Where is the US economy headed?

@georgeob1,

georgeob1 wrote:

What do you and the esteemed Keynsians believe the Greeks, Spanish and Portuguese should do now?

Persuade the ECB to pursue an inflationary target of, say, 4% per year Europe-wide, and to print money at a rate consistent with that target. I don't know how they could pull it off politically, but economically that's what Europe needs right now.

Barring that, they should consider defaulting on their debt. It's drastic, and I wouldn't be recommending it if the 4% inflation target was a realistic option. But the conceptual precedent here is Argentina, and the Argentinians seem quite happy with the decision they made in 2001.

georgeob1 wrote:

Germany appears to have done well for itself through the reduction of social benefits, increased labor market freedom and fiscal restraint these last several years. Were they wrong?

They are wrong in attributing the boom in Germany to those reform, when in fact the influence of those reforms was minimal. Again, Spain's pre-crisis debt was lower than Germany's, yet Spain is in crisis whereas Germany isn't. That's where your fiscal-policy story simply doesn't check out. To find a story that does check out, we have to look for a reason that crisis countries have in common with each other, but that Germany did not have in common with them.

What they had in common, and Germany didn't have, was huge housing bubbles. When the Euro became Europe's single currency, billions in hot money rushed from previously low-risk countries like Germany to previously-higher-risk countries like Greece, Italy, Spain, and Ireland. Housing bubbles soon started blistering. Then they burst, and all the hot money fled those countries to where it had come from. Germany was happy to take it back. That capital inflow is the reason Germany is doing well right now. The labor-market reforms, the fiscal policy, and reductions of social benefits were cosmetic, and cannot account for the huge differences in macroeconomic performance.

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Ireland and Latvia have embarked on very painful austerity programs. What do you believe will be their fate?

I think that if you compare those countries with crisis countries who resist such austerity programs, like Spain, you will find that the pain of the Irish and the Latvians will buy them precious little economic gain. Actually, I'm willing to bet on this: Let's get together in two years. If Spain on the one hand and Ireland and Latvia on the other continue on their current path, Spain will have produced more GDP growth. If not, I'll buy you dinner.

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@Thomas,

Greece has been sustained by EU partners who have so far preferred to collectively bail them out (with a big assist from the IMF) than see their major banks take a big hit on default & restructuring. However the slow action of the Greek government and people, together with a continuing (and in some aspects growing) debt crisis appears to be creating a new dynamic: they appear to be headed for default and are likely beyond saving even under the ECB scenario you propose.

You also appear to tacitly acknowledge that persuading the ECB and the EU principals to pursue such a monetary policy is not a possibility. On that we agree.

Why do you suppose the Europeans being so stupid ?

EU countries are locked together on monetary policy, but able to pursue different bugetary policies within the limitations of their continued access to borrowed money through the bond markets and their economic performance. It doesn't appear to me that the comparison you propose is really possible. The underlying problems in both Ireland and Latvia were different from thos in Spain - they are (perhaps foolishly) trying to save their banks (and investors), but, unlike Spain don't have aproblem of chronic budget deficits and high unemployment. All three experienced a collapsing housing bubble, as you said, but there were and are other important differences that in my view make their situations and needed remedies different.

To some degree Spain, like Greece and Portugual, appears unwilling to face the causes of chronic problems that exacerbate the recovery from the collapsed bubble. I believe that ios the core issue, and it is at best an illusion to suppose that Argentina (to use your example) has really recovered from anything.

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@georgeob1,

Quote:

Why do you suppose the Europeans being so stupid ?

That's not a question I would ask of anybody I thought politically astute.

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@georgeob1,

This has been one of the biggest mysteries of our time. Many Euro countries who have borrowed tens of billions are in no position to pay back on those loans, and yet the Euro continues to gain against the dollar.

I've been expecting the Euro to lose about 25% of their value, but it's going in the opposite direction. I've been looking at the Euro, because when we planned our trip to Cuba for May, the best exchange rates are from the Canadian dollar and the Euro. I purchased some Euro when it was about $1.45. It went up close to $1.49, then it came down after we returned from Cuba.

The original thought was that the Asian countries were buying Euros, because they had to pay a higher interest rate on their money, but that was five months ago, and I've read reports that those countries are having problems meeting their payments against those loans.

I'm not sure what dynamic is working on the exchange rates today.

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@georgeob1,

georgeob1 wrote:

Why are you concerned? You have loudly and repeatedly asserted that the Republicans "have no leverage" and are "widely opposed by the public" on these issues, and that their efforts will doom themselves and aid the Democrats.

You're confusing a couple of different comments of mine. They have no leverage on the Debt crisis issue, because they will be forced to raise it even if Obama refuses their demands (which pretty much everyone agrees is true) and their allies on Wall Street won't suffer them playing games with their money and prosperity in this fashion. The current government reform ideas proposed by the Republicans, summed up in the Ryan 2012 budget, are indeed widely opposed by the public.

But what the Republicans CAN do, and have been doing, is block many programs that would help ease our recession - both things such as job creation programs, a WPA-style jobs program, as well as reforms such as forcing banks to take write-downs on the some 27% of US mortgages that are currently underwater. They CAN block effective stimulus (such as food stamps), instead insisting on tax cuts - the only thing they care about, and the least stimulative action our government can take. They have blocked practically ALL Obama's nominees from moving forward, so many important positions sit empty, further hampering our ability to effectively address the crisis we see in front of us today.

Also, they can pressure the Fed to take no action whatsoever - which is exactly what has happened, and which I consider to be a gross repudiation of the Fed's role as an unemployment check in our country.

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I don't think the Republicans are insisting on "austerity" as the word is commonly used. They would be more than content simply to return government spending to its 2009 levels - something that in the midst of the recent unprecedented increase in deficits appears both reasonable and very necessary - and something that nearly every other major country is trying to do now.

That's funny, every Republican I've seen talking about the economy has mentioned levels of spending far lower than 2009.

Question: other than Germany (which Thomas already covered), has any other major country instituted an Austerity program which has lead to success? I would say the real example you should look at is England - that's the country most like what the Republicans would like to be doing here.

Cycloptichorn

1 Reply

@spendius,

spendius wrote:

Quote:
Why do you suppose the Europeans being so stupid ?

That's not a question I would ask of anybody I thought politically astute.

If you will read the preceeding posts, you will see that Thomas asserts they are all following the wrong economic policy. I don't agree, though I believe there are some chronic problems they have not yet sufficiently addressed.

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@Cycloptichorn,

Cycloptichorn wrote:

But what the Republicans CAN do, and have been doing, is block many programs that would help ease our recession - both things such as job creation programs, a WPA-style jobs program, as well as reforms such as forcing banks to take write-downs on the some 27% of US mortgages that are currently underwater. They CAN block effective stimulus (such as food stamps), instead insisting on tax cuts - the only thing they care about, and the least stimulative action our government can take. They have blocked practically ALL Obama's nominees from moving forward, so many important positions sit empty, further hampering our ability to effectively address the crisis we see in front of us today.

I would like to see some evidence that government job training programs or food stamps programs have stimulated the economy. They may well alleviate the situation of some people, but they are also subject to widespread abuse, inefficiency, and, since they are paid for with borrowed money, they also have some positively adverse effects.

We don't lack trained workers: we lack jobs anb job creation. There are many factors influencing that, including all the well known cyclic ones following a severe economic contraction. This recovery however has been severely hampered by excessive and largely ill-conceived extensions of government regulatory power, an assertive anti-business Administration that is misusing its environmental authority to impede U.S. Energy production, and a host of pending administrative decisions that are paralyzing capital investment in major sectors of the economy. I see examples of these consequences regularly among the major corporations my company serves in the permitting and development of major energy and industrial projects - many are just sitting on the fence, waiting (and waiting) to see what an increasingly intrusive government will do.

Cycloptichorn wrote:

Also, they can pressure the Fed to take no action whatsoever - which is exactly what has happened, and which I consider to be a gross repudiation of the Fed's role as an unemployment check in our country.

I find that to be a remarkable statement, given that we have a Democrat president (who reappointed Bernacke) and a Democrat Senate. The FED is actually somewhat independent (depending on the skill and character of its Chairman).

More to the point though is the question, 'what more do you believe the Fed should do?' Suggesting that it has taken "no action whatsoever" seems very far from the truth. It has already increased the money supply to a remarkable degree - a position that will require some skill (and luck) to unwind without further damage to the economy.

Cycloptichorn wrote:

Question: other than Germany (which Thomas already covered), has any other major country instituted an Austerity program which has lead to success? I would say the real example you should look at is England - that's the country most like what the Republicans would like to be doing here.

Why do you suppose the British elected a Conservative government? The fact is they are dealing with severe budget deficits and growing demands for more money from an inflated, not very productive government bureaucracy - a situation they can't allow to continue. The example of Greece represents a real possibility for any nation and you don't appear to acknowledge its reality.

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@georgeob1,

georgeob1 wrote:

they appear to be headed for default and are likely beyond saving even under the ECB scenario you propose.

. . . or they could leave the Eurozone, reintroduce the Drachme, and resume printing lots of money. Either way, they have my blessing.

georgeob1 wrote:

You also appear to tacitly acknowledge that persuading the ECB and the EU principals to pursue such a monetary policy is not a possibility. On that we agree.

Why do you suppose the Europeans being so stupid ?

I think they are re-enacting a truism people tell about the military. Just as generals are said to always fight the last war, the ECB is fighting the last economic crisis. That crisis, the one in the 70s, was caused because the world economy sputtered on the supply side---oil crisis and all that. Policy-makers, conditioned by vulgar Keynesianism, tried to solve the problem with demand-side stimulus. They achieved nothing, because the demand side wasn't the problem then. "Why were they so stupid?", you may ask. I don't think they were. It's just that they, too, tried to solve the last crisis (the Great Depression) instead of the crisis at hand.

Today's policymakers, eager to learn from their past mistakes, try to apply what they see as the lesson of the 1970s: Don't solve the problem by printing money or running deficits. But that's the wrong lesson. The right lesson is that you solve demand-side problems with demand-side policies and supply-side problems with supply-side policies. The two kinds are different, and you need to figure out which side the economy limps on before you design your solution. In today's crisis, the supply side is doing just fine. The problem is idle capacity and involuntary unemployment, caused by sluggish demand. And this problem is best addressed by demand-side stimulus.

Why are policymakers too stupid to realize it? Again, I don't think they are, any more than their peers in the 70s were. They're just stuck trying to solve the wrong kind of crisis. Stuck psychologically. Stuck by peer pressure in a culture where austerity, not open-ended analysis, has become the shibboleth of seriousness. And, in the ECB's case, stuck in a destructive legal environment: Whereas America's Federal Reserve Act grants the Fed a dual mandate to pursue both low inflation and low unemployment, European law prioritizes price stability above everything else. The ECB has no other legal reason to exist. It would be unlawful if it tried to reduce unemployment by printing money.

georgeob1 wrote:

To some degree Spain, like Greece and Portugual, appears unwilling to face the causes of chronic problems that exacerbate the recovery from the collapsed bubble. I believe that is the core issue, and it is at best an illusion to suppose that Argentina (to use your example) has really recovered from anything.

If Argentina hasn't recovered from anything, why has its post-default economy been growing at an annual eight percent over the past nine years?

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@georgeob1,

George, I have seen no persuasive evidence that 'excessive and largely ill-conceived extensions of government regulatory power' is hampering business investment or development. I'm sorry to say that your anecdotal evidence is not compelling.

As to your other points,

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I would like to see some evidence that government job training programs or food stamps programs have stimulated the economy.

Food stamps are the most stimulative way of pumping money into the economy possible, short of directly printing money and handing it to people; and it's not hard to understand why: those who use them, have very little choice other than to spend that money immediately, which turns into immediate money for shop-owners, et cetera. Unlike tax cuts for people like you and I, the money gets spent and not saved. This has a far larger stimulative effect upon the economy than other methods (including our various QE programs). Just think about it for a few minutes and you'll see; if that's not good enough for you, there are any number of economists I can link to that say basically the same thing (though, being those dastardly Keneysians, you probably discount them out of hand).

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More to the point though is the question, 'what more do you believe the Fed should do?'

I believe they should set their inflation target to 3% or even 4%, immediately, and simply wave away the concerns of inflation hawks. That would have a greater stimulative and job creation effect than almost anything the gov't can do right now.

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Why do you suppose the British elected a Conservative government?

Well, because the British are susceptible to the same sort of fear-mongering and demagoguery on the subject of the economy as American voters are. But the truth is that their Austerity measures are failing, and costing them tremendous amounts of money currently while showing little results. Surely you don't care to argue THAT point?

Cycloptichorn

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@Cycloptichorn,

It's not only the shop owners who benefit; it's also the farmers, transportation system, and the packing companies who benefit.

I also believe in helping our citizens to have enough food to eat, and a shelter to protect them from the elements. Our family received these benefits when we were young, so we didn't starve, but lived in very modest accommodations.

With almost free education, we have accomplished much in this country of opportunity, and happily paid our taxes.

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There is no free lunch. Every action of the types being cited here has side effects that change the dynamics of the whole system - and not always for the good.

Land of opportunity means a place where one can achieve something through his/her own actions. Handouts don't necessarily constitute either opportunity or stimnulus to productive economic activity.

Cyclo has read too many Democrat talking points. Even Keynes believed that money saved and then invested in productivity- enhancing equipment or enterprises has a greater economic multiplicative effect than money spent. The problem today is that investment in enterprise is far too inhibited by the almost dead bureaucratic hand of a government obsessed with top down control.

The ghastly Soviet experiment of the 20th century is proof enough that socialist distribution of goods and government central planning produce only tawdry, uniform poverty, shoddy goods and services, and ultimately tyranny.

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@georgeob1,

georgeob1 wrote:

This recovery however has been severely hampered by excessive and largely ill-conceived extensions of government regulatory power, an assertive anti-business Administration that is misusing its environmental authority to impede U.S. Energy production, and a host of pending administrative decisions that are paralyzing capital investment in major sectors of the economy.

If overregulation is hampering America's industry, we should expect to see a decline in US productivity after Obama entered office. But we don't. Productivity-wise, 2009 and 2010 were both well above George W. Bush's average.

PS: I tried to provide a direct link to a productivity graph, but it's applet-generated and non-linkable. Here's a workaround: On the BLS website, find the "Latest numbers" table, click on the dinosaur besides "productivity", and work your way to the data from there. Sorry for the inconvenience.

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I've seen no evidence that anything Obama and his democrats have done to fundamentally change this country result in positive changes.
Every single plan, gimmick and policy put into action by Obama and his democrats thus far has harmed this constitutional republic and its citizens.

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@georgeob1,

georgeob1 wrote:

There is no free lunch. Every action of the types being cited here has side effects that change the dynamics of the whole system - and not always for the good.

But you have no idea what the side effects are, or the severity of them - at all.

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Land of opportunity means a place where one can achieve something through his/her own actions. Handouts don't necessarily constitute either opportunity or stimulus to productive economic activity.

This is nothing than a meaningless Republican talking point. There's no actual data here to discuss. Do you have ANY data to discuss?

It's also a heartless and crass thing to say, when so many families are severely suffering the effects of this recession. I know that you aren't rubbing two wooden nickels together, but hey - try and have a care for the marginal members of our society. My guess is that if you had negative personal wealth and had been unable to find a job for more than a year or so, you would disagree with your own position on this matter.

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Cyclo has read too many Democrat talking points.

You don't seem to be able to refute ANY of them, so why should that matter? Calling something a 'Democratic talking point' doesn't counter a true statement. It just accuses the Democrats of repeatedly telling the truth.

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The ghastly Soviet experiment of the 20th century is proof enough that socialist distribution of goods and government central planning produce only tawdry uniform poverty, shoddy goods and services, and ultimately tyranny.

Appeals to Extremes convince nobody of anything at all, so why bother engaging in them? What you write here has nothing to do with our current situation.

Cycloptichorn

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All we get from the lefties here on A2K are meaningless, rambling talking points and personal attacks...
they seem upset and frustrated with Obama and his democrats so they lash out with irrational attacks.

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@Thomas,

Here's a productivity chart since 1947. http://www.bls.gov/lpc/prodybar.htm

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@Thomas,

No time now - I'm off to the redwoods for the weekend. But I'll check it out later. Thanks.

Have you ever been to Argentina?

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This was predicted and it's happening now.

U.S. Economy: Factories, Employers Pull Back as Costs Climb

Hey Obama, were are the jobs you and Biden promised?

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@cicerone imposter,

Thanks!

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@georgeob1,

No, I haven't been to Argentina. Have you been there recently enough to compare its current state with that of 2001?

Enjoy the Redwoods!

1 Reply

Where is the US economy headed?

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