http://www.nytimes.com/2010/06/28/opinion/28krugman.html?_r=1&emc=eta1
http://blogs.ft.com/martin-wolf-exchange/2010/06/27/is-monetary-policy-too-expansionary-or-not-expansionary-enough/
http://economix.blogs.nytimes.com/2010/06/30/another-recession-or-a-long-slow-recovery/?emc=eta1
Krugman begins his 6/28 article with: "Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as "depressions" at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929 - 1931."
Krugman goes on: "Neither the long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline - on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses."
Krugman's fear is that we are in the early stages of a third depression. And, he sees it occurring because of a failure of worldwide economic policy. This, of course, is most recently exhibited by the deficit hysteria exhibited by the G-20 in Toronto last week. We give President Obama credit for going in to those meetings advocating spending to keep consumer demand up, but to no avail as the other 19 countries out voted him.
Key here is Krugman's point that: "... future historians will tell us that this wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression. After all, unemployment - especially long-term unemployment - remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly ... In the face of this grim picture, you might have expected policy makers to realize that they haven't yet done enough to promote recovery. But no: over the past few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy."
So, Krugman concludes, it's as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression (which deepens that depression and paves the way for deflation) is actually self-defeating.
As we have said here many times, unemployment is the lagging indicator for any recovery, the "canary in the coal mine." We are with Krugman when he asks who will pay the price for this current "cut the deficit" orthodoxy? And, of course the answer is tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
We have attached a blog from Martin Wolf of the "Financial Times" where he essentially takes the same position as Krugman about the absolute necessity of continuing to spend. His point is that the overall supply of credit and money in the economies of the developed world is stagnant. Wolf is very highly regarded internationally and frequently appears on "Fareed Zakaria GPS" which is where we get an opportunity to hear his positions.
We have also attached a post by Casey Mulligan on the Times "Economix" blog. Mulligan is a very highly regarded University of Chicago economics professor. Mulligan's point is that, while some economists are saying that we will soon have a second recession, he expects a labor market recovery although it may take many years.
Mulligan includes in his post an excellent multiple trend line graphic of leading indicators over the past nine months (Case-Shiller Housing Price Index, private durables spending per person, etc.). For example, real private consumption has risen, with spending on consumer durables up almost 10%. The stock market is down over the past two months but still higher than it was last fall.
Based on multiple factors like those he refers to (not all of which are "up") in his post, Mulligan predicts that seasonally adjusted national employment and work hours will be a couple of percentage points "higher" at the end of 2010 than they are now: "... that is, we will be weakly recovering from the first recession, not starting a new one."
So, while Krugman has become very "Roubini-like", there are others in his profession that don't see the "gloom" before us. Mulligan is realistic and makes sense.
On the subject of "Roubini", we recommend his new book ("Crisis Economics - A Crash Course in the Future of Finance", Nouriel Roubini and Stephen Mihm, Penguin Press, 2010) which we are currently reading. It's a good perspective-getter on what we've just been through economically and suggests what to do for the future.
A "Third Depression"? No. We hope not.
Subscribe to:
Post Comments (Atom)
I made many of these same comments on your earlier blog post, [hopefully we can get some more discussion going on here!] however I still disagree. Your two points are conflicting: the worldwide financial system is in disarray BUT governments need to spend more.
ReplyDeleteThe worldwide financial system is in disarray because governments have spent too much. That's exactly the story in Europe - they provided too many benefits and not enough revenues.
Obviously the Keynesian way of getting out of this recession or depression is for the government to spend spend spend, but Keynes ideas keep getting revived and then proven wrong, and we are seeing that now by Obama's own metrics:
http://www.tightwind.net/2010/06/mankiw-on-the-administrations-stimulus-modeling/
"The administration predicted that without stimulus the economy would suffer 9 percent unemployment, and with stimulus it would not rise above 8 percent. The unemployment rate for May was 9.7 percent. Their conclusion is that the stimulus wasn’t large enough, rather than questioning their initial assumptions."
How can you say that we need to spend more? I would argue that we need to let go of these Keynesian ideas, and embrace some new ideas like those of Hayek and Milton Friedman. Here's a great overview:
http://online.wsj.com/article/SB10001424052748704911704575326500718166146.html
"Boosting aggregate demand by keeping school teachers employed will do little to help the construction workers and manufacturing workers who have borne the brunt of the current downturn. If those school teachers aren't buying more houses, construction workers are still going to take a while to find work. Keynesians like to claim that even digging holes and filling them is better than doing nothing because it gets money into the economy. But the main effect can be to raise the wages of ditch-diggers with limited effects outside that sector.
...
The American people are suffering from top-down fatigue. President Obama has expanded federal control of health care. He'd like to do the same with the energy market. Through Fannie and Freddie, the government is running the mortgage market. It now also owns shares in flagship American companies. The president flouts the rule of law by extracting promises from BP rather than letting the courts do their job. By increasing the size of government, he has left fewer resources for the rest of us to direct through our own decisions.
Hayek understood that the opposite of top-down collectivism was not selfishness and egotism. A free modern society is all about cooperation. We join with others to produce the goods and services we enjoy, all without top-down direction. The same is true in every sphere of activity that makes life meaningful—when we sing and when we dance, when we play and when we pray. Leaving us free to join with others as we see fit—in our work and in our play—is the road to true and lasting prosperity. Hayek gave us that map."
Ugh I just typed a huge response and it blew up on me. Summary:
ReplyDeleteMarcelo the link you post from the WSJ reads like a Republican talking points memo. Any line that begins with "The American people think..." or "The American people want..." is likely followed by a lot of stuff that isn't really supported in reality. I submit that's the case in his 'top-down fatigue' comment. I believe YOU are suffering from top-down fatigue, I believe Russ is as well, but I don't believe the American public at large feels similarly.
Also he talks about Fannie and Freddie like they're a new thing, they've been around since 1938. While I agree some arguable policy decisions have been made there, Fannie's been 'running' the mortgage market for a long, long time.
The only reason the companies we own stock in are flagship companies is BECAUSE we own stock. If we didn't, they'd have imploded. Is that what you, Russ, or Hayek want? Should GM be defunct? Should AIG have failed and taken who knows how many banks with them who made no mistake other than buying insurance from AIG? Should we have let Citi explode?
How much worse do you think our economy would be today if even ONE of those things had happened? Think about it.
Sidenote: The American taxpayer just made 10 billion off the sale of Citi stock yesterday.
Flouting the rule of law and BP: I don't believe the President sitting down with a corporation to work out a plan how to reimburse people for a disaster they created is 'flouting the rule of law'. I submit the 22 year old Exxon Valdez cases that are still on the books flout the rule of law. An infant born to a fisherman whose livelihood was ruined by the Exxon Valdez during the incident should be graduating college now (if he managed to afford it) and a lawsuit by the fisherman against Exxon could still be in process.
You may find comfort in platitudes about the rule of law, I suspect the population of the gulf coast states getting hammered by BP's irresponsibility wouldn't.
Lastly let's talk Keynes, shall we? You'd be hard pressed to find a single economist who'd agree with the idea of reducing unemployment benefits during a downturn. Economists view unemployment as one of the purest ways to keep an economy rolling when a downturn hits. The GOP's insistence that the will of the American people (you know, the people who elected a majority of Democrats to the senate?) be ignored over platitudes is a recipe for economic disaster.
Scott Brown, the newly-minted Republican senator from Massachusetts just cost his home state 700 million dollars over a platitude. He literally voted to reject money to families whose primary breadwinners got laid off and can't find work.
17 Senators from states with double digit unemployment didn't just vote no, they actively filibustered an extension:
http://thinkprogress.org/2010/07/01/filibuster-table/
Perhaps, like Sharon Angle (tea party nominee from Nevada who'll lose to Harry Reid, as laughable as that idea is), they all believe the unemployed are just lazy and are happy collecting small checks from the government instead of their old, better paying jobs:
http://thinkprogress.org/2010/06/30/angle-job/
I hear a lot of platitudes from Republicans these days about how things should be. I see very little concrete suggestions on how to solve anything.
Perhaps that makes me and Bob Bennet (Republican Senator from Utah) more alike than I thought:
http://thinkprogress.org/2010/06/30/bennett-gop-ideas/
I know I've gone a bit afield here from the original topic, but this is all wrapped in politics. All the misinformation about the stimulus' effect on the economy, the deficit, not paying for unemployment... it's got me very riled up. I see an economic disaster coming and the minority party is asleep at the switch and worse, not letting anyone else push it either.
Oh! Forgot this chart in my repost. The reason for the deficit isn't entitlement spending. It's tax cuts from 9 years ago and the longest war in American history:
ReplyDeletehttp://www.businessinsider.com/chart-of-the-day-bush-policies-deficits-2010-6
Craig - all good points, but I can see you're getting worked up as this being a Democrats vs Republicans issue. I stay away from any party affiliation, and honestly don't side with either one. It's difficult to when I still disagree with the way the Democrats are going, and the Republicans have no direction.
ReplyDeleteMy argument is a purely economic Keynes vs Friedman/Hayek debate. I think there are more economists out there that side with the Milton Friedman/Hayek viewpoint than you give credit to.
I never made the argument that people receiving unemployment benefits are just lazily sitting around collecting their lower paying checks. I would actually strongly disagree with that. The stimulus (as far as I remember) included more spending than just unemployment benefits.
The argument that I'm making is that the stimulus did not work BY OBAMA'S OWN MEASURE. He said that without stimulus unemployment would not rise above 8%, and without it it would be at 9%. After all that spending, it hasn't even dented 9.5% as of today. The only models we have to go on saying that more stimulus will help are the ones that were clearly proven wrong.
I put in my other post - "isn't the definition of insanity doing the same thing over and over again expecting a different result each time?" How can we just throw MORE money at the problem when the first round of money didn't help at all. I would be fine if we saw progress, but obviously it's not helping.
It's all about cause and effect. Keynes always used the ditch digger argument, but we see it today - 125,000 newly unemployed workers because the government had temporarily employed them for the census. So paying random people has only masked the true symptom of the economy.
From the time we all took our first macroeconomics class, we have been trained to believe the old Keynesian model of GDP = C + I + G + X and that the only thing we can truly affect is government spending. That is not true and has been proven. We just like to think the government can impact the economy. What ends up happening though is that the government simply floats too many unsustainable investments.
As for your point about would I have wanted AIG to crash or GM to fold up shop - Remember when we learned all about Creative Destruction? I would argue that GM still has not been motivated to change and create truly great cars. GM is doing better today as a result of market conditions, not because they're doing anything better. Ford on the other hand was on their own and today is building amazing cars. It's all psychological - GM can now maintain the status quo, where if they had folded up, it would have opened up the market for more innovation, and for someone else to step in and snatch up market share.
Guess what, it's protectionism - We are going to float GM just because they employ hundreds of thousands of people. If GM had folded, someone, somewhere would have had to have produced the cars that GM would have sold. This would have opened up more job opportunities.
Anyways, going back to your points about expanding unemployment benefits, I would argue that the senators that filibustered this or that don't know what they're doing either. Often times these arguments come down to political ideology rather than proven science (Economics). I guess it's just a philosophical difference in that I don't think the government knows better than me.
In the end though, we can't keep doing the same thing over and over, just throwing more money at our problems when it didn't work the first time. Money may be just masking other issues. Sometimes we should think about new ways to approach it.
Also, to comment on your last chart - I'm against the wars myself. However, as for tax cuts, I'm against high taxes anyways. I side with the people that would argue that most good things in life come from outside the government, and could be solved more effectively if entrepreneurs could approach them. Not all business is evil, as matter of fact, most of it is pretty dang great.
ReplyDeleteRemember that language, law, money and markets all preceded taxpayer-funded government, as Hayek once pointed out.
I get that you're trying to keep this out of the political arena, but honestly that last article you posted was extremely partisan. Hence my bent... as I said I knew I was headed afield a bit.
ReplyDeleteI don't disagree that there are different ways of viewing the same problem, and I certainly don't argue that Obama was a terrible fortune teller re: the Stimulus. Krugman has argued (and I agree) that things would have been worse without it, clearly you don't agree. It's almost a religious debate at this point. Empirically, it's an impossibility to "prove" either way, at least to the level to satisfy either party against their own current opinion.
You see the first round of money as not helping, I see the first round of money as not helping ENOUGH. It's an interesting debate, but ultimately I think a fruitless one. ;) I don't see either of us changing our minds.
I'll leave you with this chart:
http://mintresumes.files.wordpress.com/2010/04/clusterstock-4-2-2010-chart-of-jobs-lost-in-bush-and-obama-administrations.png
I believe that chart shows that the stimulus did, in fact, work. Not to the degree we needed it to, but there's no question that the job situation, which was a rapidly bleeding wound, has at the very least been patched. To stick with the analogy, now it's time to build back the red blood cell supply.
Gentlemen: Great discussion! It's wonderful to read your inputs and your positions. I'll go back to Krugman and Buffet saying two years ago that the stimulus money would not be "enough." It wasn't. And, there was no other "source" of stimulus to prime the pump. Had there been no stimulus, the job creation situation (see our 7/3 post) in the U.S. would have been substantially worse.
ReplyDeleteInteresting discussion here. I agree with Marcelo about the effectiveness of stimulus spending. The theory that government deficit spending is good for the economy is wrong. It can never "be enough" because it doesn't work.
ReplyDeleteFor example, if we had asked Krugman or any other Keynesian economist in 1990 what they thought of Japan raising their debt to gdp ratio from under 70% to over 200% over the next 20 years, he would have answered that the "stimulus" provided by the increased government spending would result in a booming Japanese economy. If Keynes' theory is correct, we should have seen such an economy in Japan. Instead, we see a Japanese economy subjected to (in Krugman's own words) a "lost decade" in the 90s and slow growth during the 2000s.
The Mises/Hayek theory explains Japan's situation as a unsustainable, credit fueled boom that finally burst in 1990. Rather than letting the ramifications of a such a crash actually take place and allowing the economy to restructure, a painful but quick process, Japan tried to prop up its economy with stimulus spending and bailouts. (sound familiar?) The result is a stretching out of the restructuring (includes unemployment and bankruptcies) required for future growth and a long drawn out recession.
Aaron: This is fascinating stuff which Krugman is far better equipped to answer than my own humble experience. But, a point or two: The U.S. economy is not Japan (or Greece!). If I might use the term "monosyllabic", which I know applies to music, but I'm going to use it here to apply to the Japanese economy which, for those of us who were business in the 80s and 90s, we were told we must "emulate" in order to improve our "productivity". Many of us refused because the, for example, supplier/producer relationship was not the same as the U.S. (it was "captive"). The labor situation in Japan was less costly which was nice but, again, not comparable. And, of course, Japan proved it's economy not to be comparable by responding to an economic crisis with anything but the appropriate and timely stimulus, except for the "zombie banks" that needed support to continue their sub-optimal financial activities. The Japan "miracle" was "low-cost-producer" based and "inbred".
ReplyDelete