To stimulate or not to stimulate

I am 13 minutes into the NPR program. Couldn't wait till the end before I commented. Russ, you are doing a great job selling freedom. Listening to the rest.

I wonder how much "eminent domain" will be used with this rush to the shovels.

"Mass transit construction creates more jobs than highway construction"

Translation: mass transit costs more than highways.

Russ,

I'd be curious what the non-interventionist expect to create economic growth. If not the government where will demand come from to grow the economy? As I understand it's either from the private sector, trade or consumer spending. The private sector is afraid to invest or lend because the consumer has no wages or money to spend if they have a job at all. And since we don't make anything anymore, except wine, we have almost nothing to trade with. It would be interesting to speculate on what sector will grow us out of this recession.

It seems to me if the government is the only one who can both borrow , hire and spend to invest in the future with hopes for a positive return on its investment it makes sense as the best choice to start to grow us out of this economic slump.

It beggars belief that professional economists think Obama's so-called stimulus package is a good idea.

Suppose that your income this year is $10k, and your expected income over the next five years is $250k (an average of $50k per year). Perceiving that your future self will have a far greater income than your present self, you decide that some income redistribution would be appropriate and borrow $20k. Your present income then increases to $30k, while your expected income only decreases to $230k (an average of $46k per year). By redistributing your income from the future to the present it can be available when you need it most

But you grossly overestimated your future income. Instead of $250k, your future income will actually be $150k. The $30k loan had been given on false expectations. Meanwhile you increase your consumption: not only do you have more money now but also expect to have more in the future. But when the new year begins and you discover your mistake. Instead of a $50k income you have only a $30k income, and moreover, you still have to pay back your loan! Your income actually declines after the first year from $30k to $26k.

Overestimating your future income by $100k created a personal bubble (perhaps an asset such as stocks or real estate was overvalued). For a while you enjoyed a higher standard of living, and your contribution to GDP more than doubled. In the long run, however, you are burdened with a debt that can only be repaid with a significant decline in your lifestyle and future contribution to GDP.

As painful as this personal recession may be, it is an inevitable response to your past mistakes. It could be delayed by borrowing more money, but doing so would only make the eventual recession more painful. Even if you successfully delay the recession once or twice, it is a strategy which cannot be repeated indefinitely. Lenders would eventually look upon your impoverished future and decline to loan you any more money, and you would be facing a more painful recession than the one which had been delayed.

Hopefully you are not in a situation which resembles this, but unfortunately too many people in the U.S. are. They have sensibly reduced their present spending and started saving to enrich a somber future. I find it incredible that so many economists think this is a bad idea. It may mean a few quarters of negative GDP, but increasing GDP at the expense of long term prosperity is irresponsible in the extreme.

Perhaps if postive changes in GDP were not misleadingly referred to as 'growth', then there would be less of a problem. Holding a thermometer in a refrdigerator will reduce its temperature, but it is not going to cure anyone of a fever.

An intoxicating blend of low interest rates, investor bubbles, and fiscal deficits have accustomed many in America to living well beyond their means. But it was a delusion, primarily engineered by the Federal Reserve and Congress. Both Republicrats and Democons were complicit, benefitting from the artificial boom. Once again good politics is bad economics; despite delaying and deepening the recession, both Clinton and Bush were reelected. Can Obama make it a hattrick?

Some people, including economists, then have the audacity to claim that deregulation was the problem. If only the government meddled more, then this crisis would never have happened. But are regulators expected to prevent the malinvestments which precipitate a bubble?

Suppose Obama decided that he does not want to waste money on unsuccessful scientific research. To combat this problem he creates a new regulatory agency. But there is a major problem. If regulators knew beforehand what the results would be, then there would be no need for the research in the first place. Scientists would instead go to beureaucrats for results to experiments which they never conduct.

The way to find out if something is a malinvestment is to wait and see if it loses money, by which time the regulators have failed to prevent the malinvestment! If regulators were better than private investors at making good decisions, then regulators would quit their jobs, buy stocks, and make millions! Meanwhile, every private investor would be clamoring for their advice.

In any case, bubbles are easier to see in hindsight than foresight. And even when a bubble is correctly predicted, it does not follow that the entire bubble is a malinvestment, for example, the dot-com bubble contained many good investments over the long term.

Regulators were serving two masters. They had the improbable task of preventing malinvestments, and were also to encourage lending to minorities with low credit ratings. But as Thomas Sowell recently remarked, politicians do not get elected by saying 'no' to potential voters, and we all have to suffer with the consequences.

Nothing the government is doing is helping. To help would mean increasing interest rates, lowering taxes, decreasing spending, lessening regulation, stopping the bailouts, regaining monetary discipline, and perhaps withdrawing from overseas military activity. For now they are only shifting around costs, for example, taking money from competent and successful businesses, and handing it over to politically connected failures like General Motors. Rewarding the wasteful at the expense of the productive is, of course, not good for the economy.

Anyway, I have written enough already. [/rant]

Muirgeo,

The economic contraction is the cure. The disease was the boom, that is when all the mistakes were made.

Listening to guest economists on news networks, it would be easy to come away with the impression that the cause of the recession was analogous to a weak support. Once it broke, the remaining supports could no longer hold the economy and more began to break. If only regulators had managed to stop the first support from breaking, then everything would have carried on without incident.

But reality is nothing like that. The mistakes have already been made, and someone is going to suffer the consequences. There is nothing any politician or beureaucrat can do to stop it; all they can do is shift around who pays the cost, and their preferred victim is the future taxpayer. When their creditors start refusing them loans, they will likely destroy the dollar rather than change rein in spending.

Almost half of the world's U.S. dollars are held by foreigners. Every dollar is a claim on goods and services in the U.S. Foreigners hold dollars because they want to make purchases from the U.S. or to store value. Because dollars hold their value, many foreigners exchange them in lieu of the own currency (which may have been debased by inflation).

The last 10 to 20 years have seen an erosion of savings and an explosion of debt. The U.S. has went from being the world's largest creditor to its largest debter. Many goods have been imported using borrowed money which will never be repaid. Those dollars were sent out to places like China, and one day foreigners will begin using those dollars to buy goods from the U.S. (because of inflation or government securities being downgraded).

When they try I expect they will have a nasty surprise. While living on credit, the U.S. economy has become very insular. It has stopped producing as many goods and services to be exported. Those plants and factories have been closed and replaced with shopping malls and golf courses. Foreigners will discover that there is not much for them to buy from the U.S., and many people bidding for what little there is.

When the penny drops so will the dollar. Prices will rise and foreigners will see their dollar savings being devalued. It will then become much more expensive for Americans to pay for imports from places like China. If dollars are less valuable to foreigners, then they will demand more of them in exchange for goods and services.

When the world starts avoiding dollars, the artificial boom engineered by the Federal Reserve and Congress will come to an end with an almight bust. If the above is correct, and I sincerely hope not, then this recession is yet to hit its bottom, even without the calamitous meddling of the Obama administration.

On the other hand, I am not an economist.

I have a question.

Are banks legally required to withdraw a depositors money upon demand?

I have often read that one of the primary purposes for the Federal Reserve is to prevents runs on banks. To that end they are empowered to provide banks with liquidity during a crisis. But why cannot the banks simply deny withdrawals during a time of crisis?

It seems to me that modern banks are really an amalgamation of a bank and an investment company. A traditional bank held 100% of its deposited funds in reserve, while an investment company holds 0% of its "deposited" funds in reserve. Instead, investment companies invest desposited funds and offer the possibility of a return. Modern banks are a mixture of these two: some of the deposits are kept in reserve and some are invested.

With investment companies it is accepted that deposits may be lost, and that restrictions may be placed on a depositors ability to withdraw money. Nobody pretends that such desposits are gauranteed, since it is simply beyond the power of anyone to gaurantee that gaurantee!

But it seems that modern banks, despite taking on similar risks to investment companies, are treated differently. Surely, like investment companies, they should warn depositors that their money might be lost, and that sometimes the bank might place restrictions on a depositors ability to withdraw. Armed with this knowledge after opening a new account, a depositor need worry about any bank run.

That seems a far more sensible idea than having the Federal Reserve provide liquidity. How about the "banks" tell the truth, that is, they cannot gaurantee that depositors will be able to withdraw their money whenver they want to.

Additional comment regarding the U.S. dollar:

All these bailouts and stimulus packages are creating inflation. When the government borrows or prints money to pay for these atrocities, they are pushing prices upward. Inflation debases a currency by reducing its buying power and induces less saving. In other words, dollars will be spent instead of saved because of inflation.

My understanding is that many of the dollars held by foreigners are savings. Historically the dollar has held its value, and while it is not quite 'as good as gold', it is still preferrable to many other currencies. But as the government continues upon its current inflationary course, foereigners will have more incentive to get out of the dollar. Either they will try and buy goods and services from the U.S. or other currencies. In both cases the dollars will return to the U.S. and push prices upward.

I have only just started thinking about this. Is there anyone else here who knows more?

We interupt this broadcast with a very important announcement. The beginning of the world has arrived. The infamous, immovable Muirgeo has now come completely over to our side. He had already come a long way toward it, with his concession to states' rights, and now has come all the way, agreeing to completely live and let live. And while he doesn't think we can live without his tax-supported state, he's willing to let us try. And that's all we've ever needed of him.

So, now that we've won over the toughest of them all, we know how to win over the lesser Muirgeos.

Dr. Roberts,

I enjoyed your contribution to the dialogue on NPR :)

Okay, this is my last comment for now, honest.

muirgeo on Jan 6, 2009 @ 1:52:08 AM

"It seems to me if the government is the only one who can both borrow , hire and spend to invest in the future with hopes for a positive return on its investment it makes sense as the best choice to start to grow us out of this economic slump."

Specifics please...

Hire who for what jobs? Spend for the future with what (whose) money? Where does that money come from?

What happens when the slump is over? Does the government bow out of the "everything AND the kitchen sink" business?

Dr Roberts,

What would you have the government do? To do nothing to soften the blow would put millions of Americans out of work, causing a spiral of spending decrease (both personal and business) followed by more layoffs. I congratulate the inbound Obama team for trying SOMETHING. Perhaps you have a constructive alternative you could share on this blog rather than a pithy dismissal.

In fairness, I didn't (and typically don't) listen to podcasts, I just read the blogs. Podcasts are incompatible with filling time at the cube farm. I really would like to read about your alternative.

Kind Regards,

~ Paul

Babinich,

Just like any other investor or entrepreneur they use borrowed dollars hopefully to turn a profit. Don't private banks and companies essentially borrow money from the fed to invest and ultimately stimulate the economy? So if ultimately the government investing in wind and solar and the electric grid makes these products more competitive then private industry will pick up on new demand for these products and return much more then 1 dollar for ever dollar the government invested.

Didn't government investing in the Net and microprocessors speed up their use and thus the demand and eventually contribute to the massive growth related to IT.

"“The one really great man I ever knew and for who I had unbound admirations."

F A Hayek (on Keynes)

Lee Kelly,

"...and their preferred victim is the future taxpayer."

That is the key insight to this whole bloody business. If I were a "futute taxpayer" I'd be pissed off - but the "future taxpayers" are mostly Obama fans.

Paul Williams,

"I congratulate the inbound Obama team for trying SOMETHING."

A great example of, "Something must be done, this is something, therefore it must be done". I think that what Russell and others are doing is saying "Whoa, hold on a minute, let's think this through". And I suggest to you that maybe throwing our children and grand children's future at the problem isn't the right thing to do - that perhaps a little belt tightening might be in order.

Muirgeo,

"So if ultimately the government investing in [place favorite subsidy here] makes these products more competitive then private industry will pick up on new demand for these products and return [place politically motivated expectation here]..."

Sure, that's one way to look at it. Another way is that such programs are simply payoffs from the political class to it favorites.

Muirgeo writes:

Didn't government investing in the Net and microprocessors speed up their use and thus the demand and eventually contribute to the massive growth related to IT.

But the government is talking about paving roads, and not building microprocessors. What is the return on roads? Aren't roads contributing to environmental destruction? Where will wind be placed? Here in Maryland they are blocking it from being put anywhere, just like the Kennedy's did in MA.

I can't wait to grab my popcorn and watch the massive fight over the infrastructure dollars, which will probably be disproportionately allocated to the high electoral, and fiscally irresponsible states (CA).

Here in Maryland we spend tons on highway walls, to protect people that bought houses next to the highway for noise. Return on those projects is probably negative. This will be a boondoggle, and only stimulative to the extent it employs people that lost their job in house construction.

Muirgeo wondered:

“I'd be curious what the non-interventionist expect to create economic growth.”

Go stand in a Wal-Mart and look at the vast array of products for sale there. Who created those products?

Who conceived of them, designed and tested them, figured out how to produce them, figured out how to package them, did the necessary market studies to determine the appropriate pricing and how much production capacity would be needed, set-up the required production equipment, built the necessary tooling, found the facilities in which to house the equipment, procured the necessary raw materials for production, hired and trained the workers to build them, set-up the appropriate quality control procedures, arranged for shipment, set-up all the accounting procedures for keeping the necessary books, and arranged the financing to cover all the costs until sales revenues begin flowing in?

Who invented steel refining, copper production, aluminum refining, concrete manufacturing, the internal combustion engine, the automobile, the mass-production assembly line, steam turbines for electricity production, the incandescent light bulb, the airplane, the helicopter, the diesel locomotive, the electric dynamo, alternating current, refrigeration, fertilizers, insecticides, antibiotics, vitamins, enriched bread, xerography, the telephone, radio, television, the transistor, the microchip, oil derricks, oil refineries, air conditioning, refrigeration, the microwave oven, the cell phone, radial tires, anti-lock brakes, air bags, the jet engine, jet airplanes, supertankers for transporting oil, the electron microscope, contact lenses, laser surgery, Ipods, pocket calculators, organ transplants, x-ray machines, magnetic resonance imaging machines, coronary pace-makers, coronary by-pass shunts, power tools, cordless tools, frozen dinners, fast food restaurants, food preservatives, blood pressure medicine, artificial insulin, hypodermic syringes, fluorescent lighting, anti-perspirants, toothpaste, electric toothbrushes, dental floss, anti-bacterial soap, shampoo, cosmetics, plastics like nylon, polyester and polyethylene, permanent press clothing, instant photography, digital cameras, compact discs, laporscopic surgery, chemotherapy, personal computers, ink jet printers, laser printers, fiber optics -- just to name a few things.

Who creates and makes possible this vast flow of products and services that make your life so safe and comfortable?

Government bureaucrats? No.

Government regulators? No.

Elected officials? No.

Unions? Not a bit of it.

Private, profit-seeking entrepreneurs, creators, inventors, scientists, investors and businessmen did it -- despite all the obstacles, strangling regulations, theft-taxes and controls erected by government to slow and prevent it.

You want to know how to “stimulate” the people and the process that creates this life-saving and life-enhancing stream of products -- not a single one of which you are capable of ever conceiving and creating? In Atlas Shrugged, John Galt has told you what to do, with a single statement to all the parasite-looters and blood-sucking government bureaucrats and planners of the world:

“Get the hell out of my way!”

Michael Smith,

Outstanding!

Okay, I give up and confess that I am a total failure.

I have spent the last 45 years of my life looking for that packet of guarantees that emerged from my mothers womb clinched tightly in my little fist.

Can't find that packet anywhere.

Without the documentation contained in that packet I can't prove to the government that I deserve a buffer or protection from suffering the rigors of hardship.

WHERE IS MY DAMN PACKET OF GUARANTEES? Fema get your ass down to Houston and bring me a new one, my life is a disaster without it!

BTW, the rant was because of the closing statement by Robert Reich about doing something to prevent Americans from suffering hardship.

I LOVE HARDSHIP! It is what makes people tough and sharp, stop trying to take it away from people, it will make them tough and sharp....at least the good ones. We can bury the weak ones, plenty of public land for that.

Damn, but you gotta recognize how tough times are in America right now......for Christs sake that lady in Moscow, Idaho might not get her arts center done soon! Com'on people, those are some really tough times! Can't we all just bleed some cash for her and her pretty project, why should she have to suffer hardships like that?

Then, OH MY GOD, then it is so tough out there that in the doleing out of money to massive construction projects we have the hardship of deciding how much is to be shunted to the female gender (and the left wingers who pretend to be). GOOOOLLY Gosh, who should have to live in such desparate times?

I read the book, but no one ever told me that Wonderland would look so much like America. Alice YOO HOO, where are you dear girl?

I'll second Randy. Very well said, Mr. Smith.

For those who believe that the "government" must do something:

"Harding (elected in 1920) inherited...one of the sharpest recessions in American history. By July 1921 it was all over and the economy was booming again. Harding had done nothing except cut government expenditure."

Modern Times by Paul Johnson, P 216

Hoover was the first of the "moderate" Republicans (other than TR), and the real founder of the New Deal, unwilling to just stand by and let the people suffer, let things hit bottom, and start back up again. And between himself and Roosevelt, they never did start back up again, until we'd had the Great Depression, World War II, and they were both safely out of office.

And you want the same thing all over again?

I love it! Despite Neal's repeating Russ's name God knows how many times, Robert Reich would only refer to Mr. Roberts as "your other guest." Reich has always been an arrogant ass, and he still is.

Oh, one more point. Reich is the very essence of the word glib. And he has a great radio voice. Could there be a better messenger for a message with no argument?

“Get the hell out of my way!”

Posted by: Michael Smith

Wow that was pretty melodramatic. Now do you want me to go through your list of inventions and show you how many were created directly,indirectly or funded by government agencies?

We did Get the Hell out of the way and that allowed Walmart to change from it's theme of Made in America to Made in China driving down wages and ultimatly crashing this economy. Along with other trickle down economic bull crap such as tax cuts and other changes in law that drove all the money to the top and starved out the middle class.

No one is standing in your way or in the way of the wealthy elite. The problem is you/they can't find any buyers because no one has money. The middle class has millions of people close to bankruptcy trying to payoff their ever increasing credit cards with ever increasing interest rates.

No one is saving money.. they are going deeper in debt just to stay afloat.

We can sit an do nothing... and get out of your way as you say... as Hoover did and watch the system crash even further and further. Then you can blame the democratic party for taking so long to clean up your massively horrendous mess.

Trickle down supply side economics created the last depression and it created this one. Demand side economics got us out of the last depression and will ultimately clean up the mess made by Getting out of the Way".

I'm enjoying the program, Russ, but why aren't you specifically calling out the ridiculous premise that Keynesian economics works, or that government can and should be creating jobs at all? Why aren't you ridiculing the idea that government spending should be centered around the callers that wanted spending on the idiotic "green" and "gender" programs? You should also be ripping that clown Reich to shreds on almost every topic, especially with his insistence that "demand-side" solutions will work.

You're being much too sympathetic to these ideas with your softspoken and somewhat equivocal responses.

Muirgeo,

"Now do you want me to go through your list of inventions and show you how many were created directly,indirectly or funded by government agencies?"

Don't you mean the times that the political class claimed credit for things they had nothing to do with? The times that they stepped in after the fact and attached regulations to new inventions in order to increase their revenue stream? Or the times that they used revenue taken from the productive class to invest in inventions of the productive class that showed promise of bringing in new revenue to the political class? The claims of value added are nothing but empty claims.

Merge,

You wrote:

"We can sit an do nothing... and get out of your way as you say... as Hoover did and watch the system crash even further and further."

But just a few postings above yours, I had pointed out that "Hoover was the first of the "moderate" Republicans (other than TR), and the real founder of the New Deal, unwilling to just stand by and let the people suffer, let things hit bottom, and start back up again."

And that was not the first time that had been pointed out to you. Why do you continue to ignore it, and why the fables if there was a real tale to tell, why always the imaginary laissez faire preceding disaster if there had ever been a real one?

But, I forgive you, for at least you would no longer force your folly on others, and are as much an overall voluntarist as anyone.

So, you may still be miserable, but no longer a miserable bastard.

Congratulations!

"And that was not the first time that had been pointed out to you. Why do you continue to ignore it,..."

dg lesvic

Cause it is not true. It is a re-write of inconvenient history. Hoovers big phrase was recovery is just around the corner. He did pretty much nothing his first year and a half as the economy just sank more and more into depression.

Inconvenient for who? What possible motive does dg lesvic have for slandering President Hoover?

Merge,

Robert Kuttner, one of the foremost of our leftist "economists," in The American Prospect, August 12, 2002, referred to the supposed "laissez faire world of the 1920s" as actually a world of "regulation" that the New Deal merely "added new teeth to," and to a "wrongly maligned Hoover administration...much more sensibly economic interventionist than the current Bush administration."

And that ought to have been interventionist enough for anyone.

There seems to be at least two different histories.

There is the official progressive version of history, and there is what really happened, the unremembered history.

Good job Russ.

Even though I usually disagree with Reich, I will say he's a sharp guy and I have lots of respect for the man.