have to print fancy pieces of paper commonly known as IOU's but with the technical name "Government Treasury Bonds" (and some how that makes it better). And SOMEONE has to actually cough up money (i.e. capital, of some sort) and give it to the government. The problem is that we may not have enough people in the world willing to give up the money needed for us to have more stimulus. Congress may take Krugman's advice and pass more stimulus in which they sell more US Treasury Bonds, BUT in order for any of it to work SOMEONE has to buy them, and currently no one will. In other words, beautiful theory meets world realities and it doesn't hold up.

  2. I think Ryan hit the nail on the head: Krugman is right as far as getting out of our current mess, but the problem is that government has proven totally incapable of paying down debt when times are good. Different politicians have different ways to spend money, but nobody has managed to become popular by spending tax money on debt reduction. Maybe next time will be different, but I doubt it.

  3. You guys do raise a very good point: politicians never pay off debt when times are good. The last president who inherited a surplus, instead of paying off debt, gave the excess to the richest of Americans and increased the national debt more than any other president. (I'll let you guess who that was.)

    In one respect we just have to never elect such a president again.

    It's too bad this whole mess is like a big Catch 22: if you don't spend we will lose a decade of progress, if we do spend, we will rack up crazy debt that no politician will pay off that will be dangerous in its own respect.


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