Today's economy: In a recession? Yes. Headed for the Great Depression Part II? Let's hope not. So here's the million . . . wait, the trillion dollar question: What is the best way to jump-start the economy back to life? Right now and in the near future, it seems that those in government want to revisit old, failed Keynesian strategies. Keynesian economics calls for large increases in federal deficit spending, rebate checks, stimulus packages, etc. It embodies the strange idea that borrowing from Peter to stimulate Paul will somehow result in an increase in aggregate production, "stimulating" the economy. These ideas dominated the domestic economic agenda from the 1930's to the 1970's. Were these strategies successful?2 UCLA economics PhDs studied the policies and programs of the New Deal for 4 years to determine their effects on the Great Depression. Their findings were published in 2004, with the main conclusion being that FDR's New Deal policies (more specifically, the National Industrial Recovery Act) actually prolonged the Great Depression by 7 years. Here's just one snippet from the press release:
"The fact that the Depression dragged on for years convinced generations of economists and policy makers that capitalism could not be trusted and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened." Here's the link for the full article: http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx
Japan tried to spend their way to prosperity by instituting Keynesian policies in the 1990's as well. The result: a well-documented economic stagnation which lasted a decade. On the flip side, when countries like Ireland, the Czech Republic, and New Zealand dramatically cut federal spending as a percentage of GDP - enabling them to reduce taxes, their economies boomed.
So what's the answer? What is the best way to "stimulate" the economy, preventing the next Great Depression? I'm interested to hear what you all think.
5 comments:
How does the government "stimulate" the economy? By staying out of it! A very uncomfortable market correction is the only thing that will truly heal this wound. That may or may not involve a depression, but if we hand more and more power over to the federal government every time there's a crisis, I'm afraid that one day, my grandchildren are going to ask me, What was more important than freedom?
I heard an amusing commentary on NPR that highlighted how ridiculous it is to assume that the jobs "created" by the government would somehow provide jobs to those who have recently lost theirs, in other words, financial sector employees or actors now building bridges and doing road construction.
Setting the satire aside, I think that much of the recession we are currently in is a natural correction based on market principles. Having the government intervene when the market is working just because it is painful only promotes the type of negative thinking and pessimism that prolongs recessions.
"The Public" as a whole isn't rational. Just look at all the people who keep pulling money out of the market, when now is the most rational time to be putting it in. The more the government steps in, the more its participation becomes an expectation that ultimatly cripples those who might otherwise assume more initiative under free market conditions. FREE MARKET RULES!!! It just hurts sometimes.
Well I don't know anything about the economy really, this isn't my specialty at all. But, I do listen to a lot of NPR and I did listen to all the debates and here's what I got. The U.S. is run largely on the success of small businesses. Small businesses rely on credit in order to do daily business dealings. Make payroll, purchase equipment, new supplies or product, etc. etc. Well in 2004-2006 when the real estate market was booming and everything was seeming to go up, all the banks started to invest in risky sub-prime mortgages, packaging them up, then selling them to investors. Well we all know how that ended up, people didn't make their mortgage payments, and banks lost billions in risky investments. The credit market came to a freeze. Suddenly businesses couldn't get the credit they needed to operate because banks didn't have the money to lend it. So what would've happened if the bailout wouldn't have passed? I don't know. Credit could have shut down entirely and millions could have lost their jobs. Part of me wonders if this is only postponing the inevitable, but part of me wonders what would have happened had these bailouts not taken place. But it seems to me that deregulation of the market worked in the opposite, as large corporations took on too risky investments. Like I said, I'm not an economist by any stretch of the word, but it makes sense that if the government didn't flood the system with cash, credit would have frozen and unemployment could have jumped even more.
Jen, everyone told me you were liberal but every post I've ever seen you write was conservative...did you have a change of views after moving to Portland?
One of the ways to look at the economy, to better understand the principles at work, is to "shrink" it. Sen. Inouye from Hawaii, used to eliminate six zeros when dealing with budget issues (He said $1,000 instead of one billion dollars, just to keep things in perspective.) What if the U.S. Economy was the economy of a family? How does the infusion of cash work? Where did the cash come from to finance the bailout? In the family economy, extra money can only come from four sources, two of which are balance-sheet sources (I call them "snapshot" issues) and the other two of which are income statement issues (I call these "movie" issues). So how did our U.S. family generate the money to bailout the financial sector (help one of its members in need)?
On the income side, a family can generate more cash, over time, by earning more or by spending less. Our U.S. family didn't earn more in order to generate the bailout money. And our U.S. family is not tightening its belt in some other area in order to generate the cash-flow to bail out Wall Street.
On the balance-sheet side, a family can either sell assets or borrow money to scare up needed cash. What assets did the U.S. sell to generate the money? None. So, we must have borrowed the money to generate the bailout. As with all debts, the cost of paying back the loan will be paid, with interest, later.
The interest on this debt will be very, very steep. We are already running serious deficits, and the national GDP is down. So before the bailout we were already in a borrow-and-spend mode. Interest rates have been kept artificially low. "Artificially" ultimately translates into printing money in order to keep rates low. There is no way to avoid inflation when the government is printing money in order to cover mounting debt service payments. So the interest that we will pay for the bailout will be a combination of increased debt service payments and inflation. Having lived through recessions and periods of steep inflation, I can tell you it will be no fun paying the piper when the debt ultimately comes due.
Personally, I believe the necessity for a bailout was WAY OVER-HYPED! The Bush Administration, including some very smart types, emerged at once, breathlessly prophesying near-certain doom if no immediate action were taken. When the action was delayed, they revised the forecast (to accommodate a reluctant Congress?) to give the disaster an extra week or so to materialize. Then there was some delay in actually putting the money into the markets. Now we learn that we don't need all the bailout money for the financial sector - there is enough to keep the Big Three (well, at least the Big Two) moving as well.
I believe liberals and conservatives all want the same end result - there is just some (not as absolute as many think) disagreement on how best to achieve the goal. I don't believe that the best way to achieve a healthy economy is to borrow $800 billion dollars to infuse cash into firms that have screwed up by making / participating in risky loans, however re-packaged. But I admit that is a longer-term view than those, like President Bush's economic team, who were screaming the sky would fall unless propped up by a mountain of new debt.
As a conservative-leaning person, I believe the best answer to the allegedly-imminent crisis was the same one that is the best answer to most economic problems - let the government do nothing, so the market can do best when left alone. After a short period of economic vomiting, the nation will feel and be better than if we keep taking medicine that will only keep the poison longer in a constipated system. Not every ailment calls for intervention - and when it comes to economics, I trust the aggregate wisdom of millions of people freely acting in their own best interests than the medical judgment of a collection of 300 or so legislators and a complicit executive, no matter how well intended they may be.
What does everyone think of the proposed $300 billion in tax cuts and stimulus package proposed to take place soon after Obama takes office?
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