I do find it interesting to think that the UK (in its currently financial situation) is really buying US debt at that pace. But, I guess anything is possible.

 

Well, it's an interesting angle, but the implications depend on the viewer's view of the strength of the two economies.

 

The UK and the US are both heavy borrowers at the moment.  The UK's new Conservative-led government has actually pushed through a series of tough spending cuts, actually, which I'm impressed were politically possible there (and give me hope that sanity might prevail here after the midterms, but I digress).  Both are still issuing lots of debt for the moment, though, so the UK is investing in US debt even as it's issuing its own.  Since money is fungible, it doesn't need to be explicitly or expressly stated that the UK is issuing its own debt to buy US debt.

 

So, which would concern you more:

 

(1) The US issues $1000 in new debt (i.e., borrows $1000) to buy $1000 in UK debt (i.e., to loan $1000 to the UK), or

 

(2) The UK issues $1000 in new debt to buy $1000 in US debt?

 

Neither are particularly concerning to me, honestly.  In fact, while I'm one of the bigger deficit hawks you'll find, I'd basically shrug if it came out that some of our borrowing was to buy UK debt.  It might blow up, like any bond investment, but then again, so might undiversified investments in our own debt, which is basically what we've got right now--Treasury, GSE, etc. are all different heads of the same hydra, for all practical purposes.  It's all US government debt.

 

Likewise, I'm not overly bothered by the UK doing the same thing.  In fact, all things considered, while I'd rather the US actually start getting *out* of debt, I'd much rather be indebted to the UK than to China.

"U.S. consumer sentiment plummeted in early July,"

 

So what? Who cares about consumer sentiment. Consumer sentiment is no longer corrolated with the economy.

 

Ok, maybe it's still important to some degree. But imo, consumer setiment is only applicable to purchases from disposable income, and (imo) disposable income is a much smaller percent today of the economy than it has been in the past 40 years. I have no proof of this, just my feeling.

 

So it doesn't matter how happy or how gloomy I am about the economy, my purchases are going to be pretty much the same.

 

It matters for business expansion.  Are you going to take a chance opening a new, specialty retail store with consumer sentiment very low?  Probably not.

 

There are still some businesses that can expand even in recessions, including riskier, entrepreneurial ventures (as well as the usual recession-proof retailers like Wal-Mart).  Jeni's in Columbus has been expanding, for example.  Nevertheless, on balance, businesses are more hesitant to expand when they know that consumers are more hesitant about buying, especially when it comes to trying new things.  Consumer sentiment therefore has an indirect effect, but nevertheless a real effect.

"It matters for business expansion."

 

Good point.  And it matters for makers of durable good items as well.  I held off buying a new vehicle last year during the "Cash for Clunker" sweepstakes due to empployment concerns.  My original plan was to buy in late 2010, but I considered taking advantage of the program to move up that purchase.  Alas, I decided to stick to my original plan directly as a result of job security issues.

 

So for purchases of durable good items, people usually have some leeway in the timing of a replacement, and consumer sentiment would definitely affect that.

 

If the Dayton MSA will never recover from the recession lows, than that means that Dayton has peaked, permanently. This is a tough concept for a lot of folks.

 

I think the employment drops of the last 10 years was probably a worst case scenario for manufacturing employment in this metro area. It represents the shutdown of Delphi and GM (GM does have one plant left here), where a set of large plants downsized and closed over time. This would also have some impact on suppliers, too (like the closure of that big Cooper Tire warehouse that was visible off I-75).

Cooper is an interesting case because they were just sniped by Indiana.  The Moraine warehouse is now located in Franklin, IN in Indiana's largest 'green' building or something.

 

The problem with Dayton isn't really the loss of the blue collar jobs. The problem is what it left behind: obviously the unemployed (many of whom Dayton would be much better without), the dominant regional consciousness (anti-urban), a putrid elite (from the DDN to the "economic development experts"), and worst of all is the new kings of the region: feds, eds, and meds as they say.  While Dayton has done a good job capitalizing on the Feds (VA and WPAFB) and Eds (UD, WSU, Sinclair) and Meds (the reinvestment from the hospitals into the city is extraordinary), this trifecta lacks the sort of dynamism necessary to attract people continually to the region.

So after all that taxpayer money, we are basically back to were we started before the tax credit (in housing). All those billions and we are still sitting in the same boat. What a great use of economic resources. Home prices (new and preowned) will start a noticable decline by fall, if not sooner.

 

U.S. housing starts drop 5% to 8-month low

Number of homes under construction falls to record low in June

 

"WASHINGTON (MarketWatch) -- Ground-breaking on new housing units fell sharply after a federal tax credit for buyers expired, putting the housing sector back in the dumps where it was a year ago, according to Commerce Department data released Tuesday."

 

"Despite record-low mortgage rates, housing is at risk of a double dip [recession] unless job growth strengthens soon," wrote Sal Guatieri, a senior economist for BMO Capital Markets."

http://www.marketwatch.com/story/us-housing-starts-fall-5-to-8-month-low-2010-07-20

I think we can only hope that the tax credit pulled out enough shadow inventory and allowed those who really needed to sell to get out of the market to make the next leg down less traumatic.

Actually, out of all sectors, housing is one of the least concerning to see a decline in market.  Money that enters the housing market tends to enter fixed, illiquid assets (i.e., the houses themselves) and therefore essentially become frozen in amber for the long term.  Money *not* spent on housing is money freed up for other purposes that preserve the "velocity" of money, i.e., the rate at which it circulates through the economy.

 

Of course, I have the luxury of taking a bird's-eye, macroeconomic view of this because I don't actually own a house in which I'm watching equity evaporate.

 

Realistically, though, the only sector I'd like to see shrink more than housing is the public sector.

" Money that enters the housing market tends to enter fixed, illiquid assets (i.e., the houses themselves) and therefore essentially become frozen in amber for the long term."

 

Not sure I totally agree with this.  A mortgage payment is like a conduit between the home-owner and the bank.  The money (numbers in books) flows from the home-owner to the bank via the monthly mortgage payment and then is lent out again to an expanding company that hires people and orders materials.

 

Concerning housing, the velocity of money is there.  It may be a little less than when a homeowner spends money at the local restaurant, but I don't think I would categorize the money as 'frozen for xx years'.

So after all that taxpayer money, we are basically back to were we started before the tax credit (in housing). All those billions and we are still sitting in the same boat. What a great use of economic resources. Home prices (new and preowned) will start a noticable decline by fall, if not sooner.

 

U.S. housing starts drop 5% to 8-month low

Number of homes under construction falls to record low in June

 

"WASHINGTON (MarketWatch) -- Ground-breaking on new housing units fell sharply after a federal tax credit for buyers expired, putting the housing sector back in the dumps where it was a year ago, according to Commerce Department data released Tuesday."

 

"Despite record-low mortgage rates, housing is at risk of a double dip [recession] unless job growth strengthens soon," wrote Sal Guatieri, a senior economist for BMO Capital Markets."

http://www.marketwatch.com/story/us-housing-starts-fall-5-to-8-month-low-2010-07-20

 

 

 

Abscent economies external to the supply and demand system, govenment intervention in market economies is at best only delays the inevitable.  Macro Econ 101. 

 

You can't fight the markets.

"Actually, out of all sectors, housing is one of the least concerning to see a decline in market"

 

I would agree with this.  However, a lot of people (especially in the government) would probably disagree with you.

 

The building of houses generates a lot of jobs, and generates the purchase of a lot of other items (materials to build the house pickup trucks for contractors, and furnishings to furnish the house and yard).  That is the stuff that governments like to see happening.  (the price of housing is seconday to the government except when it leads to an obliteration of the financial institutions, like we've seen in the past couple of years).

 

I still contend that if the house building had remained at it's normal pace for the past 10 years instead of booming, then the economy would still be languishing in the 2001 recession.  Without the housing boom, I'm not sure we would have come out of the 2001 recession in any meaningful way. (may have bumped along the bottom for 10 years, much like the vision of our economic future held by a number of people.)

Abscent economies external to the supply and demand system, govenment intervention in market economies is at best only delays the inevitable.  Macro Econ 101. 

 

You can't fight the markets.

 

But you can clearly manipulate them.  And if so, when aggregate demand falls, why not manipulate them so that it rises until the private sector is employing enough people to stop the manipulation?

 

So after all that taxpayer money, we are basically back to were we started before the tax credit (in housing). All those billions and we are still sitting in the same boat. What a great use of economic resources. Home prices (new and preowned) will start a noticable decline by fall, if not sooner.

 

What taxpayer money?  I thought it was a tax credit, meaning that you get that back if you engage in an economic activity that the government deems worthy of crediting back tax revenue to you?  This represents the foregoing of tax revenue, which is something that is typically looked on with favor by people of a certain political persuasion.  Or are you equating tax credits with subsidies?

" Money that enters the housing market tends to enter fixed, illiquid assets (i.e., the houses themselves) and therefore essentially become frozen in amber for the long term."

 

Not sure I totally agree with this.  A mortgage payment is like a conduit between the home-owner and the bank.  The money (numbers in books) flows from the home-owner to the bank via the monthly mortgage payment and then is lent out again to an expanding company that hires people and orders materials.

 

Concerning housing, the velocity of money is there.  It may be a little less than when a homeowner spends money at the local restaurant, but I don't think I would categorize the money as 'frozen for xx years'.

 

You're looking only at the cash flow statement, not the balance sheet, when you do that.

 

The bank is only getting $2000/mo. in mortgage payments because it committed $250,000 of its capital to the mortgagor.  The money is lent out again, yes, at $2000/mo. or so--but it would have been more productive to loan all $250,000 to viable business (who will, as you noted, hire people, order materials--and also ramp up production of useful products faster than it could have without the loan) rather than a home purchaser at the outset.  Or, in the alternative, it would have been better to loan the homeowner $175,000 to buy the exact same house at market prices (i.e., not propped up by government subsidies like the first time homebuyer credit and the mortgage interest deduction), have $75,000 immediately available to lend to more productive enterprises, *and* have a slightly smaller stream of money coming in to replenish the capital lent.

"Actually, out of all sectors, housing is one of the least concerning to see a decline in market"

 

I would agree with this. However, a lot of people (especially in the government) would probably disagree with you.

 

The building of houses generates a lot of jobs, and generates the purchase of a lot of other items (materials to build the house pickup trucks for contractors, and furnishings to furnish the house and yard). That is the stuff that governments like to see happening. (the price of housing is seconday to the government except when it leads to an obliteration of the financial institutions, like we've seen in the past couple of years).

 

I don't think the price of housing is all that secondary to the government because it is of primary concern to a great many homeowning voters, which will place democratic pressure on the representative branches of government (for better or worse).  Obviously, the construction industry has a political presence of its own and certainly will not be ignored, but it's not quite as broad-based as the homeowning population.

 

The building industry does generate a lot of jobs, but if the decline in residential unit prices is persistent, then gradually, that sector will shift towards commercial construction, industrial construction, and other higher-end fields that not only demand greater skill (and commensurately higher paychecks), but also involve the construction of facilities that have more enduring and widespread positive economic effects than any residence.  What really adds more to the economy, a $1 million single-family home or a $500,000 build-out of a couple of storefronts?  Well, up front, the home does--the dollar figure is the dollar figure.  But over time?  That's less clear.

"I don't think the price of housing is all that secondary to the government because it is of primary concern to a great many homeowning voters, "

 

By adding my qualifier "except when it leads to an obliteration of the financial institutions, like we've seen in the past couple of years)", I was basically saying that current conditions are an excpection to my statement about government caring about house prices secondarily. Normally, house prices rise slowly over time, on falling (oh so gently) in rare cases.  Therefore, normally the price of housing is not all the pressing on the minds of home-owners, since they are not starring at a big loss on the sell of the asset.

 

I'm sure the government cares very much about the price of housing right now, but I still think they care how it affect banks far more than they care about how it affects votes.  I could be wrong, of course.

 

I still think under normal conditions, the government would be more concerned with the volume of economic activity derived from homebuilding than it would be with the pace of the gradual rise/fall in house values.  Present conditions excluded.

What taxpayer money?  I thought it was a tax credit, meaning that you get that back if you engage in an economic activity that the government deems worthy of crediting back tax revenue to you?  This represents the foregoing of tax revenue, which is something that is typically looked on with favor by people of a certain political persuasion.  Or are you equating tax credits with subsidies?

 

I believe the recent home-buying tax credit was actually a direct government subsedy, in that you got the moeny whether you paid any tax or not. My co-worker's daughter bought during the time period.  She will probably end up with a tax liability for the year of maybe $500.  However, she got an $8000 credit against that $500 tax liability and does not have to pay back the additional $7,500 credit she received against no tax liability.  Therefore, I call it a direct subsidy.  (it's like giving every tax payer the child tax credit for 8 kids, even if they have no children.)

 

As to the taxpayer money, yes, it's giving away tax money that would normally be collected.  By shorting the community pot, you are effectively taking money away from everyone.

 

At least that's how I see it.

^Interesting information.  But ultimately the point of my comment was in the last sentence, that a tax credit (by which I mean government forgoing tax revenue if someone engages in a particular economic activity) and a direct subsidy for a specified activity are effectively the same thing.

 

So clearly taxpayer money is being spent.  But really the subsidization of owner-occupied housing has been a feature of American life for decades, and it holds strong bi-partisan support:

http://article.nationalreview.com/438340/we-cant-afford-this-house/christopher-papagianis-and-reihan-salam

Abscent economies external to the supply and demand system, govenment intervention in market economies is at best only delays the inevitable. Macro Econ 101.

 

You can't fight the markets.

 

But you can clearly manipulate them. And if so, when aggregate demand falls, why not manipulate them so that it rises until the private sector is employing enough people to stop the manipulation?

 

So after all that taxpayer money, we are basically back to were we started before the tax credit (in housing). All those billions and we are still sitting in the same boat. What a great use of economic resources. Home prices (new and preowned) will start a noticable decline by fall, if not sooner.

 

What taxpayer money? I thought it was a tax credit, meaning that you get that back if you engage in an economic activity that the government deems worthy of crediting back tax revenue to you? This represents the foregoing of tax revenue, which is something that is typically looked on with favor by people of a certain political persuasion. Or are you equating tax credits with subsidies?

 

Because then you have to manipulate them forever.  Eventually, the tax payer gets tired of that or runs out of money to pay those taxes.

Canada does not and never has subsidized its housing market and their economy is dong fine.  There is no longer any justification for doing so in the U.S. It has only perverted the markets, regressively taxed the poor to the benefit of the rich and resulted in boom/bust cycles.

^Agree absolutely.  But this is a mistaken policy that has overwhelming bi-partisan support.

I'm sure the government cares very much about the price of housing right now, but I still think they care how it affect banks far more than they care about how it affects votes.  I could be wrong, of course.

 

That would be an understatement. They care very much for how this affects the BIG banks and major Wall Street financial firms. Almost all efforts by the FED have been to ensure the health of these entities. All other effects are secondary.

After trillions, we are still 'unusually uncertain' about the economy. WEW!!!!

I think we are being prepared for more taxpayer funded intervention. Just give all US adult citizens $200,000 and dictate they must use it to pay down debt before they use it for other things and we will see things get a lot better fast. Of course inflation would go through the roof, but that would be just a side effect. :wink:

 

Bernanke says outlook uncertain

Says Fed may do more to spur growth but doesn't elaborate

 

"WASHINGTON (MarketWatch) -- Federal Reserve Board Chairman Ben Bernanke said Wednesday the outlook for the economy is "unusually uncertain" and the Fed is willing to do more if growth proved to be weaker than forecast.

 

"We remain prepared to take further policy actions as needed to foster a return" to full employment with low and stable inflation, Bernanke said in written testimony prepared for the Senate Banking Committee."

http://www.marketwatch.com/story/bernanke-to-address-fears-of-the-double-dip-dragon-2010-07-21?dist=countdown

 

 

The BLS has released the state employment numbers for June. 

 

Apparently, for Ohio private sector employment, there was growth on-par with mid 2000s trends, meaning an increase in employment.  So, as far as the employment picture is concerned, the Ohio economy was generating since January, the same number of jobs, on a monthly basis, as it did before the recession.

 

Based on the forecasts above I'd say we'd probably see a small drop in July, but within the range that we would see in a normally functioning economy. In fact, if the economy is in recovery, we should see the usual up/down variation around the May/June highs.

 

The thing to look for would a consistent drop in employment July, August, and September.

 

The problem of course is that this does not dig us out of the hole we dropped in during 2008/2009.  We are locking in at a considerbaly low level of employment vis a vis before the recession.

 

^Agree absolutely. But this is a mistaken policy that has overwhelming bi-partisan support.

 

That is why both the Democrats and the Republicans are bums. 

Its comforting to know that each one of us, in some small way, helped these starving executives make it through these tough times.

 

Bailed-out banks paid execs $1.6 bln: reports

 

"SAN FRANCISCO (MarketWatch) -- The U.S. Treasury's pay czar Kenneth Feinberg said that 17 bailed-out banks paid their top executives a total of $1.6 billion during the financial crisis, according to media reports Friday. Feinberg reportedly said he does not have the authority to get the banks in question to repay the lavish payments that were made while the banks were receiving taxpayer funds."

http://www.marketwatch.com/story/bailed-out-banks-paid-execs-16-bln-reports-2010-07-23

I don't care how much money they're making, I would just like an apology from at least one of the probably 2000 people who were involved in this disaster. Salary caps don't change behavior.

Just like the car industry.  The government should have let the banks go under.  The market will rightsize itself.

^The General Motors and Chrysler went through bankruptcy because they were unable to get the short term operating loans that they rely on to make payroll and other things over their massive operations because the banking system shut down.  Ford didn't because their CEO Alan Mullaly mortgaged the entire company:

 

"In 2006, Mulally led the effort for Ford to borrow US$23.6 billion by mortgaging all of Ford's assets. Mulally said that he intended to use the money to finance a major overhaul and provide “a cushion to protect for a recession or other unexpected event."

 

The idea that we should just let a crisis continue because for reasons of punishment when we have the capability to respond and fix it is an idea that generally finds precious few adherents.  People in the U.S. expect their government to be responsive, since it is of, by and for the people.

 

I'll take history, culture and the law over blind faith in the market.  As Oliver Wendell Holmes, Jr. dissented in Lochner v. New York, "The case is decided upon an economic theory that a large part of the country does not entertain."

http://www.law.cornell.edu/supct/html/historics/USSC_CR_0198_0045_ZD1.html

 

I don't care how much money they're making, I would just like an apology from at least one of the probably 2000 people who were involved in this disaster. Salary caps don't change behavior.

 

Wouldn't that moment be something.

You're begging the question of whether the federal government prevented any crisis from continuing, and assuming that the federal government does indeed have "the capability to respond and fix it."  Those are both questionable premises.  Bailing out Chrysler, GM, and most of the major banks did not prevent a crisis, certainly.  Did it prevent a worse crisis?  The administration's own figures suggest otherwise, much as they've tried to explain away the infamous graph showing unemployment higher with the bailout and stimulus than it was estimated to go if the government did nothing.

 

Blind faith in the market, you say?  I'll take "blind faith in the market" (which I contend is precisely the opposite of blind--it is rational and based on the demonstrably superior results of free enterprise over central planning) over blind faith in the government.  And I think that that is "an economic theory that a large of of the country does entertain."

 

Sweeping rhetoric about "history, culture, and the law" is as misplaced as it is ambiguous.  Free enterprise is a part of our history.  It remains a large, albeit sadly diminishing, part of our culture and law as well; we're moving away from that into a culture and economy based more on privilege, entitlement, grievance, and identity.  Given that none of the above actually add any productive skills to a workforce, it's small wonder that our jobs are heading overseas.

 

Germany, which has managed to control its spending and has resisted the siren's song of "stimulus" much more than Washington has, now has unemployment two percentage points lower than America (US = 9.5%, GER = 7.5%).  That would have been considered almost impossible not so long ago, given Germany's notoriously sclerotic labor laws; they've moved in a free-market direction and reaped the benefits, however, while we've moved away from free market policies and have paid the price.

 

The UK is buckling down on spending, too.  I'll make a bet with you, LK: Assuming that the US keeps dishing out the stimulus cash under Obama and PM Brown in the UK manages to hold the discipline necessary to maintain his austerity budget, the UK's growth will be higher than America's, both in terms of employment and GDP, over the next two years.  Taking me up on it?

^Now I am beginning to suspect that you actually enjoy our little chats as much as I have.  But why did you abruptly end the last topic of discussion only to start up again over here?  Consider that question as me begging you for an answer.

 

Did it prevent a worse crisis?  The administration's own figures suggest otherwise, much as they've tried to explain away the infamous graph showing unemployment higher with the bailout and stimulus than it was estimated to go if the government did nothing.

 

Where are you getting this from?

 

The UK is buckling down on spending, too.  I'll make a bet with you, LK: Assuming that the US keeps dishing out the stimulus cash under Obama and PM Cameron in the UK manages to hold the discipline necessary to maintain his austerity budget, the UK's growth will be higher than America's, both in terms of employment and GDP, over the next two years.  Taking me up on it?

 

Sure.  Growth starting when and ending when?  Since we're both gentlemen, shall we say a dollar, a la Mortimer and Randolph?

^Now I am beginning to suspect that you actually enjoy our little chats as much as I have. But why did you abruptly end the last topic of discussion only to start up again over here? Consider that question as me begging you for an answer.

 

Did it prevent a worse crisis? The administration's own figures suggest otherwise, much as they've tried to explain away the infamous graph showing unemployment higher with the bailout and stimulus than it was estimated to go if the government did nothing.

 

Where are you getting this from?

 

The chart is available here (among many other places), and I deliberately picked a source that is generally favorable towards Obama: http://www.theatlantic.com/business/archive/2009/07/the-politics-of-a-second-stimulus/20678/.

 

The UK is buckling down on spending, too. I'll make a bet with you, LK: Assuming that the US keeps dishing out the stimulus cash under Obama and PM Cameron in the UK manages to hold the discipline necessary to maintain his austerity budget, the UK's growth will be higher than America's, both in terms of employment and GDP, over the next two years. Taking me up on it?

 

Sure. Growth starting when and ending when? Since we're both gentlemen, shall we say a dollar, a la Mortimer and Randolph?

 

Starting July 1, 2010 (i.e., already started, but backdating to the first day of the quarter should make measurement a little easier); ending June 30, 2011.  Bet is off if the GOP recaptures either chamber of Congress in November 2010 or if the British ruling coalition either fractures or abandons the austerity budget and switches to a more stimulus-heavy economic philosophy for growth.

^Your time frame seems to be one year to me.  Shouldn't it extend to June 2012?

 

I'm don't really understand why the bet should evaporate given a change in policy in Britain, since that seems to me a failure of your advocated policy, though I would be willing to allow for a dissolution if the governing coalition broke up.  But I suppose I would be willing to grant that change in the terms if you allow that the bet is off if the Obama administration doesn't engage in any more stimulative policy during the agreed upon time-period, and furthermore would not consider extention of unemployment benefits and the like as stimulus but rather relief.

 

My argument is that austerity *works,* not that it's *popular.*  Therefore, I propose that the bet be off if the UK abandons its commitment to austerity because I can't show that it works--at least if you're unwilling to accept the theoretical case for it, which is clearly the case--without a subject country making it work (though I did already advance Germany as another successful case study, and I could likewise advance Greece as evidence of the opposite).

 

I don't recognize any difference between "stimulus" and "relief" (never mind the fact that half of the people supporting the further extension of unemployment benefits are talking about its purported benefits to the economy), and I'm not sure how you're defining the difference or what relevance you believe it has.  More importantly, though, I would add that I consider the continued distribution of the stimulus funds already authorized to be "more stimulative policy during the agreed upon time-period."  The ARRA appropriations are not even close to exhausted yet.

Did it prevent a worse crisis? The administration's own figures suggest otherwise, much as they've tried to explain away the infamous graph showing unemployment higher with the bailout and stimulus than it was estimated to go if the government did nothing.

 

I'm not sure why we are supposed to consider the stoking of demand through government expenditure a failure if the money has actually funneled its way to the economy, given that less than half of the contracts grants and loans money has even been paid out.  Since they are mostly funneling that money through state governments its possible (I don't know) that it still hasn't reached its intended end.

 

But if we are to view it as a failure, it seems more of a failure of tax benefits as stimulus since most of those have paid out:

http://www.recovery.gov/Pages/home.aspx

http://www.recovery.gov/pages/textview.aspx?List=%7BEB595CCA%2DD93F%2D48F4%2DAF96%2D11E2D41DE73D%7D&xsl=Charts/FundingOverviewChartTextView.xsl

Germany, which has managed to control its spending and has resisted the siren's song of "stimulus" much more than Washington has, now has unemployment two percentage points lower than America (US = 9.5%, GER = 7.5%).

 

Like parts of the U.S., their wages have dropped from increased export jobs. It's not all rainbows and butterflies. Consumption in Germany is stagnant and that puts them at risk for deflation. Deflation increases the real value of debt and they (along with other European countries) have a lot more debt to deal with as percentage of GDP than we do.

I don't care how much money they're making, I would just like an apology from at least one of the probably 2000 people who were involved in this disaster. Salary caps don't change behavior.

 

Wouldn't that moment be something.

 

Can you imagine? Someone like Kathleen Corbet gets up on stage and says "Hi, I'm personally responsible for the fact that millions of people have no assets and can't send their kids to college". That would never happen. I'd definitely prefer seeing that over a salary cap though!

That's just it: The aid to state and local governments was largely not block grants being channeled to construction projects and other things to put unemployed people to work.  It was to prevent state governments from having to cut salaries, benefits, and personnel the way the private sector had to.  What the administration did not appreciate is that trying to insulate the public sector from the pain made the private sector pain worse, and also introduced a great deal of uncertainty, which smothers entrepreneurship and investment.  Will these state and local governments make cuts when the stimulus cash runs out, or will they simply jack up taxes?  Will there be another round of stimulus spending to keep state and local government workers employed and shielded from the economic winds, and who will pay to maintain that shield?  When will the bill come due?  How much will it be?  These kinds of things are paralyzing to small business owners, and even midsize business managers, who want to know whether they can feel safe expanding.

 

The psychology of debt matters, particularly when there is low trust between the bulk of the public and the government--and even moreso when that low level of trust is well-deserved.  There would definitely be some people worse off if TARP and ARRA had never happened, if Fannie, Freddie, AIG, and the other subprime-entangled behemoths had been allowed to fold, etc.--but most people would notice very little difference.  I say this, incidentally, as someone who would have had more to lose than the "most people" in my previous sentence.  The government is out of touch with people whose only real contact with the banking system is a checking account, credit card, and a mortgage (maybe).

 

Likewise, elite psychology matters, too--and I see it as the primary obstacle to real reform, as much as the direct spending of public employees' unions and the other pigs at the trough.  The people in the elite class today don't want to admit that curbing the salaries and benefits of teachers, police, health inspectors, and other civil servants might actually be good for the larger economy.  Hence, they're susceptible to confirmation biases when someone tells them that aid to state and local governments is "necessary" to prevent something horrible.

If their were no bail out. Your pension would be worthless. Is that what you wanted?

If their were no bail out. Your pension would be worthless. Is that what you wanted?

 

Why do you believe that all pensions would be worthless sans bailouts?

 

By the way, I have no pension and don't plan on retiring for 35-40 years, so I'm probably not the best test subject.  I've got a 401(k) and a Roth IRA and a traditional brokerage account, so I have significant market exposure.  I keep very little of my net worth in FDIC-insured accounts.  Nevertheless, I could have weathered a more substantial temporary downturn than we had even as of March 2009 (when the Dow was at 6500), because it still would have come back--and it would have come back in an environment with lower national debt that will need to be paid off over the remainder of my working life and beyond.

That's just it: The aid to state and local governments was largely not block grants being channeled to construction projects and other things to put unemployed people to work.  It was to prevent state governments from having to cut salaries, benefits, and personnel the way the private sector had to.  What the administration did not appreciate is that trying to insulate the public sector from the pain made the private sector pain worse, and also introduced a great deal of uncertainty, which smothers entrepreneurship and investment.

 

How exactly does this make the private sector pain worse, if the private sector is continuing to lend money to the federal government at absurdly cheap rates.

 

Doesn't a lack of demand smother entrepreneurship and investment?  Why invest in something when no one is going to buy your product?  A lot of companies made some pretty fantastic profits this year, but they aren't making large-scale investments because they don't forsee and increase in demand anytime soon.  If you look at small business surveys you see that the number one concern of small businesses is sales, whereas the concerns they have for taxes has remained relatively consistent:

http://voices.washingtonpost.com/ezra-klein/the-problem-tax-fears-and-bad-sales.png

 

Will these state and local governments make cuts when the stimulus cash runs out, or will they simply jack up taxes?

I suspect they'll make cuts rather than raise taxes.

 

Will there be another round of stimulus spending to keep state and local government workers employed and shielded from the economic winds, and who will pay to maintain that shield?

Maybe, and people who want to buy U.S. Treasuries.

 

When will the bill come due?  How much will it be?

I'm not sure if one is able to specifically identify which part of the debt belongs to which line item of government expenditure, so I'll answer this one with: it will be paid off and rolled over indefinitely and the bill will be price + interest payments on debt when the money was allocated.

 

These kinds of things are paralyzing to small business owners, and even midsize business managers, who want to know whether they can feel safe expanding.

The above graph from the National Federation of Independent Businesses says that presently it is Sales that are their overwhelming concern.  It doesn't say anything about their concerns about government debt, and their concerns about taxes have remained relatively constant over time.

 

The psychology of debt matters, particularly when there is low trust between the bulk of the public and the government--and even moreso when that low level of trust is well-deserved.

But even if there is a low level of trust from the bulk of the public regarding government debt, clearly that isn't so with the purchasers of government debt?  They are trusting enough to pay precious little for it.

 

There would definitely be some people worse off if TARP and ARRA had never happened, if Fannie, Freddie, AIG, and the other subprime-entangled behemoths had been allowed to fold, etc.--but most people would notice very little difference.  I say this, incidentally, as someone who would have had more to lose than the "most people" in my previous sentence.  The government is out of touch with people whose only real contact with the banking system is a checking account, credit card, and a mortgage (maybe).

 

Likewise, elite psychology matters, too--and I see it as the primary obstacle to real reform, as much as the direct spending of public employees' unions and the other pigs at the trough.  The people in the elite class today don't want to admit that curbing the salaries and benefits of teachers, police, health inspectors, and other civil servants might actually be good for the larger economy.  Hence, they're susceptible to confirmation biases when someone tells them that aid to state and local governments is "necessary" to prevent something horrible.

 

I don't see how you can honestly think that you can curb salaries and benefits at the same time.  If you are going to curb benefits you'll have to increase salaries to attract workers.  It's clear your opinion is that there should be less government workers regardless of function, but even if you as Grammarye Rex could impose your ideal number of government workers and drastically reduce pensions how you could reduce salaries as well.

I don't care how much money they're making, I would just like an apology from at least one of the probably 2000 people who were involved in this disaster. Salary caps don't change behavior.

 

Wouldn't that moment be something.

 

Can you imagine? Someone like Kathleen Corbet gets up on stage and says "Hi, I'm personally responsible for the fact that millions of people have no assets and can't send their kids to college". That would never happen. I'd definitely prefer seeing that over a salary cap though!

 

Maybe they could test run that apology concept with a Saturday Night Live act. Then check the ratings and take it from there.

That's just it: The aid to state and local governments was largely not block grants being channeled to construction projects and other things to put unemployed people to work.  It was to prevent state governments from having to cut salaries, benefits, and personnel the way the private sector had to.  What the administration did not appreciate is that trying to insulate the public sector from the pain made the private sector pain worse, and also introduced a great deal of uncertainty, which smothers entrepreneurship and investment.

 

How exactly does this make the private sector pain worse, if the private sector is continuing to lend money to the federal government at absurdly cheap rates.

 

Doesn't a lack of demand smother entrepreneurship and investment?  Why invest in something when no one is going to buy your product?  A lot of companies made some pretty fantastic profits this year, but they aren't making large-scale investments because they don't forsee and increase in demand anytime soon.  If you look at small business surveys you see that the number one concern of small businesses is sales, whereas the concerns they have for taxes has remained relatively consistent:

http://voices.washingtonpost.com/ezra-klein/the-problem-tax-fears-and-bad-sales.png

 

The overwhelming majority of the purchasers of U.S. Treasuries recently have been other governments, not U.S. private sector banks.  Also, we've already had this discussion about the skewing of the U.S. Treasury placements towards short-term debt over the past few years, meaning prodigious impending rollover demands.

 

"Lack of demand" is really "lack of demand at a given price."  The government can inflate prices for the goods produced by politically well-connected entities and call it "demand-side economics" or what have you, but it does so at the expense of others with fewer political connections.  Even just handing out free money doesn't actually stimulate demand, though, at least not enough to affect business expansion and investment--notice that the one-time checks to all taxpayers did almost nothing to stimulate the economy, no more than they did under Jimmy Carter.

 

Will these state and local governments make cuts when the stimulus cash runs out, or will they simply jack up taxes?

I suspect they'll make cuts rather than raise taxes.

 

You suspect that.  Do you own a business?  Even if you "suspected" that, how sure could you be?  Also, on what basis do you suspect that?  The only places taxes have generally been held in check is where they are put to direct democratic votes--school levies and the like.

 

Will there be another round of stimulus spending to keep state and local government workers employed and shielded from the economic winds, and who will pay to maintain that shield?

Maybe, and people who want to buy U.S. Treasuries.

 

U.S. Treasuries to buy more U.S. Treasuries to buy more U.S. Treasuries?  Will work for a while.  Will it work forever?  Ask Greece.

 

When will the bill come due?  How much will it be?

I'm not sure if one is able to specifically identify which part of the debt belongs to which line item of government expenditure, so I'll answer this one with: it will be paid off and rolled over indefinitely and the bill will be price + interest payments on debt when the money was allocated.

 

I wasn't asking which specific line items would be allocated to any particular Treasury auction.  Businesses will want to know what the bottom line is, regardless of where the money "went."  I agree with you that it's fungible.

 

The psychology of debt matters, particularly when there is low trust between the bulk of the public and the government--and even moreso when that low level of trust is well-deserved.

But even if there is a low level of trust from the bulk of the public regarding government debt, clearly that isn't so with the purchasers of government debt?  They are trusting enough to pay precious little for it.

 

For short-term debt, perhaps.  But I do not like the implicit suggestion that we should trust in the kindness of the bond markets tomorrow forever in order to spend like gluttons today.

 

There would definitely be some people worse off if TARP and ARRA had never happened, if Fannie, Freddie, AIG, and the other subprime-entangled behemoths had been allowed to fold, etc.--but most people would notice very little difference.  I say this, incidentally, as someone who would have had more to lose than the "most people" in my previous sentence.  The government is out of touch with people whose only real contact with the banking system is a checking account, credit card, and a mortgage (maybe).

 

Likewise, elite psychology matters, too--and I see it as the primary obstacle to real reform, as much as the direct spending of public employees' unions and the other pigs at the trough.  The people in the elite class today don't want to admit that curbing the salaries and benefits of teachers, police, health inspectors, and other civil servants might actually be good for the larger economy.  Hence, they're susceptible to confirmation biases when someone tells them that aid to state and local governments is "necessary" to prevent something horrible.

 

I don't see how you can honestly think that you can curb salaries and benefits at the same time.  If you are going to curb benefits you'll have to increase salaries to attract workers.  It's clear your opinion is that there should be less government workers regardless of function, but even if you as Grammarye Rex could impose your ideal number of government workers and drastically reduce pensions how you could reduce salaries as well.

 

Government salaries and benefits could drop quite a ways before people would actually bail for the private sector en masse.  Government jobs still come with a lot of perks.  At the very least, I'd rather overcorrect on that front and then gradually re-increase the offers to fill posts to be sure that we're not overpaying for public sector labor.

 

***

 

What exactly is it *you* want?  You know what I want: Balanced budgets and reduced spending to get us there.  For the record, I'd even accept increased taxes on some fronts to get us there, if the budgetary commitment were durable (i.e., a balanced budget amendment).  What is it you're after?  As best as I can read you here, you want to spend like the Prodigal Son and trust that it will all somehow work out in the end.  Is there *any* level of deficit spending or public debt that you would consider alarming?  Is 80% debt-to-GDP too much?  90%?  125%?  And if the bond markets bailed on us like they did on Greece after all that deficit spending, how would you turn around and blame it on the Republican Party?  (Come on, I'm sure you have the excuse already written.)

What exactly is it *you* want?  You know what I want: Balanced budgets and reduced spending to get us there.  For the record, I'd even accept increased taxes on some fronts to get us there, if the budgetary commitment were durable (i.e., a balanced budget amendment).  What is it you're after?  As best as I can read you here, you want to spend like the Prodigal Son and trust that it will all somehow work out in the end.  Is there *any* level of deficit spending or public debt that you would consider alarming?  Is 80% debt-to-GDP too much?  90%?  125%?  And if the bond markets bailed on us like they did on Greece after all that deficit spending, how would you turn around and blame it on the Republican Party?  (Come on, I'm sure you have the excuse already written.)

 

First off, can we agree to drop the references to Greece as a real scenario for comparison to the U.S.?  If you really think it is valid, fine, but it seems me as being silly to equate a country with 12 million people that doesn't even have control over its own currency presents a similar possible outcome for the U.S.  Japan at least seems to be a better country to compare to a stark future for the U.S.

 

For you, the goal is balanced budgets and reduced spending.  On the federal side, I'm more concerned with reducing unemployment.  I'd rather run a temporary deficit to increase aggregate demand to reduce unemployment.  I don't have a problem with the federal government using their ability to borrow at cheap rates to subsidize the work that the state and local governments do.  It certainly isn't the fault of a kid in school or university right now that the states are receiving less revenue, so it seems pretty silly possibly to reduce the quality of their education right now when we don't have to.  There is an opportunity cost associated with abruptly stopping the education system in the U.S. no matter how much one might dislike it structurally, particularly when people are leaving private schools for the public system due to reduced or lost income brought upon by the economic crisis.

 

I don't really care who gets the blame for deficit spending, Republicans or Democrats, so long as it is assigned to the policies that caused it and the politicians who pushed those policies.  You forget, I'm not the one who is arguing that balanced budgets are primary priority therefore, I don't find it to be shameful to have responsibility for them.  If you do feel that deficits are Public Enemy Number 1, then it seems to me that you should want those responsible to be notorious.  But whatever.

 

I have no idea what level would be alarming or not.  However high deficit spending has certainly occured plenty of times in the past under circumstances far more desperate than those we are facing now.

Do you really think that deficit spending will reduce unemployment, though?  Look at the graph I already linked.

 

Maybe Krugman is right and we should have simply doubled or tripled the already-massive size of the deficit to make a dent--but I simply can't believe that the appalling lack of success of the policies already tried is a recipe for exponentially more of the same.

 

Everyone wants to cite the example of WWII, but the fact is that that was the exception, not the rule--in no small part because we were the only clear winner of the war.  Even the other victorious Allies were in shambles.  For most of the 1930s, protectionist and interventionist measures did basically nothing for us; other countries were outperforming us.  I haven't seen convincing evidence that deficit spending is correlated with higher economic growth and lower unemployment in America or anywhere else.

^I don't want to cite WWII.  I've repeatedly cited the example of eighteenth century Britain as the basis for effective debt spending.  I've also repeatedly cited this book:

http://www.amazon.com/Sinews-Power-Money-English-1688-1783/dp/0674809300/ref=sr_1_1?ie=UTF8&s=books&qid=1279947686&sr=8-1

I don't want to cite WWII.

 

WWII is probably the great real-world experiment that proved the Keynsian concept correct.  That deficit was probably paid off via economic growth during the later 1940s and 1950s.

 

 

...as one can see governmental deficits were huge vis a vis the overall GDP during the war, and even during the Depression, compared to the recent past.  In real dollars the current deficit might be higher, but it's low as a percentage of the economy.

 

A difference, though, is that deficit spending for the war effort was also accompanied by wage and price controls.  And some porportion of the deficit spending went to infrastructure, both roads, airfields, and new industrial plants and machinery.  The impact of the infrastructure spending after the war was pretty impressive as helped accomodate postwar growth.

Back to the recession.

 

The Cleveland Fed has an interesting paper online that specualates that business debt might be causing the drag on economic growth.

 

Is Debt Overhang Causing Firms to Underinvest

 

Many economists have suggested that the weakness of corporate balance sheets is constraining business spending and investment, and that this in turn is impeding growth and the recovery. High levels of debt can depress spending and investment through several channels. This Commentary explains one of them—debt overhang can cause firms to underinvest—and points to ways in which this effect might be inhibiting the recovery.

 

 

 

Many economists have suggested that the weakness of corporate balance sheets is constraining business spending and investment, and that this in turn is impeding growth and the recovery. High levels of debt can depress spending and investment through several channels. Firms with high debt, for example, must devote more cash to interest payments, so they have less available for spending. The desire to repair their balance sheets may further discourage spending. Firms with weak balance sheets might also find it harder to obtain external funds for new investment projects. And when they can raise external funds, they must pay higher rates, which increases their cost of investing.

 

One particularly important investment-damping channel is one where the overhang of existing debt distorts firms’ incentives to invest, leading them to invest less than would be optimal if they had fewer liabilities. This Commentary explains this channel and the ways in which it could inhibit the budding recovery.

 

 

 

 

 

I would note that although we aren't exactly fighting a world war, we have in fact been involved in at least two rather expensive tete-a-tete this decade (and whatever one wants to call the 'war on terror' spending). There is a guns and butter situation going on that no one in Washington seems willing to acknowledge (yet).

^

The base defense budget equals the Cold War highs of around $500B  (in current $$S).  Adding the two warsputs the defense budget at around $700B, the highest since WWII.

 

In terms of the overall budget defense spending is around 20% of the budget.  Social Security is around 20%, "income security" is around 15%, Medicare is 13%, and health is 11%.  Defense is supposedly around 50% of the "discretionary" budget .

The Washington Post spent the last week covering some of the black budget world (Dayton did extraordinarily well in those appropriations). There is a lot of money in that world.