Greg Mankiw gives this wise response to Robert Shiller's observation that confidence is the key to economic recovery:
I think a lot of economists would agree with that. The question is what
it would take to make people more confident. Bob thinks that confidence
would rise if the government borrowed more and spent more. Other
economists think that confidence would rise if the government committed
itself to, say, lower taxes on capital income. The sad truth is that we
economists don't know very much about what drives the animal spirits of
economic participants. Until we figure it out, it is best to be
suspicious of any policy whose benefits are supposed to work through
the amorphous channel of "confidence."
it would take to make people more confident. Bob thinks that confidence
would rise if the government borrowed more and spent more. Other
economists think that confidence would rise if the government committed
itself to, say, lower taxes on capital income. The sad truth is that we
economists don't know very much about what drives the animal spirits of
economic participants. Until we figure it out, it is best to be
suspicious of any policy whose benefits are supposed to work through
the amorphous channel of "confidence."
So where does that leave us? Skeptical and suspicious which are my main emotions in the current environment. But I do think the right question is to ask which policy would create more confidence. That is my main argument here.
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The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants.
What the..? Well then, why don't you get another job!
Russell Roberts: "I do think the right question is to ask which policy would create more confidence."
I agree that question needs to be asked. Perhaps the answer is that government policy will not make any difference – at least not any positive difference.
I once wrote my wife's uncle – a very high level telcom executive – that Ronald Reagan's main contribution to this nation was to help us believe in ourselves once again. He agreed.
Perhaps what is most needed is a president – and business leaders – who remind us all of just how strong our capitalist economy has been and how it always rebounds. Instead of focusing only on layoffs and plant closures, our media should also be pointing out the numerous ways we are succeeding even if crisis times. I think that's what Reagan would be doing.
John Dewey:
Perhaps what is most needed is a president – and business leaders – who remind us all of just how strong our capitalist economy has been and how it always rebounds.
I couldn't agree more. But we don't have a president who is going to do that and we won't have one anytime soon. There may be some business leaders that might do that from time to time, but it's really not their job. Besides the media and the politicians are trying to convince everyone that business and capitalism are the roots of all evil.
In the meantime, however, we can listen to Rush Limbaugh. He says all those things, confidently and proudly. He's even offered a truly bi-partisan stimulus plan that makes more sense than anything we've seen from any politician or economist. It's on his website.
The reason for the gasoline lines is panic. We need to restore confidence. Then, people will stop their panic buying and the lines will shorten.
Maybe. But I think the reason for the gasoline lines is prices below equilibrium. Panic might cause prices to be "too high" and it is possible that rising prices could cause panic driven price increases. But budget constraints will limit that, and then everything will return to normal.
My point is that markets need to use price adjustments to coordinate what people do regardless of their degree of confidence.
If markets can only coordinate when people have proper confience, there is some kind of failure going on.
At least we can all agree that economics is about people as opposed to money.
Say you're in Baghdad (or any other war torn city) and bombs are going off all over the place every other week or whatnot. No matter what anyone tells you, regardless of how many dead terrorists you'll see on TV, my guess is you're not getting out of the house much until it's been quiet FOR A WHILE, regardless of statistics and numbers showing it to be safe on paper, because, you know, you've been traumatized.
While lower tax rates on income would definitely lower risk and drive incentive (and is in general, a fabulous idea, recession or otherwise), we'd only feel CONFIDENT when we sense stability, when the loud crashing noises from outside end and it feels safe to venture out again.
Now the dust will settle regardless of government activity. It will happen anyway. I just don't see how any government activity one way or another, would help restore confidence per se.
The real question is if any government activity will expedite recovery or delay it.
Bill Woolsey,
Perhaps I'm misunderstanding you, but are there markets in which prices are failing to adjust?
I just read at lunch that declining housing prices nationwide led to increased housing sales in December. Gasoline prices have certainly responded to sluggish demand the past few months. U.S. airlines, led by Southwest, initiated a price war in the past week.
Can you explain what you meant by "markets need to use price adjustments"?
Units of confidence aren't fungible. My incresed confidence as a consumer may have a non-trivial impact on recovery, but the increased confidence of an entreprenuer or venture capitalist will mean a heck of a lot more.
Which takes us right back to the same old question: is this crisis the result of a collapse in aggregate demand or isn't it?
I'm sick of my own comments so I'm staying out of this one.
One of the problems is the peopl–investors, speculators, consumers, politicians–have been too confident. So we do not want to restore that kind of confidence.
Overconfidence leads to bad malinvestment and overconsumption. Although more confidence may help the economy at the moment, too much may do even more damage.
In any case, even when confidence returns, real mistakes have been made. Malinvestments need to be purged, and the economy needs to return to a sustainable growth path.
I am confident that those in power have baseless confidence in their power just as a bull in a china shop has confidence in his power.
Lee Kelly,
Again, you've hit it out of the park.
Casinos thrive and gamblers lose when the latter gain confidence.
People do not need confidence per se, but confidence in how risk is evaluated (but only once risk is evaluated better). If people cannot tell a good investment from a bad investment, then being confident might just cause more mayhem.
How much confidence do you want? Should people be confident enough to invest in more sub-prime mortgages? Bernard Madoff's customers were confident, was that a good thing? Wouldn't it have been better for the economy if they were less confident?
dg lesvic,
Thanks for your compliment in this thread and others. It is nice to receive some affirmation occassionally.
Lee Kelly: "investors, speculators, consumers, politicians–have been too confident. So we do not want to restore that kind of confidence."
Perhaps some consumers and some investors have been "too confident", though I'm not sure I understand what you mean by that.
The problem as I see it is that consumers and lenders are both right now afraid to do much of anything. I listen to ordinary consumers tell me that they're delaying the purchase of a car or delaying the replacement of a roof. It's not because they cannot afford it at their present income. It's because they're afraid of a depression – a fear brought on by government leaders and the media telling them they're in for tough times. That prophecy of tough times is self-fulfilling.
Lee Kelly: "the economy needs to return to a sustainable growth path"
What does that mean? that the less than 3% annual GDP growth of 2005-2007 is unsustainable?
I don't see how a large fiscal stimulus changes the fact that most Americans have seen a dramatic decline in wealth via falling home and stock prices and are up to their eyeballs in debt. The decline in wealth means that most Americans need to rationally reassess and raise their savings rate. These facts will likely not be changed because a large stimulus package puts the government further in debt to build some infrastructure.
A rookie responds. I'm not sure at all about "confidence" being what we should look to for economic recovery. Isn't over-confidence or more correctly, irrational exuberance what helped to get us into this mess in the first place? For years, I watched house prices skyrocket with no real or, as far as I could see, rational basis for those prices. Even early last year I remember hearing of people getting way more than their asking prices, especially in certain markets, like California.
I keep getting the impression that some economists and of course, politicians, want us collectively to get back to unimpeded borrowing and spending and to carrying excessive personal debt. In other words to go right back to the behaviors that got us here.
Don't know about anyone else, but each news story that discusses the proposed costs of the government stimulus only makes me want to curtail my spending even more. I just can't figure out how exploding deficits and national debt, along with wasteful spending are supposed to instill confidence.
John Dewey,
"It's because they're afraid of a depression – a fear brought on by government leaders and the media telling them they're in for tough times."
That may be an indirect cause. I just put off buying a new widescreen monitor on Sunday, even though it was marked down 15%, because I'm only about 50% certain that I will have a job by the end of the year. The company stock is down, business is slow, salaries are frozen, there have been reorganizations and layoffs, and likely to be more of both in the near future. And it seems that pretty much everyone I talk to is in the same boat (with the possible exception of government workers). So it seems prudent at this point to set aside a few thousand in short term savings – just in case. I suspect the direct cause is businesses making prudent decisions based on expectations of lower demand.
What to do? Hunker down. Watch the separation of wheat from chaff – and hope that I'm actually wheat.
Randy,
I agree that hunkering down is the prudent reaction for a single family. The problem is that hunkering down is an economic disaster when 120 million American households do it simultaneously.
As I see it, a minor recession was the result of last year's financial crisis. A major recession is the result of the fear caused by overreaction to the minor recession.
RickC: " Isn't over-confidence or more correctly, irrational exuberance what helped to get us into this mess in the first place?"M
I think if we listen too much to the mainstream media, we might believe that:
- the entire nation was in debt to the hilt;
- housing prices were unjustifiably inflated throughout the nation;
- speculation by developers was a symptomn of more widespread overconfidence.
The problem is that just wasn't true for the entire nation.
Those who did get overextended probably needed to curtail their spending. But the rest of us needed to continue as before. We didn't do so because the government and the media made us too afraid to continue.
Lee Kelly,
Again, you've hit it out of the park.
dg, Lee invariably hits it out of the park and he's a gifted writer to boot.
Overconfidence leads to bad malinvestment and overconsumption.
Indeed. The plain fact is that overconfidence lead to overlending all over the world. We cannot consume more than we produce and credit merely changes the timing of consumption. Over-confidence (whether natural or government inspired) lead lenders to essentially over-estimate future production and lend against this over-estimated future production. Unfortunately, virtually every action taken by government today is geared toward bringing people back into this euphoria. Worse, every policy discourages future production.
If banks are encouraged to lend and government is borrowing to spend at the same time as producers are discouraged from producing, how bad will the next crisis be?
a fear brought on by government leaders and the media telling them they're in for tough times. That prophecy of tough times is self-fulfilling.
John,
It's not all media. Government "leaders" have been inconsistently flailing around and that makes people justifiably nervous. First it was a "bazooka" in Paulson's pocket, then it was a fund to (idiotically) buy bad bank assets and then it was a full on government slush fund. I think most people now understand that nobody in government knows what they're doing but that they're willing to commit every taxpayer penny to do it.
Business is also in flux. For example, the SEC is flailing around, imposing idiotic rules and responding to political pressure so much that many companies like mine are not sure they'll be in business much longer. Our regulator is willing to violate every word of its mission statement to maintain liquid and orderly markets to dance to the political tune du jour. As a result, I'm not expanding and I'm not spending personally either – and neither is anyone I know.
Nancy Pelosi wants to confiscate IRA accounts because she believes she's more competent than anyone else to invest them. Of course, I'm not as confident seeing as she is on the energy committee and wants us to "break our addiction to hydrocarbons" by switching to natural gas. I'm just not sure that all that botox isn't finally doing in her pee brain, but I've stopped putting money into my IRA account just in case.
Basically, government is in flux and people naturally respond by pulling back and acting more conservatively until the dust settles.
Imagine an Island with population for 4 people: Frank the Farmer, Charlie the Chef, Mike the Miner, Sam the Smith.
Frank grows grains for all the other three, Charlie bakes and cooks for all the other three, Mike Mines for Iron for tools which Sam makes and coal to cook and keep warm, Sam makes tools for all the other three. They sleep in caves and live their lives.
Frank saves some grains for that proverbial rainy day, just in case. Mike saves some coal and steel, just in case the mine collapses. Charlie pickles some vegetables, just incase. Sam keeps few extra tools, just in case he couldn't make any.
One fine day, Barry the Bum washes up the shore of the Island. The islanders welcome barry. They had an overdose of confidence. Out of the goodness of their heart they feed him the first day. Barry promises that he will pay them back with interest. Next day, barry eats another meal and gives them an IOU. All of a sudden, Charlie realizes that there is more demand for his cuisines, he serving up his savings. He needs more utensils now, which comes from Sam's savings. Sam suddenly realizes that he needs to replenish his savings, and demands more from Mike's savings. Charlie demands more grain from Frank and that depletes the farmer's savings. This goes on for some time as everybody keeps themselves busy. Barry in the mean time takes a vacation to a near by island for a couple of days and comes back ( Home equity extraction ). Once the savings gets depleted, people produce a little bit more than they used to, to feed the extra person Barry.
Suddenly Charlie realizes that Barry has nothing to pay his debts with and hence no way to repay his own debts back to Frank or Sam. This causes Sam to realize that he has no way of paying Mike. There is a credit crunch. They also realized that there is no need to do the extra work to keep feeding the unproductive Barry. Suddenly Charlie stop producing for Barry, hence he demands less from Frank and Sam.
John "Keynesian" Dewey comes to the picture and says, there is a lack of confidence. Charlie needs to start feeding Barry as if nothing has happened. He says aggregate demand is going down. The reality is, economy was consuming more than it was producing, thus depleting the savings.
But John, may be, just may be, all the tools and savings allocated to making baking utensils need to used for making tools of masonry, so all the islanders can have a better shelter. May be barry needs to do become a brick layer. May be, just may be, resources need to be reallocated to more productive activity. May be boosting confidence in the old arrangement is not going to do it. John, true, very true, only barry borrowed more than he could consume. Yes, the extra mine that Mike opened might remain idle. Yes, the forging tools that sam was using to make utensils might be idle. they all need to find an alternate use, or needs to be altered for a different use.
Great story, Oil shock. At first, Frank, Sam, Mike and Charlie seemed really stupid (why would they lend to Barry without checking that Barry was employed in things other than acts of consumption and leisure?). But then, I realized that in the real story, Gus Government guaranteed some of Barry's borrowing and forced some of the lending. Then, suddenly, their overconfidence made sense to me.
Methinks,
Glad that I'm not alone in the Kelly fan club. And that self-proclaimed "rookie, RickC, hit one out, too.
I think that what this all comes down to is Keynesian "economics," the notion that spending is good and savings bad.
In fact savings is just what we need now more than anything else.
And isn't it also ironic what "spreading the wealth around" has really come to mean, not taking from the rich to give to the poor, as we had thought, but just the opposite, taking from all of us, including the poor, to give to the richest and most powerful.
Anyways, the smartest people in the world are right here. Too bad nobody's listening.
"The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants.
What the..? Well then, why don't you get another job!
Posted by: Flash Gordon | Jan 27, 2009 1:38:14 PM"
What is the "invisible hand", Flash, if not the "animal spirits of economic participants"?
The invisible hand is not a group thing, nor is the animal spirit of an economic participant.
Seems as if, on the issue you chose to challenge, the good Prof is in good company, at least IMHO.
tep, that's the problem. All the Barrys out there borrowed too much. Then they went and spent that money on vacations, clothes, flatscreen TVs, computers, restaurant meals, mp3 players, and bigger homes.
Everyone else receives money for providing the Barrys these goods, and for a time it looks more profitable to shift away from manufacturing and into retail or financial services.
But then the Barrys stop spending. The cat is out of the bag, defaults stack up, and Barrys everywhere begin cutting their spending to pay off debt. Suddenly their demand for all those consumer goods disappears.
Malinvestment has occurred on a massive scale. Prices fall through the floor, profits dry up. Unemployment rises and capital becomes idle. A credit crunch hits and a drop in confidence occurs (and rightly so).
Not everyone needed to be complicit in overborrowing for everyone to suffer the consequences.
Methinks says…
How could I miss Gus!
The real life Mike, Frank, Sam are unlikely to trust Barry with all their life's savings. For that we need somebody like Gus to offer the guarantees. Good point.
Confidence? Trust? My local Walmart has been sold out of ammo for the last 2 months. I really don't think trust is on the minds of most folks.
I have to agree wholeheartedly with Lee's earlier assertion regarding overconfidence. Nominal rates have had too much effect on our decisions, and having us continue to make those decisions not good.
But i have to disagree with the premise of the general argument. I don't believe that confidence drives the market. It's greed.
At the end of the day, a lot of good investors will accept cases with a lack of confidence in order to get higher returns. I agree with the idea to lower taxes, but the motivation is to increase that thing that Obama hates so much: Greed. The reason large scale investments occur is not because of confidence or to plant trees, or to protect the environment. It's for pure, unadulterated greed. People investing and using that investment want to make more money than they started with, plain and simple. Want them to invest more? Take less.
Guys,
Great discussion. Points well made.
Question.
Can someone explain to me how the economic downturn seemed to happen almost simultaneously around the world? As I understand it, in the U.S. the subprime mortgage push led to an easing of credit in general and then defaults on those loans started us down the path to this crisis.
But this doesn't explain why Iceland, for instance, went into an even steeper dive than us. It doesn't seem to have mattered how "mixed" the economy of a particular country was, whether they were closer to a free market or a more statist economy. Did all these countries follow our lead with easy credit and subprime mortgages? Or are they just that tied to our economy? Or is the real culprit central banks?
Someone please enlighten me.
I don't think anyone can say with certainty what "causes" confidence, to what degree, or even what degree of confidence is "healthy" for an economy. I would say it is safer to say that like most things in economics, the answers to those questions changes by the minute and the mile — it is definitely different everywhere, changes over time, and varies when comparing small discrete parts of the economy versus the economy as a whole.
What I *DO* think we can say is this: while government may or may not be able to enact policies or rhetoric that induce confidence, and may or may not be able to even ascertain just how much confidence is the "right amount", the more government stops intruding on the lives of individuals and the economy, the more liberty we'll all have to pursue our own best interests.
The government should worry more about making sure that one's "pursuit of happiness" doesn't impede or infringe upon another's, and less about what outcome is reached. We might not be more confident, but we'll certainly be more free.
Vidyohs–
If the invisible hand is the same thing as the "animal spirits of economic participants," then Adam Smith knew what drives it even if the good prof does not.
Cheers,
Confidence is not all that important. For example, suppose that two gamblers place the same bet on the same horse to win a race, and further, one gambler is more confident than the other. Does being more confident achieve anything that betting right does not also achieve? Of course not, the less confident gambler was just as right, and takes home just as much winnings, as the confident gambler. What is important is not confidence, but correct decision-making.
To the extent that confidence influences decision-making, it should be calibrated to market conditions; that is, when confidence is too high or too low, a sub-optimal allocation of scarce resources emerges.
By claiming that confidence needs to be restored (or at least increased), it is being implicitly assumed that confidence is not already calibrated to market conditions. But that is exactly what ought to be debated: whether or not the recent financial and economic problems are the work of "animal spirits", or real underlying economic realities. I lean toward the latter, although make some room for over-reaction.
If only investors would stop investing in government securities then maybe the government would stop spending so much. You miserable investors need to look in the mirror and recognize the negative consequence of your "bad malinvestments" in government. Government is not the answer to your problems nor the most appropriate place to park your savings. Buy some stock or corporate bonds and forget about flocking to safety by misinvesting in zero percent interest paying T-bills. You chickenshits need to invest in the U.S. economy to get the country back on track to prosperity. (Buying "Made in China" won't do the trick either.) By investing in government bonds, are you not supporting the U.S. war machine in Iraq and elsewhere, as well as the Socialist welfare state that robs the rich producers and sunbatheing loafers to redistribute to the non-productive working class? Bombs and bullets are not free. I bought some ammo at Wal-mart for the coming war between the haves and the have nots and it ain't cheap. So, stop proping up the bloated U.S. government, people. I guess your taxes are too low if you feel the need put more money in Uncle Sam's pocket. When will you crazies ever learn?
Guys,
I can understand that spending less and saving more makes sense when we're in the middle of a bubble. But not after the bubble has burst.
The problem right now – as I see it – is not that we are still consuming more than we can produce. It's just the opposite.
We do not need to build houses at the rate we were building them, of course. But we do need to continue all the other things we were doing. Why should overconsumption of housing in 2003-2007 be solved by underconsumption of automobiles, clothes, vacations, etc. in 2009?
The right time for a nation to increase saving is in the middle of economic expansion. The wrong time for a nation to increase saving is in the middle of a severe recession.
As I noted before, it may be prudent for an individual household to save more if it is concerned about a loss of job. But when 120 million households hunker down simultaneously, we're headed for a disaster.
Lee Kelly,
"…make some room for over-reaction."
Over-reaction is the actionable problem as the correction is simply necessary. But over-reaction is also prudent. Above, I estimated the probability of losing my job this year at 50%. The difference between the real and my estimate is a prudent over-reaction (I hope). So what actions can anyone take to narrow the difference? Information is the key.
Trumpit,
"If only investors would stop investing in government securities then maybe the government would stop spending so much."
Government spending is a quest for power – a method of seizing as many of the available resources as possible. Taxing or borrowing makes no difference. The investors are not the drivers of the problem, they are simply responding to the incentive that the government's quest for power has created.
"Government is not the answer to your problems…"
True
…nor the most appropriate place to park your savings."
When the government controls the bulk of the resources, it is absolutely the best place to park savings – it may soon be the only place.
oil shock: "John "Keynesian" Dewey comes to the picture and says, there is a lack of confidence."
Not sure if you misunderstand Keynesian economics or if you misunderstand my position.
Yes, Keynes did argue that aggregate demand for goods is insufficent during an economic downturn. And I agree with him on that.
I have not accepted – yet – the Keynes prescription for insufficient demand: government stimulation of the economy. Oin fact, if you look at the top of this thread, I suggested that government policy will make no difference. I'll amend that now to mean no government fiscal policy. Government monetary policy can make a huge difference.
I think I'm much more in the laissez-fare camp than a follower of Keynes. But I have always supported tax cuts – particularly cuts in business taxes and cuts in personal tax rates. So perhaps I'm as much a supply-side advocate as anything else.
TrUmPiT quote: "Buying "Made in China" won't do the trick either."
What does it matter where goods were assembled? First of all, few if any products are completely the result of only one country's workers. Take iPods for example; they are "made in China", but only about 1% of the value of an iPod is actually added to the product in China — the two most expensive components come from Japan and the US, respectively. Conversely, a product "made in the US" may have materials mined or produced in various countries around the world.
Further, I would submit that it isn't my job to look for so-called "American made" goods or services, or for that matter goods and services from any particular company. Rather, it is the job of a company, regardless of where it is headquartered, to deliver goods and services that I want to buy.
Flash,
I think you're being too clever by half.
Adam Smith put a name to a concept but could no more attempt to define individual desire than the good prof can, and I think (speculation) that is what the good prof meant when he said "the animal spirit of economic participants" which equates to the same thing as "individual desire".
Individual desire can no more be accurately predicted than can climate, hence the "invisible hand", yet it is individual desires that moves the markets.
Of course individual desire (the invisible hand) can be influenced through advertising but it can't be confidently predicted.
I went out to the creek last evening and once again failed to walk across the surface, so I might be wrong. Perhaps the good prof could enlighten us as to exactly what he meant.
Rick C,
Can someone explain to me how the economic downturn seemed to happen almost simultaneously around the world?
I can't describe every policy change around the world. However, as you noted, credit spreads tightened to unprecedented levels across the board and across boarders. One reason this may be so is that after the bursting of the tech bubble and 9/11, central banks in all developed countries dropped the interest rate to very very low levels. That made money cheaper and created a mania for credit. I can't say that was the only factor, but it is one data point.
RickC: "But this doesn't explain why Iceland, for instance, went into an even steeper dive than us."
My understanding is that Iceland's banks were overleveraged far more than made sense. Those banks had liabilities equal to 7 times the nation's GDP, as they reached ashore to play in international markets. When the poor quality of those loans – mostly to the UK – became apparent, Iceland's banks began to fail.
Iceland's citizens bought into the growth of the financial system, and had much of their wealth in financial stocks. Mortgage lenders were providing 100% financing of homes to those stockholders. As the meteoric growth of the formerly fishing nation continued, the Icelandic housing bubble grew and grew.
The collapse of financial stocks and the bursting of Iceland's real estate bubble ended the 15 year Icelandic miracle. Unlike the U.S., Iceland was a one-dimension economy – or two if we include fishing. So the financial collapse hurt that nation far more than it has hurt ours.
The right time for a nation to increase saving is in the middle of economic expansion. The wrong time for a nation to increase saving is in the middle of a severe recession.
John Dewey,
First of all, what are you going to do about it? If 120 million households judge that it is prudent for them to hunker down and stop spending, then who are you and I to dictate to them that they should do otherwise? In fact, by borrowing and spending against those households' future production, that is what congress is doing. Indirectly, it's spending their savings for them. With massive and growing national debt and looming tax increases on future earnings to pay for it, why would any household spend its savings now? It may be much harder to rebuild savings in the future because of higher income taxes. Also, because higher income taxes increase the hurdle rate, there will likely be less investment and fewer jobs in the future (I'm not counting government make work projects as they are not wealth creating and unsustainable).
As for saving during the booms and spending during the busts – that's not what U.S. households do. They overspend during the booms and find themselves with a mountain of debt and a threatened cash flow stream during downturns. I'm not sure those households are actually saving/investing. I think it's more likely that those households are trying to pay down the debt they've foolishly accumulated during the boom. They may, on average, not lose their job, but their passive income from investment is almost certainly negative or severely reduced and their income from work is either threatened by potentioal pay cuts or job loss. So, why would a rational household spend more under such circumstances?
To add to my last comment:
A few billion $ of the assets (loans) and liabilities (deposits) of Iceland's banks were British. Iceland's banks had expanded by skillful internet marketing. When Iceland's bank began to collapse, those banks guaranteed deposits of Icelanders but not of Britishers.
methinks: "If 120 million households judge that it is prudent for them to hunker down and stop spending, then who are you and I to dictate to them that they should do otherwise?"
I never advocated dictating anything to the 120 million households. I did advocate Reaganesque displays of confidence by our government leaders and by our media.
methinks: "by borrowing and spending against those households' future production, that is what congress is doing."
No need to convince me. I'm all for laissez faire government, and a shrinking of government spending once the economy recovers.
methinks: "I think it's more likely that those households are trying to pay down the debt they've foolishly accumulated during the boom."
I'm sure that some are. Those who were overextended have no choice but to cut back. But the majority of households – and in particular the wealthiest of households – are not overextended. Yet they are cutting back expenditures also. They're doing so because the government and the mass media are frightening the hell out of them.
Again, widespread predictions of economic doom become self-fulfilling.
methinks: "As for saving during the booms and spending during the busts – that's not what U.S. households do."
Just to be clear, I didn't suggest increasing spending during busts. Households need to maintain spending as much as possible during the busts.
I think savings during booms is what some households do. I think it was once what most American households did, before they allowed the government to become their safety net.
methinks: "because higher income taxes increase the hurdle rate, there will likely be less investment and fewer jobs in the future"
Perhaps, but I don't foresee that. Higher tax rates will lower investment from the potential it could have reached. And the initial shock of income tax increases usually slows the economy sharply. But our American economy has continued to grow and fund investments over the past century even while the total tax bite has increased.
The number of jobs in the U.S. economy is pretty much dependent on the number of workers. The standard of living of those workers, on the other hand, is probably indirectly proportional to the size of government spending – to the portion of output taken away from private sector decision makers.
John Dewey,
"Reaganesque displays of confidence…"
That wouldn't help me much, because I have little faith (make that no faith) in politicians. But it might help some to have a few less Paulsonesque displays of panic. What I really need is real information. For my boss to fill me in on what the company has planned. And of course, the company would like to know exactly what the government has planned. As for the economics profession, what we need are some one handed economists – but I'm getting the feeling that the macro profession isn't really up to the task.
randy: "That wouldn't help me much, because I have little faith (make that no faith) in politicians. But it might help some to have a few less Paulsonesque displays of panic."
I'll take that as a half-endorsement of my suggestion. Thanks.
By 1980, most of my boomer generation had lost all our faith in elected officials. For many of us, Reagan changed our perception of what a leader could be. I will concede that a great motivator such as Reagan comes along only once or twice a century. But the government leaders now in office could at least try. Or maybe they are.
Dave_S – By buying USA instead of buying china, you would actually be harming american's (assuming you're american). There is a very good reason that manufacturing jobs go to china: we're not willing to work for less than a certain amount per hour. The reason we're not willing to work below that amount (ignoring minimum wage for now) is because we can get a better or higher paying job elsewhere. You're actually benefiting american workers by buying products manufactured elsewhere by providing them better jobs.
Rick C – I would humbly postulate that the mortgage/credit crisis that is so hyped is no the cause, but rather the symptom. I came up with this theory after I heard Putin blame the US for the fact that the Russian financial system collapsed. At the end of the day we're talking about real numbers. If it were simply based on a mortgage crisis, than I suspect that it would be shrugged off already. The US is big, but I don't think it's big enough that the mortgage sector alone can bring down a global trade economy. Economies re-rout, especially when we're only talking about financials and transport (assuming demand is affected), and not production.