Krugman's very very simple solution to end this depression

[TakeAStepBack]

Housing prices have been in a decline for years now,

Yes, since the bubble pop in 2008. Thats the point.

 

[Wiseacre]

Do any of the Dems actually say how much more stimulus money they want to spend? Obama's jobs bill that he touts, it's about $450 billion, right? Why should we believe it'll work any better than the original stimulus? Oh sure, we get some temporary boost, but when the money runs out aren't e back in the same place but with more debt? Kinda hard to put much faith in the same guys who told us that UE would be down below 7% by now.

 

[Widdekind]

He says very very clearly in his book that the government should spend money exactly like it did when WW II started to end this current depression the way it ended the Great Depression.

World War II was the ULTIMATE in stimulus spending. Put everyone to work. So, yes, there is no doubt that putting people to work on that scale would end the unemployment issue.

On page 89 of The Great Unraveling, Krugman specifically says that WWII ended the GD only because "world war" was sufficiently motivating, that the American people supported, a super-large super-stimulus. He specifically says that the size of the stimulus matters, not (directly) what the money is spent towards. (Comparatively) low Taxes, and high spending, employs all the businesses & workers who get the Government contracts (for the new Public goods & services produced).

The difference between building "roads to nowhere", and "roads to somewhere", is only in the longer-term returns, of the latter, over the former. In the short-term, any spending will put people to work.

Nobody has advocated building "roads to nowhere". That is a mis-understanding of Krugman's comments.

 

[Widdekind]

Well if it was excessively loose to spur spending, then we should have seen spending rise above trend!

Money spent on used goods, stocks & bonds, & real-estate is not considered GDP. Perhaps "easy credit" fueled speculation, in securities & housing, without affecting nominal GDP spending ? Large amounts of money can move, without showing up in GDP.

 

[MikeK]

No chance he might have meant, say, rebuilding America's crumbling infrastructure?

I'm sure that's what Krugman meant. He might have used the example of weapons production for comparison purposes but there is absolutely no reason why he would recommend that as a specific objective.

I have heard Krugman more than once refer to FDR's WPA and CCC programs, which enabled my own father to support his family during the Great Depression and Obama has talked about a similar approach to creating jobs and rebuilding the Infrastructure. It makes perfect sense but the Republicans won't back it because they know it will be a feather in Obama's cap

 

[CrusaderFrank]

Arafat got a Nobel Prize, Krugman got one and Obama got one.

Do you see how totally meaningless they are?

 

[Widdekind]

... the key variable is nominal spending... If NGDP (total nominal spending) is rising above trend, then we've got the bad inflation. If NGDP is falling below trend, we've got the bad deflation. Now when we look at NGDP though (i'm sure you can do this yourself on FRED), there was no "inflation binge". Money wasn't excessively loose... NGDP went on to fall 9% below trend. Excessively tight money.

From 2002-2006, nominal GDP grew by 5-7% per year; in 2008, it fell by 3%. That is the "9% below trend" of which you speak?

From 2002-2006, inflation was 2-3% per year, higher than since the 1980s. Perhaps there was some "inflation binge"?

 

[Douger]

He's an idiot. Here's what you do.

"Rogers' first daughter is now being tutored in Mandarin to prepare her for the future. He is quoted as saying: "If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia." In a CNBC interview with Maria Bartiromo broadcast on May 5, 2008, Rogers said that people in China are extremely motivated and driven, and he wants to be in that type of environment, so his daughters are motivated and driven. He also stated that this is how America and Europe used to be. "
Jim Rogers - Wikipedia, the free encyclopedia

 

[CrusaderFrank]

Yeah move to China with one daughter because they'll make you abort the second one

 

[DSGE]

Well if it was excessively loose to spur spending, then we should have seen spending rise above trend!

Money spent on used goods, stocks & bonds, & real-estate is not considered GDP. Perhaps "easy credit" fueled speculation, in securities & housing, without affecting nominal GDP spending ? Large amounts of money can move, without showing up in GDP.

Yes, buying a security in the secondary market doesn't count. So let's say somebody buys a security. What does the person who sold that security do with the money.

Two options: Purchase goods and services or purchase more assets.

If they purchase goods and services, we're done, NGDP has increased.

So what if they purchase another asset? Well look at it recursively. Then somebody must have sold them the asset. That seller now has income, what do they do? If they buy goods, we're done again. If they buy an asset, keep going. Somebody must have sold them that asset, and so on, and so forth.

Now the interesting part is to realise that with a finite stock of assets, this recursive purchasing of assets can only happen in one of two ways: Either two people trade an asset, then trade back, then trade back, and so on; which is uninteresting and has no affect on economic activity. Or the stock of assets must increase. Some new assets need to be created for all those people to buy.

Why does that matter? Because while buying assets in the secondary market doesn't count toward GDP, buying assets in the primary market (when new assets are floated) does count.

 

[DSGE]

... the key variable is nominal spending... If NGDP (total nominal spending) is rising above trend, then we've got the bad inflation. If NGDP is falling below trend, we've got the bad deflation. Now when we look at NGDP though (i'm sure you can do this yourself on FRED), there was no "inflation binge". Money wasn't excessively loose... NGDP went on to fall 9% below trend. Excessively tight money.

From 2002-2006, nominal GDP grew by 5-7% per year; in 2008, it fell by 3%. That is the "9% below trend" of which you speak?

You know what "below trend" means right? You're quoting fall from the level of a previous year; I'm talking about the fall below trend.

From 2002-2006, inflation was 2-3% per year, higher than since the 1980s. Perhaps there was some "inflation binge"?

Was it the efficient supply side inflation, or was it the dastardly demand side inflation? How do you tell?

 

[Widdekind]

putting it[idle money] to work is what the government can do to help the economy.

Libertarians have dismissed that for 100 years as mal-investment, bubble, make-work, bridge to no where, Solyndra , soviet spending... We're in a housing depression because liberal bureaucrats did put the money to work in housing

The term "Fiscal stimulus" means Government runs a budget deficit, with Government expenditures (G) exceeding Tax revenues (T) by a wide margin (G >> T; G-T >> 0). The housing bubble was not (to my knowledge) financed by Government expenditures. Government policies played a part, but not expenditures (on new final goods & services in GDP).

If interest rates are stuck at zero, printing more money does nothing.

nominal interest-rates are the price of credit, reflecting the ratio of supply to demand. So, if interest-rates are zero, then there is zero demand for credit. And so, any new base money that enters the banking system will not be on-lent, but will simply get stuck in bank vaults?

So then he concludes with the idea that if interest rates are stuck at zero, a "liquidity trap", then government should try to affect output with fiscal stimulus... The only way fiscal policy is justifiable (and Krugman understands this) is if monetary policy can't do anything...

I was talking about targeting the level. Specifically, targeting the level of nominal spending... just return the level of nominal income back near its pre-recession trend line.

what about the Classical Dichotomy ? You have an economy, with some price-level (P) and output-level (Q); the nominal spending is (PQ). The economy recesses. You level target. The economy rebounds, nominally, at higher-price levels, and lower output-levels. But in real terms, the economy has shrunk; and if money is neutral, then a shrunken economy can't be equivalent to, nor just as good as, a larger one. Inexpertly, real variables, like real output (Q), seem much more important.

Fiscal stimulus makes do with already-existing money, left idle by the private sector, at low interest-rates (cheap credit is the best time to borrow).

there's no such thing as "the liquidity trap". To quote Ben Bernanke, it's a "self-induced paralysis". It's not that monetary policy can't be expansionary at the zero lower bound, it's that the central bank is unwilling to engage in expansionary monetary policy.

i.e. printing currency and inflating the money base ?

 

[Widdekind]

It doesn't work because Gov't doesn't have money in the bank to spend on projects. It must coerce that money from somewhere. So for every person who benefits there is another somewhere else who suffers.

In a liquidity trap, with zero interest-rates, money actually is idle in banks, and the Public could borrow the money, for Government expenditures, without crowding-out any potential private sector borrowers.

What you said applies, when Government Taxes are "diversionary", diverting private-sector spending, as Taxes, into Public coffers. Such "crowding out" is costly, but there are some "Public goods", like Police & Defense, from which everybody benefits collectively, so everybody should collectively contribute, via Taxes (without which no private incentive would motivate such spending). Legitimate Taxes represent collective Public co-action, on shared Public goods.

 

[DSGE]

nominal interest-rates are the price of credit, reflecting the ratio of supply to demand. So, if interest-rates are zero, then there is zero demand for credit. And so, any new base money that enters the banking system will not be on-lent, but will simply get stuck in bank vaults?

That a very... oversimplified way of looking at. But if that helps you understand it better, fine.

what about the Classical Dichotomy ? You have an economy, with some price-level (P) and output-level (Q); the nominal spending is (PQ). The economy recesses. You level target. The economy rebounds, nominally, at higher-price levels, and lower output-levels. But in real terms, the economy has shrunk; and if money is neutral, then a shrunken economy can't be equivalent to, nor just as good as, a larger one. Inexpertly, real variables, like real output (Q), seem much more important.

Of course real variables are the ones we care about. If the classical dichotomy held in the short run then we would never talk about "aggregate demand" or the concept of "stimulus". The economy would always be in equilibrium, with reals affecting reals; nominals affecting nominals. But that's not the case. In the short run, nominals can affect reals. That's why we talk about monetary non-neutrality. So stabilizing nominal variables is the key to stabilizing real variables.

Fiscal stimulus makes do with already-existing money, left idle by the private sector, at low interest-rates (cheap credit is the best time to borrow).

So what? Why does it matter if the money "already exists"? Aside from that, there are a million problems with fiscal stimulus.

i.e. printing currency and inflating the money base ?

No. Forward guidance. Telling people about what the position of monetary policy in the future.

 

[Widdekind]

You know what "below trend" means right? You're quoting fall from the level of a previous year; I'm talking about the fall below trend.

the trend was about +6% per year; spending in 2008 was about -3%; for a total swing from trend of about 9% ?

Was it the efficient supply side inflation, or was it the dastardly demand side inflation? How do you tell?

Supply-side inflation is "stagflation", where supply shocks drive up costs; prices (P) rise, whilst outputs (Q) fall. Conversely, demand-side inflation is where prices rise, motivating more output. Before 2008, both P & Q were rising, telling me 'twas demand-side inflation ?

 

[Widdekind]

The housing bubble of the late 1980s, the dot-com bubble of the late 1990s, and the housing bubble of the late 2000s, all show up, in spending, as (moderate) inflation bubbles.

Meanwhile, Pres. Clinton's "austerity" or "Fiscal consolidation" was apparently (comparatively) deflationary. Personal savings rates fell from 7.5% to 2.5%, whilst bank prime interest-rates rose from 6-9%. Inexpertly, savings were diverted to Taxes, reducing the supply of loanable credit, hiking interest-rates, and exerting (comparatively) deflationary pressures on Prices.

 

[DSGE]

the trend was about +6% per year; spending in 2008 was about -3%; for a total swing from trend of about 9% ?

Yes.

Supply-side inflation is "stagflation", where supply shocks drive up costs; prices (P) rise, whilst outputs (Q) fall. Conversely, demand-side inflation is where prices rise, motivating more output. Before 2008, both P & Q were rising, telling me 'twas demand-side inflation ?

Just combine P and Q. What's P*Q? Nominal GDP. Supply shocks offset a fall in Q with a rise in P. Demand shocks see P and Q move in the same direction. But remember, obviously P and Q are going to rise. Q rises at an average of 3% because of productivity and population growth; P rises at about 2.5% because that's where the Fed likes to run inflation. So you have to correct for that by extracting the trend. Were they rising faster than normal, slower than normal, or about normal?

Logged NGDP:

 

[DSGE]

The housing bubble of the late 1980s, the dot-com bubble of the late 1990s, and the housing bubble of the late 2000s, all show up, in spending, as (moderate) inflation bubbles. Meanwhile, Pres. Clinton's "austerity" or "Fiscal consolidation" was apparently (comparatively) deflationary.

Looking at growth rates doesn't tell you anything. You need to look at it's position relative to trend. I don't know if you have any econometrics packages, but it'd be a more informative to go and detrend the series for NGDP with an HP-filter.

 

[itfitzme]

The housing bubble of the late 1980s, the dot-com bubble of the late 1990s, and the housing bubble of the late 2000s, all show up, in spending, as (moderate) inflation bubbles. Meanwhile, Pres. Clinton's "austerity" or "Fiscal consolidation" was apparently (comparatively) deflationary.

Looking at growth rates doesn't tell you anything. You need to look at it's position relative to trend. I don't know if you have any econometrics packages, but it'd be a more informative to go and detrend the series for NGDP with an HP-filter.

Good stuff, DSGE. Though I must admit, I am having a hard time following it and only hope to fully grasp it with a couple re-readings.

You seemed so hell bent on differentiating inflation targeting from NGDP targeting that it seems, for quite a while, that you were implying that NGDP targeting didn't cause high inflation. This, of course, seemed tremendously non-nonsensical and I was relieved when you finally referred to inflation as a proxy for NGDP. I remain perplexed, though, what mechanism we are expecting will constrain inflation (- deflation) within reasonable limits using NGDP targeting. I'm missing something (aside from a formal model). Other than that, conceptually it seems fine.

In retrospect, I think you may have presented the constraint for inflation(-deflation) in your presentation of supply vs demand side inflation(-deflation). Correct me if I am wrong, but what you are saying is that the Fed need only target PQ if they are trending in the same direction. If they are trending in the opposite direction, that is a supply side phenomena and is always good.

But then, I am left with the issue that rising prices with falling output is what we know to be stagflation (isn't' it, basically?). Are we just saying that stagflation was an artificially, Fed monetary policy, caused problem and that the economy is stagflation stable? If so, why? What is the mechanism that ensures prices will not naturally rise on falling supply and employment?

To be sure, your suggesting targeting NGDP with is, PQ.

If P and Q rise too fast, or fall too fast, targeting MV brings PQ back in line.

If Q rises with P falling, we are fine, in a sense, that's what we want anyways as we expect excess supply to be bought up at lower pricing.

Do we care about deflation then? I'm not sure that we don't.

On the flip side, with Q falling and P rising, that seems a bit of an issue.

I'm just not getting it. Seems to me that just targeting PQ leaves one completely unaware of what is happening when P and Q are moving in opposite directions. NGDP looks just fine but we have either deflation or stagnation going on.

 

[editec]

When the BANSTERS refused to fund the NORTH to maintain the union, do you know what Lincoln did?

He issued GREENBACKS. You know that "keynesian fiat money"?

Then he kicked the CSA's ass using those dubious funds.

Then in return for his service to the nation he was shot in the head.

BUT...the Banksters of New York and Europe did NOT get what they really wanted when they refused to lend the USA money.

They did not get end of this US Republic, they didn't not see an end to the Monroe doctrine, and the Western Hemishere was NOT reopened for a recontinuance of colonialism.

If you think that a NATION ought not have the right to issue its own currency, then you really do not understand the first thing about this nation, or the root cause of our "economic" woes.

And if you do not understand the realtionship between power to issue currency, REAL wealth and role money?

Then you might either be a Republic or a Democratic tool.