Joe Gagnon (formerly associate director of Monetary Affairs, and of International Finance, Divisions at the Fed) of the Peterson Institute for International Affairs has had enough with the policy paralysis . From Stop Sticking Our Heads in the Sand! A Plan for Action on Jobs:
…our leaders have been in denial about the true nature and magnitude of the problem. The ongoing stock market anxiety surely must wake them up.
Many actions that would be helpful—extension and enlargement of the payroll tax cut, extension of unemployment benefits, extension of aid to the states, and a substantial and accelerated infrastructure program—require Congressional approval. I have no insights as to how to get such actions approved in the face of determined opposition by many members of Congress.
Instead, I propose aggressive actions that can be taken by the Obama Administration and the Federal Reserve without a single vote in Congress.
First and foremost, the Federal Reserve should announce an additional $2 trillion of asset purchases, including longer-term Treasury bonds, agency mortgage-backed securities (MBS), and foreign exchange. …
…
…the Administration should use its control of Fannie Mae and Freddie Mac to force them to invite all homeowners whose mortgages are already guaranteed by Fannie and Freddie, and who are not delinquent in their mortgage payments, to refinance their current mortgage balance at the new low rates regardless of loan-to-value ratio….
… the Administration needs to … embrace moderate further dollar depreciation consistent with monetary easing.
The entire piece is here. Dr. Gagnon doesn’t explicitly locate the source of the policy paralysis. S&P attributed it to the veto power of a group of intransigent legislators.
I’m not religious, but somehow the phrase “casting your pearls before swine” comes to mind. My only quibble with Gagnon’s recommendations is that I’d like to see the Fed explicitly announce a 4% inflation rate target rather than a less than explicit 3% target.
Well, there is a case to be made for expropriation of creditors. Pretty rough, though. Still, we might get there.
However, the data so cleanly fits an oil shock, that the emphasis must surely fall on increasing transportation fuels and seeing what we might do on the demand side to see if we can facilitate some easier transition.
But if there’s not enough oil to go around, stimulative fiscal or monetary policy will not solve the problem. Only increased efficiency in oil use or increasing the transportation fuel supply will help. So we seem to have Arthur Miller policy here, a desperate attempt to maintain consumption when, in fact, there is no way to do that without oil.
Steve Kopits However, the data so cleanly fits an oil shock
Huh? I’m just not seeing this. Shouldn’t there be some broad based inflation if this were an oil shock? I’ll grant you that a spike in oil prices probably didn’t help things, but the economy was already losing steam (and was predicted to lose steam) long before the run up in oil prices.
What we need is fiscal stimulus to backstop a muscular QE3. I think you might be able to talk enough GOP conservatives into increased operations and maintenance budgets in DoD. The idea being that increasing the remanufacturing and rebuilding of beat up military equipment would kill two birds with on stone. It would have a stimulative effect right now, and it would also put the Pentagon in a better position to kill outyear appropriations for planned replacement systems. Rebuild the equipment today and put it on the shelf for tomorrow. I’m afraid that the alternative will end up being disposing of beat up equipment today and replacng it with more expensive, gold plated systems tomorrow.
Nothing new, FED asset bubbles, more road paving and massive housing refi, no mention of serious financial reform,tax reform, free trade, military adventures nor the implications of continued computer/digital automation on the current and future job market. Does anyone in the economics field have any new insights,ideas?
I don’t see any of this happening. The GOP has already rejected extending the payroll tax reduction. Some of them seem more focused on defeating Obama than on the health of the nation.
Beyond that, I believe the GOP will read what’s happening as pushing for more cuts – maybe even a token amount to defense* – and that will drive things down & down. Tax revenues will fall, the economy will falter and we could be looking at an actual depression, one that would make a “lost decade” look nice.
It would be humorous if it weren’t sad but the commenters here repeatedly claim the “failure” of Keynesian economics – when they obviously have no grasp of numbers, of what Keynesian economics even is and sometimes barely seem to hold on to reality. If we are actually seeing a failure, it’s the failure of austerity. It’s not working in Britain at all; the economy has been tanking and the cuts have barely started to bite hard. It’s not working anywhere in Europe. I try to give credit to the ECB so maybe they have been raising rates to send a signal that the debt problem isn’t really that big. I’m saying maybe they were trying to point to the need to squash (non-existent) inflation as a way of saying that was more important than the problem everyone was focused on. That hasn’t worked because those rate hikes have slowed Europe’s economy when it needed stimulus. And Italy, which has a budget surplus – biggest in the western world – and which has cut it’s debt by a lot, is being crushed despite huge cuts. No reward for austerity.
And as for failure of economic models, the grand Ricardian tradition hasn’t worked for over 2 years now. Rather than admit we’re in a liquidity trap, as Keynes said, they have argued what’s necessary is confidence, meaning austerity that creates confidence, because that stimulates production. The supply oriented models are failing, not the Keynesian demand models.
*Note that S&P specifically referred to “discretionary” spending, not non-defense discretionary spending. The GOP lumps them together when they talk about spending but then only cuts the non-defense part. Expect true idiocies like attempts to eliminate the EPA.
S&P attributed it to the veto power of a group of intransigent legislators.
S&P made no such claim. S&P was concerned with BOTH the lack of consensus on tax reform and entitlement reform. They was motivated by the reluctance to move on either side of that equation. The intransigent legislators you refer to were only half of the problem. You can’t place the blame squarely on either side when neither side got what they wanted.
Slugs –
If increased prices are driven by supply and demand fundamentals, there is no need for broader inflation, and indeed, that’s what we see. Oil and food prices are up, but housing is down. We associate inflation with oil prices because Arthur Miller tried to maintain aggregate demand with easy money back in the 1970s–but it didn’t work. That’s exactly the point I’m trying to make, except I think we’re trying to compensate now with fiscal policy.
The economy started running out of steam in Q1, with increased oil prices. But who was calling for a recession? We were. But not CBO, not OMB, not Macroeconomic Advisors, not Goldman, not the Fed, nor any of the usual commentators (maybe with the exception of Roubini). All of these folks revised their outlooks down through the first half of the year. Not Menzie–and not even Jim–have called for a recession.
Now, perhaps I’m jumping the gun, and the recent stock market turbulence will not lead to a recession (in which case, a Satan-laced crow sandwich awaits me), but it’s looking pretty grim. And I’m running a straight-up oil model; no fancy DSGE stuff, but our simple model is providing very good guidance at the moment both in direction and timing.
Menzie,
You finally said something I agree with. It was those intransigent legislatures. Of the 161 “No” votes in the House voting against the final debt deal, 95 of them were Democrats and 34 were Tea Party endorsed. The S&P was right to fear the Democrat party’s attempt to default on the US debt and for it to react by downgrading US debt to AA+. Thanks for pointing that out.
“Some of them seem more focused on defeating Obama than on the health of the nation.”
Seem? Are you being sarcastic… they openly avow it.
A modest proposal:
President Obama should go on TV and announce this: For the foreseeable future, the economy shall generate at least 300,000 jobs per month. If the private sector doesn’t generate that number with all the help we are giving and will give them yadda yadda, the government will. I will request jobs bill every month from congress for whatever the number is; I expect the American public will put sufficient pressure on their elected representatives to do the right thing and pass the bills each and every month. This, btw, will get us back to “even” in employment in roughly four years, and is a crucial component in long term deficit reduction.
Steven Kopits In his lectures Prof. Robert Fogel always used to remind students that “small times small equals smaller.” Oil prices are simply not that large of a component of US GDP to be a big player here. And the run up in prices did not begin until very late in the 1st quarter, with most of the price shock occurring in April. There was a bit of a dip in new car sales in reaction to higher oil prices
http://online.wsj.com/mdc/public/page/2_3022-autosales.html
but even the slightly dampened sales were above 2009/2010 levels.
We associate inflation with oil prices because Arthur Miller tried to maintain aggregate demand with easy money back in the 1970s–but it didn’t work.
Okay, Arthur Miller was a playwright. I think this is a composite of Arthur Burns and Bill Miller, right? But I like the playfulness. ;->
If the Fed doesn’t try to maintain aggregate demand, then I don’t quite see how you get sustained, broadbased inflation. You can get some transient spikes in certain commodities, but you’ve really got to work at it to get inflation. Sorry, but I just don’t find this credible.
But who was calling for a recession? We were. But not CBO, not OMB, not Macroeconomic Advisors, not Goldman, not the Fed,
We still don’t have a second dip recession, so if you predicted we would be in one today, then your prediction was wrong. Plenty of folks, including all of those you named plus many you didn’t, were very worried about a very fragile recovery that might feel an awful lot like a recession. And those predictions were being made 2 years ago based on known phasing out of fiscal stimulus.
I think we can agree that it is almost certain economic growth will be limp for quite awhile, and there’s a decent chance of a double dip in the next 6 months. But what’s happening in Europe and the idiocy of the Tea Party will be more determinative than 20% swings in oil prices.
Jeff This is nonsense. The Administration offered a “grand bargain” that would have been three-fourths spending cuts (including entitlements) and one-fourth tax hikes. That plan met wih S&P’s approval, although I’m not sure just who died and left S&P in charge. But I digress. Once S&P’s math error was pointed out to them they changed their story and blamed political brinksmanship. S&P agreed that there was no serious question about the the government’s financial ability to pay, now or in the future. So this wasn’t an economic issue. The political brinksmanship that S&P was talking about was Sen. McConnell’s promise that threats to default would be permanent features of the landscape as long as the GOP had anything to say about it. Sen. McConnell concluded that “ransoming the hostage” worked, so the GOP was going to run that play again and again. If there is a risk of default it is because of the GOP’s eagerness to play chicken; it is not and never was due to the economic inability of the US government to pay its debts. This whole “equivalence” argument is garbage. There is no equivalence between the two sides. The Democrats bent over backwards to negotiate; meanwhile the GOP had two factions. One faction wanted to push things to the last minute, while the other faction actually looked forward to default and seemed to get some kind of perverse pleasure out if.
Set the inflation target to 4%, sure. But we need an instrument to actually make things happen regardless of expectations – where reality leads, expectations will follow. So I say mint The Coin, or two of them. Put them on deposit at the Fed. Use them to write checks against, payable to households in amounts inversely proportional to household income. Lather rinse repeat until recovered.
This proposal is sarcasm, right? Just print money. Why didn’t I think if that?
Economists used to understand the importance of honest prices generated by supply & demand as the invisible hand insuring optimal allocation of resources.
Slug: Your story makes a nice liberal narrative, but fails to recognize the overall facts. The democrats want to bridge the budget gap with tax increases and the republicans want to bridge the gap with entitlement reforms. The resulting deal made no progress on either ends and that is the reason for the downgrade. It could have been avoided with serious concessions from either side, it did not require concessions on both ends. Since either side had the power to avoid the downgrade, neither side can legitimately put the blame on the other. You can say that the democrats “bent over backwards” on the negotiating table, but the end results do not support that interpretation. In the end there was nothing more than (maybe) a few billion in actual cuts that won’t make a dent in the long-term situation. Serious entitlement reform was never on the table and the fact that democrats have refused to put it on the table was just as detrimental as the republicans failing to put tax increases on the table.
Bryce We’re in a recession. Worse yet, we’re in a recession with a low output equilibrium. Sorry, but the invisible hand cannot help you out here. Oh, a few days ago someone pointed out that Smith’s “invisible hand” was a metaphor and metaphors do not take the objective case. A metaphor is not an object. You are abusing the term.
Patrick I agree. The Fed has a lot of anti-inflation street cred and it will be hard to convince the street that the Fed actually intended to set a 4% target. But it’s worth a try.
The 30 years leading up to the recession was a debt-fueled gamble that the future (i.e., today) would be more prosperous than it turned out to be. When the hoped for prosperity failed to materialize, the debt did not evaporate. So it needs to be paid down at the expense of current consumption. Until it is paid down more, consumption will not recover. But I agree that this is a good time for public sector investment in basic infrastructure. Unfortunately, over-spending in the good times has left us with few resources to do that. Maybe the current difficulty is the hard lesson we need to truly practice Keynesian public finance in the future: run surpluses during the good times to fund stimulus in the bad times. Without that rainy day fund, Keynesian stimulus may not work.
This would be completely insane and irresponsible but it is what I would suspect from a former FED official (one who got us into this mess in the first place by a complete lack of economic understanding). The problems we face are structural which have been magnified by current and past policy error after policy error. Thinking that this problem can be solved by the same bankrupt policies of the past is thinking that needs to be retired….and soon.
By all means, let’s have more policy born of panic and fear. That’s been a recipe for success many times before.
The only true stimulus is coming in November 2012.
The idea of spending on infrastructure on the one hand sounds good to me, because we certainly need to invest in our roads and bridges and it would help put construction workers back to work. Moreover, the world is still willing to lend us 10-year funds for 2.5%, so it’s not like we couldn’t in theory fund this investment. The problem, though, is that infrastructure development takes planning and engineering work by relatively few people before construction begins, so I don’t think it would have quite the immediate impact that we would hope. Plus, with all the bickering in Washington (from both sides), how would we decide what projects get the green light and which don’t? Unfortunately, politics would play too much of a role, I think, and instead of repaving the roads and bridges that need it the most, we’d see a lot of projects in Nevada, Kentucky, Ohio, and California with nothing for the rest of the country. Plus, the cynic in me thinks that instead of selecting contractors based on cost and quality of workmanship, there would be all kinds of strings attached to steer it to firms owned by women, minorities, etc.
For all those who believe in Keynesian economic on the national government level, MarkOhion says: “Maybe the current difficulty is the hard lesson we need to truly practice Keynesian public finance in the future: run surpluses during the good times to fund stimulus in the bad times. Without that rainy day fund, Keynesian stimulus may not work.”
How can the US Govt build a rainy day fund? The closest thing we have are the various Trust Funds (TF), and they are calculated as debt. The largest is the SSTF, and it’s use is totally misunderstood. The other TFs used to provide the borrowing head space since the debt ceiling was breached in May, will require even more borrowing to ?replace? (or probably not).
Keynesian economics do not work at this level. Only the spending side is even implementable, which forces the ?savings? side to add to borrowing. Amazing
Slugs –
Yes, Burns.
Oil is, in fact, a large component of consumption. In every case, when oil consumption has exceeded 4% of GDP, the US has gone into recession. We’ve been running 5.5-6.0% since April, plenty high enough to induce a downturn. The transmission time for an oil shock into the economy historically is 30-180 days. Our formal presentations since mid-April have, without exception, suggested a recession by end of summer. (See this article, for example, http://www.aspousa.org/index.php/2011/04/pick-one-spr-or-recession/)
As for GDP growth predictions, I follow them more or less real time. Menzie and Jim typically post a number here. These forecasts have been revised down during the course of the first half of the year. I seem to recall Goldman, Macroec Advisors, and the Fed all made such negative revisions, with most of them calling for renewed growth in H2. A number of economists, including Fed Chair Bernanke, have described recent weak growth as “puzzling” or unexplained. (“The economy’s continuing struggles aren’t just confounding ordinary Americans. They’ve also stumped the head of the Federal Reserve. Fed Chairman Ben Bernanke told reporters Wednesday that the central bank had been caught off guard by recent signs of deterioration in the economy.”, June 22,
http://apnews.myway.com/article/20110622/D9O16AK02.html).
If you’re using a simple oil model, none of this is unexplained. The data is entirely consistent with the model.
Now, we could have a “soft landing” for oil prices, which is the equivalent of the administration’s “get used to it” policy. This is possible, but it has very little support in the historical record: it would be a substantially anomalous outcome. And indeed, events on the ground are suggesting that the recent high oil prices are inducing a recession, consistent with historical precedent.
Cuts in government spending clearly takes away from job creation. The Economist cited a 1.4 percent decrease in GDP will be caused by cutting government spending. Things are so backwards. Supporting job growth, investment in companies that hire, etc. would yield tax revenues that would balance the budget. Fiscal restraint in a recessionary period. This has happened before, before the great depression.
Slug: Relative prices ARE the invisible hand. Nothing metaphorical there, just reality. Why don’t you just say you don’t believe in markets but only in govt manipulation & be done with it.
Many actions that would be helpful—
extension and enlargement of the payroll tax cut,
Many see this as a supply side tax cut. It is absolutely the dumbest thing anyone could ever come up with and it is definitely not supply side. We have Social Security and Medicare and a tax that is supposed to be dedicated to paying for each. Both programs over-spend the tax receipts supporting them. So for some reason reducing the tax receipts is supposed to make things better? Only an academic economist could come up with such foolishness.
extension of unemployment benefits,
As I have stated before this is the best way to increase the number of unemployed. If you lower the cost for being unemployed is that actually supposed to reduce unemployment? Agan this makes no sense.
extension of aid to the states,
If states have a need for additional revenue they should tax their own citizens. Taxes taken to the states then returned to the states do nothing but siphon off $0.75 or every dollar, returning $0.25 to the states at most. Why not allow the states to keep the entire $1.00? Additionally, this usually means that states that are fiscally responsible end up paying for the incompetence of fiscally irresponsible states. Additional foolishness.
substantial and accelerated infrastructure program
Let’s hear it for shovel ready jobs – oh, that’s right, they are not “exactly” shovel ready. I do not need to comment on this when President Obama has done such an adequate job.
—require Congressional approval.
Thanks God. Congress is the problem but at least this will make it harder to institute such disastrous policies.
Milton, did it ever occur to that maybe, just maybe, The Economist, like Krugman and slugbutt and Menzie, might be wrong.
The goals are to push down bond yields and mortgage rates, to push down the value of the dollar in terms of foreign currencies – Great idea what is pegged to the USD? The Yuan, de-peg the Yuan repatriate US firms (manufacturing/mining etc), see flow of dead pools of dollars held offshore to avoid the 35% tax come back to the US. Stimulate the economy. This is a pathetic excuse of a piece……Why does everyone neglect the Chinese Yuan, bring exporting back to the US. As for push down bond yields to help with mortgages – please think principal repayments, all a steep yield curve does is make banking more profitable. This medicine has not worked previously (presumably because these cuts in Long Term interest rates don’t get passed onto the everyday home owner). This method implies giving a dying person more medicine despite the fact this medicine has been proven not to work previously…..Very costly experiment, that will fail…….
Jeff The resulting deal made no progress on either ends and that is the reason for the downgrade.
How does this address my point that Obama offered a “grand bargain” that was rejected by the Tea Nuts in the GOP? The “grand bargain” more than met S&P’s desired debt reduction target. The “resulting deal” may have disappointed S&P, but the “resulting deal” wasn’t the one initially advanced by Obama. You claimed that the Democrats did not offer to cut entitlements. This claim is simply false. An offer was made and the GOP declined because it included increases in tax revenues.
Serious entitlement reform was never on the table and the fact that democrats have refused to put it on the table was just as detrimental as the republicans failing to put tax increases on the table.
So $3.2T in spending cuts along with $0.8T in tax revenues was not your idea of “serious”? You’re simply off on Planet Triscallion here.
Look, McConnell said that holding the debt ceiling hostage was going to be the template for all future debt ceiling increases. What spooked S&P was the fear that future games of chicken are likely to get out of control. S&P’s amended statement made it pretty clear they did not question the US govt’s economic ability to pay; only the possibility that something could go wrong in future games of chicken.
Bryce Why don’t you just say you don’t believe in markets but only in govt manipulation & be done with it.
Because that is not what I believe. Markets are very good at allocating goods and services through price signals, but I’m not quite as infatuated with microeconomics as you are. Markets are not perfect. Sometimes markets fail. Sometimes we have recessions. Recessions are an indicator of market failures. And when the Walrasian market clearing interest rate is negative and the Fed rate is at zero, then the idea of “honest prices” is as meaningless as dividing by zero. Take the advanced stuff in micro and learn about multiple equilibria. Take the advanced stuff in macro and learn about being stuck in low output equilibrium points.
Steve Kopits Let’s step back and take a reality check using Prof. Fogel’s principle of “small times small equals smaller.” As a back-of-the-envelope calculation and to keep the arithmetic simple, let’s assume a $14T GDP and we’ll use your value of oil representing 4% of GDP. The run up in oil prices earlier this year lasted about 5 weeks (call it one-tenth of a year). The price hike was roughly 20%. So:
$14T x 0.04 x 0.10yr x .20 additional cost ~$11.2B. Do you honestly believe that an $11.2B shock could push a healthy US economy into recession? I don’t think so. Now if the price shock had persisted, as it did in many previous oil shocks, then I could be convinced. As I said before, the price hike certainly didn’t help an already fragile economy, and we may very well find ourselves in a double-dip; but that’s a long way from being able to claim that we’re going to have an oil shock recession.
Slug…bull s,
“So $3.2T in spending cuts along with $0.8T in tax revenues was not your idea of “serious”?
Actually, it was your boy Barry who rejected this deal when at the last minute he insisted on $.4T in additional taxes. He killed the deal.
Obama also said he would veto any plan that did not raise the debt ceiling past the 2012 election. Obama was willing to sabotage the debt deal because he put politics (i.e., his re-election campaign) above the interest of the country.
Nice spin though.
CoRev How can the US Govt build a rainy day fund? The closest thing we have are the various Trust Funds (TF), and they are calculated as debt.
I guess this is the man-on-the-street’s idea of Keynesian economics. Keynesian economics is not about building up “rainy day” funds. Rainy day funds may inadvertently result from Keynesian policies, but that is not the main point. The point of Keynesian economics is to soak up excess savings when aggregate demand is weak and to increase national saving through contractionary fiscal policies when the economy starts to overheat.
Keynesian economics do not work at this level. Only the spending side is even implementable, which forces the ?savings? side to add to borrowing. Amazing
You have a very short memory. In the late 90s the concern was that too much govt saving (i.e., surpluses) was acting as a fiscal drag on the economy. That was one of Bush’s justifications for his 2001 tax cut. So it’s just not true that Keynesian policies do not result in surplues; however, it is true that GOP policies do not result in surpluses. Maybe that’s what you were thinking.
2slugs, I do appreciate you trying to have a conversation, but it is so much simpler when you actually converse with the other person addressed. You see I was responding to MarkOhio re: his “Maybe the current difficulty is the hard lesson we need to truly practice Keynesian public finance in the future: run surpluses during the good times to fund stimulus in the bad times. Without that rainy day fund, Keynesian stimulus may not work.”
Perhaps you intended your comment for MarkOhio and mistakenly addressed me, or perhaps you’re more interested in taking meaningless shots
Warren You’re confused. The $0.4T tax hike proposal was to counter John Boehner’s last minute demand that Obamacare be defunded…this after Boehner had already agreed to the previous “grand bargain” but had to find a way to blow up the deal or else face the wrath of Tea Party nuts. Obama changed the deal after Boehner changed the deal. But nice attempt at BS’ing your way through.
2slugs, there you go again throwing more 2slugs bullsh$t. Obamacare can not be defunded in a separate funding bill. The original bill must be amended or repealed.
Care to provide your link to a source?
Slug,
Wallowing in Krugman’s BS and lies, eh?…
Boehner never demanded that Obamacare be DEFUNDED. When Obama insisted on a tax hike trigger in their debt deal, Boehner responded with a trigger that would end the individual mandate in Obamacare. Tit for tat. Obama’s trigger was not acceptable to Boehner just as Boehner’s trigger was not acceptable to Barry the idiot. The deal fell apart because nObama demanded higher taxes at the last minute.
And, again, Obama was willing to sabotage any deal that did not raise the debt limit sufficiently to get him past the 2012 election….because Obama cared more about his ‘politics of personal destruction’ (Kill Romney) re-election campaign than the american economy.
Keep on wallowing…..
Warren You’re right. It was repeal of the mandate, not outright defunding. However, repeal of the mandate effectively meant that taxes had to increase in order to continue Obamacare because the mandate is critical to the overall funding. But you’v got the order of events wrong. Boehner called for repeal of the mandate first, and he did so after his caucus gave a thumbs down to the original deal. Obama countered with the tax hike after Boehner threw in the healthcare monkey wrench. I realize that Boehner tried to spin it the other way for a few days, and at first Boehner somehow neglected to mention the business about repealing the mandate, but we now know the actual sequence of events. The proposed tax hike was a reaction to the new demand that the mandate be repealed.
2slugs, in response to your prior WI recall election result claim(s), the republican recalls are over and they still hold control over the WI Senate , 17 to 16 seats. Dem won two seats from damaged republicans with marriage fidelity issues.
Next week are the recall elections for two democrat senators. One of those seats is vulnerable.
I guess out spending the republicans 2:1 and wishful thinking still can’t beat logic.
Menzie, I await your election analysis.
CoRev:
The federal government can certainly park its surpluses in a bank account just like any other government or business. I called that a “rainy day fund.” Feel free to call it something else, if you prefer. But those surpluses are one side of Keyensian fiscal policy that have not existed (except for 2 years) since the 1970s. So we shouldn’t be surprised when the other side of Keyensian policy (stimulus) doesn’t work as well as advertised.
MarkOhio says: “The federal government can certainly park its surpluses in a bank account just like any other government or business. I called that a “rainy day fund.””
Actually it can not. Several laws and reality stop that from happening. Consider what would happen when the regulating, taxing, money creating/printing, law making, etc. organization (US Govt) began to invest in the considerably smaller investment/banking organization(s).
It’s not a pretty picture when we consider the likelihood of politicians managing this “rainy day fund”.
Menzie: Let’s assume that a fraction ‘alpha’ of households are ‘hand-to-mouth’ consumers in the spirit of Campbell & Mankiw. If payroll taxes are temporarily lowered for these households, we would expect a large consumption response from them. But wouldn’t we expect a small consumption response (i.e., MPC near the interest rate) for the ‘1-alpha’ other households given such a temporary change in payroll taxes?
Phil Rothman: Your logic makes sense, but payroll taxes are regressive as currently structured. So I expect the payroll tax reduction to go to a group that is more liquidity-constrained than median income tax payer.
Menzie: I agree with your hunch. Still, all else equal, it seems it would be efficient to target these funds to only the ‘alpha’ share of households; I understand, though, that political constraints could very well make such an option infeasible. For a PIH-consumer like me, the temporary payroll deduction has had no measurable effect on my planned consumption stream (and am not Ricardian enough to have reduced my consumption in expectation of a future tax increase to pay for this temporary tax change).
In a future post, it might be interesting to examine some estimates of ‘alpha,’ e.g., pre- and post-2007:12. It’s easy to imagine that a structural break has taken place through which it’s increased quite considerably.
Steven Kopits/2slugbaits:
With regard to the contribution of oil prices to recession, 2slugbaits estimates a tiny additional cost of about $11.2B over 5 weeks. Until recent years, oil/gas prices have been relatively sticky, so people made personal budget decisions based on this. Until a few years ago, low gas prices meant it was safe to buy an SUV. If the consumer assumes correctly or incorrectly that higher prices are more-or-less permanent, say for 10 years, the back of the envelop calculation becomes $14T x 0.04 x 10yr x .20 = an additional cost of about $1.12 Trillion. Of course the consumer does not break things down this way when he fills up at the gas station, but this definitely impacts consumer confidence towards personal austerity, something that could contribute to a recession. Hard to say, though, exactly how strongly oil is contributing.
The following post was made in response to a policy proposal made by Morgan Stanley economist David Greenlaw, but it also is germane to Joe Gagnon’s suggestion wrt Fannie & Freddie:
http://blogs.wsj.com/economics/2011/08/11/guest-contribution-pushing-back-on-idea-of-refi-stimulus/
I have been developing a model for what creates jobs within various societies. Two key graphs appear to tell much:
Graph 1. percent of jobs versus sources of the income — left side A direct Gov’t check, civil service, teachers, much of the income of medical practicioners, B second tier jobs– money spent that pays you which comes from an A source, … C is jobs with income that has only a slight tie to A, and B
Graph 2. percent of Gov’t spending versus economic benefit, A add productivity for all–infrastructure, effective education, loans that save an industry and get paid back etc, B spending with no expected productivity–defensive spending that we expect/imagine saves us from dread consequences, airport security, foreign wars, police and prisons, foreign aid, costly legal system, C money given out with no production– benefit is through demand creation and an economic multiplier, (money goes to rich and poor) continuing extensions of unemployment benefits versus working on something from A, free food, housing, loan guarantees for banker gaming, storing FEMA trailers for 5 years.
The results forecast that government spending is a main driver of job creation. Cutting spending on A and B jobs will create a downturn. Moving money to productive jobs will rebuild the country and the economy.
Present politics of talking motherhood issues (balanced budget amendment versus working on the above toipcs) appear aimed at job destruction prior to the next election to create a blame issue. I fell most economists know the right path but politics is the road block.