Saving Ourselves With Financial Ruin
Nobel economics laureate Vernon L. Smith blogs at The Daily Beast:
So what has been the government's response in the current crisis? Besides spending stimulus, it was tax incentives for new home buyers and cash for clunkers if you bought a new car. All three are programs for borrowing output, homes and cars from future production and sales. Using subsidies to pump up home sales beyond what people could afford was the problem that led to the crisis. Now the problem is touted as the solution.We are in times not seen since the Depression, when at its depth in 1934 my parents lost their Kansas farm to the bank. Such memories and the intensity of the current crisis led me and my colleague, Steven Gjerstad, to examine the last 14 recessions including the Depression. We have been surprised and dismayed to learn that in 11 of these 14 recessions the percentage decline in new house expenditure preceded and exceeded percentage declines in every other major component of GDP. Hence the sources of the current debacle are hardly new! Moreover, past recoveries in the housing market have been closely associated with recovery from recession. The latest data continue to tell us that the turnaround in housing, consumer durables, and business investment are all anemic.
Our past housing and government spending mistakes leave us with no good choices. But please no more government spending! The deficit must now be faced. Avoid any new taxes; they are unlikely to reduce the deficit without discouraging recovery.
Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies. Don't subsidize them; just reduce their taxes even as they become larger; also reduce any unnecessary impediments to their formation. This is strongly indicated by the business dynamics program of the Bureau of Census and the Kauffman Foundation which has tracked new startup firms in the period 1980-2005. The entry of new firms net of departing firms in this period account for a remarkable two-thirds more employment growth (3 percent per year) than the average of all firms in the US (1.8 percent per year). The invigorating turmoil created by new technologies, with accompanying growth in output, productivity, and employment lead to new business formation as old firms inevitably fail. Reducing barriers to that growth encourage a recovery path which does not mortgage future output.
Everybody thinks that WWII got us out of the great depression because it was an enormous 4-year forced government "stimulus package". However, most people forget that near the end of 1945 ... when the war was won and the soldiers started returning home, economists predicted a 26% unemployment rate for 1946 and a slip right back into the depression.
The Truman administration, to its credit, cut spending from $85 Billion in 1945 to $30 Billion in 1946. The resulting cut in taxes allowed for a huge increase in the creation of real jobs and housing starts. This is what really ended the Depression and created the baby boomers and prosperity of the 50's.
AllenS at July 21, 2010 6:05 AM
Don't forget the importance of the GI Bill. A lot of those guys coming back from the war didn't go back to the factories, mine or farms, but instead went to college and discovered they could work wonders with their minds and not just their hands.
I R A Darth Aggie at July 21, 2010 7:21 AM
FTA: Now the problem is touted as the solution.
Well, how else are they going to clear the decks, redistribute the wealth and provide reparations (subversively)?
This is beyond incompetence, this is theft.
Feebie at July 21, 2010 9:27 AM
After watching Bill Maher's "Religulous", I realized what the big plan for the debt is -- nothing! They figure the rapture will come before we have a total economic meltdown.
Dwatney at July 21, 2010 9:36 AM
Dwatney - Are you sure that the secular humanists of the left REALLY believe in the rapture?
Really?
No, they figure that the society will collapse into a feudal serfdom, and they imagine that they shall be the lords.
I suspect they will use the Otter defense on the nations that purchased our debt:
"Hey, you fucked up. You trusted us."
brian at July 21, 2010 11:06 AM
The problem is nobody seems to want to learn from history, so successive generations end up repeating it and mistakes made previously. It wouldn't surprise me if WWIII is essentially a rehash of WWII with the same reasons and conditions from the late 1930s except with different countries.
Tony at July 21, 2010 11:11 AM
Future News:
Keynesian Bankrobbers Save Local Economy
The biggest bank robbery in Kennebrokeport history has left the people stunned. Criminals stole $12 million dollars in cash and government notes, 12% of the town's annual economic output.
The robbers offered an interesting bargain. In exchange for a pardon, they will spend all of the cash within the town on restaurant meals and consumer goods, thus stimulating the local economy. Town leaders are hopeful, and some are even pleased.
The mayor announced that this was a great opportunity to "jump-start" the economy in what are difficult economic times. "We will all start working and spending again. I think we all forgot how to consume. Now we will get back into the habit, and eventually we will all be rich".
The mayor continued "I have talked to government economists about the effect of this. They say we have lucked out, that we should get an economic boost of 1.5 times the amount stolen and spent (1). We are actually going to make a lot of money on this deal. I didn't know that bank robbery could be so beneficial to the community. I'm thinking of changing our entire attitute toward this type of theft."
Townspeople are suspicious of the newcomers spending a lot of cash, but do not want to ruin their own economic future by prying into how they obtained the money. "We're just happy that someone is spending again, although they are not great tippers."
(1) easyopinions.blogspot.com/2009/03/cargo-cult-economics.html#mainpoint_b
Andrew_M_Garland at July 21, 2010 11:30 AM
AllenS (July 21, 2010 6:05 AM) is right.
Government Spending Divides, It Does Not Multiply
Robert J. Barro is a Professor of Economics at Harvard. He found that spending in World War II decreased GDP by 20% (a multiplier of 0.8). Government spending killed GDP, even assuming that the spending itself was useful.
Quip: If you think WW2 ended the Great Depression in the U.S., then we can carry out the same enlightened policies without needing a war. Conscript most of the able bodied men and have them build tanks. Then destroy the tanks. Impose rationing for good measure. At the end, everyone is supposed to be rich.
Actually, this isn't so funny. Keynesian economics recommends to do just that. And Obama and many in congress are Keynesian in their thinking, because they like the recommendation that the government should tax a lot of money and spend it on signs saying "Brought to You by Caring Democrats".
--> yelnick.typepad.com/yelnick/2010/04/did-fdr-end-the-great-depression.html#tp
Government spending did not end the Great Depression. Reducing spending and lowering tax rates did it.
Andrew_M_Garland at July 21, 2010 11:36 AM
I wouldn't read too much into the post WWII boom. You need to remember that much of the rest of the industrialized world was in ruins. The postwar GI Bill was certainly a difference maker on a personal level (my dad went from prewar poultry farming and plumbing to being a wartime P47 pilot to a postwar career as a Chemical Engineer) but our industry had no real competition for years after the war.
We no longer have a large population of bright and motivated people who never had a chance at college. We have regulatory armies in place to ensure that the next big thing won't be made here. We throw roadblocks in the way of getting the energy we do have, and push pie-in-the-sky plans that defy economic realities. We're importing millions of undereducated aliens to dilute our shared prosperity.
Meanwhile, we have a government that is costing us as much as the one that won WWII while delivering rising unemployment.
MarkD at July 21, 2010 11:45 AM
brian,
You may be on to something. This may be a plan to take down China, :-).
Dwatney at July 21, 2010 11:48 AM
@Andrew_M_Garland: "Criminals stole $12 million dollars in cash and government notes, 12% of the town's annual economic output."
Not mentioned was that the criminals spent the whole swag on a carton of black market smokes.
old rpm daddy at July 21, 2010 12:24 PM
Don't forget that the average age of the WWII soldier was 35 and that many of the people taking advantage of the GI Bill had families and full time jobs to support them. They mostly went to school part-time at night. This describes my father's and uncles situations.
@MarkD: Also realize that we were spending billions to rebuild Europe and Japan during this time as well as growing our own prosperity. If we did have competition from these societies at that time, we wouldn't have had to spend the $$ on their resurrection. Either way it would have been a zero-sum. The growth was real.
AllenS at July 21, 2010 1:18 PM
I know my company would be in much better shape if we weren't swamped with taxes. We could hire an extra salesman and hopefully expand the business.
Doug Stephens at July 21, 2010 7:00 PM
My reading and experiences suggest that the current deficit and government spending problems (which are real) and the problems of slow job growth (which are also real) are not so related as Vernon Smith would seem to think.
The anemic growth coming out of the recession is largely caused by two things: the hangover of too much consumer debt (the debt, much of it built on farcical housing valuations, that fueled the last recovery), and structural changes in our economy that have been going on for years, but whose effects are being felt far more acutely now than they were in the past.
The last recession, early in GWB's first term, had as its proximate cause, the collapse of the Internet bubble. Following that recession, the intervening years of a growing economy (maybe I should use scare quotes there) were built on a massive growth of consumer debt fueled by a real estate boom that was itself fueled by an industry-wide relaxation of lending standards (this has lots of culprits too numerous to mention now).
When the real estate bubble came crashing down, with no new bubble yet to replace it, we found ourselves where we are now: facing the real issues of what the economic developments in the world over the past 40 years (let's say, post the Nixon-China rapprochement).
The U.S. has been shedding manufacturing jobs ever since we started opening up to more free trade with poorer countries that have real industrial capacity. The U.S. has been shedding less hands-on jobs (e.g., customer support call centers) since cheap calls to India made customer service there cheaper than call centers here. Other industries have crumbled, too: our media were overbuilt (how many people do you need to report on the same story?). Our airline industry had too much capacity, and made too many promises to its union employees. We built a prison-industrial complex that houses millions at enormous costs and further enables the public employee unions that cripple the budgets of states like California.
The real reason this recession is different than many previous recessions is that it is not subject to any quick fixes. We're out of bubbles; we're out of Fed juice (how long has the funds rate been basically at 0%?). This recession is the product of a host of 40 or more years decisions on by both private and public actors. Moreover, the growth industries - the hot startups in Silicon Valley, for example - don't need a lot of employees, they don't need a lot of people without degrees, and they don't even need many people with liberal arts degrees.
The small company I help run manages with a few full time employees, and then we contract with people all over the globe for other services. I've got a great coder in Bangladesh who reliably delivers great work for less than a tenth I'd have to pay for that work here in the U.S. And he's delighted to work for me because one job for me can be the equivalent of half a year's income for the average Bangladeshi. And I give him several a year. He's happy, I'm happy my business prospers. But what it doesn't do is create a lot of jobs here in the U.S.
Bringing things around full circle, the point of my post is that if you look at what has been going in our country and in the world economy, you should not be surprised at all by our slow recovery from the recent recession. We have too many workers, many of whom have the wrong skills for the industries that are likely to be successful in the future (which also don't need that many employees); we have a nation buried by consumer debt (that, one bright spot, finally seems to be awakening from it); and we have a government that appears incapable of dealing effectively with its long-term deficits.
That said, right now, our government's policies are not holding our recovery back. Or financial policy makers are more worried about deflation than inflation; treasury can borrow money on the cheap; tax rates are low compared to much of our history. Cutting the deficit now is largely irrelevant to addressing present economic pain.
No, the real thing holding our recovery back right now are the legacies of past decisions and the realities of the world in which we now compete.
Christopher at July 21, 2010 7:07 PM
P.S. – Please don't read my post above as an argument against dealing with the deficit or government spending. Those clearly do need to be addressed (though I strongly doubt our government is up to the task; too many vested interests in SS, Medicare, and Defense). But they aren't the source of our present problems.
Christopher at July 21, 2010 7:23 PM
That said, right now, our government's policies are not holding our recovery back. Or financial policy makers are more worried about deflation than inflation; treasury can borrow money on the cheap; tax rates are low compared to much of our history. Cutting the deficit now is largely irrelevant to addressing present economic pain.
I will call a bull shit marker on this paragraph.
P.S. – Please don't read my post above as an argument against dealing with the deficit or government spending. Those clearly do need to be addressed (though I strongly doubt our government is up to the task; too many vested interests in SS, Medicare, and Defense). But they aren't the source of our present problems.
I will argue the size of the government is a large part of our problem -- essentially any bureaucracy is a lifetime position between the rules for firing and the unions.
We need to pare the fed (and states) government(s) back to the minimum needed. Tell me how you can justify most of the departments that are there? Where are they mentioned in the Constitution?
Jim P. at July 21, 2010 7:59 PM
I will call a bull shit marker on this paragraph.
Then by all means, do. There are at least 4 straightforward claims in there you are welcome to refute.
Christopher at July 21, 2010 10:49 PM
No, they figure that the society will collapse into a feudal serfdom, and they imagine that they shall be the lords.
Posted by: brian
I've been saying that since before I graduated from high school, and people called me paranoid
lujlp at July 22, 2010 4:36 PM
Back in the 70's, we had this saying— The fact that you're paranoid doesn't mean they're not out to get you.
Crid [CridComment at gmail] at July 22, 2010 7:42 PM
That said, right now, our government's policies are not holding our recovery back.
What do you call the decision to let the Bush tax cuts expire?
What about the mandate on businesses Obamacare will/are generating?
What about the moratorium on drilling in the Gulf they are trying to impose?
What about the refusal to waive or relax rules for the Gulf cleanup?
What about the CPSC regs that are an onus on small business?
Or financial policy makers are more worried about deflation than inflation; treasury can borrow money on the cheap; tax rates are low compared to much of our history.
For now -- If Steinbrenner had died last year -- his estate would would have owed $500 million -- next year it would be $600 Million. That is on money and property that he paid taxes when he acquired it.
As for borrowing money on the cheap -- where is the money to pay it back coming from?
Cutting the deficit now is largely irrelevant to addressing present economic pain.
So when do we cut it -- when the fourth or fifth generations is paying for it?
Jim P. at July 22, 2010 7:56 PM
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