to stimulate or not to stimulate

[Jos Theelen]

Mervyn King, the governor of the Bank of England, has cautioned against further significant government spending to stimulate the economy.

A top European Union politician on Wednesday slammed U.S. plans to spend its way out of recession as "a way to hell."

European Union nations on Thursday rejected new spending projects to boost their recession-hit economies, standing firm against massive street protests demanding subsidies and U.S. suggestions to stoke growth with more aid.

German Finance Minister Peer Steinbrueck said here Friday that the stimulus plan proposed by the European Union (EU) to reactivate the EU economy would mean waste of money.

Some quotes from the EU about stimulus plans. It seems to me that the love between the EU and Obama is cooling rapidly. I doubt they will say "We want Bush back", but they clearly disapprove Obama's idea's about stimulating the economy out of the mud.

What do you think about stimulating the economy?

[Valmy]

Economic dogma has always been to try to stimulate and spend out of recessions.  I do not see anything particularly stunning about the idea, simply some frustration with the execution.

Of course economic dogma has also been to save during good times, which our government has never thought a worthwhile plan.

[Fate]

Deficits don't matter. Stimulate away.

[KRonn]

We've doomed, of course, given that Socialist type nations, and even quasi-communist or former communist nations (Russia, China) are concerned over US spending too much.   

[The Minsky Moment]

Steinbruck has been bashing away at the stimulus from the beginning. 

Meanwhile, the latest forecast is that the German economy will shrink 4 percent this year.  It appears that masochistic Bruningism is alive and well in the Federal Republic.

[garbon]

Are modern democracies capable of providing appropriate stimulation?

[Sheilbh]

What do you think about stimulating the economy?

Don't Germans have fears about any inflationary policies (even at the potential edge of deflation) and anything that devalues the currency?  Aren't those sort of two big taboos of post-war Germany? 

My view is that Paulson's work seems to have eased the credit crisis sufficient enough for something like Geithner's plan, which, as I understand, is a bit like TARP possibly to work.  Whereas with the same pressure we saw at the end of last year and in early January it wouldn't even have the possibility of working.

I do think stimulus is good.  I think the US has done enough at the minute and that the goal now should be to stabilise the banking system and then institute the sort of systemic reform that may be necessary.  Then, hopefully, when the banks are a bit more safe the stimulus money should really kick in in the form of infrastructure and tax cuts (the state aid is far more emergency) and the combination of a comparatively stable if chastened and risk-averse banking sector and consumers and contractors with money can help other sectors of the economy to start growing.

I don't think there's any need for further stimulus and that the main goal should be stabilising and then reforming the banks so that when stimulus is felt it can work.  This was the problem with Brown's VAT cut, it was complicated and expensive for companies to work out and it came at a time when global banks were falling all over the place so  it didn't really help people spend that much.

I'm not so scared about America or Eurozone economies spending much more.  I don't know if the UK can because if we get too high a debt there could be a run on Sterling and, unlike with the Dollar and the Euro, if that happens we're the only ones who really lose, not China and the rest.

Today I was reading our latest inflation figures.  Basically we have two measures the RPI (retail price index, which includes house prices) and CPI (consumer price index, which doesn't).  When Brown made the Bank of England independent he switched goverment inflation measurements from RPI to CPI and set a target of 3% (above which the Governor has to write an explanatory letter to the Chancellor).  Now RPI is at 0%, while CPI increased from 3 to 3.2%

[garbon]

I think the US has done enough at the minute

Indeed. Stanford doesn't need any more donations for its Linear Accelerator.

[Zanza]

Steinbruck has been bashing away at the stimulus from the beginning. 

Meanwhile, the latest forecast is that the German economy will shrink 4 percent this year.  It appears that masochistic Bruningism is alive and well in the Federal Republic.

So how could Germany stimulate its export-based industries that are suffering from the recession? Domestic demand is actually not worse than in the last years - mainly because it was already low.

I work in the German auto industry, but unless Americans, Russians, Chinese, West Europeans etc. start buying premium cars again, I don't see how any amount of stimulus will help the auto industry here as Germans can't make up for the lack of demand worldwide unless we have a stimulus program called "A BMW, Mercedes, Audi, or Porsche for everyone". For commercial vehicles, orders are negative, i.e. more cancelled than new.

Demand for new cars has picked up in Germany because of a subsidy, but it is mostly spent on small, foreign cars, so it doesn't help the exporters here much.

Other areas that are suffering badly are transport, tourism, chemicals, and machinery. Not sure how domestic demand for that stuff can be increased a lot either.

[viper37]

Economic dogma has always been to try to stimulate and spend out of recessions.  I do not see anything particularly stunning about the idea, simply some frustration with the execution.

Of course economic dogma has also been to save during good times, which our government has never thought a worthwhile plan.

Keynes theory also implies that a government should reduce spending once there is growth, wich they never really seem to do.

Here, at least, they never did it and now they are just spending more than they already did, back when they needed to spend more to get us out of the last recession.

[viper37]

My opinion about Obama's plan is that he's spending way too much money and a lot of it for stuff wich has dubious economic value.

spending on infrastructure isn't really bad.  At some point or another, you're going to have to, so spending more for the next 2 years and less there after isn't really bad in this time period.  But this crisis is now a pretext for multi-million dollars bailout of a various kind of industries in trouble, some of wich have nothing to do with the recession.

[derspiess]

My opinion about Obama's plan is that he's spending way too much money and a lot of it for stuff wich has dubious economic value.

I'm trying to figure out how throwing more & more money at a failed public education system is going to lead to economic prosperity, as he was claiming last night. 

This guy ended up being farther to the left economically than I feared.

[The Minsky Moment]

So how could Germany stimulate its export-based industries that are suffering from the recession? Domestic demand is actually not worse than in the last years - mainly because it was already low.

I work in the German auto industry, but unless Americans, Russians, Chinese, West Europeans etc. start buying premium cars again, I don't see how any amount of stimulus will help the auto industry here as Germans can't make up for the lack of demand worldwide unless we have a stimulus program called "A BMW, Mercedes, Audi, or Porsche for everyone". For commercial vehicles, orders are negative, i.e. more cancelled than new.

Demand for new cars has picked up in Germany because of a subsidy, but it is mostly spent on small, foreign cars, so it doesn't help the exporters here much.

Other areas that are suffering badly are transport, tourism, chemicals, and machinery. Not sure how domestic demand for that stuff can be increased a lot either.

Germany has been practicing demand repression for years.  The Schroeder program was supposed to cause substantive reform, but it bogged down.  What did get done very rigorously was wage suppression.  That restored "competitiveness" but combined with the half-reforms, the German economy spun out of balance.  In the short run there may not much to do about this, but it is kind of sad that there really isn't much effort to try.

[MadImmortalMan]

IMO--The problem with the spending-stimulus concept is that total spending capacity is not infinite. It is possible to have a recession severe enough that it can't be spent away. And the worse a recession gets, the more constricted the capacity for spending gets. Also, for a very large and diverse economy with an already well-developed infrastructure, direct spending has much less impact on the health of the system than it does for a very small economy. I don't view those as refutations of the idea of spending stimulus altogether. I think that if a recession is driven largely by certain problems or economic sectors (as opposed to systemic decline), then stimulus spending can be more effective by targeting it at the problem.