How to Fix What Ails Us

[badlydrawnjeff.livejournal.com]

Intel's CEO, Paul Otellini, had some fairly harsh words for the folks in power this week:

Otellini singled out the political state of affairs in Democrat-dominated Washington, saying: "I think this group does not understand what it takes to create jobs. And I think they're flummoxed by their experiment in Keynesian economics not working."

Since an unusually sharp downturn accelerated in late 2008, the Obama administration and its allies in the U.S. Congress have enacted trillions in deficit spending they say will create an economic stimulus -- but have not extended the Bush tax cuts and have pushed to levy extensive new health care and carbon regulations on businesses.

...

As a result, he said, "every business in America has a list of more variables than I've ever seen in my career." If variables like capital gains taxes and the R&D tax credit are resolved correctly, jobs will stay here, but if politicians make decisions "the wrong way, people will not invest in the United States. They'll invest elsewhere."

Take factories. "I can tell you definitively that it costs $1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the United States," Otellini said.
The rub: Ninety percent of that additional cost of a $4 billion factory is not labor but the cost to comply with taxes and regulations that other nations don't impose. (Cypress Semiconductor CEO T.J. Rodgers elaborated on this in an interview with CNET, saying the problem is not higher U.S. wages but anti-business laws: "The killer factor in California for a manufacturer to create, say, a thousand blue-collar jobs is a hostile government that doesn't want you there and demonstrates it in thousands of ways.")

"If our tax rate approached that of the rest of the world, corporations would have an incentive to invest here," Otellini said. But instead, it's the second highest in the industrialized world, making the United States a less attractive place to invest--and create jobs--than places in Europe and Asia that are "clamoring" for Intel's business.

This is similar, as CNet reports, to what Carly Fiorina had to say on the matter, with the difference being that Otenelli isn't running for office. But clearly the business class is less concerned about speaking up right now.

We do need to think ahead to what's going to fix the problems, though. "Unexpectedly," unemployment claims are increasing again, home sales are in decline, and the stimulus, which was supposed to save us all, has "done exactly as we expected it to", which is to mean not performed as intended at all.

So let's see - we have a failed stimulus, a looming tax hike, new costs associated with health care and financial reforms, and businesses are not spending money in anticipation of this uncertainty. What's the way out? How do we fix this problem? Where do we go from here?

Comments

[badlydrawnjeff.livejournal.com]

Worked a charm in the 40's. It was called the "war effort" then, of course. Which, provided a convenient "frame" to foil the efforts of those prevented it from working in the 30's.

War efforts aren't really Keynesian in the sense that it's not pump priming or anything like that - a war is a special case where the unemployed get drafted and other people fill holes. It's not really fixing a perceived lack of private demand as we understand it.

Actually, the CBO recently released a report showing that there were minor positive results. Very minor.

As I noted below, the CBO does not do independent analysis - they just run the numbers using the suggestions provided to them by the legislators. So when they say it made positive results, it's because the multipliers given to the CBO demand as such.

Thus it is not out of the realm of possibility to think a larger stimulus would have worked better.

Only if you buy the multipliers, though - we shouldn't have seen job losses of this magnitude with the stimulus - the projections were that we'd be in a better employment place doing nothing than we are right now with the stimulus. It's way, way outside the realm of possibility at this poiont.

On the other hand, I haven't seen any indications that it's made anything worse. But then, I do not consider politically motivated statements from orange mid-western politicians or possible human-turtle hybrids to be valid indicators. I guess that reflects my bias.

Clearly, it does. Look at unemployment. Look at home sales. Look at how companies have been reacting and continue to react. The evidence is overwhelming that it is making things worse, which is no surprise - this sort of stimulus made things worse in the 1930s and in 1990s Japan, too.

[surferelf.livejournal.com]

It's not really fixing a perceived lack of private demand as we understand it.

In the words of Lenny Bruce, "What do you mean 'we', Kimosabe?" To some, the same kind of mobilization needs to take place in order to have an effect. Either the government becomes the (temporary) employer of last resort and "drafts" the unemployed in to public works projects, or it could just mail money to people. Either way, as long as the amount of spending is close to the amount of wealth that vanished in the crisis, the problem of lack of private demand, or in other words "folks being broke", is solved. You keep this up until the economy is strong enough to operate on its own, and then you tax the bejeezus out of everyone in the boom times when the bill comes due.

Only if you buy the multipliers, though - we shouldn't have seen job losses of this magnitude with the stimulus - the projections were that we'd be in a better employment place doing nothing than we are right now with the stimulus. It's way, way outside the realm of possibility at this poiont.

You are correct that unemployment is worse now than the administration's projections of what it would be if there was no stimulus. What I dispute is your conclusion that the stimulus made it worse. I think you shouldn't dismiss the possibility that the administration's projections underestimated the extent of the damage to the economy. That they were thinking we would have 8% unemployment, but the economy was actually on track for 12%, so the stimulus only bumped it up to 10%. Many smart people said at the time that the size of the stimulus was too small to have much of an impact.

Clearly, it does.

I'm not sure if that's a comment about my biases, which I wear on my sleeve, or about indications, which have been frustratingly opaque.

Look at unemployment. Look at home sales. Look at how companies have been reacting and continue to react. The evidence is overwhelming that it is making things worse, which is no surprise - this sort of stimulus made things worse in the 1930s and in 1990s Japan, too.

I am looking at everything you mentioned, and I see signs that could be interpreted as the stimulus either having no effect, or a minutely positive effect. I know of no economist that thinks stimulus spending in the 1930s made it worse. I am aware of the school of thought that it prevented a necessary correction, following which the economy could have grown at a faster rate than it did, but not that the spending actually worsened the situation.

[badlydrawnjeff.livejournal.com]

In the words of Lenny Bruce, "What do you mean 'we', Kimosabe?"

"We" being "the people talking about Keynes."

Either the government becomes the (temporary) employer of last resort and "drafts" the unemployed in to public works projects, or it could just mail money to people. Either way, as long as the amount of spending is close to the amount of wealth that vanished in the crisis, the problem of lack of private demand, or in other words "folks being broke", is solved.

That's the theory in a nutshell, yes. In practice, however, this doesn't occur. Time and time again, the money doesn't act as a replacement, doesn't fill the holes, and creates more problems ranging from basic crowding out to more complex uncertainties in the economy.

What I dispute is your conclusion that the stimulus made it worse. I think you shouldn't dismiss the possibility that the administration's projections underestimated the extent of the damage to the economy.

I admit that's possible, but not likely. I say not likely because, again, we have a) the government's/economist's theoretical model of how a Keynesian stimulus should work and b) the results of previous attempts of similar Keynesian stimuli. The results for b) have been unequivocally poor, and given how the economy has reacted to the stimulus - i.e., not continuing in a specific trend - I think it's safe to say that the stimulus is the cause of the extended problem, up to and including the double dip it appears we're headed into.

The chief problem with Keynesian theory is that it assumes that the lack of private demand is something that needs to be fixed via intervention, as opposed to something that needs to be created by actual need. When you try to force markets to exist, they fail, right? If you try to open an ice business at the North Pole, you're going to go out of business. It's the same deal with the stimulus - if demand is down, the government is not in a position to say "this demand must rise," because the government doesn't create demand. Can't create demand. And if it tries to create demand, it ends up doing so at the expense of those who are already saying no, and then become less likely to say yes in the future. Cash for Clunkers is a great quick example of that.

Many smart people said at the time that the size of the stimulus was too small to have much of an impact.

Well, Krugman did for sure, but his ability to forecast this stuff is very questionable. Regardless, both of us can toss experts at each other who support our claims here. I'm wondering whether you have some historical evidence of this type of thing working.

I am looking at everything you mentioned, and I see signs that could be interpreted as the stimulus either having no effect, or a minutely positive effect. I know of no economist that thinks stimulus spending in the 1930s made it worse.

Here are two (http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx). I do tend to focus on historians more than economists on this though, because I prefer the tangible and I prefer the hard evidence of what works. Thus, historians like Amity Shlaes and Thomas Fleming, who've both written books on the Great Depression, give me a lot of pause about our current situation.

[surferelf.livejournal.com]

That's the theory in a nutshell, yes. In practice, however, this doesn't occur. Time and time again, the money doesn't act as a replacement, doesn't fill the holes, and creates more problems ranging from basic crowding out to more complex uncertainties in the economy.

Could it be this is because time and time again, people freak out about the deficit spending and prevent a stimulus that is large and long enough to do the job. In the case of WWII those folks didn't object because they were willing to spend whatever it took to defeat the axis, so the same abortive pressure on spending didn't come to bear.

The chief problem with Keynesian theory is that it assumes that the lack of private demand is something that needs to be fixed via intervention, as opposed to something that needs to be created by actual need. When you try to force markets to exist, they fail, right? If you try to open an ice business at the North Pole, you're going to go out of business. It's the same deal with the stimulus - if demand is down, the government is not in a position to say "this demand must rise," because the government doesn't create demand. Can't create demand. And if it tries to create demand, it ends up doing so at the expense of those who are already saying no, and then become less likely to say yes in the future. Cash for Clunkers is a great quick example of that.

Yes, what you have said is true, but it does not accurately describe this situation. Demand is not down because because the need went away. The need is still there, it's just that nobody has any money to pay for it. The fact that spending on medical care went down last year is a good indicator of this. It's not like we were miraculously healthier in 2009 and therefore required less trips to the doctor. Cash for Clunkers is actually a bad example for your point. After a brief dip in sales after the program ended the automakers have recovered to have their first profitable quarter in years. A better example would have been the Home Buyer's Tax Credit.

I'm wondering whether you have some historical evidence of this type of thing working.

Again, I'm sticking with my guns (no pun intended) and saying that the war effort for WWII is the only example where the spending was commensurate to the problem and was allowed to continue for a sufficient duration to correct it.

Here are two. I do tend to focus on historians more than economists on this though, because I prefer the tangible and I prefer the hard evidence of what works. Thus, historians like Amity Shlaes and Thomas Fleming, who've both written books on the Great Depression, give me a lot of pause about our current situation.

Ha! That's who I was thinking about. They don't claim that the spending actually made the economy worse. They claim that it prevented the economy from improving as fast as it could have. And actually, as I reread this, the spending doesn't even seem to be the biggest part of their beef.

[surferelf.livejournal.com]

Bah. html FAIL.

[badlydrawnjeff.livejournal.com]

Could it be this is because time and time again, people freak out about the deficit spending and prevent a stimulus that is large and long enough to do the job. In the case of WWII those folks didn't object because they were willing to spend whatever it took to defeat the axis, so the same abortive pressure on spending didn't come to bear.

Ah, but there was an abortive attempt on th spending as things got dismantled and the economy was going back to shit.

Demand is not down because because the need went away. The need is still there, it's just that nobody has any money to pay for it.

The problem with this is that you think every piece of demand is necessary demand. That's why economies expand and contract, that ebb and flow.

Ha! That's who I was thinking about. They don't claim that the spending actually made the economy worse. They claim that it prevented the economy from improving as fast as it could have. And actually, as I reread this, the spending doesn't even seem to be the biggest part of their beef.

well, it's the same concept in my mind - if the economy is being cramped by the stimulative spending, it's making things worse. That may be entirely semantic.

[surferelf.livejournal.com]

Ah, but there was an abortive attempt on th spending as things got dismantled and the economy was going back to shit.

Yeah, a lot of that is explained by an industrial economy having to switch back from military production to consumer goods. Plus, dumping a few hundred thousand GIs on the labor market is going do depress wages at first. That's just going to hurt for a little while, there's not much that can be done about it.

The problem with this is that you think every piece of demand is necessary demand. That's why economies expand and contract, that ebb and flow.

No. I don't think that. But I do think there is enough necessary demand to do the trick.

well, it's the same concept in my mind - if the economy is being cramped by the stimulative spending, it's making things worse. That may be entirely semantic.

I look at it as the price you pay for avoiding catastrophe. The valley is filled in with the peaks. The law of misery conservation, if you will.

[badlydrawnjeff.livejournal.com]

Yeah, a lot of that is explained by an industrial economy having to switch back from military production to consumer goods.

No, I'm talking 37/38, not post-war. The economy didn't crash post-war as the models would make you expect.

I look at it as the price you pay for avoiding catastrophe.

But what if it's causing catastrophe? Or enhancing existing catastrophe?

[surferelf.livejournal.com]

No, I'm talking 37/38, not post-war.

Ah. Gotcha.

The economy didn't crash post-war as the models would make you expect.

There was a bit of a dip and it caused some angst, but it sorted itself out rather quickly.

But what if it's causing catastrophe? Or enhancing existing catastrophe?

This is not catastrophe. This is merely suckiness.

[badlydrawnjeff.livejournal.com]

There was a bit of a dip and it caused some angst, but it sorted itself out rather quickly.

PEr Keynes, that shouldn't have happened, though.

This is not catastrophe. This is merely suckiness.

Okay, so what if it's causing suckiness, or enhancing existing suckiness?

[surferelf.livejournal.com]

PEr Keynes, that shouldn't have happened, though.

Reasonable people can disagree about that. Also the Austrians have a point when they assert that things are always more complicated than they may seem.

Okay, so what if it's causing suckiness, or enhancing existing suckiness?

Given that the reason for the stimulus was to try to mitigate the fallout from the collapse of 2008, I just think it's entirely more likely that the suckiness was caused by the collapse, rather than the attempted remedy.

But you asked "what if". I'm not sure what the alternative is. Five years of IMF-style austerity and North Korean Tree-bark soup for everybody?

[badlydrawnjeff.livejournal.com]

Reasonable people can disagree about that.

Well, wait - what's the reasonable disagreement. At least from this perspective, the economy did not act in a way predicted by Keynes following WW2.

Given that the reason for the stimulus was to try to mitigate the fallout from the collapse of 2008, I just think it's entirely more likely that the suckiness was caused by the collapse, rather than the attempted remedy.

Okay, I think I'm confusing things.

1) Things sucked going into 2009.

2) The government acted.

3) The stimulus is either a) causing further problems or b) enhancing the existing ones.

But you asked "what if". I'm not sure what the alternative is. Five years of IMF-style austerity and North Korean Tree-bark soup for everybody?

Well, where I'm going is that it's time to place Keynes in the proverbial dustbin.

[surferelf.livejournal.com]

3) The stimulus is either a) causing further problems or b) enhancing the existing ones.


You're forgetting: or c) did nothing or d) helped, but not enough.

I think Keynesianism is useful because, while it may not be effective, it doesn't really hurt anything either. It's impossible for a politician to do nothing during a financial crisis, and this option keeps them from doing something that might really cause harm. Also, this way we get a bunch of infrastructure upgrades that we needed to do anyway.

Clarification

[surferelf.livejournal.com]

I should say that I still believe that Keynesianism is effective. However, it appears to be nearly impossible to do correctly, due to political constraints. It is therefore effectively rendered ineffective.

[badlydrawnjeff.livejournal.com]

You're forgetting: or c) did nothing or d) helped, but not enough.

Fair enough, but those also don't seem like realistic options, given history.

I think Keynesianism is useful because, while it may not be effective, it doesn't really hurt anything either.

What? How about crowding out? How about artificially fabricating demand, leading to longer slumps? How can you say that?

Also, this way we get a bunch of infrastructure upgrades that we needed to do anyway.

We'd already be getting those. What usually happens is that places that need upgrades get ignored in favor of more poltiically-expedient ones.

[surferelf.livejournal.com]

If crowding is a problem, and I'm not convinced that it is, it's a short term one. Sellers might get the money now that they would have received later, but the fact is they're still getting the money. So, it all averages out in the end. To some extent, fabricated demand is not a problem, it's the goal. It seems to me that it doesn't become a problem until it gets inflationary. At the moment, it's not politically feasible to spend enough money to do that.

We'd already be getting those. What usually happens is that places that need upgrades get ignored in favor of more poltiically-expedient ones.

All I can say is that's not the way it's happening in my locality. The sexy projects continue to get financed from dwindling state coffers because the local politicians can use them as props for their re-election campaigns. The stimulus funds are going to the boring but necessary projects that keep getting put off for "later".

[badlydrawnjeff.livejournal.com]

Sellers might get the money now that they would have received later, but the fact is they're still getting the money.

That was the argument for Cash for Clunkers and for the Home Buyers Tax Credit. Both are considered failures.

All I can say is that's not the way it's happening in my locality. The sexy projects continue to get financed from dwindling state coffers because the local politicians can use them as props for their re-election campaigns. The stimulus funds are going to the boring but necessary projects that keep getting put off for "later".

Then you're one of the lucky ones.