The Villain - Magazine - The Atlantic
EXCERPTS:
"The critique from the right is that the continued steps to stimulate the economy are both unnecessary, given that the financial crisis has passed, and inflationary. Allan Meltzer, an economist and historian of the Fed, says Bernanke is trying to do what is beyond his powers. “The current high unemployment is not a monetary problem,” Meltzer says, meaning we are past the point where further rate cuts will stimulate hiring. Bernanke has been accused of trying too many remedies with poor odds of success. Possibly, he would plead guilty to this. He has said he admires Franklin Roosevelt’s catchall approach to fighting the Depression, which was less an ideology than an enthusiasm for enthusiasms. The fear now is that the Fed’s balance sheet—that $2.9 trillion—represents kindling for inflation that one day will catch.
The mechanism for ignition would be as follows: Each time the Fed purchases a Treasury security or a mortgage-backed bond, it credits the selling bank with a “reserve” in the same dollar amount. Bank reserves exist as electronic notations, but they represent real money available for loans, and much of that money is sitting idle today, partly because loan demand is weak. If banks, presently, were to lend all their excess reserves, say in the form of cash, the supply of currency would nearly triple overnight, and the price of a burger would, you can bet, do the same. And if the Fed were faced with such an onslaught, and chose to soak up the excess reserves by quickly selling its assets, the deluge would overwhelm markets, send interest rates soaring, and snuff out the recovery.
Showing posts with label history. Show all posts
Showing posts with label history. Show all posts
Saturday, March 17, 2012
Sunday, January 8, 2012
Monday, October 17, 2011
Amity Shlaes: Three Policies That Gave Us the Jobs Economy - WSJ.com
This article gives you good historical perspective for thinking about what can be done to get the economy out of its current slump.
EXCERPT:
"There's the silver lining to our current cloud. It is that the economic mediocrity of the recent years constitutes someone's advantage. And that someone is young innovators. All this time, demand has once again been building. As soon as the economy feels reliable, people will go out and make the 2015 equivalent of the early PC."
EXCERPT:
"There's the silver lining to our current cloud. It is that the economic mediocrity of the recent years constitutes someone's advantage. And that someone is young innovators. All this time, demand has once again been building. As soon as the economy feels reliable, people will go out and make the 2015 equivalent of the early PC."
Friday, October 7, 2011
Friday, September 23, 2011
Manhattan Institute Video
The first 13 minutes of the video below provide an interesting evaluation of the government's actions during the depression of the 1930s, and of why it's relevant today.
Manhattan Institute Video
Manhattan Institute Video
Thursday, September 8, 2011
Why the Stimulus Failed - WSJ.com
Review & Outlook:Why the Stimulus Failed - WSJ.com
EXCERPTS:
"This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy," they write. The stimulus "was implemented at a time when the Keynesian model had every chance of succeeding on its own terms. The high level of unemployment and the rapid deadline for spending created both the supply of workers and the demand for workers. If the job market results are so lackluster in this setting, economists should expect even weaker stimulative results during more modest recessions."
EXCERPTS:
"This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy," they write. The stimulus "was implemented at a time when the Keynesian model had every chance of succeeding on its own terms. The high level of unemployment and the rapid deadline for spending created both the supply of workers and the demand for workers. If the job market results are so lackluster in this setting, economists should expect even weaker stimulative results during more modest recessions."
Monday, August 29, 2011
Thursday, August 18, 2011
Monday, July 4, 2011
Obama’s Economists: ‘Stimulus’ Has Cost $278,000 per Job | The Weekly Standard
EXCERPTS:
"The report was written by the White House’s Council of Economic Advisors, a group of three economists who were all handpicked by Obama, and it chronicles the alleged success of the “stimulus” in adding or saving jobs. The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus”... the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job.
"The report was written by the White House’s Council of Economic Advisors, a group of three economists who were all handpicked by Obama, and it chronicles the alleged success of the “stimulus” in adding or saving jobs. The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus”... the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job.
Saturday, June 4, 2011
Fatal Fatalism - NYTimes.com
Here's a good statement of the Keynesian view of recessions.
Excerpts:
"Our current economic discourse is pervaded by fatalism. Leave aside the people who insist that somehow Obama has destroyed capitalist incentives by passing Mitt Romney’s health care plan and threatening to raise tax rates to Clinton-era levels. Even among people who should be sensible, you hear many assertions that run something like this: historically, recovery from financial crisis is usually slow, so we have to accept a slow recovery this time around too. Actually, that’s more or less what Obama has been saying.
This fatalism is deeply destructive — because there’s no good reason we need to experience many years of high unemployment. What historical experience shows isn’t that there’s no answer to post-crisis slumps, it only shows that most governments have responded to such slumps with the same kind of fatalism and learned helplessness we’re showing now. (Hey, Greg, I have first dibs on that!)
We are not, after all, suffering from supply-side problems. We don’t have high unemployment because workers lack the necessary skills, or are stuck in the wrong industries or the wrong locations; the hypothesis that we’re mainly suffering structural unemployment has been repeatedly shot down by evidence. This is a demand-side slump; all we need to do is create more demand.
So why is this slump, like most slumps following financial crises, so protracted? Because the usual tools for pumping up demand have reached their limits. Normally we respond to demand-side slumps by cutting short-term nominal interest rates, which the Fed can move through open-market operations. But we now have severely depressed private demand thanks to the housing bust and the overhang of consumer debt, so even a zero rate isn’t low enough.
So what’s the right response? Should we just throw up our hands, and say that having 12 million or so adults who should be working out of work, and roughly $1 trillion per year of output we should be producing not getting produced, is just a fact of life? Or should we be using unconventional policies to deal with an abnormal situation?
The answer seems obvious. We should be using fiscal stimulus; we should be using unconventional monetary policy, including raising the inflation target; we should be pursuing aggressive measures to reduce mortgage debt. Not doing these things means accepting huge waste and hardship.
But, say the serious people, there are risks to doing any of these things. Well, life is full of risks. But it’s simply crazy to put a higher weight on the possibility that the invisible bond vigilantes might manifest themselves, or the inflation monster emerge from its secret cave, over the continuing reality of enormous human and economic damage from doing nothing.
The truth is that we have nothing to fear but fear itself — fear and complacency — the two things we have to fear are — amongst our fears ….
Anyway, seriously, the fatalism that has overtaken economic debate is a terrible thing. It is, indeed, the main enemy of prosperity.
Excerpts:
"Our current economic discourse is pervaded by fatalism. Leave aside the people who insist that somehow Obama has destroyed capitalist incentives by passing Mitt Romney’s health care plan and threatening to raise tax rates to Clinton-era levels. Even among people who should be sensible, you hear many assertions that run something like this: historically, recovery from financial crisis is usually slow, so we have to accept a slow recovery this time around too. Actually, that’s more or less what Obama has been saying.
This fatalism is deeply destructive — because there’s no good reason we need to experience many years of high unemployment. What historical experience shows isn’t that there’s no answer to post-crisis slumps, it only shows that most governments have responded to such slumps with the same kind of fatalism and learned helplessness we’re showing now. (Hey, Greg, I have first dibs on that!)
We are not, after all, suffering from supply-side problems. We don’t have high unemployment because workers lack the necessary skills, or are stuck in the wrong industries or the wrong locations; the hypothesis that we’re mainly suffering structural unemployment has been repeatedly shot down by evidence. This is a demand-side slump; all we need to do is create more demand.
So why is this slump, like most slumps following financial crises, so protracted? Because the usual tools for pumping up demand have reached their limits. Normally we respond to demand-side slumps by cutting short-term nominal interest rates, which the Fed can move through open-market operations. But we now have severely depressed private demand thanks to the housing bust and the overhang of consumer debt, so even a zero rate isn’t low enough.
So what’s the right response? Should we just throw up our hands, and say that having 12 million or so adults who should be working out of work, and roughly $1 trillion per year of output we should be producing not getting produced, is just a fact of life? Or should we be using unconventional policies to deal with an abnormal situation?
The answer seems obvious. We should be using fiscal stimulus; we should be using unconventional monetary policy, including raising the inflation target; we should be pursuing aggressive measures to reduce mortgage debt. Not doing these things means accepting huge waste and hardship.
But, say the serious people, there are risks to doing any of these things. Well, life is full of risks. But it’s simply crazy to put a higher weight on the possibility that the invisible bond vigilantes might manifest themselves, or the inflation monster emerge from its secret cave, over the continuing reality of enormous human and economic damage from doing nothing.
The truth is that we have nothing to fear but fear itself — fear and complacency — the two things we have to fear are — amongst our fears ….
Anyway, seriously, the fatalism that has overtaken economic debate is a terrible thing. It is, indeed, the main enemy of prosperity.
Monday, March 7, 2011
The Weekend Interview with Paul Johnson: Why America Will Stay on Top - WSJ.com
EXCERPTS:
"In his best-selling history of the 20th century, "Modern Times," British historian Paul Johnson describes "a significant turning-point in American history: the first time the Great Republic, the richest nation on earth, came up against the limits of its financial resources." Until the 1960s, he writes in a chapter titled "America's Suicide Attempt," "public finance was run in all essentials on conventional lines"—that is to say, with budgets more or less in balance outside of exceptional circumstances.
"The big change in principle came under Kennedy," Mr. Johnson writes. "In the autumn of 1962 the Administration committed itself to a new and radical principle of creating budgetary deficits even when there was no economic emergency." Removing this constraint on government spending allowed Kennedy to introduce "a new concept of 'big government': the 'problem-eliminator.' Every area of human misery could be classified as a 'problem'; then the Federal government could be armed to 'eliminate' it."
Twenty-eight years after "Modern Times" first appeared, Mr. Johnson is perhaps the most eminent living British historian, and big government as problem-eliminator is back with a vengeance—along with trillion-dollar deficits as far as the eye can see."
"In his best-selling history of the 20th century, "Modern Times," British historian Paul Johnson describes "a significant turning-point in American history: the first time the Great Republic, the richest nation on earth, came up against the limits of its financial resources." Until the 1960s, he writes in a chapter titled "America's Suicide Attempt," "public finance was run in all essentials on conventional lines"—that is to say, with budgets more or less in balance outside of exceptional circumstances.
"The big change in principle came under Kennedy," Mr. Johnson writes. "In the autumn of 1962 the Administration committed itself to a new and radical principle of creating budgetary deficits even when there was no economic emergency." Removing this constraint on government spending allowed Kennedy to introduce "a new concept of 'big government': the 'problem-eliminator.' Every area of human misery could be classified as a 'problem'; then the Federal government could be armed to 'eliminate' it."
Twenty-eight years after "Modern Times" first appeared, Mr. Johnson is perhaps the most eminent living British historian, and big government as problem-eliminator is back with a vengeance—along with trillion-dollar deficits as far as the eye can see."
Saturday, February 26, 2011
Roosevelt on government spending, inflation, profits, and prices
The first two minutes of this video gives you a sense of how Roosevelt (president from 1933 through 1945) viewed profits, prices, and the role of government. The rest of the video deals with the tendency of price controls to lead to black market activity.
Saturday, December 11, 2010
Companies Keep Tight Grip on Cash - WSJ.com
EXCERPTS:
"Corporate America's cash pile has hit its highest level in half a century.
Rather than pouring their money into building plants or hiring workers, nonfinancial companies in the U.S. were sitting on $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the Federal Reserve said Thursday. Cash accounted for 7.4% of the companies' total assets—the largest share since 1959.
The cash buildup shows the deep caution many companies feel about investing in expansion while the economic recovery remains painfully slow and high unemployment and battered household finances continue to limit consumers' ability to spend.
***
In one bright sign, the Fed's data show that the net worth of U.S. households increased to $54.9 trillion in the third quarter, up from $53.7 trillion in the second quarter, as rising stock-market wealth more than offset declining home values.
That was still well below the second-quarter 2007 peak of $65.7 trillion. After-tax household income rose to an annualized $11.42 trillion from $11.37 trillion in the second quarter.
The cash pooling up at companies has the potential to help the economy grow more vigorously and bring unemployment lower—if they start spending it on new plants, equipment and employees.
But in the wake of the worst economic downturn since the 1930s, companies are hesitating to make that shift, said Brian Bethune, economist at IHS Global Insight.
"Corporate America's cash pile has hit its highest level in half a century.
Rather than pouring their money into building plants or hiring workers, nonfinancial companies in the U.S. were sitting on $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the Federal Reserve said Thursday. Cash accounted for 7.4% of the companies' total assets—the largest share since 1959.
The cash buildup shows the deep caution many companies feel about investing in expansion while the economic recovery remains painfully slow and high unemployment and battered household finances continue to limit consumers' ability to spend.
***
In one bright sign, the Fed's data show that the net worth of U.S. households increased to $54.9 trillion in the third quarter, up from $53.7 trillion in the second quarter, as rising stock-market wealth more than offset declining home values.
That was still well below the second-quarter 2007 peak of $65.7 trillion. After-tax household income rose to an annualized $11.42 trillion from $11.37 trillion in the second quarter.
The cash pooling up at companies has the potential to help the economy grow more vigorously and bring unemployment lower—if they start spending it on new plants, equipment and employees.
But in the wake of the worst economic downturn since the 1930s, companies are hesitating to make that shift, said Brian Bethune, economist at IHS Global Insight.
Tuesday, October 26, 2010
Sunday, October 24, 2010
Saturday, October 23, 2010
Fools Rush In Where Europe Rushes Out - Jonah Goldberg
EXCERPTS:
"As of this writing, France is paralyzed. By the time you read this, it might be in flames.
In Britain, where politics is more polite but the problems are perhaps just as dire, the government is proposing budget cuts on a scale not seen for nearly a century.
In Greece, well, the less said about Greece the better.
All of these countries--and many more--are going through painful retrenchments because they spent too much money, made too many promises, and expected too little from their citizens. The era of European austerity is upon us, because the Europeans--or at least those in charge--understand the mess they've made of their economies.
This should present a real problem for Barack Obama and the vast (though shrinking) chorus of experts, editorialists, and activists who support his agenda. In broad terms, all of the policies Obama and the Democrats have pushed are the sorts of policies the British, the French, and other Europeans had for years, even decades.
As far as I am aware, no one has asked President Obama a simple question: If your philosophy is so great, how come the countries that have embraced it for generations are so much poorer than we are?
Nor have they asked: If guaranteed health care for everyone will make us so much more "competitive," how come we've been doing so much better than our "competitors" who already have socialized medicine, high tax rates, and lavish pensions?
Nor has the president been queried about the incongruity of saying his policies have laid a "new foundation" for economic growth and job creation when the countries he's trying to emulate are trying to dismantle the very same foundations in order to survive.
***
What's irrational about saying that we shouldn't be rushing into a condemned building everyone else in the developed world is rushing out of?
"As of this writing, France is paralyzed. By the time you read this, it might be in flames.
In Britain, where politics is more polite but the problems are perhaps just as dire, the government is proposing budget cuts on a scale not seen for nearly a century.
In Greece, well, the less said about Greece the better.
All of these countries--and many more--are going through painful retrenchments because they spent too much money, made too many promises, and expected too little from their citizens. The era of European austerity is upon us, because the Europeans--or at least those in charge--understand the mess they've made of their economies.
This should present a real problem for Barack Obama and the vast (though shrinking) chorus of experts, editorialists, and activists who support his agenda. In broad terms, all of the policies Obama and the Democrats have pushed are the sorts of policies the British, the French, and other Europeans had for years, even decades.
As far as I am aware, no one has asked President Obama a simple question: If your philosophy is so great, how come the countries that have embraced it for generations are so much poorer than we are?
Nor have they asked: If guaranteed health care for everyone will make us so much more "competitive," how come we've been doing so much better than our "competitors" who already have socialized medicine, high tax rates, and lavish pensions?
Nor has the president been queried about the incongruity of saying his policies have laid a "new foundation" for economic growth and job creation when the countries he's trying to emulate are trying to dismantle the very same foundations in order to survive.
***
What's irrational about saying that we shouldn't be rushing into a condemned building everyone else in the developed world is rushing out of?
Wednesday, October 6, 2010
Interview with Laurence Meyer (former Fed Governor) on the causes of the financial crisis
Good overview of the financial crisis.
Monday, September 27, 2010
Tax Cuts and Revenue: What We Learned in the 1980s - WSJ.com
EXCERPTS:
"The Reagan tax cuts reduced rates for all income classes, even though it was well understood that cutting the lower rates would result in substantial revenue losses. Low tax rates (below 20%) do not cause much of a disincentive for working, saving or investing, and hence there is little supply-side effect. We did argue, however, that reducing the high marginal rates (up to 70% on high-income earners) would cause little, if any, revenue loss, because of the large, positive supply-side effects. Were we right?
Since most of the Reagan tax cuts applied to lower- and middle-income earners, there was close to a dollar lost in tax revenue for each "dollar" of tax cut for these groups. Still, CBO figures show that total tax revenue only fell from 19.2% of gross domestic product (GDP) in 1982, before most of Reagan's tax-rate reductions were put in place, to 18.4% of GDP in 1989, the year he left office. This happened because the U.S. economy grew by more than one-third in real terms (34.3%), much faster than the 24.3% rate expected even by economists within the Reagan administration. Thus, by the time President Reagan left office, the economy was generating more tax revenue at a maximum 28% rate than many on the left forecast it to generate at a maximum 70% rate.
The Reagan tax-rate reductions did, in fact, pay for themselves—but it took about seven years.
The Obama administration wants to extend the Bush tax cuts only for those making less than $200,000 a year. This will significantly reduce federal revenues. But the rate cuts it does not want to extend would be more likely to increase tax revenues.
The reason is simple: Those who earn more than $200,000 annually are among the ones who create most of the new jobs and fund new investment—the engines of economic growth. Without these jobs and new investment, the economy will be smaller and throw off less tax revenue.
"The Reagan tax cuts reduced rates for all income classes, even though it was well understood that cutting the lower rates would result in substantial revenue losses. Low tax rates (below 20%) do not cause much of a disincentive for working, saving or investing, and hence there is little supply-side effect. We did argue, however, that reducing the high marginal rates (up to 70% on high-income earners) would cause little, if any, revenue loss, because of the large, positive supply-side effects. Were we right?
Since most of the Reagan tax cuts applied to lower- and middle-income earners, there was close to a dollar lost in tax revenue for each "dollar" of tax cut for these groups. Still, CBO figures show that total tax revenue only fell from 19.2% of gross domestic product (GDP) in 1982, before most of Reagan's tax-rate reductions were put in place, to 18.4% of GDP in 1989, the year he left office. This happened because the U.S. economy grew by more than one-third in real terms (34.3%), much faster than the 24.3% rate expected even by economists within the Reagan administration. Thus, by the time President Reagan left office, the economy was generating more tax revenue at a maximum 28% rate than many on the left forecast it to generate at a maximum 70% rate.
The Reagan tax-rate reductions did, in fact, pay for themselves—but it took about seven years.
The Obama administration wants to extend the Bush tax cuts only for those making less than $200,000 a year. This will significantly reduce federal revenues. But the rate cuts it does not want to extend would be more likely to increase tax revenues.
The reason is simple: Those who earn more than $200,000 annually are among the ones who create most of the new jobs and fund new investment—the engines of economic growth. Without these jobs and new investment, the economy will be smaller and throw off less tax revenue.
Sunday, September 26, 2010
Czech president tells UN to stay out of economics | Reuters
EXCERPTS:
"UNITED NATIONS, Sept 25 (Reuters) - Czech President Vaclav Klaus on Saturday criticized U.N. calls for increased "global governance" of the world's economy, saying the world body should leave that role to national governments.
The solution to dealing with the global economic crisis, Klaus told the U.N. General Assembly, did not lie in "creating new governmental and supranational agencies, or in aiming at global governance of the world economy."
"On the contrary, this is the time for international organizations, including the United Nations, to reduce their expenditures, make their administrations thinner, and leave the solutions to the governments of member states," he said....
Klaus, a free-market economist who oversaw a wave of privatization in the 1990s after communism collapsed in his homeland, also said the world was "moving in the wrong direction" in combating the economic crisis.
"The anti-crisis measures that have been proposed and already partly implemented follow from the assumption that the crisis was a failure of markets and that the right way out is more regulation of markets," he said.
Klaus said that was a "mistaken assumption" and it was impossible to prevent future crises through regulatory interventions and similar actions by governments.
That will only "destroy the markets and together with them the chances for economic growth and prosperity in both developed and developing countries," he said.
"UNITED NATIONS, Sept 25 (Reuters) - Czech President Vaclav Klaus on Saturday criticized U.N. calls for increased "global governance" of the world's economy, saying the world body should leave that role to national governments.
The solution to dealing with the global economic crisis, Klaus told the U.N. General Assembly, did not lie in "creating new governmental and supranational agencies, or in aiming at global governance of the world economy."
"On the contrary, this is the time for international organizations, including the United Nations, to reduce their expenditures, make their administrations thinner, and leave the solutions to the governments of member states," he said....
Klaus, a free-market economist who oversaw a wave of privatization in the 1990s after communism collapsed in his homeland, also said the world was "moving in the wrong direction" in combating the economic crisis.
"The anti-crisis measures that have been proposed and already partly implemented follow from the assumption that the crisis was a failure of markets and that the right way out is more regulation of markets," he said.
Klaus said that was a "mistaken assumption" and it was impossible to prevent future crises through regulatory interventions and similar actions by governments.
That will only "destroy the markets and together with them the chances for economic growth and prosperity in both developed and developing countries," he said.
Tuesday, September 7, 2010
What Happened During the Depression? - Thomas Sowell
EXCERPTS:
"There are always calls for the government to "do something" when things are going bad. Those who make such calls have almost never bothered to check out what actually happens when the government does something, as compared to what happens when the government does nothing....
There are two conflicting assumptions about what happened during the Great Depression. The most popular assumption, especially among politicians, is that the market failed and the government had to intervene to save the economy.
Another assumption is that the market went down and was on its way back up when federal intervention sent it down again and led to massive unemployment. If you don't let facts get in the way, you can just pick whichever assumption you like-- and the first assumption wins that popularity contest, hands down.
But, if you look at the facts, they go like this: Unemployment never hit double digits in any of the 12 months following the big stock market crash of 1929 that is often blamed for the massive unemployment of the 1930s. Unemployment peaked at 9 percent, two months after the October 1929 crash, and then began drifting downward.
Unemployment was down to 6.3 percent by June 1930, when the first big federal intervention occurred. Within six months, the downward trend in unemployment reversed and hit double digits for the first time in December 1930.
What were politicians to do? Say 'We messed up'? Or keep trying one huge intervention after another? The record shows what they did: President Hoover's interventions were followed by President Roosevelt's bigger interventions-- and unemployment remained in double digits in every month for the entire remainder of the decade.
"There are always calls for the government to "do something" when things are going bad. Those who make such calls have almost never bothered to check out what actually happens when the government does something, as compared to what happens when the government does nothing....
There are two conflicting assumptions about what happened during the Great Depression. The most popular assumption, especially among politicians, is that the market failed and the government had to intervene to save the economy.
Another assumption is that the market went down and was on its way back up when federal intervention sent it down again and led to massive unemployment. If you don't let facts get in the way, you can just pick whichever assumption you like-- and the first assumption wins that popularity contest, hands down.
But, if you look at the facts, they go like this: Unemployment never hit double digits in any of the 12 months following the big stock market crash of 1929 that is often blamed for the massive unemployment of the 1930s. Unemployment peaked at 9 percent, two months after the October 1929 crash, and then began drifting downward.
Unemployment was down to 6.3 percent by June 1930, when the first big federal intervention occurred. Within six months, the downward trend in unemployment reversed and hit double digits for the first time in December 1930.
What were politicians to do? Say 'We messed up'? Or keep trying one huge intervention after another? The record shows what they did: President Hoover's interventions were followed by President Roosevelt's bigger interventions-- and unemployment remained in double digits in every month for the entire remainder of the decade.
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