Obama Jobs Plan

[HisMajestyBOB]

The trade agreements with Colombia, South Korea and Panama are in there too.

Those have been tied up forever.
In the South Korean case, one issue is that they want Koreans to buy more US brand cars. Except GM owns Daewoo, one of the most popular cars in South Korea :loll:
And the protectionists claim that the agreement would take US jobs, ignoring the fact that most Hyundais and Kias sold in the US are made in the US, by Americans.

[grumbler]

I didn't say anything about a solution to anything.  I was merely pointing out that deficit spending inflates an economy above the level it would be in the absence of that deficit. 

Fine, but I would also note that your pointing it out doesn't make it true.  National economies don't operate at a deficit.  Government deficits are paid for by selling bonds, generally, and those bonds suck cash out of the economy, deflating it at exactly the same rate that government deficit spending inflates it.  Where deficits are financed by inflation, the relationship is similar but not as direct.   This won't be true for non-national economies like Greece's, where inflation can be exported via the common currency, but that makes the PIIGS model largely inapplicable to the US.

What deficit spending by government does is distort spending; the government doesn't spend the dollars it borrows the same way as the consumer would have spent those dollars had he opted to do something with them other than to buy bonds (with the equivalent effect for inflation).  Deficit spending is more distorting than pay-as-you-go spending, because its costs are higher and longer-term.

[The Minsky Moment]

I think it would still need to have been larger.  US GDP shrunk by almost 7% (annualised) in the first quarter of 2009 and the 2008 decline has also been consistently revised downwards.  I think you needed a larger stimulus and had the debate taken place knowing how large a decline had taken place, I think you would've got one.

GDP shrank from a bubble inflated level.  It doesn't make a lot of sense to me to try and regain that level through Keynesian stimulus.

This confuses output with asset values. 
GDP attempts to measure actual value added produced on an annual basis.  The bubble was not in GDP, but in the valuation of certain kinds of assets (real estate) already in existance.  An asset bubble affects current production only to the extent that it causes producers of those assets to over-invest in production of those assets on the basis of straight extrapolation from an unsustainable trend.  That did happen to a certain extent, for example in the construction of new housing and to a lesser extent in new car purchasers (which also were boosted by securitization driven easy credit terms).  But the drop in GDP far exceeded any "bubble effect" on current production, as inevitably happens when this sort of crash occurs.

You can't get around the fundamental accounting reality that the sum of spending/saving balance of the consumer, business, government and foreign sectors must sum to zero.  For a country like the US with a significant current account deficit, that means that the household, business, and government sectors must run a net savings deficit on a combined basis.  For households, balance is simply household savings, i.e income - consumption, for business it is business savings (undistributed profit) - investment, for the government it is the budget deficit.

The essential problem in the US crisis was and is the overextension of private households, that is households used cheap credit to finance consumption levels in excess of income.  Once the assets used as collateralize this process deflate, the only way the situation can be "worked out" is by allowing the household sector to repair its collective balance sheet by saving on a net basis.  That is what happened starting in late 08 and continues to this day.

But if households are saving, then the combination of the business and government sectors must be in deficit.  On the business side, this requires either a profits crash or an investment boom.  Profits luckily have held up but investment has been restrained.  That is not surprising not only because an asset crash does little to encourage business confidence, but also because large swaths of the business sector were also overextended in terms of financing and have used the interim period to improve their own balance sheets rather than invest in further expansion.

That leaves the government.  Put simply, if the private sector is to be afforded the opportunity to recover and restructure, and there is no practical way to a earn a large current account surplus, the government must run a large deficit.  That is the essence of the Keynesian argument.  The government acts as the borrower of last resort, sustaining the national GDP until revived consumer spending and business investment can take over and perform their traditional functions as engines of growth.  If the government does not, than the private sector must go into deficit, and the mechanism for that will not a private spending boom, but rather a reduction in household income and/or business profits.

The Chicago school response is to contend running deficits just kicks the problem down the road and that the key to recovery is to get the motor of business sector investment going.  The freshwater economists argue that running government deficits hurts business confidence while fiscal probity improves it.  But the historical evidence does not support the argument and ultimately it is based on a fundamentally flawed economic model that does not take into account how business investment actually arises - i.e. how it is financed.  An big asset bubble generates complex and highly leveraged financial structures that collapse when the bubble pops, and the consequence is that the financial sector must restructure and financial investors become risk averse.  So businesses cannot increase investment coming out the crash like Chicago would like because the financing is not there.

If you look at the present state of the US, this is all very apparent.  Securitization is still effectively dead to the extent not directly propped by the Fed or Treasury.  Banks are not lending on affordable terms to business.  The junk and acquisition finance markets, after a brief revival, are back in the doldrums.  But Treasury yields are ridiculously low.  The market is speaking loud and clear and what it is saying is that notwithstanding the US fiscal deficits and debt, it views US federal government debt as a high-quality asset, and prefers the liquidity and security advantages of lending to the government over financing private business activity.  That presents the US with a simple choice: either exploit the willingess of the world to finance the US government at ludicrously cheap rates to invest in needed infrastructure projects that promise long run economic returns, or retrench and trigger a collapse in US living standards and productive capacity in the hope that at some future date the falling knife of debt deflation can be caught.

[mongers]

.....
.  That presents the US with a simple choice: either exploit the willingess of the world to finance the US government at ludicrously cheap rates to invest in needed infrastructure projects that promise long run economic returns, or retrench and trigger a collapse in US living standards and productive capacity in the hope that at some future date the falling knife of debt deflation can be caught.

Sorry for cutting your excellent post, but I think this is a very important opportunity that some in the republican party will both fail to understand and actively work against, to the long term detriment of their own country.

[Admiral Yi]

Joan, of course bubbles involve assets.  But as you already mentioned in many cases they do involve production, such as the breakneck production of housing.

You omit the fact that government borrowing has a crowding out effect on business investment.

You wave away the current account deficit as an exogenous variable.  It's obviously not.  It's a function of consumption and the exchange rate.  If we stop sucking in the world's capital (through the deficit) and propping up consumption (through the deficit) then the effect should be to reduce both the current account deficit and the capital account surplus.

And your closing comment about government investment in economically beneficial infrastructure is kind of goofy.  The overwhelming majority of government spending is consumption.

[Razgovory]

I'm tired of this guy and his ideology.

He has an ideology?

In any case if you are tired of him don't watch his speeches.

I did. I am watching now UFO Hunters on the Pseudo-History Channel.

I'll listen tomorrow to Glenn Beck and Rush Limbough comentaries on the speech and unmasking of Obama;s lies.
Worst President evah.

Why do you listen to a guy who hates Jews? 

[MadImmortalMan]

You omit the fact that government borrowing has a crowding out effect on business investment.

I think the plan is to sell all the debt to Ben Bernanke.

[The Minsky Moment]

You omit the fact that government borrowing has a crowding out effect on business investment. 

Government borrowing *can* crowd out business investment under certain conditions.  Those conditions are not even close to be present now.  Banks now are perfectly happy to park billions in excess cash with the Fed and earn a whopping 0.25% interest rather than lend it out.  If the government really were competing with the private sector for finance, one would expect to see high and rising interest rates; instead they are at historical lows and falling.

You wave away the current account deficit as an exogenous variable.  It's obviously not.  It's a function of consumption and the exchange rate.  If we stop sucking in the world's capital (through the deficit) and propping up consumption (through the deficit) then the effect should be to reduce both the current account deficit and the capital account surplus. 

Its true the current account isn't exogenous.  So if government were to cut spending, the negative income and profit effect would be offset to some degree by improvement in the current account.  But for a large domestically focused economy like the US, the effect is only just that - an offset, and a minor one like that.  Especially given that there is no other economy or group of economies out there currently capable or willing to absorb hundreds of billions of dollars of net exports from the US.

And your closing comment about government investment in economically beneficial infrastructure is kind of goofy.  The overwhelming majority of government spending is consumption. 

Don't understand your point.  All government spending ultimately translates into household income (and consumption) or business profits.

[MadImmortalMan]

Don't understand your point.  All government spending ultimately translates into household income (and consumption) or business profits.

Not until after it's taxed.


Edit: I mean, it first comes OUT of the economy by taxing those households and businesses. Or debt issuance.

[The Minsky Moment]

Not until after it's taxed.

Government spending either involves payment of wages of government workers (HH income), income transfer payments (HH income) or procurement of goods and services (business profits).  To the extent the spending is deficit spending, then by definition that income and profits is not offset by taxes.

[CountDeMoney]

Watched the speech tonight.  Reassuring to see that certain House members continue to eschew decorum when a nigger's at the podium.  Why break a streak.

[MadImmortalMan]

Not until after it's taxed.

Government spending either involves payment of wages of government workers (HH income), income transfer payments (HH income) or procurement of goods and services (business profits). 

Yes, obviously. But it's not magic. The money the government spends has to first come out of the economy before it can go back in. That money was already out there in the households and businesses before the government took it to spend back to them. If it's borrowed, it's just future taxes.

[Ideologue]

Not until after it's taxed.

Government spending either involves payment of wages of government workers (HH income), income transfer payments (HH income) or procurement of goods and services (business profits). 

Yes, obviously. But it's not magic. The money the government spends has to first come out of the economy before it can go back in. That money was already out there in the households and businesses before the government took it to spend back to them. If it's borrowed, it's just future taxes.

But, ideally, infrastructural improvements pay for themselves.  I.e., a road without potholes leads to systemic transportation savings, water without bacteria in it leads to systemic healthcare savings, B-52s capable of threatening Arabs who would dare embargo oil leads to systemic energy savings, and so on.

[MadImmortalMan]

 

Yes. Which is why stimulus should be spent on those types of things that produce growth like infrastructure.

[Ideologue]

Yes. Which is why stimulus should be spent on those types of things that produce growth like infrastructure.

Well, wouldn't the government be paying government employees and private businesses to renovate that infrastructure?  It would become household income and business profits.

But I guess we're not really disagreeing here...