a trillion dollar bill is missing
Anonymous said...
Any Whodunnit has to assume that constraints go up the supply chain for such a large output gap.
If one assumes that Financial Wizardry is our Whodunnit, then one has to ask how long does it take the financial wizards to adjust? It has been two years, how long can the likes of Hank Paulson be hysterical before they do the rational readjustment? If its two years, then one's economic theory has to include collusion between Government and Financial Wizards.
If we suffer a retail adjustment only, then the problem would not reach that far up. The consumer delevers when he cannot make adjustments in household inventories, passing the problem up the chain. The consumer must be suffering a distortion in the range of elasticities he is looking at, one or more of several inputs is way out of bounds.
Reply Mar 01, 2010 at 04:51 AM
Goldilocksisableachblond said in reply to Anonymous...
"The consumer must be suffering a distortion in the range of elasticities he is looking at, one or more of several inputs is way out of bounds."
For many years , consumers have been taking inputs up the wazoo . 'Out of bounds' is putting it mildly. That they would then suffer from distorted elasticity should not be surprising.
Tell us something we don't know.
Reply Mar 01, 2010 at 07:00 AM
Miep said...
That pretends the past growth was all sustainable, or more basic desirable. I dont share that optimism. A stimulus that closes the entire gap would be crazy anyway.
Reply Mar 01, 2010 at 04:56 AM
jazzbumpa said in reply to Miep...
Ahhh - Miep.
The blue line that you call "pretense" has been sustainable (except for certain aberrant periods like the OTHER Great Depression. Which, by the way, also demonstrated a sizable output gap.
Optimism has nothing to do with it. Recognizing a couple centuries of history does.
Cheers!
JzB
Reply Mar 01, 2010 at 04:13 PM
Oskar Shapley said in reply to Miep...
You are right that that some part of the old output level was not desirable.
The people who were e.g. in construction and finance are unemployed now. They stopped producing those wasteful things. Step 1 completed.
What should have happened now is Step 2 where the omnipotent market seamlessly reallocates the idle labour force into other industries. Like, I don't know, candy making and more of everything else by a bit.
There is no reason to believe that the current level of output is where GDP should be. We know this because there is high unemployment. Rather we see, that at least half of a trillion of stuff is not being made.
If the private sector does not pick this up, the government should. Spend the money on repairing some old bridges and useful things like that.
Reply Mar 01, 2010 at 05:03 PM
bakho said...
As Fatas and Mihov note, the unemployment gap is even larger than the GDP gap. See their Figure 2. Employment growth is below where it should be on the regression.
http://fatasmihov.blogspot.com/2010/02/labor-markets-and-current-cycle-and.html
Does this indicate that the "Bailout" added to the GDP (or made it less negative, especially for the banksters) but that too much of the stimulus was poorly targeted for job creation?
Reply Mar 01, 2010 at 05:06 AM
anne said...
"That pretends the past growth was all sustainable, or more basic desirable. I don't share that optimism. A stimulus that closes the entire gap would be crazy anyway."
Say what? What past growth wasn't all that sustainable and when?
http://www.measuringworth.com/growth/
February 22, 2010
Annualized Growth Rates
Eisenhower
1953 to 1960 Real GDP = 2.71%
1953 to 1960 Real GDP per capita = 0.90%
Kennedy & Johnson
1961 to 1968 Real GDP = 5.21%
1961 to 1968 Real GDP per capita = 3.89%
Nixon & Ford
1969 to 1976 Real GDP = 2.72%
1969 to 1976 Real GDP per capita = 1.65%
Carter
1977 to 1980 Real GDP = 2.78%
1977 to 1980 Real GDP per capita = 1.65%
Reagan
1981 to 1988 Real GDP = 3.49%
1981 to 1988 Real GDP per capita = 2.56%
Bush I
1989 to 1992 Real GDP = 1.67%
1989 to 1992 Real GDP per capita = 0.39%
Clinton
1993 to 2000 Real GDP = 4.01%
1993 to 2000 Real GDP per capita = 2.81%
Bush II
2001 to 2008 Real GDP = 2.31%
2001 to 2008 Real GDP per capita = 1.36%
Reply Mar 01, 2010 at 06:50 AM
bakho said in reply to anne...
The two periods with the largest GDP growth are the 2 periods with the greatest reductions in poverty level. Both LBJ and Clinton pursued policies that delivered more money to those at the bottom of the economy and created an upward spiral. GDP growth and making more people productive go hand in hand.
Reply Mar 01, 2010 at 07:04 AM
Matt said in reply to bakho...
Ironically, when Clinton was President some people were saying that welfare reform, not to mention NAFTA, would increase poverty.
Also, Piketty and Saez claim that income inequality dramatically increased during the Clinton administration- specifically, the share of income held by the top 1% was 8% in 1980, 13% in 1992, and 17% in 2000. If Clinton pursued policies that "delivered more money to those at the bottom of the economy" he didn't do a good job, did he?
Reply Mar 01, 2010 at 08:36 AM
jazzbumpa said in reply to Matt...
Well, NAFTA ultimately did increase domestic poverty.
Clinton's term was a mixed bag. Poverty levels decreased in both absolute and relative terms, but wealth continued the Reagan thrust of accumulating at the top - though far less so than under Bush, Jr. I just read today that in CY 2005, every penny of income growth was captured by the top 10%.
The Clinton rising tide did a little something to help float the dinghies; unlike under Reagan and the Bushes, when they got swamped.
But for now - we're screwed.
JzB
Reply Mar 01, 2010 at 04:33 PM
Goldilocksisableachblond said in reply to anne...
"Say what? What past growth wasn't all that sustainable and when? "
When it became dependent on total credit market debt growing at a faster rate than GDP , starting about 30 years ago. From 1945 to 1975 or so you can say that GDP growth was "real" and sustainable , as total debt/gdp remained essentially constant. Since then we've gone from one debt-financed 'Greenspan Put' to the next , and like Japan , we now face the large corresponding 'Take'.
To see what the chart above looks like 10 years from now , we just need to look at Japan.
Reply Mar 01, 2010 at 07:21 AM
Goldilocksisableachblond said in reply to Goldilocksisableachblond...
Here's a presentative chart showing Japan's gdp , and the effects of the collapse of their debt-fueled stock and RE bubbles , starting around 1990.
http://www.taipanpublishinggroup.com/images/web/reports-whitepapers/japanese-real-gdp.gif
Reply Mar 01, 2010 at 07:43 AM
Miep said in reply to anne...
[quote] Say what? What past growth wasn't all that sustainable and when?
http://www.measuringworth.com/growth/ [/quote]
From arround 2000 onwards. Higher growth in the past is nice. It is not obvious at all if growth just decreases no matter what is done with a higher basis level. By international developed standards, US growth was more off an expectation than the rule. The high gdp growth we got used to just goes back arround 200 years. Before that growth was much slower. Imagine someone in Japan or Germany would have drawn such a line in 1990. For the big picture, 20 year or even 2000 year data can be very misleading.
Many mistakes were made after after 2000. So even asuming potential growth is still up at the old numbers, that does not translate into an opportunity to "close the gap" by keynsian stimulus spending on the fast. US growth from 2000 onwards was done with huge misalocations towards real estate, record low saveing rates and huge current account deficits. Also lets not forget the wars. Those soldiers cant just switch to civil jobs and be very productive there. That will take years.
As far desirability is concerened:
I dont know, i am lazy i find the working hours in rich European countries long enough. Americans work longer. What they do in those long hours is often off doubtfull utility. They guard other people in prisons, occupy foreign countries, or pack everything in little bags at sumpermarcets. I am unconvinced if Americans would keep working those hours in a more egalitarian society.
Reply Mar 01, 2010 at 08:59 PM
anne said...
Bakho:
The two periods with the largest GDP growth are the 2 periods with the greatest reductions in poverty level. Both LBJ and Clinton pursued policies that delivered more money to those at the bottom of the economy and created an upward spiral. GDP growth and making more people productive go hand in hand.
[Precisely and importantly so.]
Reply Mar 01, 2010 at 07:13 AM
beezer said...
Yes to Anne and Backho.
One wonders how Obama can package this better distribution and call it "reform." Can't wait to see the Republicans block letting 80% of the population get more of the pie.
Reply Mar 01, 2010 at 07:26 AM
anne said...
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=87&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2007&LastYear=2009&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=no#Mid
January 15, 2010
Federal Government Net Saving, 1992-2008
(Billions of dollars)
1992 (- 302.5)
1993 (- 280.2) Clinton
1994 (- 220.4)
1995 (- 206.2)
1996 (- 148.2)
1997 (- 60.1)
1998 ( 33.6)
1999 ( 98.8)
2000 ( 185.2)
2001 ( 40.5) Bush
2002 (- 252.8)
2003 (- 376.4)
2004 (- 379.5)
2005 (- 283.0)
2006 (- 203.8)
2007 (- 236.5)
2008 (- 642.6)
[Through the Clinton years there was a continually declining government budget deficit which became an increasing surplus. Then came the purposeful immediate and continuous reversal of Clinton economic policy in the Bush years. So much for the debt nonsense about what was sustainable and when.]
Reply Mar 01, 2010 at 07:29 AM
Drake said in reply to anne...
How about presenting this data with annotations also showing which party controlled the House and Senate during those years?
For instance, the Republicans controlled the House from 95-2006, and the Democrats from 2007 - present.
Reality is more complex that who sits in the Oval Office.
Reply Mar 01, 2010 at 07:54 AM
jazzbumpa said in reply to Drake...
Actually, Cactus at Angry Bear did the heavy lifting on this back in '07. Rep Pres is always worse. Dem Pres with Dem congress is best.
I wrote about it and have a table here, od info from cactus.
http://jazzbumpa.blogspot.com/2010/01/republicans-all-wrong-all-time-pt-6.html
Or you can go right to the source.
http://www.angrybearblog.com/2007/02/god-punishes-us-when-we-collectively_16.html
Two data supported facts:
1) Republicans are bad for the economy
2) Reagan/Bush Tax cuts are bad for the economy.
JzB
Reply Mar 01, 2010 at 04:45 PM
Goldilocksisableachblond said in reply to anne...
anne ,
Call it debt nonsense if you like , but be prepared to hear more about this nonsense over the coming years. It's the basis of all of our economic problems , both here and in many advanced economies worldwide.
You're focused on public debt , which is the smaller part of our debt problem. Private debt is what has really skyrocketed since 1980. An as we see today , bad private debt can end up on public balance sheets. Total debt growing at a faster rate than gdp is not sustainable -- something has to give , eventually. It's simple math , really.
A typical graph of total debt/gdp:
http://www.americanthinker.com/debt_gdp.png
I happen to agree with you about the superiority of Clinton's policies compared to what came before or after him. Had we continued and expanded those policies , we'd likely be in a lot better shape today , because a middle class getting its fair piece of the economic pie wouldn't be as likely to become so over-indebted. Total debt/gdp growth levels even moderated briefly for a few years in the 1990's , but , overall , the trend was ever higher.
The debt gimmick was a way to borrow , or steal , GDP growth from the future. Now , it's payback time.
Reply Mar 01, 2010 at 08:21 AM
NKlein1553 said in reply to Goldilocksisableachblond...
Public sector debt and private sector debt are inversely related. The Clinton surpluses of the late 90's were one of the major factors that contributed to the explosion of private sector debt in the early 00's. Another important and related factor was the deregulation of the financial sector that Clinton's advisers like Rubin encouraged.
Reply Mar 01, 2010 at 09:04 AM
Goldilocksisableachblond said in reply to NKlein1553...
"Public sector debt and private sector debt are inversely related."
That's the way it's supposed to work , gov't engages in countercyclical deficit spending to offset periods of private sector saving or deleveraging. It worked that way without increasing the combined debt/gdp level significantly up until about 1980. Since then , debt/gdp has soared. The accounting difference between the ( normally offsetting ) public vs. private savings is reflected in our large external debt.
Reply Mar 01, 2010 at 09:27 AM
acerimusdux said in reply to Goldilocksisableachblond...
What changed in 1980 was monetary policy became more single-mindedly focused on reducing inflation. Thus, less money was printed. With not enough money to keep up with economic growth, economic expansion then instead becomes dependent on increasing levels of debt.
Now, of course, in the high inflation late 1970s and early 1980s, there was some good cause for this policy shift. The problem is it has gone too far and no one (at the Fed anyway) seems to be willing to admit it. This extreme low-inflation targeting is the cause of the strong dollar, and thus exchange rate imbalances, trade deficits, and uncompetitive US export industries.
Reply Mar 01, 2010 at 05:23 PM
paine said in reply to Goldilocksisableachblond...
maybe u ought to say
changes in the rate of change in pub vs pri debt
will move inversely if stabilizing production expansion rates at some notion od sustainable "full capacity "
is the concious goal of gub macro managers
Reply Mar 02, 2010 at 04:23 AM
Goldilocksisableachblond said in reply to paine...
That works for me.
You could also add the stipulation that " expanding a parasitic financial sector is NOT the conscious goal of gub macro managers ".
Those desired conditions held for 3 decades or so after WWII , and countercyclical fiscal policy worked pretty well , debt levels offset , and overall debt/gdp was remarkably constant relative to what's occured since then. These two periods define the difference between sustainable and unsustainable financing of an economy.
Reply Mar 02, 2010 at 01:18 PM
MKS said in reply to anne...
so what's the difference between these numbers and the OMB? The numbers found in the OMB's historical tables, while maintaining the same general trend, are significantly different in most of those years.
http://www.whitehouse.gov/omb/budget/historicals/
for the years listed in your post:
-290,321
-255,051
-203,186
-163,952
-107,431
-21,884
69,270
125,610
236,241
128,236
-157,758
-377,585
-412,727
-318,346
-248,181
-160,701
-458,555
Reply Mar 01, 2010 at 11:00 AM
anne said...
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=87&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=1992&LastYear=2009&3Place=N&Update=Update&JavaBox=no#Mid
January 15, 2010
Federal Government Net Saving, 1992-2009
(Quarterly at annual rates, Billions of dollars) *
Qtr1 Qtr2 Qtr3 Qtr4
1992 (- 296.0) (- 302.2) (- 313.2) (- 298.6)
1993 (- 312.1) (- 275.3) (- 282.2) (- 251.3) Clinton
1994 (- 236.4) (- 202.9) (- 220.6) (- 221.7)
1995 (- 221.4) (- 206.2) (- 210.3) (- 186.7)
1996 (- 194.3) (- 149.5) (- 138.3) (- 110.8)
1997 (- 92.4) (- 71.0) (- 35.6) (- 41.5)
1998 ( 7.9) ( 20.7) ( 52.3) ( 53.4)
1999 ( 79.1) ( 96.1) ( 103.5) ( 116.6)
2000 ( 205.3) ( 175.0) ( 181.8) ( 178.8)
2001 ( 159.4) ( 119.0) (- 104.4) (- 12.0) Bush
2002 (- 205.4) (- 249.7) (- 262.9) (- 293.0)
2003 (- 300.6) (- 375.0) (- 451.4) (- 378.5)
2004 (- 409.3) (- 384.4) (- 361.6) (- 362.5)
2005 (- 288.9) (- 288.1) (- 287.4) (- 267.7)
2006 (- 207.3) (- 229.4) (- 215.5) (- 163.0)
2007 (- 200.9) (- 221.3) (- 258.8) (- 265.0)
2008 (- 433.5) (- 796.9) (- 665.7) (- 674.1)
2009 (- 969.1) (-1,268.9) (-1,327.0) Obama
* Seasonally adjusted
Reply Mar 01, 2010 at 07:30 AM
anne said...
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2010&base_name=fourth_quarter_final_demand_gr
February 27, 2010
Fourth Quarter Final Demand Growth Revised Down to 1.9 Percent
The reporting on the revisions to fourth quarter GDP noted that the growth rate was revised up from 5.7 percent to 5.9 percent. However, this increase was attributable to revisions to the rate of inventory accumulation (actually slower de-accumulation). The rate of final demand growth was actually revised down from 2.2 percent to 1.9 percent. This bad news went largely unnoticed.
--Dean Baker
Reply Mar 01, 2010 at 07:39 AM
kharris said...
I remember many a conversation back in the good old days, looking at the level of policy stimulus against the output gap in the cycle before the crunch. (This, by the way, may be related to issues of "sustainability".) Look at the track of actual output against potential during the 2005 to late 2007 period. We had a large structural deficit and fairly accommodative monetary policy in the middle years of the decade, and did no better than keep up with trend. Compare that to the prior cycle, in which output rose above trend before undershooting modestly.
What the heck was wrong with the economy in the "oughts"? There were obviously some distortions. The 40% of corporate profits going to finance and housing's contribution to growth nearly double the norm were hints signs of distortion, right along with the problem of huge stimulus getting nothing more than trend growth.
So, we have research showing that financial crunches lead to slow recover, and that global recession leads to slow recovery. Is it worse than that? Do we need to look for slow recovery relative to a less steep growth trend?
Reply Mar 01, 2010 at 07:57 AM
Goldilocksisableachblond said in reply to kharris...
"Is it worse than that? Do we need to look for slow recovery relative to a less steep growth trend? "
That's my bet. I wish they'd run it on Intrade.
"We're turning Japanese
I think we're turning Japanese
I really think so "
Reply Mar 01, 2010 at 06:30 PM
anne said...
Interestingly enough, Congressional Republicans did all that could be done to prevent or undermine Clinton economic policy including shutting down the government for a time, fortunately to almost no avail. Governor Bush however campaigned for the Presidency with the continually express intent to change Clinton policy and that is precisely what happened with the assistance of Congressional Republicans from the time Bush became President. The results are quite sadly clear.
Reply Mar 01, 2010 at 08:05 AM
anne said...
http://www.bls.gov/webapps/legacy/cesbtab1.htm
http://www.bls.gov/webapps/legacy/cpsatab1.htm
February 5, 2010
The Bush experience in monthly job creation was,
19,200 x 96 months = 1.84 million jobs created in all;
the Clinton experience was,
240,310 x 96 = 23.07 million jobs created in 96 months;
enough job creation to keep up with civilian work force growth would have meant,
140,500 x 96 = 13.49 million jobs created in 96 months.
Reply Mar 01, 2010 at 08:07 AM
anne said...
http://www.bls.gov/webapps/legacy/cpsatab1.htm
February 5, 2010
The Bush experience in monthly private job creation was,
900 x 96 months = 86 thousand jobs created in all;
the Clinton experience was,
220,250 x 96 = 21.14 million private jobs created in 96 months.
Total Nonfarm Private Employment, 1992-2008
(Thousands) *
December 1992 ( 90,537)
December 2000 ( 111,681)
December 2008 ( 112,542)
Clinton ( 21,144) (+ 23.4%) Total private jobs created
Bush ( 86) (+ 0.0%)
(Actual averages)
Clinton ( 220,250) Monthly private jobs created
Bush ( 896)
* Establishment data, seasonally adjusted.
Reply Mar 01, 2010 at 08:10 AM
anne said...
http://www.census.gov/prod/2009pubs/p60-236.pdf
September 10, 2009
Real Median Black Household Income, 1992-2008
1992 ( 28,199) *
1993 ( 28,660) Clinton
1994 ( 30,208)
1995 ( 31,414)
1996 ( 32,087)
1997 ( 33,506)
1998 ( 33,442)
1999 ( 36,065)
2000 ( 37,093) (High)
2001 ( 35,840) Bush
2002 ( 34,739)
2003 ( 34,705)
2004 ( 34,304)
2005 ( 34,033)
2006 ( 34,139)
2007 ( 35,219)
2008 ( 34,218)
* Income in 2008 adjusted dollars
[Interestingly, real median Black household income was $28,090 in 1973 and $28,199 in 1992. I would say that Clinton did a good job indeed.]
Reply Mar 01, 2010 at 08:52 AM
anne said...
http://www.census.gov/prod/2009pubs/p60-236.pdf
September 10, 2009
Poverty Rate Black, 1992-2008
(Percent of Black Population)
1992 ( 33.4) (High)
1993 ( 33.1) Clinton
1994 ( 30.6)
1995 ( 29.3)
1996 ( 28.4)
1997 ( 26.5)
1998 ( 26.1)
1999 ( 23.6)
2000 ( 22.5) (Low)
2001 ( 22.7) Bush
2002 ( 24.1)
2003 ( 24.4)
2004 ( 24.7)
2005 ( 24.9)
2006 ( 24.3)
2007 ( 24.5)
2008 ( 24.7)
[Interestingly, Black poverty was 31.4% 1973 and 33.4% in 1992. I would say that Clinton did a good job indeed.]
Reply Mar 01, 2010 at 08:55 AM
anne said...
http://www.census.gov/prod/2009pubs/p60-236.pdf
September 10, 2009
Real Median Household Income, 1992-2008
1992 ( 46,063) *
1993 ( 45,839) Clinton
1994 ( 46,351)
1995 ( 47,803)
1996 ( 48,499)
1997 ( 49,497)
1998 ( 51,295)
1999 ( 52,587) (High)
2000 ( 52,500)
2001 ( 51,356) Bush
2002 ( 50,756)
2003 ( 50,711)
2004 ( 50,535)
2005 ( 51,093)
2006 ( 51,473)
2007 ( 52,163)
2008 ( 50,303)
* Income in 2008 adjusted dollars
[Interestingly, real median household income was $45,533 in 1973 and $46,063 in 1992. I would say that Clinton did a good job indeed.]
Reply Mar 01, 2010 at 09:07 AM
anne said...
http://www.census.gov/prod/2009pubs/p60-236.pdf
September 10, 2009
Poverty Rate, 1992-2008
(Percent of population)
1992 ( 14.8)
1993 ( 15.1) Clinton (High)
1994 ( 14.5)
1995 ( 13.8)
1996 ( 13.7)
1997 ( 13.3)
1998 ( 12.7)
1999 ( 11.9)
2000 ( 11.3) (Low)
2001 ( 11.7) Bush
2002 ( 12.1)
2003 ( 12.5)
2004 ( 12.7)
2005 ( 12.6)
2006 ( 12.3)
2007 ( 12.5)
2008 ( 13.2)
[Interestingly, the poverty was 11.1% 1973 and 14.8% in 1992. I would say that Clinton did a good job indeed.]
Reply Mar 01, 2010 at 09:12 AM
anne said...
"Public sector debt and private sector debt are inversely related. The Clinton surpluses of the late 90's were one of the major factors that contributed to the explosion of private sector debt in the early 00's."
Say what?
http://etext.library.adelaide.edu.au/c/carroll/lewis/looking/chapter2.html
1872
Through the Looking-Glass, and What Alice Found There
By Lewis Carroll
The Garden of Live Flowers
Alice never could quite make out, in thinking it over afterwards, how it was that they began: all she remembers is, that they were running hand in hand, and the Queen went so fast that it was all she could do to keep up with her: and still the Queen kept crying 'Faster! Faster!' but Alice felt she could not go faster, though she had not breath left to say so.
The most curious part of the thing was, that the trees and the other things round them never changed their places at all: however fast they went, they never seemed to pass anything. 'I wonder if all the things move along with us?' thought poor puzzled Alice. And the Queen seemed to guess her thoughts, for she cried, 'Faster! Don't try to talk!'
Not that Alice had any idea of doing that. She felt as if she would never be able to talk again, she was getting so much out of breath: and still the Queen cried 'Faster! Faster!' and dragged her along. 'Are we nearly there?' Alice managed to pant out at last.
'Nearly there!' the Queen repeated. 'Why, we passed it ten minutes ago! Faster!' And they ran on for a time in silence, with the wind whistling in Alice's ears, and almost blowing her hair off her head, she fancied.
'Now! Now!' cried the Queen. 'Faster! Faster!' And they went so fast that at last they seemed to skim through the air, hardly touching the ground with their feet, till suddenly, just as Alice was getting quite exhausted, they stopped, and she found herself sitting on the ground, breathless and giddy.
The Queen propped her up against a tree, and said kindly, 'You may rest a little now.'
Alice looked round her in great surprise. 'Why, I do believe we've been under this tree the whole time! Everything's just as it was!'
'Of course it is,' said the Queen, 'what would you have it?'
'Well, in our country,' said Alice, still panting a little, 'you'd generally get to somewhere else—if you ran very fast for a long time, as we've been doing.'
'A slow sort of country!' said the Queen. 'Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!'
'I'd rather not try, please!' said Alice....
Reply Mar 01, 2010 at 09:21 AM
NKlein1553 said in reply to anne...
Anne, I thought you were supposed to be data set lady or something like that. Instead of quoting Alice in Wonderland maybe you should try looking at one of your famous spreadsheets. Here's a nice graph showing the relationship between public sector debt and private sector debt:
http://3.bp.blogspot.com/_a-xfgIB_zfs/SmzmAFpko6I/AAAAAAAAAQo/FFiSwIDd0l0/s1600-h/Imagem3.png
And here's a nice explanation of how the sector financial balances operate:
http://www.nakedcapitalism.com/2010/03/parenteau-on-fiscal-correctness-and-animal-sacrifices-leading-the-piigs-to-slaughter-part-1.html
When Goldilocksisableachblond writes:
"The accounting difference between the ( normally offsetting ) public vs. private savings is reflected in our large external debt," she is exactly correct as can be clearly seen in the first graph. However, I disagree with her about the superiority of Clinton's policies. Running public sector surpluses is generally a bad idea.
Reply Mar 01, 2010 at 09:45 AM
kharris said in reply to NKlein1553...
Disagreeing over a policy, without giving any notion of why, doesn't really count for much. Seems nothing more than personal preference.
While we're on the subject, my preference is to look at debt levels and future obligations in determining the relative virtues of various budget balances. Since the US faces a demographic budget challenge for the next couple of decades, I have a hard time seeing how a public sector surplus, starting around the time we actually had one, is a bad idea. Ir would very likely have gone away on its own pretty soon.
Reply Mar 02, 2010 at 07:34 AM
anne said...
"Public sector debt and private sector debt are inversely related. The Clinton surpluses of the late 90's were one of the major factors that contributed to the explosion of private sector debt in the early 00's."
There is no necessary relation between government and private debt, and this is so much nonsense but do go on and remember the problem is always and forever the success of Clinton economic policy which has to be turned to failure. I understand.
Reply Mar 01, 2010 at 09:55 AM
Goldilocksisableachblond said...
Here's a 12/09 paper from the St. Louis Fed that illustrates the point I've made about phoney , debt-fueled gdp growth. It's Fed-speak , so not absolutely explicit , but you should be able to draw your own conclusions :
http://www.zerohedge.com/sites/default/files/output%20gap.pdf
An excerpt:
"Components of existing statistical methods to estimate potential output are typically subject to inertia. Hence, if the recent real estate bubble increased GDP and productive
inputs to levels higher than what would be expected by economic fundamentals, then it is likely that potential output estimates will also be beyond what economic fundamentals would imply. Thus, these estimates would be
biased. One way to better understand how bubbles affect key macroeconomic indicators is to consider that high growth in real estate prices may affect GDP not only through the
increase in the value of residential services, but also through its indirect impact on higher-than-usual growth in (i) the finance and insurance sector and (ii) consumption—the latter caused by perceived increases in personal
wealth."
.....
"...consumption—the latter caused by perceived increases in personal wealth"
This " perceived increase in wealth " was felt not just by the owners of homes with inflated values , but also by the lenders who were willing to shower those homeowners with cash based on that perception. Add in the virtually nonexistent lending standards , and you've got a recipe for trouble , but also a recipe for a boost , albeit temporary , in gdp.
They go on to estimate that the true output gap , rather than the 6% figure CBO estimated at that time , may be more like 1%. Thus , 5% of GDP was bubble BS --- gone , and not coming back , so don't base economic policy on chasing it.
They only considered the RE bubble , but the same could be said about the dotcom bubble , and about the entire debt bubble since 1980.
Given ever-expanding access to cheap credit , any individual , or any country , can appear prosperous -- for a time. We're in the process of discovering what happens when that time runs out.
Reply Mar 01, 2010 at 10:32 AM
NKlein1553 said...
Anne, I'm not saying all of Clinton's economic policies were bad. In fact, the earned income tax credit was a terrific idea. But the decision to attempt to pay off the national debt by running continuous budget surpluses was not only misguided (few people realize the national debt is a public good), but it was also destined to fail. Goldilocksisableachblond is correct, what is important is the overall level of debt, not the ratio of public sector debt to GDP. Trying to reduce overall debt levels by cutting the public sector debt will be counterproductive. If the current account is in deficit the only way for the public sector to run a surplus is for the private sector to also run a deficit. The deregulation of the financial sector, which was not started by Clinton, but was certainly encouraged by his economic advisers, enabled the private sector to increasingly rely on debt and leverage to mitigate stagnating real wages. This was clearly not a sustainable growth strategy and while President Bush's subsequent economic policies were certainly disastrous I don't think it is reasonable to lay the blame for the early 00's recession solely on him. President Clinton certainly must share much of the blame. Anne, you seem like a reasonable person so I don't understand the Clinton worship.
Reply Mar 01, 2010 at 10:41 AM
kharris said in reply to NKlein1553...
You have implied a causal direction between domestic debt and the current account - you seem to suggest the current account drives the domestic savings rate. If that is not what you meant, I have a hard time seeing that the rest of what you wrote early in the above comment makes any sense. The standard view is quite the opposite, that the domestic savings rate drives the current account. If so, then there is nothing contradictory about both the public and private sectors running surpluses simultaneously. The only problems presented are managing assets held abroad and making sure that the level of domestic consumption justifies the high savings rate - no sense starving people so that they can save.
Reply Mar 02, 2010 at 07:40 AM
john c. halasz said in reply to kharris...
These are GDP accounting identities, not causal/behavioral claims. Further they are aggregates, so what actually is causing what amidst the behavior of myriad dispersed agents or agencies or the incentives of conflicted policy dilemmas isn't transparent or readily explained. Probably, the most that could be said on a generalized level is that flows will be driven by the seeking out and capture of productive surpluses.
At any rate, since savings=investment is a short-run accounting identity, a lack of productive profitable investment opportunities, thus a lack of investment spending, will lower savings rates, since through lowering costs and raising profits such investment produces further "savings" and since the lack of investment spending will dampen wages and employment. Thence lowered savings will tend to blow out the CA deficit (i.e. import output from foreign capital investment to compensate for the lack of domestic investment/output).
Yes, it is possible for a country to be saving in both public and private sectors, provided it runs a CA surplus: e.g. China. But all countries can't do so in the same time frame. If you're alluding to the "global savings glut hypothesis", then since saving=investment, global figures indicate no such thing, since both have declined marginally over the last decade. What has occurred is a massive rise in for-ex reserves, with China leading the pack. Such excess for-ex reserves amount to a policy of forced domestic savings, which has the effect of Keynesian hoarding, marginally subtracting from global aggregate demand, while the recycling of such reserve surpluses abroad has distorted investment allocations.
Reply Mar 02, 2010 at 10:27 AM
anne said...
N Klein:
But the decision to attempt to pay off the national debt by running continuous budget surpluses was not only misguided (few people realize the national debt is a public good), but it was also destined to fail. Goldi is correct, what is important is the overall level of debt, not the ratio of public sector debt to GDP. Trying to reduce overall debt levels by cutting the public sector debt will be counterproductive. If the current account is in deficit the only way for the public sector to run a surplus is for the private sector to also run a deficit....
[Thanks. I will think through rather than being dismissive of the possibility of a necessary relation between public and private debt.]
Reply Mar 01, 2010 at 10:51 AM
paine said in reply to anne...
"Goldi is correct, what is important is the overall level of debt, not the ratio of public sector debt to GDP"
anne this is bogus
Reply Mar 01, 2010 at 12:02 PM
NKlein1553 said in reply to paine...
paine, I'm not sure what you think is bogus. Are you saying that the federal government needs to retrench and starting to cut back on the deficit spending? Or are you saying that the overall level of debt in the economy is unimportant? Can you clarify? Your point below about the federal deficit being too small in Jackson's time to make a significant impact on the overall economy is well taken, but I'm not really trying for an in depth analysis here. So while Jackson's fiscal policy certainly didn't *cause* the crash of 37 it certainly didn't help. In general, I don't think it's possible to state with any degree of certainty what caused what when dealing with events that far in the past. My only purpose in criticizing the Clinton surpluses here is to try and convey the fact that government spending underpins private savings. After people understand that then private investment decisions based on animal spirits, balance of trade issues, and other such things can be added on. Or is it your position that how much the federal government spends and what it spends its deficits on has no relationship to private sector savings? Thank you for your responses.
Reply Mar 01, 2010 at 12:25 PM
paine said in reply to NKlein1553...
" are you saying that the overall level of debt in the economy is unimportant?"
not unimportant but hardly a barrier to full employment fiscal deficits
trade gaps need closing however
savings is a word i only use in micro talk about households
it has no serious macro use beyond
the stale taste of thrift it imparts
to the discussion
if you mean to say the federal budget oughta borrow all that firms and households don't spend yup i agree
the cycle requires
total expenditures on real domestic output
equal total income from domestic real output
if uncle wants to maintain total output and employment levels
he has to expend any difference eh ??
Reply Mar 01, 2010 at 01:53 PM
NKlein1553 said...
Thank you Anne. If you look at the private sector net savings and public sector deficit data you will see an extremely strong positive correlation. I know that correlation is not causation, but examining the historical data for past U.S. recessions/depressions caused by private sector debt buildups (1819, 1837, 1857, 1873, 1893, and 1929) you will see that all of these recessions/depressions were preceded by federal government attempts to pay off the national debt. President Jackson actually succeeded in paying off the national debt in 1837 (the only time in U.S. history that there was no national debt), which was immediately followed by a severe depression under President Van-Buren. Somehow I doubt this is all coincidence. Again, I want to emphasize I am not condemning all of President Clinton's economic policies. We are only talking about the national debt here.
Reply Mar 01, 2010 at 11:07 AM
NKlein1553 said in reply to NKlein1553...
For a more academic explanation of the sector financial balances than the link to Naked Capitalism I posted earlier see:
Godley, Wynne and Marc Lavoie. "An Integrated Approach to Credit, Money, Income, Production, and Wealth." (2006, Palgrave-Macmillan).
This website also has a pretty detailed explanation of what Godley calls "stock-flow consistent macro-economic models."
http://bilbo.economicoutlook.net/blog/?p=4870
Reply Mar 01, 2010 at 11:16 AM
paine said in reply to NKlein1553...
nklein
the fiscal policy of andy jackson hardly produced the 37 crash
the federal budget was way too small
even r the battle with nicky biddle
though it hardly helped
didn't have serious impaxt either
your point has no depth or application in and of itself
you need much else
take jacksonian america
we ran trade gaps back then and bop deficits
once firms failed to invest like wild men
the system contracted and stagnated
Reply Mar 01, 2010 at 12:01 PM
anne said...
http://www.economagic.com/em-cgi/data.exe/var/togdp-householdsectordebt
http://www.economagic.com/frbz1.htm
January 30, 2010
Household Sector Debt as a Percent of GDP, 1992-2008
1992 ( 61.02)
1993 ( 61.28) Clinton
1994 ( 61.77)
1995 ( 63.41)
1996 ( 64.21)
1997 ( 64.09)
1998 ( 64.95)
1999 ( 66.16)
2000 ( 67.55)
2001 ( 71.68) Bush
2002 ( 76.36)
2003 ( 81.50)
2004 ( 85.12)
2005 ( 88.86)
2006 ( 93.14)
2007 ( 95.37)
2008 ( 95.72)
[Household sector debt increased 10.7% through the Clinton years and 41.7% through the Bush years. This despite the dramatically changed government budget situations during the respective Presidencies. There would seem to be no necessary relation between public and private debt, judging from such a period of time.]
Reply Mar 01, 2010 at 11:10 AM
NKlein1553 said in reply to anne...
I should add that it is not only the level of public sector debt that matters, but also how the debt is used. So while the presidency of George W. Bush saw a massive increase in deficit spending most of that money was diverted to unproductive mal-investment (mostly going to the military, tax-cuts to the wealthiest Americans, and a poorly designed Medicare subsidy) and hence not saved. So while it is true that the private sector cannot accumulate financial assets without the federal government net-spending (either through tax cuts or through physical disbursements), it is vitally important how the money is spent.
Reply Mar 01, 2010 at 11:33 AM
Goldilocksisableachblond said in reply to anne...
anne,
"There would seem to be no necessary relation between public and private debt, judging from such a period of time."
Change that to " between public and household debt " and it would be more accurate.
All sectors have to be considered public -- composed of federal , state , and local gov't -- household , financial and non-financial business , foreign , etc.
The continued growth in total debt/gdp over the Clinton terms was mainly due to the financial and business sectors , associated with the dotcom boom.
Your numbers do illustrate an important point about the Clinton era vs. the Bush era --- household debt growth was much more subdued under Clinton. We should have tried to improve on that trend , rather than reversing it , as occurred on Bush's watch.
Reply Mar 01, 2010 at 11:55 AM
paine said in reply to anne...
look at corporate debt
and financial corporate debt in particular
Reply Mar 01, 2010 at 12:20 PM
anne said...
N Klein:
I know that correlation is not causation, but examining the historical data for past U.S. recessions/depressions caused by private sector debt buildups (1819, 1837, 1857, 1873, 1893, and 1929) you will see that all of these recessions/depressions were preceded by federal government attempts to pay off the national debt.
[Arguing that a government budget surplus may produce conditions leading to a recession, possibly a severe recession, is interesting. James Galbraith mentioned such a possible problem, but I am not sure where since I did not consider the idea all that seriously.
I am thinking.]
Reply Mar 01, 2010 at 11:19 AM
Worker said...
Like an alcoholic I once knew. Lot's of potential.
But he kept trying to cure his hangovers with a bloody mary brunch.
Pretty soon he wasn't showing as much potential.
Reply Mar 01, 2010 at 11:45 AM
paine said in reply to Worker...
sense less analogy
credit is not booze
Reply Mar 01, 2010 at 11:55 AM
paine said...
this potential out put line is a sick joke
if as this graph suggests out put in certain years
exceeds potential output what does that mean ???
non sustainable ??
how and why ??
we operate with a taboo line not a production ceiling
if a ceiling could be said to exist we maybe came close to hitting it in...1943 not 2000
as to running a steady fiscal surplus
not while running a steady BOP deficit
the trade gap was never addressed by the rubinoids
in clinton II
forget the bush tax cut substitute and infra structure boom by green gore to pull us out of the recession of 01
and you still need to confront the trade gap eh ???
Reply Mar 01, 2010 at 11:54 AM
paine said in reply to paine...
taboo line ??
nairu baby nairu
god love clinton II
for at least proving a generation of big footed econ cons
had missed the taboo line on the high side
Reply Mar 01, 2010 at 12:17 PM
anne said...
"Goldi is correct, what is important is the overall level of debt, not the ratio of public sector debt to GDP"
I realize this does not make sense, but I am trying to find a way to be sympathetic to the argument against a budget surplus per se.
Reply Mar 01, 2010 at 12:06 PM
paine said in reply to anne...
what is a vvery interesting data run of course
is the flow of net borrowings by financial outfits in this period
ballooning its way to a pop !!
Reply Mar 01, 2010 at 12:12 PM
paine said in reply to anne...
a budget surplus per se
is like an audience with one hand
for a clap we at least need two
and for applause we need many hands
a few other hands
trade gap
corporate investment rate
houseold borrowing
Reply Mar 01, 2010 at 12:15 PM
paine said...
goldi and nklein are operating with way too simple a tool kit here
its like trying to do systemic bypass surgery
with a box cutter and a bicycle pump
Reply Mar 01, 2010 at 12:08 PM
paine said...
household debt after 20 years of fairly stable jiggering
took off in 85
from 45 % => 100% of gdp now ...more or less
we've been "here" before of course ..in the big D
is it sustainable ??? probably not
even if jobs and wages come alive again
but
a nice 6 % inflation
with a fed lock on nominal rates would of course
allow a nice decline in ten years or so
the dollar ??
DOWN !!!!
well it needs to fall anyway eh ??
as prolly
almost all oecd currencies need to fall
Reply Mar 01, 2010 at 12:32 PM
don said in reply to paine...
Paine: "the dollar ??
DOWN !!!!
well it needs to fall anyway eh ??
as prolly
almost all oecd currencies need to fall"
Why not just revalue the others? I would be happy with a cessation of reserve buildups abroad.
Reply Mar 01, 2010 at 03:41 PM
NKlein1553 said...
paine, I mentioned the trade gap in my earlier comments.
"If the current account is in deficit the only way for the public sector to run a surplus is for the private sector to also run a deficit."
So if the U.S. were running a sufficiently large balance of payments surplus it would be possible for both the public sector and the private sector to also run surpluses. So my argument is not against a budget surplus per se. Of course you have to look at what other sectors are doing, I never said otherwise.
Reply Mar 01, 2010 at 12:36 PM
NKlein1553 said in reply to NKlein1553...
But the fact is the U.S. was not running a current account surplus in the late 90's, is not running a current account surplus now, and will almost certainly not be running a current account surplus in the near future. So what's left? Only the public sector and the private sector. Of those two only the public sector has the wherewithal to create financial assets safely. The private sector can expand credit money, but ultimately that's going to lead to a bubble. If you want to blast through the NAIRU wall the public sector is going to have to step up to the plate. Both Presidents Clinton and Bush primarily relied on the private sector and we see where that got us.
Reply Mar 01, 2010 at 12:48 PM
paine said in reply to NKlein1553...
"If you want to blast through the NAIRU wall the public sector is going to have to step up to the plate."
exactly
i don't think we disagree here
the other categories of expenditure were in the back of your mind
trade balance and net corporate investment
the total debt incubus bit troubles me however
the system is closed since
we borrow in our own limitless currency
is it the default on private debt you think cracks the system eventually
it isn't
it's the sudden slow down of the credit flow
which is the product of fragmented
banking systems with self imposed constraints
that ultimately emerge out of the
partitioning of decision making
inherent in a multitude of seperated profit pools
ie there is no reason for mass waves of default
if credit flows can be maintained and work outs
are gradually partially serially imposed
too much debt service is like to much taxes
impossible to calculate without a whole system specification
including constraints that in the end are accidental
why in
Reply Mar 01, 2010 at 02:07 PM
Patrick said in reply to paine...
I take it you'd go with Stiglitz's Bank of Uncle idea? As currently configured, the hi fi boyz are clearly incapable of investing in anything other than fraudulent paper fantasies. And the much vaunted community banks are about to take eat CRE turd sandwich. That leaves uncle to as the banker of first and last resort.
Reply Mar 01, 2010 at 08:04 PM
paine said in reply to NKlein1553...
fair enough
Reply Mar 01, 2010 at 02:21 PM
anne said...
Paine:
what is a very interesting data run of course
is the flow of net borrowings by financial outfits in this period
ballooning its way to a pop !!
http://www.economagic.com/em-cgi/data.exe/var/togdp-totalcreditdebt
http://www.economagic.com/frbz1.htm
January 30, 2010
Total Credit Market Debt as a Percent of GDP, 1992-2008
1992 ( 234.87)
1993 ( 236.02) Clinton
1994 ( 236.82)
1995 ( 241.99)
1996 ( 245.92)
1997 ( 247.22)
1998 ( 255.62)
1999 ( 263.24)
2000 ( 265.43)
2001 ( 276.76) Bush
2002 ( 288.71)
2003 ( 300.67)
2004 ( 307.24)
2005 ( 315.24)
2006 ( 326.85)
2007 ( 342.39)
2008 ( 357.75)
[Credit market debt increased 13.0% as a percent of Gross Domestic Product through the Clinton years and 34.8% through the Bush years.]
Reply Mar 01, 2010 at 12:44 PM
paine said in reply to anne...
no anne
just the borrowings of financial outfits
can't locate it it
but as i recall it really took off recently
more then nonfiancial corporate debt
while household debt is obviously borrowing against lot values
the hi fi bit was pure paper towering
neither is worse then the other
but it was the paper towers treatened collapse
that caused the crisis
even if raised on faulty lot collateral
at its base
Reply Mar 01, 2010 at 02:18 PM
spencer said...
NKlein -- you are almost right.
The current account deficit is equal to the domestic savings gap.
So it is the sum of the private and public debt.
Both can have debt, or one can have debt and the other in surplus.
Reply Mar 01, 2010 at 12:52 PM
paine said in reply to spencer...
see how empty this gets at such a level of abstraction
Reply Mar 01, 2010 at 02:09 PM
anne said...
http://www.economagic.com/em-cgi/data.exe/var/togdp-totalcreditdebt
http://www.economagic.com/frbz1.htm
January 30, 2010
Total Credit Market Debt as a Percent of GDP, 1980-2008
1980 ( 162.84)
1981 ( 161.33) Reagan
1982 ( 170.43)
1983 ( 174.53)
1984 ( 178.92)
1985 ( 191.85)
1986 ( 208.26)
1987 ( 219.97)
1988 ( 224.09)
1989 ( 227.31) Bush
1990 ( 231.16)
1991 ( 235.70)
1992 ( 234.87)
1993 ( 236.02) Clinton
1994 ( 236.82)
1995 ( 241.99)
1996 ( 245.92)
1997 ( 247.22)
1998 ( 255.62)
1999 ( 263.24)
2000 ( 265.43)
2001 ( 276.76) Bush
2002 ( 288.71)
2003 ( 300.67)
2004 ( 307.24)
2005 ( 315.24)
2006 ( 326.85)
2007 ( 342.39)
2008 ( 357.75)
[The expansion of public or private credit market or household debt was simply no problem through the Clinton Presidency, quite unlike the Bush and Reagan Presidencies.]
Reply Mar 01, 2010 at 01:20 PM
anne said...
http://www.economagic.com/em-cgi/data.exe/var/togdp-totalcreditdebt
http://www.economagic.com/frbz1.htm
January 30, 2010
Total Credit Market Debt as a Percent of GDP, 1980-2008
1980 ( 48.26)
1981 ( 46.68) Reagan
1982 ( 47.44)
1983 ( 46.61)
1984 ( 47.03)
1985 ( 50.70)
1986 ( 54.12)
1987 ( 56.14)
1988 ( 57.21)
1989 ( 58.36) Bush
1990 ( 60.04)
1991 ( 61.46)
1992 ( 61.02)
1993 ( 61.28) Clinton
1994 ( 61.77)
1995 ( 63.41)
1996 ( 64.21)
1997 ( 64.09)
1998 ( 64.95)
1999 ( 66.16)
2000 ( 67.55)
2001 ( 71.68) Bush
2002 ( 76.36)
2003 ( 81.50)
2004 ( 85.12)
2005 ( 88.86)
2006 ( 93.14)
2007 ( 95.37)
2008 ( 95.72)
Reply Mar 01, 2010 at 01:21 PM
anne said...
Correcting heading above:
Household Sector Debt as a Percent of GDP, 1980-2008
Reply Mar 01, 2010 at 01:24 PM
anne said...
http://krugman.blogs.nytimes.com/2010/03/01/a-great-failure/
March 1, 2010
A Great Failure
By Paul Krugman
Mark Thoma, the trillion-dollar gap: *
[Actual versus potential real Gross Domestic Product\, 1990-2010]
It’s crucial to realize that the trillion dollars’ worth of goods and services we could have produced this year, but won’t, is a loss we’ll never make up. And that doesn’t count the suffering and damage to our future inflicted by the non-monetary costs of mass long-term unemployment.
And yet, the prevailing sentiment in Washington and other centers of power is that we’ve done enough, and that it’s time to start pulling back — to normalize monetary policy, tighten our fiscal belts. Policymakers are congratulating themselves for avoiding total collapse, when they should be berating themselves for failing to engineer recovery.
It’s tragic.
* http://economistsview.typepad.com/economistsview/2010/02/the-trillion-dollar-gap.html
Reply Mar 01, 2010 at 01:29 PM
Reality Bites said...
Nklein, you are wrong to tie public sector debt to private sector debt/surplus before the end of Breton Woods. We operated off of the gold standard back in the days of Jackson and under that standard, it is possible for both the private sector to save and the government to run surpluses.
Your analysis is only correct when applied to modern fiat currencies where the private sector can save only by holding debt. The Federal Reserve Note is the "debt" of the FED and the US Treasury obligations that pensions and so many private sector entities hold as assets are the debt of the US Government.
However the model is incomplete I believe, you can save by storing non-perishable commodities like gold and oil instead of someone else's debt. However the total amount of savings in the form of debt far outweighs the amount of commodities so the model can be a very rough approximation. What makes the model wrong is that savings can be accumulated from any future obligation, not just future obligations from the public sector. I can save by buying Microsoft bonds, Berkshire bonds, or even stock equities that confer the right to future profits. When a company goes IPO, that creates private sector savings.
Keen says that the money to buy that IPO has to be created by the FED, but money can be created without the need for the FED to buy government debt. Banks can borrow directly from the FED and create money through making loans only subject to capital requirements. Thus there is a way for the private sector to save without the government ever having to issue more debt.
P.S. Alternate theories say that the correlation between higher government deficits and private savings is due to the public realizing that they must save more in order to pay for the higher taxes that are inevitable. Sure enough, the Bush tax cuts are expiring and we have Obama already thinking about raising taxes further beyond that. The private sector sees this and knows it must save more now to be able to consume their preferred amount in the future with the higher tax rate.
Reply Mar 01, 2010 at 01:46 PM
paine said in reply to Reality Bites...
i think nklein gets the post gold standard proviso
rb
you are making sense however
where's the old reality bites
i like this one better
"money can be created without the need for the FED to buy government debt. Banks can borrow directly from the FED and create money through making loans only subject to capital requirements"
right on !!!
you go off course in the ps
wish you'd left it out
--along with the keen reference --
Reply Mar 01, 2010 at 02:28 PM
NKlein1553 said in reply to paine...
Yeah, Ricardian Equivalence is just silly.
Reply Mar 01, 2010 at 05:44 PM
NKlein1553 said in reply to Reality Bites...
Thank you for the correction Mr. Bites (love your name btw). You are correct to point out that technically my comments only apply to the post-Brenton Woods system. However, I would add that because the U.S. government held a monopoly over gold distribution at the time and was able to set a fixed conversion rate the situation was a bit more complicated than you describe. Also, paine was right to call attention to the fact that because the federal budget was such a small fraction of overall GDP at the time the fiscal policies of Jackson probably didn't have much of an effect on the economy. It seems my lame historical analogies won't fly with this crowd =)
As for Steve Keen, I've seen some of his "Debunking Economics," slides, but I really haven't done much reading about Circuitist theories. I'll have to look into it more. As a recent college graduate teaching various social studies subject (including economics) to public high school students I'm open to different theories (I don't want anyone to accuse me of brainwashing anyone). Recently I've been looking through various blogs and other material to try and broaden my horizons beyond the traditional textbook explanations I got as an undergrad. I like this blog a lot because it presents a pretty wide range of viewpoints all in one place. I also really admire Anne's commitment to using hard data to support her arguments. However, in this case I don't agree that the pursuit of budget surpluses is a good policy objective in and of itself (which is how I perhaps mistakenly interpreted her post at 7:29 a.m). This is especially true since during the 90's the U.S. was running a current account deficit and, despite the comparatively robust job growth, the dreaded NAIRU was still lurking about distorting everyone's perceptions about what the potential for the U.S. economy actually was. IMHO, there is no given correct level of public debt, it all depends on capacity utilization rates and the price level. So I'm pretty sympathetic to the Chartalist theories because it seems to me at least the major problem with modern capitalism is a lack of demand, not supply. Therefore, I agree with paine. The government should do what it can to fill the AD gap. But I'm sure I could be wrong. And if my analysis seems like "trying to do systemic bypass surgery with a box cutter and a bicycle pump," it's because I'm not really a very sophisticated commentator. I've been going through that Godley book recently and there's certainly a lot I don't understand yet. But still I do my best to present what I think is right.
Reply Mar 01, 2010 at 05:09 PM
Reality Bites said...
As you can tell, I'm conflicted over the theory tying private savings to public sector deficits/debt. The theory has some strong points, but it also seems to be missing crucial factors and completely dismisses the ability for the private sector to save other than through government deficits. That strikes me as wrong.
Reply Mar 01, 2010 at 01:50 PM
paine said in reply to Reality Bites...
you are missing the part whole mirage
yes i can really save
but the system can't if
the amount of my saving and every one elses
saving isn't spent
by some one some where some how
if it isn't spent then the production that would make my saving a real increment to wealth or welfare is lost
thru slack productive capacity
Reply Mar 01, 2010 at 02:31 PM
Goldilocksisableachblond said...
One thing I should make clear , I'm not a deficit hawk given the situation we face now. I think the gov't should be going balls-out creating jobs right now , preferably geared to future productivity and sustainability -- infrastructure , green energy , etc.
IIRC , there's a theory , backed by real math , that says that debt/gdp ( or debt/income , for an individual ) levels can increase indefinitely and sustainably , PROVIDED credit remains available and PROVIDED revenue ( or income ) grows faster than the prevailing interest rate on debt , since debt-servicing ability will always be covered by the new debt plus revenue increases.
This theory is of no use to typical individuals , since overall interest rates on household debt is rarely , and never consistently over the long haul, lower than the rate of household income growth. Nor is credit availability guaranteed.
For gov't , it's easier to imagine the possibility , and Japan proves you can function for a long time with gov't debt/gdp more than double what we now have. The problem is that when debt/gdp is so high , a prolonged spike in borrowing costs causes the situation to quickly spiral out of control. It's for this reason , I'm guessing , that the EU tried to set a fairly restrictive standard of 60% debt/gdp on member states.
Anyway , this leads to my preferred way out of this mess. The gov't acquires ALL household debt , forcing a hefty haircut on the banks since a good chunk of it is dead meat , then refinances ALL of it at rates that would lower the debt servicing costs of the current debt to a level that would result in trivial default rates. Impose fairly tight restrictions against accumulation of added debt until the gov't-held debt is paid off or moved back into the private sector. The only cost to the gov't is the differential between the return received on this basket of debt compared to that of Treasuries , plus the markdown resulting from the interest rate difference as compared to the initial bank loans.
Borrowers would make exceptional efforts to stay current , since this would be a once-in-a-lifetime deal , and they're pissed at the banks and their 30% rates , anyway.
There's the moral hazard , of course , but that hasn't stopped us from bailing out the bigshots.
The way to get this done is to first lobby for a total debt jubilee , claiming that creditors should eat the totality of their own crap. Panic will ensue , which will be fun to watch for awhile , then we make the compromise offer outlined above.
Reply Mar 01, 2010 at 02:00 PM
paine said in reply to Goldilocksisableachblond...
"The problem is that when debt/gdp is so high , a prolonged spike in borrowing costs causes the situation to quickly spiral out of control"
sky hooked claim needs grounding :
run some numbers past us
like
debt to gdp ratio at peak
debt service as percent of gdp
--assume a rate of interest in peak year --
now add your assumed
tax structure to service the debt
maybe u'll see 60 % is ridiculously arbitrary and low
as is the 3% average fiscal deficit to gdp ratio
which with 2 % growth and 3 % inflation
ends up with a 60% debt limit
3/5 of gdp
imagine 5 % interest rate as debt service --high--
then 3 % of gdp goes in taxes to pay the debt service chicken feed
out of 18% gdp uncle takes now
that would be 17% of fed budget
now tax wealth
wealth is what 4 times gdp
so we tax the top half of the wealth upside down pyramid
2 times gdp
so tax rate 1.5 % (3%/2)
a mere pinprick eh ??
simple
eh what ??
Reply Mar 01, 2010 at 03:03 PM
Goldilocksisableachblond said in reply to paine...
I agree the 60% figure might be overly conservative.
I'm thinking along the lines of Japan , or worse. Say 200-300% gov't debt/gdp. Interest rates of 10% would gobble 20-30% of GDP. In the U.S. , that would be over 100% of current revenues. I'm with you on raping the rich if we ever get to that point.
Rogoff says that , historically , gov't debt/gdp > 90% is associated with reduced gdp growth. It's not an absolute rule , but it's probably the kind of thing the EU looked at in setting their limit.
Reply Mar 01, 2010 at 03:39 PM
paine said in reply to Goldilocksisableachblond...
"Rogoff says that , historically , gov't debt/gdp > 90% is associated with reduced gdp growth."
my guess if it tells us anything it tells us slowed growth leads to increased deficits
Reply Mar 01, 2010 at 05:49 PM
paine said in reply to Goldilocksisableachblond...
love the boldness here:
why can't academic economists spread their wings like this
likely loss of respectiblity ??
" The gov't acquires ALL household debt , forcing a hefty haircut on the banks since a good chunk of it is dead meat , then refinances ALL of it at rates that would lower the debt servicing costs of the current debt to a level that would result in trivial default rates. "
beautiful
"Impose fairly tight restrictions against accumulation of added debt until the gov't-held debt is paid off.."
why bother ??? the banks you bought the mortgages from would end up owning most of the incremental
t bills you created to buy em
you already gave em a hair cut give em
another ...every year
" or moved back into the private sector."
what is that all about ???
Reply Mar 01, 2010 at 03:11 PM
Goldilocksisableachblond said in reply to paine...
paine,
My idea of restrictions against added debt was only meant to apply to those households under the new , sweetheart payback deal. The idea being we do the big moral hazard thing only once a century or so. The restrictions need not be absolute , but tight enough to prevent another big overleveraging episode. Those consumers who chafed at the restrictions could pay off the gov't paper via private sector credit , if they wanted.
Banks would have newly cleaned sheets , so they could go crazy lending to everyione else. That would be fine with me , so long as they don't expect more bailouts.
Reply Mar 01, 2010 at 03:24 PM
Bruce Wilder said...
Increasing leverage, while decreasing (productive) investment, is a way to disguise, for a time, a change in income and wealth distribution. It's all promises, but no delivery, isn't it?
The chart draws a mis-leading trend-line, because GDP was inflated for much of 00s, by the misleading numbers generated by financial sector debt growth. There wasn't enough investment in real, productive capital stock, after the end of the Clinton/dot-com boom, to sustain any economic growth (beyond the effect of population growth). ANY!
It was all a shell game. Leverage can be a shell game. You take $100 of prospective cash flow, divide it up, and sell it for $150.
Some one is going to lose. And, later, they are going to find out that they lost.
Reply Mar 01, 2010 at 02:32 PM
paine said in reply to Bruce Wilder...
"Increasing leverage, while decreasing (productive) investment, is a way to disguise, for a time, a change in income and wealth distribution. It's all promises, but no delivery, isn't it?"
bruce
maybe you're losing me here
income :
if you're saying unsustainable micro household borrowing rates can mask the fact income is falling behind expenditures for that household
i agree
wealth :
well if a household is borrowing against collateral (ie wealth) that's value collapses (lot values)
i agree
no delivery:
as in no real net wealth
again at the household level yes
but the system has say
new houses built with borrowed funds eh ??
the hi fi sector produced and sold "services "
that were consumed like bon bons
by their clients that was their real output
the welfare value of these services ???
no less then a heroin injection
to an addict