Deficit Spending

83 thoughts on “Deficit Spending”

1. brava!

2. Word.
   The standard argument against Keynesian stimulus is that it is wielded frivolously against recessions which should be tolerated rather than fought, and doing so does long term damage to the economy. I agree with that argument, which means the argument for fiscal stimulus paid for by deficit spending then comes down to the question: is this the big one?
   Anyone who thinks that this recession and credit crisis is not “the big one”, please raise your hand.

3. Sadly there are many people in your once-great country who are hostile to bog-standard Keynesian economics. Krugman is working on a new edition of The Return of Depression Economics which may do something to dispel the ignorance. Maybe as you say he doesn’t need any validation from you, Hilzoy, but I think his message needs all the amplification it can get. There’s going to be plenty of noise coming from the opposition. So keep up the good work.

4. The fact that every single debate moderator effectively endorsed this foolishness makes me worry that the Very Serious People are going to make it tremendously difficult for the next president to address our economic troubles.

5. And by “the next president” I mean President Obama, since McCain has made clear that he’s determined to worsen the economy if he gets into the White House — well, as determined as he can be, since he could easily come up with a completely new course of action at any moment.

6. “And this is also a good time to engage in some serious infrastructure spending…”
   IOW, “Yehaw! While we’re spending money like water, here’s MY wish list! What the Hell, I’ll be dead when the bill comes due.”
   The standard argument against Keynesian deficit spending is that, in practice, it’s just an excuse, and the people doing it have no intention whatsoever of not doing it when it’s not needed. That instead of alternating deficit spending, and paying down deficits, you end up deficit spending all the time.
   Because, of course, deficit spending is politically rewarding, allowing as it does for buying votes without annoying people with the taxes to pay for the spending, while paying down deficits is political suicide in a democracy.
   It’s great that somebody is willing to loan you the money for chemo, but, PLEASE, skip the sports car and vacation home in Hawaii.

7. If there is any concern about cutting spending, I would suggest lopping 40% off our military budget. We already spend 10 times what China does. Decreasing military spending by $250B would help pay for the domestic spending Krugman suggests.

8. Oh, and it’s a boy, 8lbs, 21″. No wonder my 80 lb wife looked like she was carrying twins!

9. “We already spend 10 times what China does.”
   I’d be cool with that, but don’t fool yourself when it comes to China; Most of their military spending is off budget, they’ve got a REALLY goofy way of funding the military by having the military run companies which are then guaranteed profits even if they poison baby formula.

10. 
    The fact that every single debate moderator effectively endorsed this foolishness makes me worry that the Very Serious People are going to make it tremendously difficult for the next president to address our economic troubles.
    
    The VSP’s are fighting the last war, which in this case means the inflation of the 1970s and early 1980s.
    In 1929 it had only been 56 years since the last great meltdown in 1873. By way of contrast, for us today 1929 is 79 years past, and that in a culture whose sense of history extends back a couple of decades at best.
    There has been a massive loss of generational memory as the people who lived through the 1930s have passed on or aged into senility. As a result there aren’t enough VSPs left in positions of influence who have any real appreciation of what a deflationary spiral looks like.

11. Oh, and it’s a boy, 8lbs, 21″.
    Congratulations and best wishes to everyone in your family Brett.
    
    The standard argument against Keynesian deficit spending is that, in practice, it’s just an excuse, and the people doing it have no intention whatsoever of not doing it when it’s not needed. That instead of alternating deficit spending, and paying down deficits, you end up deficit spending all the time.
    
    That would explain the horrible red ink under the Clinton administration then.

12. That instead of alternating deficit spending, and paying down deficits, you end up deficit spending all the time.
    I remember when Bill Clinton went on a wild spending orgy, ballooning the deficit to vast proportions. Oh, wait, that never happened. The last time we had a Democrat in the white house, he buckled down, cut spending, and dramatically shrank the deficit.

13. I would extend the “do not want to hear about the need to stop spending” from those who strongly support the iraqi war. Its huge, expensive, and not producing much return, economically or otherwise. I recall that article a while back that talked about all the things that could have been done with the iraq war money. Those supporting the war have no business critiquing others for wasteful ways.

14. Spending is only part of the solution, of course.
    We could also raise taxes on those who have benefitted from the insane policies of 2001-2008. And put a transaction tax on stock trades. And confiscate the estates of every executive of every bank and insurance entity on Wall Street.
    The choice is NOT to either cut spending to the bone, OR run trillion-dollar deficits; we could ALSO increase spending AND taxes to pay for that spending.

15. Military spending is government spending. Never mind that deficit hawks hardly ever acknowledge that. Here’s the question: is this the wrong time to cut back on military spending?
    After all, millions of people in and out of uniform make their living off the Pentagon. Cutting the Pentagon budget means the same thing as cutting any budget: buying fewer things and employing fewer people. At a time when the federal government must “stimulate the economy”, how wise would that be?
    As a lay Keynesian, I am perfectly willing to continue funding the military-industrial complex as a jobs program. I think we would be better off employing all those people to do different jobs, of course. Even paying them to build Pyramids in the Arizona desert would be more productive (meaning, less counterproductive) than paying them to keep occupying Iraq. Better yet might be Keynes’s old suggestion: pay them to bury banknotes in deep holes in the ground, and allow the free market to create an industry out of digging them up again. Even better suggestions may occur to the reader. What would not be wise is a massive reduction in military spending. Laying off the Iraqui army all at once didn’t work out very well.
    But let’s make sure we don’t let the people who are simultaneously deficit hawks and just plain hawks have it both ways. That’s all I ask.
    –TP

16. Here’s the question: is this the wrong time to cut back on military spending?
    Different types of spending are not equivalent. Dollars spent on the military provide relatively little benefit to taxpayers: spending ten times as much as China doesn’t really make us any safer than if we only spent five times as much as China. In contrast, investing in R&D for alternative energy production can have a much higher ROI.
    Laying off the Iraqui army all at once didn’t work out very well.
    I’m not too worried that the US Army will respond to a DOD budget cutback by forming insurgent militias dedicated to overthrowing the government. Is that a concern you seriously have?

17. We’re going to get in trouble because of the argument that it’s irresponsible to spend while times are good; the GOP is going to hammer us on it. It’s too intuitive.
    What we’re going to have to do — and it will be difficult — is frame the argument as: if we had spent our money responsibly when we were up, then we wouldn’t be in a position now of choosing between bad or worse.
    Or: The Republicans Party is a bunch of fair-weather friends; the last Democratic President pushed the money from boom times back into the economy and gave us an even bigger boom, whereas the Republican President took the boom profits for his rich friends, and as a result the economy tanked — but you’re the ones that have to tighten your belts now?

18. Here’s the Nixonland version of my argument: everyone was crazy for LBJ’s policies when times were good, but as things started to go bad everyone turned on each other in the blink of an eye.
    Democrats are up now, but the threat isn’t that we’ll be blamed for the coming crash so much as that we stand to lose more if people turn on each other like they did in the late 60s. The GOP knows that and they’ll be stoking that fear for all it’s worth.
    Think Watts under a black President; that’s the scenario I’m worried about.

19. Dollars spent on the military provide relatively little benefit to taxpayers
    To be more specific, military funding spent on domestic investments isn’t particularly bad. Money spent on things that get blown up or that gets spent overseas is bad because there’s zero return; especially bad in our highly-leveraged economy where $1 is worth much more than its face value in GDP.
    If the money is going to training, benefits for soldiers’ families, veteran’s care, construction projects, domestic bases, or R&D, it’s a good investment, a political winner, and more importantly just the right thing to do for soldiers. Unfortunately, that’s not where much of it is going right now.

20. I’m not too worried that the US Army will respond to a DOD budget cutback by forming insurgent militias dedicated to overthrowing the government. Is that a concern you seriously have?
    Hyperbole much, Turb? I think Tony was just saying that dumping a bunch of unemployed soldiers on a strained economy is bad policy, and he pointed to recent experience in Iraq as empirical support. It doesn’t have to cause a revolution to be a bad idea; it’s a good analogy.

21. Different types of spending are not equivalent.
    Yes and no. From a purely economic point of view, whether you pay people to build anti-anti-missile missiles* or you pay them to pray against an ICBM attack, the economic stimulus is about the same. The military efficacy may be about the same, too, but that’s a different question. Paying people to build wind farms and smart power grids is more useful than either of the above, of course. But whether or not you lay them off from “defense” first, or merely re-label them, seems unimportant to me.
    I’m not too worried that the US Army will respond to a DOD budget cutback by forming insurgent militias dedicated to overthrowing the government.
    Neither am I, though the case of Tim McVeigh gives me a little pause. But my point is that un-employing soldiers is hardly an economic stimulus unless “the free market” stands ready to snap them up.

22. “…while paying down deficits is political suicide in a democracy.”
    And that’s why Bill Clinton had such high popularity ratings when he left office. Sure, Brett.
    Non-sequitur: my comments may be more infrequent, or, who knows, more frequent, for a while, since about half an hour ago I fell, and am now trying to determine if I just badly sprained my foot, or broke it. May go to emergency room (again!) in a couple of hours, when my sweetie comes home, if it isn’t clearer by then.

23. From Seb Mallaby, I’m not sure why we can’t still try this:
    http://www.washingtonpost.com/wp-dyn/content/article/2008/09/07/AR2008090701950.html
    “Tax hikes, in other words, are not automatic job destroyers. Joel Slemrod of the University of Michigan, a top expert on this subject, says bluntly, “There is no compelling evidence that a low-tax strategy is better for the economy over the medium or long run.” Just look at the Clinton era. In 1993, the top marginal rate (income tax plus Medicare) was raised to 42.5 percent — the same rate that Obama proposes but minus the candidate’s proposed increase in the payroll tax. During the rest of the Clinton period, the economy generated millions of new jobs, and careful academic postmortems find that the 1993 tax hike caused little to no damage to the incentives of top earners.”
    In other words, offset spending a bit with a tax hike. And look:
    Via Across The Curve, two dreadful numbers from Bloomberg:
    http://www.bloomberg.com/apps/news?pid=20601109&sid=anUDEEEP1_M0&refer=exclusive
    “The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion. ”
    “The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.”
    We’ve come out of worse holes, so it’s not hopeless. But we should be careful with the stimulus package to invest as much of it as possible, as opposed to simply priming the pump, if that makes sense.

24. This is not rocket science. It’s bog-standard Keynesian economics. People who comment on economics and politics should either make some effort to understand it or hold their peace.
    Krugman may be correct in his analysis — and he’s an unquestionably great economist — but this post elides the real issues in dispute. By the way, “bog-standard Keynesian economics” is (1) a bastardization of what Keynes really said and (2) hugely oversimplified.*
    The problem with increased government spending on top of already-high deficits is that the government starts competing more and more for debt with the public sector. Interest rates go up, counteracting any stimulus effect of the spending (which, aside from unemployment benefits, is almost always grossly overstated). Moreover, this puts upward pressure on the money supply, creating a risk of inflation, currency devaluation, and sustained malaise (e.g., stagflation & the like).
    Some spending is clearly a good idea. But spending more on infrastructure seems to be a closer call.
    *Krugman wouldn’t regard himself as a Keynesian economist, as that term is understood and used, and almost certainly would argue that an idea is a good one because its “bog-standard Keynesian economics”. (At least, the Krugman who wrote the intro to Keynes General Theory wouldn’t have said that ….) Krugman ould probably say instead that everyone is a Keynesian as the term “should be understood.”

25. To be more specific, military funding spent on domestic investments isn’t particularly bad. Money spent on things that get blown up or that gets spent overseas is bad because there’s zero return; especially bad in our highly-leveraged economy where $1 is worth much more than its face value in GDP.
    This doesn’t make any sense at all, Adam. Military funding on domestic investments goes to people who build the domestic investments. Money spent on things that get blown up overseas results in money being provided to people who build things that get blown up overseas. In either case, the private sector gets the money in some fashion and there is some stimulus effect.

26. Hyperbole much, Turb? I think Tony was just saying that dumping a bunch of unemployed soldiers on a strained economy is bad policy, and he pointed to recent experience in Iraq as empirical support.
    Iraq’s post-invasion economy is so different than our economy that I think this sort of comparison obscures much more than it clarifies. I’ll spare you a long listing of the major differences (unless you’d like to write it), but suffice it to say, if you’re not worried about out-of-work soldiers leading uprisings, there’s not much the decision to disband the Iraqi Army tells us that we don’t already know. And yes, putting people employed by the defense establishment out of work is a trivially obvious effect of significantly cutting defense spending that doesn’t need to be justified by inappropriate analogies to radically different situations.
    Neither am I, though the case of Tim McVeigh gives me a little pause. But my point is that un-employing soldiers is hardly an economic stimulus unless “the free market” stands ready to snap them up.
    There is no shortage of people just as deranged as McVeigh is who have never spent a day in the US military. I don’t think we can reason about the behavior of a million plus servicemen based on the behavior of one homicidal nutjob who happened to have been in the military.

27. This doesn’t make any sense at all, Adam. Military funding on domestic investments goes to people who build the domestic investments. Money spent on things that get blown up overseas results in money being provided to people who build things that get blown up overseas. In either case, the private sector gets the money in some fashion and there is some stimulus effect.
    Sorry, I should have said infrastructure investments. I think everything I listed — with the possible exception of benefits — falls in that category.
    Spending money to manufacture a bullet doesn’t have any clear production-efficiency benefits, particularly since much of the manufacturing capacity presumably already exists. The marginal cost is very high relative to the gains, at any rate.

28. Spending money to manufacture a bullet doesn’t have any clear production-efficiency benefits, particularly since much of the manufacturing capacity presumably already exists. The marginal cost is very high relative to the gains, at any rate.
    That’s one problem with virtually all so-called “bog-standard Keynesian” stimulus packages: If there’s a downturn, there’s almost invariably an excess of capacity. Why do you think infrastructure projects are different?
    Again, Krugman’s analysis could be correct. I agree with some of his proposals. But his proposal in favor of infrastructure spending just strikes me as weird. I wouldn’t say that “The usual argument against public works as economic stimulus is that they take too long” … the usual argument against public works as economic stimulus is that it offers very little bang for the buck, even in a sustained depression. (See, e.g., Depression, The Great.)
    Moreover, both Krugman and Hilzoy ignore the real objections to greater deficit spending. Among other things, it can be highly counterproductive.

29. I actually agree with von 100% even though normally I agree with Hilzoy 100%.
    Just look at what mortgage rates (which for all intents is purely a reflection of government ability at this point) have done since the bailouts. Look at the bond yield curve getting significantly sharper.
    We start doing even more deficit spending and more bailouts and interest rates are going to soar even as we have a bad recession and even as total monetary supply (debt + base) is contracting. This is the worst of all worlds.
    Wait a few years when most of the bad debt is gone and then have massive stimulus. Heck, start a lot more on energy and transportation infrastructure now. But general deficit based stimulus just isn’t going to work (I’m not against increasing unemployment benefits while cutting out tons of corporate subsidies and raising taxes).

30. the usual argument against public works as economic stimulus is that it offers very little bang for the buck, even in a sustained depression. (See, e.g., Depression, The Great.)
    No offense, but that’s a really crappy example.

31. “the usual argument against public works as economic stimulus is that it offers very little bang for the buck, even in a sustained depression. (See, e.g., Depression, The Great.)”
    Are you talking about immediate term bang for buck or long term? Revamping our infrastructure isn’t going to do much to stop a contraction, but it can lay down the groundwork for increased productivity gains on a decades long timescale as long as they are relevant. (Digging random holes, repaving streets over and over or platning trees and cleaning up trash is only marginally relevant to long term growth).

32. No offense, but that’s a really crappy example.
    Why? Infrastructure spending had positive effects during the Great Depression (got food on the table, lowered social pressures, etc.), but it didn’t provide much stimulus.
    Are you talking about immediate term bang for buck or long term? Revamping our infrastructure isn’t going to do much to stop a contraction, but it can lay down the groundwork for increased productivity gains on a decades long timescale as long as they are relevant.
    I agree that some infrastructure spending can indeed “lay down the groundwork for increased productivity gains.” (Same deal with spending on basic science.) But Krugman is arguing that infrastructure spending is going have a stimulus effect. I think he’s overstating that case, while completely ignoring the case against higher deficit spending.

33. That’s one problem with virtually all so-called “bog-standard Keynesian” stimulus packages: If there’s a downturn, there’s almost invariably an excess of capacity. Why do you think infrastructure projects are different?
    von, it seems to me that this argument concerns Keynesian stimulus in general, not the distinction between investing in infrastructure versus investing in manufactured goods. What is the impact of excess capacity? Are you suggesting that this is a cause or effect of downturns?
    Infrastructure projects in general are distinct from capacity production (does anyone advocate that?) because, e.g.:
    1.They theoretically increase per-capita production efficiency, which doesn’t affect supply/demand — it affects elasticity, which should be welfare-neutral.
    Moreover, in a downturn the constraints on capital investment actually prevent welfare-maximization (firms can’t afford to cut back production). Stimulus alleviates that opportunity-cost problem.
    2. Public-works investments reduce transaction costs — the efficiency gains from repairing a road aren’t neutralized because they might hurt the tire industry.

34. By the way, Hilzoy, your last paragraph is grating … and, frankly, a bit of an unintended self parody.

35. Brett, mazel tov!
    Re deficit spending and infrastructure, yes and yes. It stinks, but we really have no alternative now. Let’s get some real use out of it: we can upgrade our energy grid and build more solar, wind, & nuclear.
    Von, re your 4:49 what do you see as a good economic stimulus? Interest rates are low already, so are taxes, and we already tried throwing money at the rich with the lack of result you noted, so what else is left? Besides, even if short-term bang for buck may be low, the long-term national RoI is fantastic.
    I agree that we should try to balance stimulus packages with military cuts. Maybe, just maybe, the general recession will actually make it a little easier to lose bases and military contracts because the losses won’t stand out as much, especially if we can replace those particular job losses with targeted infrastructure programs. I think that over the next 20 years we will get a lot more use out of better roads and grids than out of a bigger inventory of tanks and bombers. Also, of course, we are still going to spend a lot in Iraq during drawdown. And we’ll have to watch out for the impulse to scrimp on post-war medical care, but Obama is well aware of that issue.
    Von, re your 4:03, I think you’re missing the point. Yes, any money spent domestically goes into the domestic economy. But we get to keep roads, dams, etc., and they keep making money for us, whereas we don’t get to keep the bombs. We may also wonder whether military suppliers keep their high profits at home, or invest them abroad; this is much less of an issue for fields in which profit margins are lower because of much lower entry barriers. And not an issue at all for direct government employment.

36. Adam, as noted above, I agree with 1 and 2 can be effects of infrastructure spending. (Not clear that they would be effects here, of course.) But neither is a “stimulus” in the sense that Krugman or Hilzoy suggests to the reader, i.e., equivalent to upping unemployment benefits. And neither Krugman nor Hilzoy mentions, much less addresses, the real arguments against deficit spending.

37. More specifically, excess capacity is meaningless if your marginal costs are such that increasing output doesn’t benefit you (i.e., you’re in an elastic portion of the firm’s demand curve). Stimulus alleviates that problem by decreasing marginal costs (making employment cheaper, decreasing transportation, etc., etc.).
    That’s why no one actually advocates stimulus by increasing supply; that makes no sense because you’re just funding a deadweight loss. If you decrease firm costs, any supply expansion comes as a result of net-beneficial efficiency gains.

38. “Interest rates are low already, so are taxes, ….”
    Historically, yes, but c’mon: The Fed Rate has dropped from 4.75 to 1.5 in the last year, but mortgage rates are currently increasing (and stand at around 6.33, at least according to here: http://www.bankrate.com/brm/ratewatch/leading-rates.asp).
    We’re facing a liquidity crisis. I don’t know if it makes sense to have the government competing for scarce debt at this moment in time. Krugman doesn’t even make the case.

39. von, the question you asked, I believe, was the distinction between stimulus for production goods versus capital goods. The examples I gave are not “effects,” they’re distinctions between the two. Upping unemployment benefits doesn’t seem to clearly fall in either category; it’s certainly not “analogous” to, e.g., public-works projects.
    Could you please give an example of the “real” arguments against deficit spending that you keep referring to?

40. Adam, you’re losing me. “That’s why no one actually advocates stimulus by increasing supply ….” isn’t quite right: A lot of people advocate supply-side stimuli. You may disagree with them, but that doesn’t mean that they don’t exist.
    Von, re your 4:03, I think you’re missing the point
    My 4:03 post was in response to Adam’s 2:57 post, which Adam subsequently clarified at 4:32 ….. which, as clarified, I largely agreed with (although it doesn’t save Krugman’s point here.)

41. Could you please give an example of the “real” arguments against deficit spending that you keep referring to?
    I think I’ve been giving them throughout, Adam. I don’t know that it makes sense to put the government deeper and deeper into the debt market.

42. Also, I recognize that Krugman proposes an extension of unemployment benefits (though frankly, I disagree) — but he rightly distinguishes it from infrastructure spending (the next paragraph) and none of his other proposals seem supply-targeted, so I don’t see the point of singling that proposal out when I was pretty clearly confining my discussion to infrastructure investments, which are quite distinct.

43. Adam, you’re losing me. “That’s why no one actually advocates stimulus by increasing supply ….” isn’t quite right: A lot of people advocate supply-side stimuli. You may disagree with them, but that doesn’t mean that they don’t exist.
    Very well then, I disagree. 🙂
    I think I’ve been giving them throughout, Adam. I don’t know that it makes sense to put the government deeper and deeper into the debt market.
    Ah, I see. Quite separate from the stimulus issue. Sorry, I was hyperfocusing.

44. Adam: offhand, I suspect some of the “real arguments” might be found in the post of mine that I linked to in this post. It’s here. Though possibly von has some other ones in mind.

45. And von: the “this” that I meant was standard Keynesianism was just: in a recession, it makes sense to stimulate the economy through deficit spending. Whether Krugman is a Keynesian more generally was beside the point I was trying to make.

46. The problem with increased government spending on top of already-high deficits is that the government starts competing more and more for debt with the public sector. Interest rates go up, counteracting any stimulus effect of the spending
    But part of the problem is that even with low interest rates there is insufficient private spending. If private investors see no projects that have good returns they don’t invest. If people are reluctant to spend money because they are unemployed, or worried about becoming unemployed, and so on, demand falls, and private investment becomes unattractive.
    The idea is for govt to step in and start demanding.
    If there’s a downturn, there’s almost invariably an excess of capacity. Why do you think infrastructure projects are different?
    I don’t understand what you are getting at here. Yes, in a downturn there is unused capacity, factories are idle, etc. But isn’t the idea of govt spending partly to get that capacity put into use?

47. Um, other countries are already doing it. The Australian government just announced ten billion dollars of bonus payments to lower and middle income families and pensioners, as well as bringing forward the planned $20b of infrastructure spending they’d promised over the next 5 years. Of course, it’s easier to do it when there’s a fat surplus sitting there. But there’s no doubt that Keynesian measures are being taken by governments all over. It’s not even being opposed by conservatives here.
    Emma

48. If there’s a downturn, there’s almost invariably an excess of capacity. Why do you think infrastructure projects are different?
    I don’t usually wade into these threads, but von, I thought that the buzz about these new energy technologies was twofold, that it would provide jobs that would remain domestic and would provide something that the rest of the world would be buying up after we perfected it. Wouldn’t this deal with your concerns about excess capacity? I suppose that anything that we do will eventually create excess capacity, but, like they say, in the long run, we are all going to be dead…

49. … Yeah, I still am unclear what von’s point about excess capacity point was, and that was the first thing I asked, i.e., “What is the impact of excess capacity? Are you suggesting that this is a cause or effect of downturns?”

50. Hilzoy, I agree that complaints about deficit spending from Bush-proponents are nauseating. I want to point out that it’s not just that we ran up big debts then. Bush’s tax policies significantly contributed to the problem we are now hoping to fix with intelligent deficit spending.
    Look, Bush cut taxes for the rich, and capital gains taxes. The hope was that this would create wealth by spurring investment. But there was no shortage of investment dollars to begin with. Pouring more investment dollars into the system did make more available as venture capital — but that mostly meant that more stupid ideas got funded, not that more wealth was created. Lots of money moving around, so the stock market looked great, but no comparable growth in physical manufacturing capacity and productivity. Worse yet, most of the new dollars went to people who didn’t want to wait years for new development, they wanted a quick return, especially since we began the period with historically high personal debts and an aging population (so that the pension-plan institutional investors needed liquidity). The inevitable result was a staggering growth in the derivative markets and new, fast-return, high-liquidity investment vehicles. Money chasing money, money churning around, no new wealth created. The only thing we built was lots of fancy new housing stock, which is not an ongoing wealth-producer.
    In short, supply-side doesn’t just not work, it harms. Can we please bury that idiotic notion once and for all now?

51. A defense of Keynes in the FT by Ed Crooks, probably timed to coincide with a stimulus package and deficit spending. It’s a good read:
    http://www.ft.com/cms/s/0/a754a046-9c79-11dd-a42e-000077b07658.html
    “Robert Skidelsky writes at the end of his definitive three-volume biography that Keynes’ ideas “will live so long as the world has need of them”. It certainly seems to need them now. Keynes was scathing about the view that the Great Depression was a return to normality, a necessary correction after the unsustainable excesses of the 1920s. On the contrary, he argued, the economic expansion should be seen as the normal state of affairs and the downturn was an “extraordinary imbecility”.
    With the right policies, he said, the good times could be brought back. He was right then; we must hope he will be right again.”
    We can certainly agree on the “extraordinary imbecility”.

52. Adam: offhand, I suspect some of the “real arguments” might be found in the post of mine that I linked to in this post. It’s here. Though possibly von has some other ones in mind.
    Yes, Hilzoy. Arguments that I’ve been making throughout this thread: Now is not a good time for the government to be competing in the debt markets.
    FTR, the trouble with your post isn’t that you don’t know better. The problem is that you do know better. Yet, you still create a strawman and demonize your opponents (e.g., your cancer analogy), rather than grapple with the opposing position on the merits. You’ve managed to become exactly what you purport to hate.
    … Yeah, I still am unclear what von’s point about excess capacity point was, and that was the first thing I asked, i.e., “What is the impact of excess capacity? Are you suggesting that this is a cause or effect of downturns?”
    Adam, your confusion exists because I had understood you to argue what Krugman (and Hilzoy) argue: infrastructure spending is an effective stimulus. But it’s not. The argument for (or against) infrastructure spending is largely independent of the argument for (or against), e.g., unemployment benefits.
    Btw, the question of capacity was introduced by you as a purported way to distinguish infrastructure spending from other forms of spending. My comment was intended to point out that capacity is not a good way to distinguish infrastructure spending from other forms of spending, although they can of course be distinguished in other ways.

53. Von: Now is not a good time for the government to be competing in the debt markets.
    This is the “crowding-out” argument, which Hilzoy did discuss in her linked post.

54. “Yes, Hilzoy. Arguments that I’ve been making throughout this thread: Now is not a good time for the government to be competing in the debt markets.”
    That’s not an argument: it’s an assertion. Can you link to an argument backing the assertion?
    “Yet, you still create a strawman and demonize your opponents (e.g., your cancer analogy), rather than grapple with the opposing position on the merits. You’ve managed to become exactly what you purport to hate.”
    This is assertion without explanation; I don’t understand what value you think it holds for people who can’t read your mind: where’s your argument and explanation of what you mean by this?
    “But it’s not. The argument for (or against) infrastructure spending is largely independent of the argument for (or against), e.g., unemployment benefits.”
    Once more: where is your actual argument?
    All you’re doing here is asserting that people are wrong. And they should believe you because… no reason. Just because you say so.
    Needless to say, this isn’t a very interesting contribution to a discussion.

55. By the way, a lot depends on what kind of infrastructure spending is at issue. Infrastructure spending generally works through the supply side: You spend on roads, bridges, etc. to increase the supply of such things, reducing costs to the user. For instance, if there are a lot of roads and bridges, the cost of driving is lessened.
    As I’ve mentioned, I’m doubtful that infrastructure spending is a good stimulus to spur economic growth. Particularly given the current financial environment, the limited benefits are outweighed by the costs. (A cost-benefit analysis that Krugman fails to address.)
    Just because I don’t think that Krugman or Hilzoy are persuasive, however, does not mean that there aren’t other good reasons to spend on infrastructure. But it depends on what kind of infrastrucutre spending is at issue.
    Someone who believes in infrastructure-spending-as-stimulus will look for the greatest bang for buck. That implies spending on short-term projects (keep in mind that a “short-term” project in the world of infrastructure spending can take up to five years). Roads, bridges, drilling for oil, etc. would be your choice. They will immediately shift the supply curves that will have maximum effect.
    Someone who evaluates infrastructure apart from its limited stimulus effects, however, will look at completely different kinds of projects. For instance, I think there are legitimate arguments to spend on nuclear power and/or light rail. These arguments have to do with long-term changes in the supply curves — for instance, to shift the supply of non-carbon-generating electricity, making it more competitive with carbon generating electricity.

56. This is the “crowding-out” argument, which Hilzoy did discuss in her linked post.
    Yup. Although, rather than discuss it in this post, Hilzoy relies on the not very persuasive claims that its completely irrelevant because “bog-standard Keynesian economics” makes it so.
    Krugman’s argument, which Hilzoy endorses, is “you want to increase government spending or else you don’t understand economics.” My point is that, if you truly understand economics, you are going to realize that it’s not even close to being that simple. Before one proclaims policy X as the bestest because of its purported benefits, let’s at least mention why you think those benefits outweigh the costs.
    Neither Krugman nor Hilzoy do that. Here’s the closest Hilzoy comes:

    But these are not normal circumstances. We are heading into a serious recession. We need to do what we can to get the economy moving again. And fiscal stimulus is exactly the way to do this.
    Saying that we need to cut back on spending at this point is like saying to someone who has just been diagnosed with a treatable form of cancer, and to whom people are willing to lend money: look, you’ve just spent a whole lot of money on the operation to remove your tumor; you just can’t afford the chemo and radiation that your doctors recommend. Time to tighten your belt! Time to retrench!
    To which the obvious answer is: putting my plan to buy a new car on hold is one thing. But saving money by not going through chemo and radiation is insane. This is exactly the same. And when debate moderators ask questions like this:
    “What are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan?”
    The appropriate response is: we are going to have to get our budget deficits under control. But this is absolutely the wrong time to do it. We need to get through the present crisis first.

    The present crisis is primarily caused by a lack of liquidity in the financial markets. Given that Hilzoy’s proposal is going to further decrease liquidity in those same markets, I’d like at least an explanation why that cost is outweighed by Hilzoy’s purported benefits.
    That’s not an argument: it’s an assertion. Can you link to an argument backing the assertion?
    Gary, the crowding-out argument is well known and well supported. If you want to be involved in this debate, look it up.

57. Von: Someone who believes in infrastructure-spending-as-stimulus will look for the greatest bang for buck. That implies spending on short-term projects….
    Yet Keynes famously asserted that pyramid-building, which is by no means a short-term project, will stimulate aggregate demand “if the education of our statesmen on the principles of the classical economics stands in the way of anything better.” So, are we to believe that Keynes didn’t understand Keynesian economics?
    Gary, the crowding-out argument is well known and well supported.
    It was well supported until Keynes demolished it. He acknowledged of course that crowding-out takes place when the economy is operating close to full employment (or as we would now say, at NAIRU). Hilzoy’s point is that the economy isn’t anywhere near that.

58. von,
    Krugman doesn’t argue (I think) that infrastructure spending should be done because it solely provides stimulus, he argues that the traditional reasons for avoiding infrastructure spending do not currently hold, so we should start doing it. Just for reference, here is what Krugman says:
    And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.
    At the risk of becoming something or other because I fail to use a von-approved analogy, it would be like extracting a bullet from a patient while you have them open for heart surgery: the normal costs of such an action are no longer a reason for not doing them.
    I certainly see your point that not all infrastructure spending should be treated as having the same stimulus effect and would welcome discussion of the various types of infrastructure spending and why they are or are not good in the current situation, but I don’t see Krugman or Hilzoy making the strong argument that you see.

59. I will leave the question who has become what they hate for other people to address. However:
    The general argument for any sort of stimulus in the case of depression, as I understand it, is just that absent steps to increase demand, a recession will be longer and deeper than it would be otherwise. And the arguments for infrastructure, in particular, are twofold: first, that it will put people to work, thereby putting them in a position to spend money and increase demand, and second, that unlike paying them to dig holes and fill them up again, infrastructure spending is spending that produces longer-term economic benefits. As an investment in future productivity, it beats e.g. unemployment benefits, though unemployment benefits seem to have more in the way of immediate stimulative effects.
    The argument against it as a form of stimulus, as I understand it, is what Krugman says: it takes too long, so that if you’re facing a short recession, by the time projects are designed and contracted, etc., you’re likely to be into the recovery, at which point this spending will be more likely to overheat the economy than to correct recessionary pressures.
    That’s why Krugman says: look, this recession is likely to be long enough and deep enough that that argument does not apply.
    As to the question of crowding out future investment: as I said in the post I linked to, under normal circumstances I take this seriously, and would favor raising taxes enough that we do not have a structural deficit. But, as I said in this post, these are not normal circumstances. To continue the cancer analogy that von objects to: under normal circumstances, I wouldn’t choose to undergo chemotherapy. But it would be different if I actually had cancer.
    So, von: is it your contention that the bad results of deficit spending not only exist, which I don’t think anyone disputes, but are large enough to outweigh the good effects of stimulus at present? If, for instance, the ‘crowding out’ factor was large enough to completely obliterate any good effects of providing a stimulus — e.g., if for every dollar the government spent that exceeded its revenues, one entire dollar removed itself from the economy (and all its multipliers went with it) — then deficit spending would be worse than a wash, since it would provide no stimulus but would require debt service.
    However, I don’t know any economist who thinks that that effect is that large. Can you cite one? Or any other explanation of why stimulus in the face of recession is likely to be completely ineffective or counterproductive, on the whole?

60. To be clearer about infrastructure v. extending unemployment benefits: extending UI seems to provide more stimulus in the short term, but without any long-term benefits. (It’s not an investment in anything.) Infrastructure provides fewer immediate benefits (though still greater than $1 for every $1 invested), but also gives you long-term benefits. Normally, the time it takes to get infrastructure spending up and running is a pretty compelling argument against using it as a stimulus, except in the case of paying for state infrastructure projects that are ready to go but might be cut back because states have to balance their budgets. In this case, Krugman argues, that argument does not hold, since this recession is likely to last long enough that we will still need stimulus by the time those projects start.
    Of course, he thinks we can and should do both, as do I.
    And again, von, the question (to my mind) is not about the existence of crowding out, but about whether it’s large enough to make deficit spending now either pointless or counterproductive.

61. Btw, the question of capacity was introduced by you as a purported way to distinguish infrastructure spending from other forms of spending. My comment was intended to point out that capacity is not a good way to distinguish infrastructure spending from other forms of spending, although they can of course be distinguished in other ways.
    But von, your comment didn’t do that; you just asserted that there is usually excess capacity before downturns.
    Let’s go back to the bullet example. If capacity is 100 bullets/day and actual production is 50 bullets/day, then a stimulus package that pays for 50 bullets/day won’t have much effect (unless there’s a second, higher equilibrium, as Krugman has argued), and in fact will arguably be inflationary because a surplus from the artificial supply increase will remain after the stimulus ends.
    Now, if there’s a stimulus for infrastructure expansion, then that doesn’t matter. If the stimulus pushes capacity to 150 bullets/day, 200, 250, whatever — the market equilibria only shifts if there was inefficient underproduction already, and in the meantime you’ve employed people building the expansion; at worst nothing happens, but at best you’re paying for a capacity expansion that the market desired but wasn’t able to afford because of the economic contraction.
    Combined with a stimulus for efficiency (which includes public-works projects that improve everybody’s cost of transport), you in theory have the best of both worlds: reducing marginal unit costs while moving the market equilibrium upward.
    Regardless, the claim that capacity is irrelevant to stimulus is simply inaccurate. Capacity is relevant to the type of stimulus because (if we’re all good free-market types here) there has to be a reason for underproduction: efficiency and capacity investments are ways of solving underproduction, but subsidizing production only works if the market can be moved to a new equilibrium. The presence of excess capacity alone doesn’t really indicate anything.

62. And again, von, the question (to my mind) is not about the existence of crowding out, but about whether it’s large enough to make deficit spending now either pointless or counterproductive.

    In other words, this is a quantitative argument, rather than the qualitative arguments that often dominates blogs…

63. Infrastructure spending generally works through the supply side: You spend on roads, bridges, etc. to increase the supply of such things, reducing costs to the user. For instance, if there are a lot of roads and bridges, the cost of driving is lessened.
    By what conceivable definition of the term are infrastructure investments “supply side”? How in the world do you quantify a “supply” of bridges? Is there a plant in Brooklyn stamping them out on an assembly line?

64. The present crisis is primarily caused by a lack of liquidity in the financial markets. Given that Hilzoy’s proposal is going to further decrease liquidity in those same markets, I’d like at least an explanation why that cost is outweighed by Hilzoy’s purported benefits.
    Purchasing “bad debt” increases liquidity because, for example, it (a) decreases leverage ratios by taking bad debt off the books (b) decreases volatility and systemic risk by taking questionable instruments off the market (c) decreases counterparty risk by reducing the chance of default (d) provides a direct capital infusion into the market.
    If you agree that there is a liquidity crisis then a capital infusion is probably the best possible option for unfreezing the credit markets, deficit spending or no. If you believe that systemic valuation problems are aggravating the liquidity crisis (which they are) then buying up “bad debt” is probably the single best policy that could be pursued to increase liquidity.

65. I’m confused about this “crowding out” business. I thought the now-infamous TED spread, coupled with near-zero (and at times even negative) yield on short-term Treasuries, implies that government is the only entity anybody wants to lend to right now. This deplorable condition is a free-market outcome, not a government mandate.
    So what’s the government supposed to do? Refuse to borrow money? Or, having borrowed it, use it only to pay down its debt? And if it does the latter — namely redeem its maturing bonds faster than it sells new ones, thus putting net cash into private hands — what are the now-cash-holding former bondholders going to do with their cash, since they don’t feel safe lending it to anybody except the government?
    –TP

66. Adam: unless, of course, you think we’re in a liquidity trap that is being brought about not only by the destruction of value in e.g. mortgages, MBS, etc., but also by a massive crisis of confidence that leads people to hoard cash, or keep it in Treasuries, rather than lending it out.
    In that case, you might think that while recapitalizing the banks and buying bad assets is essential to keeping the banking system from failing, it will not itself solve the underlying problems in the economy. You might also wonder about crowding out: in a situation in which no one is lending in any case, what is there to be crowded out? And, of course, you might think that any model of the effects of fiscal policy that used the idea that it is basically counteracted by the monetary policies of the Fed to argue that it will not be effective, would not apply in a liquidity trap, when monetary policy is much less effective. (“Pushing on a a string”, etc.)

67. Adam: unless, of course, you think we’re in a liquidity trap that is being brought about not only by the destruction of value in e.g. mortgages, MBS, etc., but also by a massive crisis of confidence that leads people to hoard cash, or keep it in Treasuries, rather than lending it out.
    Actually, I don’t think that should make a difference. (And if the former case is true, we’re probably well and truly hosed anyway.)
    Liquidity is only secondarily related to value. I could have a ton of appreciating assets and no leverage, but if I can’t sell them, I have no liquidity. Likewise, I could have depreciating assets and tons of leverage, but if I can sell them on a dime, I’m highly liquid.
    The reason we’re in a “liquidity crisis” is because of overleveraging (increasing leverage decreases liquidity) and valuation problems (counterparty risk; the “confidence crisis” hilzoy refers to). Straight capital infusions are the first step toward alleviating an overleveraging problem. But equity investments are better, and capital investments don’t really solve the risk problem.
    Regardless, deficit spending is simply not the issue.

68. There is no compelling evidence that a low-tax strategy is better for the economy over the medium or long run
    For lack of a better way to put it, this basically smells right to me.
    I’d like to invite anyone who differs — von, brett, whoever — to look at the economic history of the US, look at the history of (frex) the income tax rates, and show me a meaningful correlation between lower taxes and overall economic health.
    The top tax rate in this country has been as high as 90%, at times that seem, in retrospect, reasonably healthy. I just don’t see a clear correlation. It seems like other factors are far more relevant.
    A question:
    Is it better for the overall economy for average folks to be spending money, or saving money?
    Should we be stimulating the local economy, as it were, or making our excess capital (in whatever amount that might be) available to banks?
    Thanks –

69. Von, re your comment as to interest rates being low, that
    Historically, yes, but c’mon: The Fed Rate has dropped from 4.75 to 1.5 in the last year, but mortgage rates are currently increasing (and stand at around 6.33
    I was actually thinking about the Fed Rate when I said “rates,” which was sloppy phrasing on my part. My point was, the closest we have to a government-set rate has already been cut as far as possible. And taxes are low, and we have a plan in place to give tons of $$ to the rich. These clearly aren’t helping, and you don’t think CCC The Sequel will work either, so I still want to know what you think will work. What government intervention or policy change will unstick credit?
    Quite possibly, we need something other than a financial stimulus. As an ignorant layman, any market freeze looks to me like it must be a modified Prisoner’s Dilemma situation — everyone rationally freezes, nobody is well off with everyone frozen, but anybody who moves first risks losing even more. In the abstract, the simple way out of any Prisoner’s Dilemma is to use government’s extra-market coercive powers to remove the risk: pass short-term laws to force everyone to move together and/or to refrain from exploiting others’ moves. Here, I am at a loss to figure out what course of action to coerce, because I don’t understand the nature of the risk the banks are trying to avoid. You appear to have a handle on it, so could you explain and prescribe? Preferably in small, simple steps?

70. von: Why? Infrastructure spending had positive effects during the Great Depression (got food on the table, lowered social pressures, etc.), but it didn’t provide much stimulus.
    Depends on how you define stimulus, I guess. The implication of the above is that other measures could have somehow stimulated the economy without, e.g. putting food on the table. This strikes me as nonsensical (which is why I’m sure I’m not understanding the finer points of your arguments); whether or not the New Deal immediately stimulated the economy, I think there’s no question that its effects were a necessary prerequisite to economic growth. Compare, e.g., Britain or Germany during the interwar period, both of whom suffered infinitely worse than the US in large part because of a lack of large-scale public works projects to, if not stimulate, then at least bolster, their economies.
    Or, to put it a more colorful way: you seem to be arguing that the problem with bandaging a wound is that it doesn’t allow the patient to immediately get up and dance. That may be true, but it’s hard to see how he’s going to boogie with a hole in his chest.

71. Apropos of this discussion: I have easy access to accounts of the US during the Great Depression, but can anyone recommend a good source for its impact in Europe, or in specific European countries? In particular, I’m curious about the strategies that other governments used, and about their effects.

72. Jim, try Brad deLong’s book.

73. Or The Road to Wigan Pier, for a more worm’s-eye view.
    [Gary, is there any discussion of Stresemann and Golden-Age Weimar in that book? I admit I only dipped into it but I didn’t see, which is a somewhat strange omission IMO.]

74. Remember a month ago, how we had to hand over $700 billion right away because otherwise the system would freeze up immediately and the whole house of cards could collapse and we’d go into another Great Depression?
    Good times, good times. Turns out that because the money was forked over with no conditions, it’s not going to make one damned bit of difference for several quarters: Banks Are Likely to Hold Tight to Bailout Money.
    The bailout was a bandaid to move the complete collapse into the next administration. That it might handicap the federal government under that next administration in undertaking the demand-side, deficit spending that’s needed to provide some solidity to this hollowed-out economy is just a bonus.

75. There’s a bit here, Anarch, though keep in mind the book is a short history of the entire economics of the 20th century, so it’s glancing, and by no means primarily a political history. For any remotely detailed look at Weimar, look elsewhere.

76. Gary: thanks. It doesn’t seem to be listed at Amazon; do you know if it exists in a dead-tree form?

77. Yet Keynes famously asserted that pyramid-building, which is by no means a short-term project, will stimulate aggregate demand “if the education of our statesmen on the principles of the classical economics stands in the way of anything better.” So, are we to believe that Keynes didn’t understand Keynesian economics?
    Now you’re talking about the demand-stimulating effects of government spending generally, not infrastructure spending per se. Krugman is arguing for infrastructure spending, presumably in part because it can be a supply-side stimulus.
    Outside of certain limited circumstances (e.g., extending unemployment benefits), the cost-benefit argument for pure demand-side stimulus is pretty weak.
    Adam, you’re right that I agree with some, targeted government spending. The bailout, for instance, was probably the least bad of a series of bad options. But agreeing that some government spending is appropriate is not the same as agreeing that all government spending is appropriate.
    These clearly aren’t helping, and you don’t think CCC The Sequel will work either, so I still want to know what you think will work.
    It’s not clear that anything will work, and the first lesson of fiscal policy is “do no harm.” But here is what I would consider, were I king:
    1. I would enact a tax plan similar to Obama’s, albeit without the payroll tax changes. (It’s shortsighted and will have the wrong effect; it can result in a massive tax increase on the self-employed. We should be means testing at the recipient end.)
    2. I would have passed the original bailout with the regulatory changes proposed by Congress but without the 110 billion in extra pork.
    3. I would reduce trade barriers to goods. (Long term, I would also reduce trade barriers to labor via immigration reform — but that’s just not going to fly in the current environment.)
    4. I would engage in discussions for a long-term restructuring of the capital and debt markets.

78. As an ignorant layman, any market freeze looks to me like it must be a modified Prisoner’s Dilemma situation — everyone rationally freezes, nobody is well off with everyone frozen, but anybody who moves first risks losing even more.
    Actually, for those with cash, this is a buying opportunity in the equity markets (and perhaps the real-estate markets as well).
    And to the argument that people are only willing to lend to the government, so government should be taking on a lot of debt: No, not exactly. Most markets are continuing to clear. And crowding out continues to have an impact by increasing the cost of debt. But the point is that infrastructure spending has a boost in the future, which is also when crowding out effects are most likely to be felt.

79. Oh, and 5 & 6:
    5. I would extend unemployment benefits and increase the per-child tax credit (as proposed by McCain).
    6. I would consider McCain’s plan to purchase mortgages, and (contra Krugman) strong consider doing so at face value.

80. von: Krugman is arguing for infrastructure spending, presumably in part because it can be a supply-side stimulus.
    No, I think a more reasonable interpretation of Krugman is this: infrastructure spending (on projects which can be initiated rapidly, not on projects which are still at the drawing-board stage) provides an immediate stimulus to aggregate demand; it also improves the stock of physical capital, which means there are long-run benefits in the form of an increase in potential GNP.
    Can anyone can show me an instance where Krugman has used the term “supply-side stimulus” with a straight face, so to speak? If so I will give von’s interpretation another look.

81. FWIW, Kevin, my interpretation’s almost the same as yours — to the point where I literally hadn’t even considered this as a “supply-side” anything.

82. “I remember when Bill Clinton went on a wild spending orgy, ballooning the deficit to vast proportions. Oh, wait, that never happened.”
    Yeah, what happened was that an economic bubble caused revenues to, for a comparatively short while, rise faster than Congress’ spending increases could keep up with. Causing us to very briefly dip into surplus territory, but scarcely by intent, and the paydown of the debt was minuscule before spending caught up with the end of the bubble.
    Kinda like a shopaholic paying down some of his credit card balance the day after winning the lotto… doesn’t mean he’s thrifty.
    Counter-cyclical spending is all well and good in theory, but real world politicians are incapable of executing the “cyclical” part of it.

83. Funny how those “economic bubbles” just tend to coincide with Democratic presidents, isn’t it? You’d almost think that supporting the working class and the middle class tended to increase the wealth of a nation, while supporting the wealthy at the expense of the working and middle class tends to decrease it.

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