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Even Henry Blodget is beginning to understand


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In explaining the problem facing the economy to the general public, Blodget does a very good job in this article.  I'm surprised but have to give him credit -- he "gets it"...  Although -- not sure I agree with his "solution,"  I'm more in the Buffett camp, believing that any new fiscal and/or monetary policy initiatives would have little to no sustainable positive impact.

 

http://www.businessinsider.com/how-to-fix-the-economy-2011-10

 

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In explaining the problem facing the economy to the general public, Blodget does a very good job in this article.  I'm surprised but have to give him credit -- he "gets it"...  Although -- not sure I agree with his "solution,"  I'm more in the Buffett camp, believing that any new fiscal and/or monetary policy initiatives would have little to no sustainable positive impact.

 

http://www.businessinsider.com/how-to-fix-the-economy-2011-10

Wow I can not believe he wrote that. I find myself agreeing with him something I almost never do.
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I think Blodget is spot on. Based on Richard Koos work its basically a copy of his recommendations. I also think the most important part is leveling with the American people. Whats interesting is Christie has the best shot of being able to do it and still win...

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In these solutions infrastructure plays a large role.  My question is there any positive NPV projects left in the US that won't require subsidies as far the eye can see.  Most of the large projects I have heard of high speed rail and solar farms, etc. only are viable with a subsidy.  If these are the only projects available (requiring subsidies to work economically) isn't borrowing money to fund these negative NPV projects just digging the hole deeper?

 

Packer

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I dont think we need to the moon type infrastructure.

 

Simple stuff like loaning governments the money to fix bridges, roads, and the like would work. Focus on required work which must be done, just pull that demand forward a few years. Maybe 50% federal and 50% muni bond type programs available to the states. Requires that they directly hire workers at the lowest wages possible. Reduces unemployment, improves infrastructure on the cheap, vs. waiting for a booming economy and hire tax revenues.

 

Also low hanging fruit like a bank which finances winterizing old buildings and homes. Simple improvements that pay for themselves and only require someone who can commit to long term 10 year financing. Assumptions need to be conservative and savings real. Perhaps direct savings could be received from the power company to the bank for repayment.

 

Introducing rail and other things is a sure fire way to turn this into a partisan fight vs. a jobs / recovery act.

 

Blodgett must have just interviewed Koo and translated his prescription into Joe Six Pack Speak.

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Sounds good where do we sign up.

 

Packer

 

Unfortunately his political predictions are likely right lol. We will like get a GOP win, tax cuts, rate cuts, and more contraction. I feel like Peter Schiff, its weird having the politics and economics mostly right, but not having the proper portfolio positioning lol.

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Here is what I don't get about the idea that fixing a bridge pays for itself:

 

The GDP (movement of goods and services) that the replacement/fixed bridge helps facilitate is likely exactly what it was before the repairs/replacement happened. 

 

I see more debt but no additional utility.  So I don't know how it pays for itself.

 

I can see how it is necessary... but I don't see it paying for itself.  It's the same throughput it produced for the past 50 years.

 

Still better than pissing money away without any lasting benefit -- yes I see that.  However I don't see the debt being paid off by the virtue of paying expensive maintenance on a bridge that is already carrying traffic. 

 

Instead, what I see is a deficit that is far worse than it looks on paper because we are delaying capital expenditures.  Meeting that deficit head-on is something that needs to happen eventually, but paying for itself?  If we can't pay for things (running deficits) using the bridge that is still working thus far, how will having yet more debt expense with the exact same bridge throughput pay for itself?

 

I agree, the bridge has to be fixed or things go down the toilet quickly.  But how does it pay for itself?

 

I would think you get more value by stretching that bridge right down to the very last pound of traffic it can support before tearing it down and rebuilding.  Obviously you run the risk of the bridge falling down and costing lots of throughput, but in theory if you could time it precisely I would think delaying as long as possible is the best approach.  Not a realistic approach, but you'd be getting the most mileage out of the bridge per dollar already spent the last time it was built/repaired.

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Here is what I don't get about the idea that fixing a bridge pays for itself:

 

The GDP (movement of goods and services) that the replacement/fixed bridge helps facilitate is likely exactly what it was before the repairs/replacement happened. 

 

I see more debt but no additional utility.  So I don't know how it pays for itself.

 

I can see how it is necessary... but I don't see it paying for itself.  It's the same throughput it produced for the past 50 years.

 

Still better than pissing money away without any lasting benefit -- yes I see that.  However I don't see the debt being paid off by the virtue of paying expensive maintenance on a bridge that is already carrying traffic. 

 

Instead, what I see is a deficit that is far worse than it looks on paper because we are delaying capital expenditures.  Meeting that deficit head-on is something that needs to happen eventually, but paying for itself?  If we can't pay for things (running deficits) using the bridge that is still working thus far, how will having yet more debt expense with the exact same bridge throughput pay for itself?

 

I agree, the bridge has to be fixed or things go down the toilet quickly.  But how does it pay for itself?

 

I would think you get more value by stretching that bridge right down to the very last pound of traffic it can support before tearing it down and rebuilding.  Obviously you run the risk of the bridge falling down and costing lots of throughput, but in theory if you could time it precisely I would think delaying as long as possible is the best approach.  Not a realistic approach, but you'd be getting the most mileage out of the bridge per dollar already spent the last time it was built/repaired.

 

That is exactly what the Japanese did and see what that got them - 200% debt to GDP. Let's not go down the same bridge, Mr Obama.

 

This is the quandary facing the politicians in the US (and Europe). All the sensible projects that will provide future returns to the economy have too long time horizons (like most good investments) and will not benefit their election goals.

 

The proposed Greek bailout reeks of the same bad logic. Say, they advance Greece the short term funding they need to tide them over for a few months and at the sam time ask existing bondholders to exchange their holdings into much longer dated holdings. Greece's structural problem remains (the debt is too much for the economy to bear) so yields on their bonds stay elevated. The private bondholders (lots of banks presumably) will then suffer losses on the new long dated bonds when they are marked to market yields. So, they still need to be bailed out to shore up their capital base - effectively resulting in two bailouts instead of one (if they simply allow Greece to deafault/restructure and then shore up the banks that take a hit).

 

With overleveraged domestic economies, the West has limited options to stimulate domestic growth through stimulus. Export growth would be the solution - but who do you export to when everyone is trying to deleverage?

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Here is what I don't get about the idea that fixing a bridge pays for itself:

 

The GDP (movement of goods and services) that the replacement/fixed bridge helps facilitate is likely exactly what it was before the repairs/replacement happened. 

 

I see more debt but no additional utility.  So I don't know how it pays for itself.

 

I can see how it is necessary... but I don't see it paying for itself.  It's the same throughput it produced for the past 50 years.

 

Still better than pissing money away without any lasting benefit -- yes I see that.  However I don't see the debt being paid off by the virtue of paying expensive maintenance on a bridge that is already carrying traffic. 

 

Instead, what I see is a deficit that is far worse than it looks on paper because we are delaying capital expenditures.  Meeting that deficit head-on is something that needs to happen eventually, but paying for itself?  If we can't pay for things (running deficits) using the bridge that is still working thus far, how will having yet more debt expense with the exact same bridge throughput pay for itself?

 

I agree, the bridge has to be fixed or things go down the toilet quickly.  But how does it pay for itself?

 

I would think you get more value by stretching that bridge right down to the very last pound of traffic it can support before tearing it down and rebuilding.  Obviously you run the risk of the bridge falling down and costing lots of throughput, but in theory if you could time it precisely I would think delaying as long as possible is the best approach.  Not a realistic approach, but you'd be getting the most mileage out of the bridge per dollar already spent the last time it was built/repaired.

 

That is exactly what the Japanese did and see what that got them - 200% debt to GDP. Let's not go down the same bridge, Mr Obama.

 

This is the quandary facing the politicians in the US (and Europe). All the sensible projects that will provide future returns to the economy have too long time horizons (like most good investments) and will not benefit their election goals.

 

The proposed Greek bailout reeks of the same bad logic. Say, they advance Greece the short term funding they need to tide them over for a few months and at the sam time ask existing bondholders to exchange their holdings into much longer dated holdings. Greece's structural problem remains (the debt is too much for the economy to bear) so yields on their bonds stay elevated. The private bondholders (lots of banks presumably) will then suffer losses on the new long dated bonds when they are marked to market yields. So, they still need to be bailed out to shore up their capital base - effectively resulting in two bailouts instead of one (if they simply allow Greece to deafault/restructure and then shore up the banks that take a hit).

 

With overleveraged domestic economies, the West has limited options to stimulate domestic growth through stimulus. Export growth would be the solution - but who do you export to when everyone is trying to deleverage?

 

I don't think the idea is that the bridge pays for itself, but rather that employing labor to construct that bridge results in a multiplier effect that counteracts the destruction in demand and private-sector wide deleveraging that has a reverse multiplier effect.  Therefore, output that would evaporate in its entirety only evaporates by 25% or something like that.

 

Richard Koo would argue that if the government does not use its ability to borrow cheaply and build that bridge, GDP will collapse at a precipitous rate that actually causes deficits to increase even more rapidly, thereby getting you to a situation where both GDP has collapsed and government debt to GDP has increased markedly. 

 

Obviously, it's better to put money into projects that actually will be beneficial to the economy in the long run.

 

According to the BOJ, total debt to GDP continued to go up until the late 90s, and then it finally started to go down despite government debt to GDP climbing all the way up to 200%.  Of course, the global recession has probably caused total debt to GDP to go up again.

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I don't think the idea is that the bridge pays for itself, but rather that employing labor to construct that bridge results in a multiplier effect that counteracts the destruction in demand and private-sector wide deleveraging that has a reverse multiplier effect.  Therefore, output that would evaporate in its entirety only evaporates by 25% or something like that.

 

Richard Koo would argue that if the government does not use its ability to borrow cheaply and build that bridge, GDP will collapse at a precipitous rate that actually causes deficits to increase even more rapidly, thereby getting you to a situation where both GDP has collapsed and government debt to GDP has increased markedly. 

 

Obviously, it's better to put money into projects that actually will be beneficial to the economy in the long run.

 

According to the BOJ, total debt to GDP continued to go up until the late 90s, and then it finally started to go down despite government debt to GDP climbing all the way up to 200%.  Of course, the global recession has probably caused total debt to GDP to go up again.

 

The question is how effective is the multiplier effect, especially given the likelihood that some portion of spending leaks out as payment for inputs that are imported.

 

The problem I have with Koo's analysis is we don't know how the counterfactual would have played out. We do not know, for example, whether Japan would have fared better if they had simply let the forces of creative destruction work. The downturn would have been severe but it might have been followed by an equally sharp rebound.

 

There have been cases of emerging market economies that have had to take tough IMF medicine (Latam and South East Asian countries in the 80s and 90s) in response to debt problems. I believe they experienced balance sheet recessions too. These countries were not afforded the luxury of stimulus spending; instead fiscal austerity was prescribed; yet they eventually recovered in relatively short order in some cases.

 

If Richard Koo had discussed these other cases and explained how they fit into his theory, it would make his analysis much more compelling. As it is, his work stands on a sample of one - it sounds logical and plausible but it is far from proven imo.

 

I have no problem with stimulus spending per se. It is fine if you are doing it from a position of fiscal strength (which is what Singapore and HK did in 1998); my concern is when you try to do it from a weakened position because of the unintended consequences that may develop.

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I suppose if we went through a period of building more houses than immediately needed made us feel good for a while, then fixing more bridges than immediately needed would feel similar.  And the types of people who are sitting on their butts after building too many houses are now the very people who could do work on bridges (or other government building renovations, like perhaps adding insulation or something where it could pay off in energy savings).

 

Then perhaps when homebuilding finally comes back there will be a labor shortage in construction as these govt projects would perhaps overlap homebuilding until completed.

 

Although instead of increasing the deficit to do this I feel they should raise taxes on the rich (who aren't investing the money anyhow).  This argument that higher taxes are going to keep them from investing doesn't make sense -- their taxes are low now and yet they are not investing.  Ireland has like an 11% or 12% corporate tax and they are not booming.  Low taxes don't make people open factories and create jobs.

 

 

 

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I suppose if we went through a period of building more houses than immediately needed made us feel good for a while, then fixing more bridges than immediately needed would feel similar.  And the types of people who are sitting on their butts after building too many houses are now the very people who could do work on bridges (or other government building renovations, like perhaps adding insulation or something where it could pay off in energy savings).

 

Then perhaps when homebuilding finally comes back there will be a labor shortage in construction as these govt projects would perhaps overlap homebuilding until completed.

 

Although instead of increasing the deficit to do this I feel they should raise taxes on the rich (who aren't investing the money anyhow).  This argument that higher taxes are going to keep them from investing doesn't make sense -- their taxes are low now and yet they are not investing.  Ireland has like an 11% or 12% corporate tax and they are not booming.  Low taxes don't make people open factories and create jobs.

Eric as long as pretty girls find men with money more interesting than men without I think the wealth creators will pile up the dough as quick as they can regardless of the marginal tax rate.
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I don't think the idea is that the bridge pays for itself, but rather that employing labor to construct that bridge results in a multiplier effect that counteracts the destruction in demand and private-sector wide deleveraging that has a reverse multiplier effect.  Therefore, output that would evaporate in its entirety only evaporates by 25% or something like that.

 

Richard Koo would argue that if the government does not use its ability to borrow cheaply and build that bridge, GDP will collapse at a precipitous rate that actually causes deficits to increase even more rapidly, thereby getting you to a situation where both GDP has collapsed and government debt to GDP has increased markedly. 

 

Obviously, it's better to put money into projects that actually will be beneficial to the economy in the long run.

 

According to the BOJ, total debt to GDP continued to go up until the late 90s, and then it finally started to go down despite government debt to GDP climbing all the way up to 200%.  Of course, the global recession has probably caused total debt to GDP to go up again.

 

The question is how effective is the multiplier effect, especially given the likelihood that some portion of spending leaks out as payment for inputs that are imported.

 

The problem I have with Koo's analysis is we don't know how the counterfactual would have played out. We do not know, for example, whether Japan would have fared better if they had simply let the forces of creative destruction work. The downturn would have been severe but it might have been followed by an equally sharp rebound.

 

There have been cases of emerging market economies that have had to take tough IMF medicine (Latam and South East Asian countries in the 80s and 90s) in response to debt problems. I believe they experienced balance sheet recessions too. These countries were not afforded the luxury of stimulus spending; instead fiscal austerity was prescribed; yet they eventually recovered in relatively short order in some cases.

 

If Richard Koo had discussed these other cases and explained how they fit into his theory, it would make his analysis much more compelling. As it is, his work stands on a sample of one - it sounds logical and plausible but it is far from proven imo.

 

I have no problem with stimulus spending per se. It is fine if you are doing it from a position of fiscal strength (which is what Singapore and HK did in 1998); my concern is when you try to do it from a weakened position because of the unintended consequences that may develop.

 

The beauty of Koo and Europe is you do have counterfactuals. Austerity was tried in Japan in various administrations, and is being tried in Europe and the UK. Not surprisingly a cut in government spending leads to recession, less tax revenues, more spending on entitlements, and higher Debt to GDP levels because of less GDP.

 

His argument is pretty convincing if anyone cares to listen to it. I have yet to see where full blown austerity has work or even been politically viable. Seems to me that the people eventually rise up and occupy wall street, or some European square. Economics has a hint of politics in it, and Austerity fails the politically via test in most places. The only place it appears to be going ok is Ireland and Lewis thinks its because they have a culture which has suffered for hundreds of years.  Its clean and neat and sounds great but does it work, and more importantly will it work her?  I dont think Americans have the stomach for it but we shall see. Obama is wrong or off on so many things, but is the one standing between the Elites and the pitchforks, I think he will get out of the way if its politically viable for him.

 

 

---

 

Eric think of a Roof. Your house needs a new roof and a bathroom remodel. Your roof leaks and you have a bathroom from the 1965. Would you get the updates when a huge percentage of construction workers were offline and willing to take lower rates, and when interest rates were at 2% for 10 years. Or would you wait for more expensive happy times. The stuff has to get done either way, and your neighbor took a chance and his roof fell in last week. Also what if the city had a fund and you had to spend money to help the out of work workers. Wouldnt you rather put them to work doing things that needed to be done anyway.

 

That is what the Gov is facing inmo. We have crappy roofs and bathrooms. That need to be fixed, we can continue to transfer money to out of work workers or can pay them to fix things when we have cheap salaries and low rates.

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The beauty of Koo and Europe is you do have counterfactuals. Austerity was tried in Japan in various administrations, and is being tried in Europe and the UK. Not surprisingly a cut in government spending leads to recession, less tax revenues, more spending on entitlements, and higher Debt to GDP levels because of less GDP.

 

His argument is pretty convincing if anyone cares to listen to it. I have yet to see where full blown austerity has work or even been politically viable. Seems to me that the people eventually rise up and occupy wall street, or some European square. Its clean and neat and sounds great but does it work? Some prefer dogma and economic ideologies though...

 

 

No one is doubts that austerity causes more pain and higher debt ratios in the short term. The question I posed was whether full blown austerity is a better solution than what Koo recommends. Japan tried the "muddling through" approach that Europe and the US are trying now. The fact that govt debt to GDP ratio in Japan ballooned shows that they did employ massive countercyclical spending and it didn't work. Koo explains this by saying things would have been worse without this spending. This is the counterfactual that we don't know.

 

I gave the examples of such counterfactuals, i.e. the emerging countries that did pursue full-blown austerity under IMF supervision. They did not suffer lost decades and were back to healthy growth rates in relatively short order. If Koo had taken the trouble to examine these cases and offer an explanation of why austerity worked in contradiction to his theory, I would be more convinced. Otherwise, his work is prone to confirmation bias.

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I suppose if we went through a period of building more houses than immediately needed made us feel good for a while, then fixing more bridges than immediately needed would feel similar.  And the types of people who are sitting on their butts after building too many houses are now the very people who could do work on bridges (or other government building renovations, like perhaps adding insulation or something where it could pay off in energy savings).

 

The question is whether the country as a whole benefited from the house building party that made everyone feel good while it lasted. This is the problem when you have a govt that reflexively feels it must keep people happy all the time. It is not so different from feeding us Big Macs and McFlurries all the day long and worrying about the heart bypasses later on.

 

Although instead of increasing the deficit to do this I feel they should raise taxes on the rich (who aren't investing the money anyhow).  This argument that higher taxes are going to keep them from investing doesn't make sense -- their taxes are low now and yet they are not investing.  Ireland has like an 11% or 12% corporate tax and they are not booming.  Low taxes don't make people open factories and create jobs.

 

I agree that the rich are not going to stop investing just because taxes got higher. But this does not mean taxes do not matter. If tax rates are high enough, the rich will get more creative to avoid them. Globalisation has made this easier and it has also made relative tax rates matter. For many years Ireland prospered when relative tax rates were low. You can't just pick two data points (low tax rates and economic malaise in Ireland) and assume lack of causality between the two when there are so many variables at work.

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I suppose if we went through a period of building more houses than immediately needed made us feel good for a while, then fixing more bridges than immediately needed would feel similar.  And the types of people who are sitting on their butts after building too many houses are now the very people who could do work on bridges (or other government building renovations, like perhaps adding insulation or something where it could pay off in energy savings).

 

Then perhaps when homebuilding finally comes back there will be a labor shortage in construction as these govt projects would perhaps overlap homebuilding until completed.

 

Although instead of increasing the deficit to do this I feel they should raise taxes on the rich (who aren't investing the money anyhow).  This argument that higher taxes are going to keep them from investing doesn't make sense -- their taxes are low now and yet they are not investing.  Ireland has like an 11% or 12% corporate tax and they are not booming.  Low taxes don't make people open factories and create jobs.

Eric as long as pretty girls find men with money more interesting than men without I think the wealth creators will pile up the dough as quick as they can regardless of the marginal tax rate.

 

I just want to be interviewed by Poppy Harlow before she loses her figure.

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Guest Hester

I just want to be interviewed by Poppy Harlow before she loses her figure.

 

I think there is a long line of pretty blonde women to replace her when that tragic event happens.

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For many years Ireland prospered when relative tax rates were low. You can't just pick two data points (low tax rates and economic malaise in Ireland) and assume lack of causality between the two when there are so many variables at work.

 

Actually that's exactly what I was driving at.  Tax rates alone don't determine prosperity -- it's these things like "final demand" that determine whether anyone is in the mood to create factories and create jobs.

 

Thus the argument that lower taxes (the Republican argument) will stimulate demand is kinda strange given that they're talking about lower taxes for the people who have so much money they don't spend all their income.

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I just want to be interviewed by Poppy Harlow before she loses her figure.

 

I think there is a long line of pretty blonde women to replace her when that tragic event happens.

 

Relief.  I just need to make sure my cash pile grows to the 12 inch equivalent (whatever that means in terms of future buying power).

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The beauty of Koo and Europe is you do have counterfactuals. Austerity was tried in Japan in various administrations, and is being tried in Europe and the UK. Not surprisingly a cut in government spending leads to recession, less tax revenues, more spending on entitlements, and higher Debt to GDP levels because of less GDP.

 

His argument is pretty convincing if anyone cares to listen to it. I have yet to see where full blown austerity has work or even been politically viable. Seems to me that the people eventually rise up and occupy wall street, or some European square. Its clean and neat and sounds great but does it work? Some prefer dogma and economic ideologies though...

 

 

No one is doubts that austerity causes more pain and higher debt ratios in the short term. The question I posed was whether full blown austerity is a better solution than what Koo recommends. Japan tried the "muddling through" approach that Europe and the US are trying now. The fact that govt debt to GDP ratio in Japan ballooned shows that they did employ massive countercyclical spending and it didn't work. Koo explains this by saying things would have been worse without this spending. This is the counterfactual that we don't know.

 

I gave the examples of such counterfactuals, i.e. the emerging countries that did pursue full-blown austerity under IMF supervision. They did not suffer lost decades and were back to healthy growth rates in relatively short order. If Koo had taken the trouble to examine these cases and offer an explanation of why austerity worked in contradiction to his theory, I would be more convinced. Otherwise, his work is prone to confirmation bias.

 

As I understand it, and I may be wrong about this since I have not read Koo's book, the Asian and Latin American financial crises would not be considered balance sheet recessions under Koo's definition, as they were not situations where the entire private sector was minimizing debt despite having zero-cost money.  Instead, there were massive defaults, and the costs to borrow skyrocketed (more similar to Greece than the US).  But to be frank, that discussion is beyond my ken, as I am not too familiar with the details of those crises.  Nevertheless, your point is well taken.

 

The problem for anyone who advocates Koo's viewpoint is that the most similar counterfactual situation is the Great Depression.  And it is very difficult, if not impossible, to prove that a second Great Depression would have occurred without the "stimulus" that has been ongoing.  It's the curse that goes along with preventing disaster by taking drastic action.  For example, Tim Geithner and Hank Paulson will forever be vilified by large segments of the population because those people cannot imagine or do not believe counterfactually that a second Great Depression would have occurred had TARP not been put into place. 

 

The fact that government debt to GDP ratio in Japan ballooned shows only that there was massive countercyclical spending by the govt, not that it didn't work.  If Japan had subscribed to liquidationist theory (a less sugarcoated term for full blown austerity), is it clear that they would have gotten a purging and then bounce back of the economy?

 

Andrew Mellon said the following while he was Treasury Secretary under Hoover: "[L]iquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

 

A lot of people believe that Mellon was right.  I (and most Keynesians) believe he was wrong.  In my view, we would get a massive and prolonged worldwide unemployment in the vein of the Great Depression that would cause huge social unrest and that would have resulted in lost generations of people.  The productive capacity of the global economy would actually shrink and be less than it could otherwise be because of this shock to the system.  The geopolitical ramifications of having high unemployment and increased poverty across the entire world (the assumption being that if US unemployment went to 25%, the world economy would collapse as well, as decoupling is an illusion) are unknowable, but I doubt they would be good.  (Do we want real class warfare?  Do we want people coming into power that would institute new "cultural revolutions"?)

 

Ultimately, it comes down not to whether government is an efficient spender of capital -- it isn't.  But the question is whether there is a role for government to play in counteracting the reverse mutiplier when you have worldwide, Minsky/Fisher debt-deflation, and where the government can borrow at zero cost, which only seems to occur when the government can print money without causing a collapse of the economy.

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I suppose if we went through a period of building more houses than immediately needed made us feel good for a while, then fixing more bridges than immediately needed would feel similar.  And the types of people who are sitting on their butts after building too many houses are now the very people who could do work on bridges (or other government building renovations, like perhaps adding insulation or something where it could pay off in energy savings).

 

The question is whether the country as a whole benefited from the house building party that made everyone feel good while it lasted. This is the problem when you have a govt that reflexively feels it must keep people happy all the time. It is not so different from feeding us Big Macs and McFlurries all the day long and worrying about the heart bypasses later on.

 

Your characterization of the motivation behind the bridge building project is incorrect.  The point is not to make people feel good or to instill confidence. 

 

The government is actually trying to spend money in a way that will counteract the leakages in the system that result from the balance sheet recession effect.  This is why broad based tax cuts won't work.  With such tax cuts, a large percentage of that money goes back to people who likely will just put that cash back into the banks.  On the other hand, when a government project is directly linked to employing people who have been out of work, it is far more probable that the money will be recirculated via spending by those newly employed persons.  No doubt there will be leakages along the way, but the multiplier is probably better by building the bridge than by doling out the money willy nilly through undirected tax cuts. 

 

So the proper analogy for government action now is not feeding the people Big Macs in denial of the heart attack to soon come.  Instead, it is like pumping the patient who has just suffered a heart attack -- due to all the Big Macs he ate -- with meds that save his life and that keep him going until his body recovers and that gives him time to change his diet in a way that unclogs his arteries.

 

In my view, the best way to stimulate is through tax expenditure programs and public-private partnerships that are directed towards reducing unemployment but that keep the actual spending decision in the private sector rather than with the government.  The bonus depreciation tax relief put in place by President Bush, for example, was a good idea, IMO.  There is a potential for graft and incompetence, however, with the public-private partnerships that must be closely monitored (see Solyndra). 

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I suppose the government could partner with my local utility to send a guy out to figure why my energy bill is much higher than that of my neighbor's.  Then the government could subsidize the cost of getting a solution in place (new windows or insulation.  new refrigerator.  new furnace). 

 

Perhaps the government could enter a public/private partnership with lenders to finance these projects for the homeowner.  This is necessary because the homeowner doesn't have enough cash to do the project without help, and banks won't lend to homeowners who are in a financial pinch.  Something akin to Fannie Mae that buys loans underwritten to certain guidelines.

 

The government borrows at such a low rate that it should be something that pays for itself, maybe even netting a profit.  The homeowner can service the new debt out of the cash flows of the project (lower utility bill).

 

And the subsidy only goes to homeowners that have the worst energy efficiency (per the records of the utility company).

 

It would stimulate sales of items hit hard from the housing construction downturn, and employ laborers idled by the same.  It also dovetails with the nation's goal of energy independence.

 

Perhaps it also generates fee income for banks that underwrite the loans -- instead of higher account fees, maybe this kind of a program.

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