Stimulus
A look at stimulus packages past and present, and how previous presidents FDR, Eisenhower, Ford and Clinton reacted to recessions. We'll also look at how the two main economic theories, classical and Keynesian have fared over history and why Keynesian is the view that everyone from Barack to Bush seems to be interested in today.
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I want to say that your voice is lovely on the podcast. Thanks for bringing history to the general public.
Good podcast, especially your point that stimulus only works when done on a massive scale. Bush's $150 billion sounds like a lot of money, but it's all at once, it's small compared to the $13 trillion of the total U.S. economy, and you're right that most of it will be put towards paying down debt, not buying goods and services.
And that's the real problem. The debt load of the average American has finally reached the point where people simply don't have money to spend anymore. Too much going to the credit card companies and now, the mortgage lenders.
The answer is to put out a package that will help bring down the national debt load. The government could pay a portion of everyone's credit card debt. We could limit the amount of credit an individual can receive in total. We could also cap the interest rates and eliminate a lot of the fees. And we could start requiring education programs in high school to teach kids how credit works and why it's important not to spend more than you can afford to pay off in a month.
Sound socialist? Perhaps, but we've shown no problem bailing out major corporations when they "need" it. Why? Because we believe the benefit to our society and our economy as a whole is worth it. By helping Americans pay down their debt and imposing restrictions that limit the debt load in the future, we can insure people always have money to spend. It'll mean some lean times for a while, maybe even a smaller economy overall, but once the adjustments are made, we'd be more stable.
Think that'll ever get on any presidential candidate's agenda?
And that's the real problem. The debt load of the average American has finally reached the point where people simply don't have money to spend anymore. Too much going to the credit card companies and now, the mortgage lenders.
The answer is to put out a package that will help bring down the national debt load. The government could pay a portion of everyone's credit card debt. We could limit the amount of credit an individual can receive in total. We could also cap the interest rates and eliminate a lot of the fees. And we could start requiring education programs in high school to teach kids how credit works and why it's important not to spend more than you can afford to pay off in a month.
Sound socialist? Perhaps, but we've shown no problem bailing out major corporations when they "need" it. Why? Because we believe the benefit to our society and our economy as a whole is worth it. By helping Americans pay down their debt and imposing restrictions that limit the debt load in the future, we can insure people always have money to spend. It'll mean some lean times for a while, maybe even a smaller economy overall, but once the adjustments are made, we'd be more stable.
Think that'll ever get on any presidential candidate's agenda?
I agree on your point about automatic rather than politically generated stimulus. I agree with Friedman's opinion that current rebates will only be seen as an increase in future taxation, and I don't think that directly feeding money to those that will spend it necessarily avoids this complication (what happens to the people who sell goods bought with government funds).
I would be interested to know your thoughts on the actions of the central bank, and how a central bank that appears to react to financial market sentiment (rather than in a predictable manner or reacting to indicators), might affect America's ability to react to recession. Presumably if the markets know that the central bank will react to their sentiment then they can largely remove central bank actions from their future predictions?
Also, isn't it the case that because different multipliers apply to tax cuts and government spending (only a fraction of tax cuts actually get spent), an increase in government spending financed by an equally proportioned tax cut is expansionary (at least in the short run).
I would be interested to know your thoughts on the actions of the central bank, and how a central bank that appears to react to financial market sentiment (rather than in a predictable manner or reacting to indicators), might affect America's ability to react to recession. Presumably if the markets know that the central bank will react to their sentiment then they can largely remove central bank actions from their future predictions?
Also, isn't it the case that because different multipliers apply to tax cuts and government spending (only a fraction of tax cuts actually get spent), an increase in government spending financed by an equally proportioned tax cut is expansionary (at least in the short run).
I would be interested to know your thoughts on the actions of the central bank, and how a central bank that appears to react to financial market sentiment (rather than in a predictable manner or reacting to indicators), might affect America's ability to react to recession.
I'll tackle the question in bits. But for this part...what you might want to think about it the debate over what role the 1929 Stock crash played in what really was the 1930-34 Recession. Some economists say it had no effect, others say the perception and real loss of capital among consumers lead them to cut spending.
Depending on how you interprest that event you will either support the Fed getting involved in market making (becasue the market is important to the overall ecnoomy and consumer's perception of if they should spend) or they should not play the market game because its a waste of time.
I'm in the former category. The market is a real factor on the economy. The 90's demonstrated that stock assests can make consumers feel richer and thus spend more of income than they would because they feel they have backup in the asset category. There might have been such an effect with home prices where the asset makes you feel richer.
The only question is how much to they get involved?
I'll tackle the question in bits. But for this part...what you might want to think about it the debate over what role the 1929 Stock crash played in what really was the 1930-34 Recession. Some economists say it had no effect, others say the perception and real loss of capital among consumers lead them to cut spending.
Depending on how you interprest that event you will either support the Fed getting involved in market making (becasue the market is important to the overall ecnoomy and consumer's perception of if they should spend) or they should not play the market game because its a waste of time.
I'm in the former category. The market is a real factor on the economy. The 90's demonstrated that stock assests can make consumers feel richer and thus spend more of income than they would because they feel they have backup in the asset category. There might have been such an effect with home prices where the asset makes you feel richer.
The only question is how much to they get involved?
jameskelley,
Always a pleasure.
Yes, but I think making debt payments tax deductible, as mortgage interest and retirement savings are, might be a roundabout way of doing it.
The trouble with the government paying debt as stimulus is that it leads to no direct spending and maybe there might be spending once Uncle Sam pays the consumers debt, but it all might just lead to a greater cycle of debt. People would have to feel some amount of pain for borrowing in order to stop doing it in the future.
Better regulation of lenders might help. Perhaps as the food packages clearly detail the calories for people to see or ignore, new credit cards or mortages could better make people aware of the future payments that will be due and for how long at some kind of average mimimum monthly payment cycle, so that consumers better know what they are getting.
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Always a pleasure.
Yes, but I think making debt payments tax deductible, as mortgage interest and retirement savings are, might be a roundabout way of doing it.
The trouble with the government paying debt as stimulus is that it leads to no direct spending and maybe there might be spending once Uncle Sam pays the consumers debt, but it all might just lead to a greater cycle of debt. People would have to feel some amount of pain for borrowing in order to stop doing it in the future.
Better regulation of lenders might help. Perhaps as the food packages clearly detail the calories for people to see or ignore, new credit cards or mortages could better make people aware of the future payments that will be due and for how long at some kind of average mimimum monthly payment cycle, so that consumers better know what they are getting.
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