Krugman's very very simple solution to end this depression

[ilia25]

...current deficits are extraordinary and Krugboy calling it 'austerity' is crazy.

Look at your own chart. The reason for current deficits is low government income (low, because the economy is depressed). Austerity will reduce the government receipts further...

Political hacks are doing to the word "austerity" what they've done to the words "gay" and "marriage". Making up new definitions can give the illusion of discourse but it's a crock. Here's what most people say "austerity" means:

Austerity

A program in which a government drastically reduces spending and/or increases taxes or other revenue sources. A government launches austerity programs when their deficit and/or national debt become unsustainable. The IMF and the World Bank often require austerity programs in exchange for restructuring or refinancing a country's debt. Austerity is usually politically unpopular because it may involve cutting programs like food subsidies or national health care.​

Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

This means that "austerity" brings lower deficits because of sever spending cuts and increasing revenue.

Those advocating austerity hope that it will bring lower deficits because of sever spending cuts and increasing revenue. The problem is that in a depressed economy slashing spending also brings the revenues down. So austerity makes depression worse, but has no immediate effect on deficit. Long-term it makes the debt problem worse by prolonging depression -- and big deficits.

 

[ilia25]

Worked means restored the economy to some kind of health.
And no, no stimulus has ever done that.

You sound like a clockwork monkey.

The truth is boring and repetitive sometimes.

But you could easily make your case by pointing to a case where a government economic stimulus solved a recession.

Stimulus is not for solving recessions. It is only needed in a depressed economy when central bank is unwilling to help. This depression is the first one since 30s. Then WWII provided big enough stimulus to end the depression. This time there was no meaningful stimulus, so we are still in depression.

 

[expat_panama]

...Here's what most people say "austerity" means:

Austerity

A program in which a government drastically reduces spending and/or increases taxes or other revenue sources. A government launches austerity programs when their deficit and/or national debt become unsustainable. The IMF and the World Bank often require austerity programs in exchange for restructuring or refinancing a country's debt. Austerity is usually politically unpopular because it may involve cutting programs like food subsidies or national health care.​

Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

This means that "austerity" brings lower deficits because of sever spending cuts and increasing revenue.

Those advocating austerity hope that it will bring lower deficits because of sever spending cuts and increasing revenue. The problem is that in a depressed economy slashing spending also brings the revenues down...

Are you saying that over the past couple years federal spending has been slashed, or are you saying spending has not been slashed?

 

[Widdekind]

Looking at growth rates doesn't tell you anything. You need to look at it's position relative to trend.

From FRED, during the 1990s-2000s, nGDP (Y=PQ) grew at about +6% per year, split about equally between prices (P) & quantities (Q). But, under Clinton, outputs increased above trend, whilst prices fell below trend; under Bush the younger, the opposite occurred, as outputs fell & prices rose, relative to their +3%/year trends. So, relative to trends, under Clinton, the US benefitted from positive supply shocks, e.g. falling oil prices, as slumping Asian economies bowed out of the market, in the late 1990s; whereas under Bush, the US suffered from negative supply shocks, resembling "stagflation", e.g. rising oil prices, amidst war in Iraq, in the mid 2000s.

Inexpertly, real variables (e.g. real GDP output, Q) really are important. An economy that spends lots of money, on only a few items (high P, low Q), resembles a third world African economy. If you plot the "Penn effect", from the Penn World Tables data, for prices (P) vs. nominal GDP per capita (PQ/N); then you find that developed economies, like Europe & Japan, fall along a straight line (P ~ Y/N), reflecting the relationship between rising prices & (individual) wages. But, developing economies plot above that "best case" trend-line, having higher prices, for the same income per capita, as compared to developed economies. If you look only at total income (per capita), countries in the latter category can be comparable to the former. But being able to buy only a few 'baskets & bananas' (exaggerating for simplicity w/o minimizing the issue), for exorbitant prices, is not really a high standard of living. So perhaps looking only at the level of nominal spending may mask real poverty ?

 

[EdwardBaiamonte]

Then WWII provided big enough stimulus to end the depression.

so do you advocate making weapons for a military of say 30 million men, dumping them in to the sea, and praying for a recovery.

One has to be profoundly liberal or perfectly stupid to imagine that would help.

 

[EdwardBaiamonte]

This time there was no meaningful stimulus, so we are still in depression.

well what about:
3 wars
bank bail outs
787 stimulus
prescription drug bill
$16 trillion debt
budget going from $2-3-4 trillion

if liberals wasting money stimulated we'd have a huge boom rather than a depression. See why we are positive a liberal will be slow, very slow??

 

[starcraftzzz]

Then WWII provided big enough stimulus to end the depression.

so do you advocate making weapons for a military of say 30 million men, dumping them in to the sea, and praying for a recovery.

One has to be profoundly liberal or perfectly stupid to imagine that would help.

dude even conservatives point out you are a retard

 

[EdwardBaiamonte]

Then WWII provided big enough stimulus to end the depression.

so do you advocate making weapons for a military of say 30 million men, dumping them in to the sea, and praying for a recovery.

One has to be profoundly liberal or perfectly stupid to imagine that would help.

dude even conservatives point out you are a retard

so do you advocate making weapons for a military of say 30 million men, dumping them in to the sea, and praying for a recovery

 

[Wiseacre]

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.

Does any liberal dare to think that by producing about 100 million planes tanks ships heavy weapons and tanks that it would help rather than hurt our economy??

Krugman is a Nobel liberal but not a soul will dare defend the pure stupidity of his liberalism which is now everyone's liberalism.

Krugman is great because he's the best they got and even the common liberal knows in his heart that Krugman is a liberal and so that liberalism is nutty.

Lib/dems often throw up the WWII case as an example of a stimulus that worked. But I don't think so, first of all stimulus is supposed to be temporary and short-term. It's supposed to be a prime the pump deal where an influx of gov't spending gets the economy going again on a sustained basis. Otherwise, it's just a stopgap that helps people out on bad times, with no real economic value.

Which is fine, nothing wrong with helping people through bad times, except the gov't is so wasteful and ineffective at it. Much of it is politically motivated and therefore less efficient at providing the most bang for the buck. And the kicker is down the road you end up with the same economic situation, or nearly so, but with a bigger debt load.

If you look at the gov't spending during the 2nd world war, you see we started at 10 billion in 1940, then went up to approx 14 billion in 1941. That's an increase of 40%; our spending last year was around 3.5 trillion, no? So, do we want to increase gov't spending by 40%, up to nearly 5 trillion bucks?

Then in 1942 spending more than doubled, going up to around 35.5 billion. So, in year 2, do we spend around 12.5 trillion? In 1943, spending increased again to about 83 billion, more than doubled again. So we spend about 30 trillion in year 3? And we got 2 more years of spending increases to go before the war was over. That's the level of spending that occurred between 1940-1945. That ain't a stimulus, that's an effing world war. Yeah, we got out of the depression, but look what happened to our debt levels. And I got news for the leftwingers who think we can raise taxes enough to pay that off, hell we can't raise taxes enough to pay off the debt we got now, or even just balance the budget.

It's about spending folks. Krugman can talk all day long about more spending, but if you notice the rest of the world ain't buying it, and neither should we. I suppose we can put off the day of reckoning when the bill comes due; the really bad part is our kids and grandkids will get stuck with it. This'll be the 1st generation that I know of who fucked over their kids and left 'em in a far worse economic situation.

 

[EdwardBaiamonte]

It's supposed to be a prime the pump deal where an influx of gov't spending gets the economy going again on a sustained basis. .

but even that liberal idea is perfectly 100% stupid. A weapon and solar panel from Solyndra have the exact same utility: $0

Only a liberal is 100% plain stupid enough to suggest building 1000 Solyndra plants or 1000 weapons plants would prime a pump. Its actually a perfect formula for depression. It doesn't lead into a pump primed sustained economy it leads into a huge bubble and depression.

See why we are 100% a liberal willl be slow, very very slow?

Talking to liberals now is just like it would have been to talk to Nazis in 1932, Chinese communists in 1947, or Russian communists in 1916- a plain waste of time. Their brains are brainwashed.

 

[ilia25]

...Here's what most people say "austerity" means:This means that "austerity" brings lower deficits because of sever spending cuts and increasing revenue.

Those advocating austerity hope that it will bring lower deficits because of sever spending cuts and increasing revenue. The problem is that in a depressed economy slashing spending also brings the revenues down...

Are you saying that over the past couple years federal spending has been slashed, or are you saying spending has not been slashed?

Of course the federal spending was growing. But if it had been slashed, it would not reduce the deficits. Worse, it will ensure that the deficits will stay high for many more years.

 

[EdwardBaiamonte]

Those advocating austerity hope that it will bring lower deficits because of sever spending cuts and increasing revenue. The problem is that in a depressed economy slashing spending also brings the revenues down...

Are you saying that over the past couple years federal spending has been slashed, or are you saying spending has not been slashed?

Of course the federal spending was growing. But if it had been slashed, it would not reduce the deficits. Worse, it will ensure that the deficits will stay high for many more years.

Ron Paul would slash spending by 2 trillion first year to insure immediate surplus.

That would also make private sector and taxes boom thus further decreasing deficit.

Econ 101- we got from stone age to here through private innovation, with 2 trillion more in the private sector the economy would grow and innovate in a sustainable way, taxes would increase, unemployment would disappear. Over your head??

 

[starcraftzzz]

Are you saying that over the past couple years federal spending has been slashed, or are you saying spending has not been slashed?

Of course the federal spending was growing. But if it had been slashed, it would not reduce the deficits. Worse, it will ensure that the deficits will stay high for many more years.

Ron Paul would slash spending by 2 trillion first year to insure immediate surplus.

That would also make private sector and taxes boom thus further decreasing deficit.

Econ 101- we got from stone age to here through private innovation, with 2 trillion more in the private sector the economy would grow and innovate in a sustainable way, taxes would increase, unemployment would disappear. Over your head??

yea look how well it doing in europe u douche

 

[EdwardBaiamonte]

Of course the federal spending was growing. But if it had been slashed, it would not reduce the deficits. Worse, it will ensure that the deficits will stay high for many more years.

Ron Paul would slash spending by 2 trillion first year to insure immediate surplus.

That would also make private sector and taxes boom thus further decreasing deficit.

Econ 101- we got from stone age to here through private innovation, with 2 trillion more in the private sector the economy would grow and innovate in a sustainable way, taxes would increase, unemployment would disappear. Over your head??

yea look how well it doing in europe u douche

it????
show me a country that slashed spending by $2 trillion and I'll pay you $10,000. Bet??

 

[expat_panama]

...Of course the federal spending was growing...

Krugboy said we've just had two years of austerity. We all know that 'austerity' means drastic spending cuts. We have to accept the fact that Krugboy's wrong.

...if it had been slashed, it would not reduce the deficits...

Yes it would, because spending cuts = deficit cuts is how it's always worked.

The official numbers Obama sends out from the Government Printing Office show that over the past 70 years we've cut spending nine times. Eight times that spending was cut the deficit also fell, and that one time it didn't the deficit fell the following year. It's all there for everyone to see:

Real life. Cut the deficit by cutting spending.

 

[ilia25]

...Of course the federal spending was growing...

Krugboy said we've just had two years of austerity. We all know that 'austerity' means drastic spending cuts. We have to accept the fact that Krugboy's wrong.

If you counting both federal, state and local government spending, it fell if adjusted for inflation, and fell even more per capita. That is austerity.

Now if you want to argue that austerity means something entirely different -- go ahead, I don't think anyone cares.

...if it had been slashed, it would not reduce the deficits...

Yes it would, because spending cuts = deficit cuts is how it's always worked.

The official numbers Obama sends out from the Government Printing Office show that over the past 70 years we've cut spending nine times. Eight times that spending was cut the deficit also fell, and that one time it didn't the deficit fell the following year. It's all there for everyone to see:

Real life. Cut the deficit by cutting spending.

Slashing spending does not cut deficit when the economy is depressed and central bank is not willing to help. All your numbers before 2009 are thus irrelevant. And so are 2% cuts in the recent years.

 

[DSGE]

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.

Yes, I'm saying that the central bank should never react to a supply shock. I'll put some AD/AS graphs below that might be helpful.

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?

Prices will rise on falling supply. Prices tell you about scarcity of one thing relative to another (since we use dollars as the medium of account, it tells you about scarcity relative to the amount of money). When a negative supply shock hits the economy, that means that goods we produce have become more scarce. So naturally the money price of those goods must rise.

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.

We don't care about this kind of deflation, no; the kind where things get cheaper because we become more productive. The problem with deflation, the thing everybody is scared of, is downward wage rigidity. When "deflation" occurs, prices fall and hence the nominal wage must fall in order to maintain the equilibrium real wage. Unfortunately, if wages are downwardly sticky (because of money illusion), the real wage won't return to normal, it'll get stuck above equilibrium, and unemployment ensues.

So the problem with deflation is that nominal wages aren't good at falling. But, the deflation from a positive supply shock doesn't cause wages to fall. A positive supply shock makes us better at producing things, so our marginal product of labour, and hence our equilibrium real wages, increase. That is, our nominal wages stay the same, but the price level falls, making the real wage higher. There is no downward pressure on wages from a supply shock causing deflation; falling wages is a problem caused by falling NGDP (nominal spending/income).

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

Yeah it's an issue, but it's not an issue monetary policy can do anything about. That kind of recession happens on the real side of the economy. Something happens to make us less productive. We can only solve that recession by becoming more productive, not by expanding money.

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.

Maybe this will help:

Here's a simple AD/AS diagram. I've omitted the long run aggregate supply curve, we can just think about short run aggregate supply shocks. Initially the economy is at equilibrium (the full employment equilibrium) with output Y1 and price level P1.

There's a negative supply shock. Output falls to Y2 and prices rise to P2. So my claim is that supply side inflation is efficient. It's the natural response to falling output. It's not so much the inflation we care about, it's that output (and hence our real ability to consume/invest) has fallen. Think about this: what happens if we try to fight the rising price level by tightening money?

Say we contract money enough to prevent the price level from rising at all. So the supply shock takes us from P1 to P2, and we tighten money to bring us back to P1.

So after doing this, the price level is back to normal. But money is non-neutral in the short run. Trying to stop the price level rising has plunged the economy even deeper into recession. What we care about here isn't that prices rise in a supply shock, it's that our real ability to consume falls. It falls even further if we try to stop prices from rising.

The argument is slightly different for easing money to maintain full employment in a supply shock, which results in accelerating inflation. But most people are familiar with that point anyway.

 

[Widdekind]

Then WWII provided big enough stimulus to end the depression.

so do you advocate making weapons for a military of say 30 million men, dumping them in to the sea, and praying for a recovery ?

Some debt can generate profitable rates of return. Businesses routinely borrow for private-sector Investments (machines, factories). Governments can also borrow for Public Investments (Infrastructure).

Now, some businesses borrow badly, build "idle factories", and eventually, in the long-term, go bankrupt. Likewise, Governments could borrow badly, build "roads to nowhere", and, in the long-term, leave their Publics saddled with staggering debts with nothing (productive) to show. Bad borrowing, for non-productive pursuits, is bad for private businesses, and the Public / Government.

Indonesia, in the mid 1990s, built too many office buildings & factories. In the short-term, everybody was working, and the economy seemed healthy. In the long-term, debts started coming due, and the unprofitable bad Investments didn't generate profits. And so their economy crashed. Likewise, building any "widget" in huge quantities, and dumping them into the ocean -- which is effectively what the Indonesians did -- would put people to work, in the short-term. But, in the long-term, our grandchildren would have debts... with no profits to show for them... and then, yes, they would go bankrupt, as the US economy crashed.

But, borrowing need not be bad. If money is borrowed, for profitable private or Public Investments, then people are put to work today; and tomorrow the profits pay off the debt. Businesses borrow for private Investments, profitably; Governments can borrow for Public Investments, profitably too.

This time there was no meaningful stimulus, so we are still in depression.

well what about:
3 wars
bank bail outs
787 stimulus
prescription drug bill
$16 trillion debt
budget going from $2-3-4 trillion

if liberals wasting money stimulated we'd have a huge boom rather than a depression.

borrowing for profitable (Public) Investments would be an effective (Fiscal) stimulus. "Throwing money at the Recession" may have been in-effective. Fiscal stimulus does not merely mean "borrowing money & dropping it out of helicopters", in my understanding. Fiscal stimulus means "borrowing money for profitable, Bigger-than-business, Infrastructure Super-Investments", like nation-wide transportation & energy infrastructure. I.e. 'tis merely lots & lots of private Investments, collectively coordinated, as a Public Super-Investment (many machines, many factories). As the former can be profitable, on the smaller private sector scale; so the latter could be profitable, on a larger Public scale.

But, conversely, as businesses can borrow badly & go broke, so can Governments / Publics. Yet, not all borrowing is inherently bad.

 

[expat_panama]

...counting both federal, state and local government spending, it fell if adjusted for inflation, and fell even more per capita. That is austerity...

You can decide that while the rest of the world says 'austerity' means 'drastic spending cuts'.

...Slashing spending does not cut deficit when the economy is depressed...

Your comment differs from your numbers showing that from 2009 to 2010 we had a $61B cut in spending along with a $120B drop in the deficit.

 

[Middleoftheroad]

Are you saying that over the past couple years federal spending has been slashed, or are you saying spending has not been slashed?

Of course the federal spending was growing. But if it had been slashed, it would not reduce the deficits. Worse, it will ensure that the deficits will stay high for many more years.

Ron Paul would slash spending by 2 trillion first year to insure immediate surplus.

That would also make private sector and taxes boom thus further decreasing deficit.

Econ 101- we got from stone age to here through private innovation, with 2 trillion more in the private sector the economy would grow and innovate in a sustainable way, taxes would increase, unemployment would disappear. Over your head??

You are way out in left field. First off, Ron Paul never said he would slash spending by 2 T the first year. Period, he never made that comment.

Second, this is not econ 101. You are preaching Austrian Economics, which they don't teach or pratice ANYWHERE in America. So I don't know where you took this class, but it wasn't in any first world country.

Third, in science there is a rule "when theory doesn't match reality, the theory must be changed or abolished" Your theory doesn't match reality. Spain cut spending this year, they immediately went into a recession. Greece cut spending twice, both times, they went into a recession. Everywhere austerity is being implemented, the economies are struggling, each and EVERY time. its nice to say that its not true and dig your head into the sand, but that doesn't make it not true.