The need to raise taxes...
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Yes. For more on savings and injections, seeonthebottom said:
http://en.wikipedia.org/wiki/Circular_flow
I’m in a bit of a hurry so I’ll make this quick. Apologies for any typos. Do to hasty typing.onthebottom said:
Keynesian multipliers are about short term economic fluctuations. In other words, deviations from the long run trend in the growth rate of GDP. Economic growth normally refers to the long run trend in GDP. For example, an increase in savings (one example of a leakage) reduces GDP and the multiplier in the short run. However, in the long run, savings increase the capital stock, leading to economic growth.
In the short run, Keynesians would argue that both an increase in government spending or a decrease in taxes will increase GDP (taxes by less than an increase in government spending). However, they are talking about deviations around the long run trend which is determined by things like technology, quantities of capital, labour, etc. Many New classicals argue that this is unlikely. For example, one New classical view, called Recardian Equivalence, argues that when the government runs a deficit, people will just treat it as deferred taxes and increase savings to pay for the future tax increases, leading to no change in GDP even in the short run..
When US workers concentrate on what they are most productive at they produce the US more per hour than when they are employed at some other task. Further, when US consumers import goods from countries that are more efficient producers of those goods buying power is improved.Meister said:
Everyone likes to talk about how car manufacturing jobs "fled" to Japan, but have you counted up the savings to the average American car owner from lower auto prices?
Count up the number of jobs that have "fled" from the US over the past 30 years and then compare with the current unemployment rate, also look at US worker productivity. Not only has unemployment NOT risen to some massive level, productivity numbers are reasonably good too. Conclusion: New jobs were created that US workers were better at.
- car prices have risen dramatically across the board, domestic or importedfuji said:
- when comparing goods you have to compare a toaster for 18 dollars which most likely will fail in 2 or 3 years compared with an American made (if you can find one) for 40 dollars that may last 10 years. (automotive is the exception)
- job replacement of skilled tradespeople: a tool and die maker at 35 dollars an hour is now servicing air conditioners for 17 dollars an hour. Employment level hasn't changed, but standard of living has.
- The massive trend of importing accumulates massive deficits. It's like going to Walmart to buy all your food and clothing on credit except you don't have to pay it back right away. Instead Walmart will invest in your house, your car... Where does it end?
- Massive deficits are coming home to roost. 1 Euro = 1 US in 2001, 1 Euro = 1.55 US today. Fallouts: 110 dollar oil, 1000 dollar Gold, Bread and milk at staggering prices, vacationing abroad a luxury, erosion of capital, transfer of technology to Asia.....
Oh yes, but it's all good because we can buy an 18 dollar toaster.
Over a 30 year period? You have to be kidding. You can buy a car for under $10k now, and it's a much better one than the car that cost twice that much (inflation adjusted) 30 years ago.Meister said:
Wrong. Total productivity per hour worked in the US has risen which means that US workers are now employed in jobs that produce more per hour than they used to be. You can cite all the anecdotes you like, but the macro data is there plain for all to see.
If it's true that skilled trades are now doing less productive jobs in the past (which is not in evidence from one anecdote, btw) then what has happened is that the jobs have shifted away from that sector of the economy entire, to some other sector which has even higher productivity.
False. Living beyond your means creates deficits. The US economy actually produces more now than it used to and yet Americans consume still more than that.
This is true. Stop living beyond your means. Has nothing to do with which goods are produced in which country. It has everything to do with Americans producing X and consuming X+N. You can't afford to consume more than you produce in the long run.
Note that American production has INCREASED over the last 30 years so it is not the case that the deficit is because of some drop in production. It is a rise in consumption that has been the problem.
Rupublican Americans just don't get it...the country is fucked financially. The decline of the American empire has started. It may take another 10 years, it may take 20 years but during that time the USA will be passed by China for sure, India probably. Whomever makes it to the next POTUS will have their hands partially tied...the Chinese need simply to say, "fuck you and do as we say or we call in our loans"
March 10, 2008
Op-Ed Columnist
The Face-Slap Theory
By PAUL KRUGMAN
Friday’s employment report — which was so weak that it had many economists declaring that we’re already in a recession — was bad news. But it was actually less disturbing than what’s going on in the financial markets.
The scariest thing I’ve read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown.
To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall.
As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn’t spread to other financial markets or to the economy as a whole.
Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market that has taken over a lot of the work banks used to do. This de facto bank run sent shock waves through the financial system.
The Fed responded by rushing money to banks, and markets partially calmed down, for a little while. But by December the panic was back.
Again, the Fed responded by rushing money to banks, this time via a new arrangement called the Term Auction Facility. Again the markets calmed down, for a while.
But again, the respite was only temporary. Last month another market you’ve never heard of, the $300 billion market for auction-rate securities (don’t ask), suffered the equivalent of a bank run. Last week two big financial companies announced that they had been unable to raise the cash demanded by their lenders. Even Fannie Mae and Freddie Mac, the giant government-sponsored mortgage agencies long regarded as safe places to put your money, are now having trouble attracting funds.
One consequence of the crisis is that while the Fed has been cutting the interest rate it controls — the so-called Fed funds rate — the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.
What’s going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.”
A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)
The Fed’s latest plan to break this vicious circle is — as the financial Web site interfluidity.com cruelly but accurately describes it — to turn itself into Wall Street’s pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.
Some observers worry that the Fed is taking over the banks’ financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down — there are $11 trillion in U.S. mortgages outstanding — it’s a drop in the bucket.
The only way the Fed’s action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past.
But slap-in-the-face only works if the market’s problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that’s hard to believe.
The third time could be the charm. But I doubt it. Soon, we’ll probably have to do something real about reducing the risks investors face.
A plan to restore the credibility of municipal bond insurance would be a start (how crazy is it that New York State, rather than the federal government, is taking the lead here?). I also suspect that the feds will have to get explicit about guaranteeing the debt of Fannie and Freddie, which really are too big to fail.
Nobody wants to put taxpayers on the hook for the financial industry’s follies; we can all hope that, in the end, a bailout won’t be necessary. But hope is not a plan.
March 10, 2008
Op-Ed Columnist
The Face-Slap Theory
By PAUL KRUGMAN
Friday’s employment report — which was so weak that it had many economists declaring that we’re already in a recession — was bad news. But it was actually less disturbing than what’s going on in the financial markets.
The scariest thing I’ve read recently is a speech given last week by Tim Geithner, the president of the Federal Reserve Bank of New York. Mr. Geithner came as close as a Fed official can to saying that we’re in the midst of a financial meltdown.
To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall.
As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn’t spread to other financial markets or to the economy as a whole.
Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market that has taken over a lot of the work banks used to do. This de facto bank run sent shock waves through the financial system.
The Fed responded by rushing money to banks, and markets partially calmed down, for a little while. But by December the panic was back.
Again, the Fed responded by rushing money to banks, this time via a new arrangement called the Term Auction Facility. Again the markets calmed down, for a while.
But again, the respite was only temporary. Last month another market you’ve never heard of, the $300 billion market for auction-rate securities (don’t ask), suffered the equivalent of a bank run. Last week two big financial companies announced that they had been unable to raise the cash demanded by their lenders. Even Fannie Mae and Freddie Mac, the giant government-sponsored mortgage agencies long regarded as safe places to put your money, are now having trouble attracting funds.
One consequence of the crisis is that while the Fed has been cutting the interest rate it controls — the so-called Fed funds rate — the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.
What’s going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.”
A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)
The Fed’s latest plan to break this vicious circle is — as the financial Web site interfluidity.com cruelly but accurately describes it — to turn itself into Wall Street’s pawnbroker. Banks that might have raised cash by selling assets will be encouraged, instead, to borrow money from the Fed, using the assets as collateral. In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities.
Some observers worry that the Fed is taking over the banks’ financial risk. But what worries me more is that the move seems trivial compared with the size of the problem: $200 billion may sound like a lot of money, but when you compare it with the size of the markets that are melting down — there are $11 trillion in U.S. mortgages outstanding — it’s a drop in the bucket.
The only way the Fed’s action could work is through the slap-in-the-face effect: by creating a pause in the selling frenzy, the Fed could give hysterical markets a chance to regain their sense of perspective. And to be fair, that has worked in the past.
But slap-in-the-face only works if the market’s problems are mainly a matter of psychology. And given that the Fed has already slapped the market in the face twice, only to see the financial crisis come roaring back, that’s hard to believe.
The third time could be the charm. But I doubt it. Soon, we’ll probably have to do something real about reducing the risks investors face.
A plan to restore the credibility of municipal bond insurance would be a start (how crazy is it that New York State, rather than the federal government, is taking the lead here?). I also suspect that the feds will have to get explicit about guaranteeing the debt of Fannie and Freddie, which really are too big to fail.
Nobody wants to put taxpayers on the hook for the financial industry’s follies; we can all hope that, in the end, a bailout won’t be necessary. But hope is not a plan.
fuji said:
A Honda Civic used to be around 8k in the 80s. It is probably around 17k now. Similar price increases in domestic makers. The reason they are better cars now is because of technological advancements not because jobs fled to Japan.
You are talking about personal deficits. While that is a problem also, US deficits are causing the dollar to tank right now. Ie. Walmart needs to pay its vendors in China or Mexico X dollars for goods. The vendor needs to sell these dollars to pay his workers in local currency. Because of the trade imbalance there are far more requests to sell dollars than to buy dollars, hence the tanking.
And, I'm glad you brought up this "living beyond your means" because you are confirming my theory. The standard of living is dropping as people can not afford these things anymore, but still buy them on credit. Ie. their purchasing power has eroded. If you want to see purchasing power go to Europe and look at the number of Audis, Mercedes' and BMWs in the hands of average workers who have several weeks of vacation a year. To me that's real standard of living. Not like in North America where you have to work 55 hours a week with 2 weeks vacation and questionable health insurance just so you can afford a Hyundai.
You don't think the Japanese have been pushing the technological envelope, with their specialization in such things?Meister said:
I am talking about consumption at a macro level exceeding production at a macro level. Consumption comes in multiple formes: Personal spending on consumption, government spending on services and goods that are consumed, like healthcare and other services, etc.
So long as consumption is larger than production America as a whole is living beyond its means; this despite it producing more per person than it ever has before.
Fundamentally the trade imbalance is because Americans consume more than they produce.
That's objectively false at a macro level. At a macro level the US economy now produces more than it ever has in the past per person, which means there is more production available per person for people to consume.
Unfortuantely consumption has grown faster than production.
So, objectively, it is NOT the case that people can't afford things, it is objectivelyt he case that they have increased their consumption faster than they have increased their production.
The MRSP for a Honda Civil is around $15k now and if it was $8k in the 80's that is a doubling of price. Over that time the CPI has more than doubled (up 2.5 times actually, according to Bureau of Labour Statistics), so the price of a Civic has actually fallen--this despite the modern Civic having not only better technology (like fuel efficiency) but also many more features (like airbags).
In other words you are paying less and getting more.
In other words you are paying less and getting more.
While I think the US savings rate (or lack there of) would argue against the last theory I was more interested in the cost of government as an effect on long term GDP growth and competitiveness.someone said:
The reason I'm so against tax increases (except school bonds - all of which I have voted for, even in spoiled school districts) is that I believe running a deficit is the only way to constrain government spending.
OTB
While I think your overall conclusion that the US is "fucked financially" is dead wrong I do think in the next few decades we'll become more like the UK. The center of economic activity will shift West to Asia and we'll be a very rich economy that's no longer the largest. The more interesting question I think is will the world superpower status also shift West.sailorsix said:
OTB
I think it would be very difficult to draw general conclusions. It would depend on what the money was spent on. For example, Scandinavian countries have high levels of government spending as a percent of GDP and good growth rates. However, in cases where the savings were financed by borrowing, it would crowd out private investment. If that deficit is used for public investment that gave a higher social return (perhaps education) it might not be bad. If it were used to finance unnecessary wars and the like, it would be a negative.onthebottom said:
On a side note, you should be aware that GDP (how economic growth is normally measured) is not a measure of welfare. GDP only measures market economic activity. While there would be a correlation between GDP and welfare, the two are definitely not the same. Thus, I tend to be more concerned with how government spending affects welfare (a harder concept to measure) than GDP. For that, you have to look at the costs and benefits of the particular expenditures.
BTW, although I doubt very much that Recardian Equivalence holds anywhere near completely, I would not place to much weight on the observation of a single country (the U.S). You can think of many countries like Japan, Italy, etc. that have high government deficits but also have high savings rates. Indeed, it places them in the fortunate position that they have positive national savings despite the government deficits. However, I admit that it may not be the government deficits that lead to the high savings rates. The order of causation could be the reverse. High private savings, reduce the economic harm of government deficits, making them a more attractive political choice for governments.
I’m more concerned with the costs and benefits of what government is spending money on.onthebottom said:
The only thing that controls spending is concern over budget deficits, there is no other control. If you think either political party or branch of government is an efficient user of public funds you're kidding yourself. The only way to control government is to starve it of cash - that means instead of making hard choices it will run a deficit, when that deficit grows uncomfortably large there is political pressure.DonQuixote said:
OTB
You have to learn to view these numbers as percentages of GDP. That keeps them in proportion. After the mild recession of 01 the deficit increased to 3-4% of GDP, where it caused alarm. Now that it's running under 2% it's no longer on the radar. That number will increase again as the economy slows. It will again cause concern - there will be two cries for a solution, raising taxes and cutting spending.DonQuixote said:
If you look at debt as a % of GDP you will find that the US is in much better shape than most developed economies (including Canada), not because our debt is small, it's not, but because we grow our economy better than most.
Keeping the economy productive and competitive and keeping taxes low helps the above ratios. Raising taxes would both harm the economy and result in more wasted spending, and we'd still run a deficit of 1-3%.
I don't think governments are rational consumers, I think they're drunken sailors, thus I think they should be treated this way. We can easily afford to balance our budget if we want to, we could cut defense spending by 25% and still have the capability to kick the worlds ass any day we want.
I think the American people wisely chose to reward pols that promise to hold the line on taxes with election, now getting them to deliver is another story (ask W's dad).
OTB
You are wrong about this (I’m fairly sure I pointed this out before). If you check the following, you will find that in 2006, government debt in the U.S. is 36 percent of GDP and in Canada it is 28%. Since then the difference could have increased as Canada has run surpluses and the U.S. Deficits.onthebottom said:
http://stats.oecd.org/wbos/default.aspx?datasetcode=GOV_DEBT
More importantly, if you check the following, you will find that interest payments on government debt as a percent of GDP is not only MUCH higher in the U.S. than Canada (about 3.5 times higher) but is even higher than the OECD average.
http://www.oecd.org/dataoecd/5/51/2483816.xls
Still, the numbers are not so bad that the next government can't correct the situation. However, it must be frustrating as the U.S. was just starting to get their fiscal house back in order after Reagan and now they have to start over again.
BTW, Looking at the numbers as a perecent of GDP is part of the story. However, more important is looking at national savings (government dissavings from deficits plus private savings). You do this an compare the United States with other western countries that run high deficits and the other western countries don’t look so bad. Indeed, I don't think the American government deficits would be nearly as bad of they were balanced with some private savings. I will leave you to do the search for the statistics if you are interested.
I was looking at:someone said:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
To save you a bit of time, Canada is #22 US is #65.
OTB
Thanks for clearing that up. I would not take the CIA too seriously as they were the people who claimed Iraq had WMDs.onthebottom said:
Moreover, the U.S. has strange ways of working out their debt numbers. For example, unlike most countries, they don’t take into account social security obligations. Moreover, recently someone told me that their numbers are not net of financial securities held. Some governments departments hold a lot of financial assets. As you likely know, a lot of American debt is actually held by other parts of the American government (e.g. the social security administration). I’m guessing the CIA is using the American methods (at least for the U.S. debt number). The OECD numbers would be standardized.Frankly I question the need to raise taxes.........Moreover I question the Governments ability to live within a budget.
Reality is we need public audits.
Reality is we need public audits.
