THE $858 billion tax package signed into law this month provides some stimulus for our ailing economy. With the unemployment rate at 9.8 percent, more will certainly be needed, yet further deficit spending may not be a politically viable option.
Instead, we are likely to see a big fight over raising the national debt ceiling, and a push to reverse the stimulus we already have.
In that context, here’s some good news extracted from economic theory: We don’t need to go deeper into debt to stimulate the economy more.
For economists, of course, this isn’t really news. It has long been known that Keynesian economic stimulus does not require deficit spending. Under certain idealized assumptions, a concept known as the “balanced-budget multiplier theorem” states that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.
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Saturday, December 25, 2010
Thursday, December 23, 2010
An Invitation
For any who have enjoyed following Shiller Feeds, I want to invite you to follow my new personal blog at www.durancentral.com. Perhaps you will find my posts on random topics including economics, politics, religion and technology to be of interest. I also plan to use my new blog to highlight some of the other projects I am working on that may be of interest to you.
Best wishes for a very Merry Christmas and a Happy New Year!
David
Best wishes for a very Merry Christmas and a Happy New Year!
David
Thursday, November 18, 2010
Shorting Fiscal Consolidation
NEW HAVEN – Real long-term interest rates – that is, interest rates on inflation-protected bonds – have fallen to historic lows in much of the world. This is an economic fact of fundamental significance, for the real long-term interest rate is a direct measure of the cost of borrowing to conduct business, launch new enterprises, or expand existing ones – and its levels now fly in the face of all the talk about the need to slash government deficits.
Nominal interest rates – quoted in terms of dollars, euros, renminbi, etc. – are difficult to interpret, since the real cost of borrowing at these rates depends on the future course of inflation, which is always unknown. If I borrow euros at 4% for ten years, I know that I will have to pay back 4% of the principal owed as interest in euros every year, but I don’t know what this amounts to.
If inflation is also 4% per year, I can borrow for free – and for less than nothing if annual inflation turns out to be higher. But, if there is no inflation over the next ten years, I will pay a hefty real price for borrowing. One just doesn’t know.
Sunday, November 14, 2010
Bailouts, Reframed as ‘Orderly Resolutions’
DISTASTEFUL as it may seem, we need to prepare for the next financial crisis, which, of course, will arrive eventually. Right now, though, people are so angry about the recent bailouts of Wall Street that the government may not be able to use the same playbook again.
The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. The net losses of the $700 billion Troubled Asset Relief Program, for example, which ran from October 2008 to October 2010, amounted to only $30 billion by the latest estimate. Yet TARP may have prevented many trillions of dollars of losses in gross domestic product.
Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July. It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers. Now they will be called “orderly resolutions.”
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The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. The net losses of the $700 billion Troubled Asset Relief Program, for example, which ran from October 2008 to October 2010, amounted to only $30 billion by the latest estimate. Yet TARP may have prevented many trillions of dollars of losses in gross domestic product.
Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July. It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers. Now they will be called “orderly resolutions.”
Read full commentary
Sunday, October 3, 2010
The Survival of the Safest
CORPORATE managers struggling to preserve their companies and protect their core employees have inadvertently contributed to a vicious cycle of rising unemployment and plummeting national morale. If we are to break out of this downward spiral, we first need to understand the problem, then deal with it on a huge scale.
It’s no surprise that business confidence has been shaken over the last few years. Executives are unwilling to take on new risks, and people in all walks of life are nervous about trusting in one another. In a broad sense, damage to morale — which John Maynard Keynes called “animal spirits” — surely ranks as one of the most important reasons for the American economy’s persistent weakness.
Yet professional managers throughout the business world see it as their job to keep work-force morale high. But, paradoxically, the actions they take for their own workplaces often make the overall crisis more severe.
A remarkable book by Truman Bewley, titled “Why Wages Don’t Fall During a Recession” (Harvard, 1999), provides insights into the current situation, even though it focuses on the recession of 1990-91 and the long “jobless recovery” that followed it.
Read full commentary
It’s no surprise that business confidence has been shaken over the last few years. Executives are unwilling to take on new risks, and people in all walks of life are nervous about trusting in one another. In a broad sense, damage to morale — which John Maynard Keynes called “animal spirits” — surely ranks as one of the most important reasons for the American economy’s persistent weakness.
Yet professional managers throughout the business world see it as their job to keep work-force morale high. But, paradoxically, the actions they take for their own workplaces often make the overall crisis more severe.
A remarkable book by Truman Bewley, titled “Why Wages Don’t Fall During a Recession” (Harvard, 1999), provides insights into the current situation, even though it focuses on the recession of 1990-91 and the long “jobless recovery” that followed it.
Read full commentary
Friday, September 24, 2010
Seven More Years of Hard Times?
NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-run assessment of the future of the world’s economies.
The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.
According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.
Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. So we have to be historically oriented in our method. History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.
Read full commentary
The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.
According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.
Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. So we have to be historically oriented in our method. History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.
Read full commentary
Monday, August 30, 2010
The Case for Reviving Revenue Sharing
PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.
In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.
State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.
In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.
Read full commentary
In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.
State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.
In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.
Read full commentary
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