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This model seems flawed: 1. The government can increase spending, but they can't create money. Either they get it from taxes, or they get it from devaluing the

This model seems flawed: 1. The government can increase spending, but they can't create money. Either they get it from taxes, or they get it from devaluing the currency (i.e. taxing holders of currency, or currency-denominated assets). How would it help to take $1 away from an employer building widgets, and use it to hire a Diversity Coordinator at the DMV? 2. What's the long-term effect on business decisions if the only two modes the economy is in are a) growth, or b) near-zero interest rates? It looks like this would lead to lots of leverage. 3. You're assuming that it's always better for someone to have a job than to lose it. So you'd end up subsidizing candlestick makers (probably by taxing light bulb factory owners). At best, this philosophy merely gives everyone a reason to misbehave. At worst, it fines the productive, growing parts of the economy, in order to reward the unproductive, shrinking parts of the economy. America in the 1930's. Japan in the 1990's. How many lost decades will it take to discredit this stuff?

hga 17y ago
WRT to #1, before you get to the "or" items, government borrowing crowds out private, since a national government (or at least ours) is viewed as a much safer creditor in the earlier periods of economic trouble. In the longer term, sovereign debt defaults, explicit or implicit (your "or" items, including the inflation tax), inevitably follow this type of counter-cyclical spending (statistically, since this tends to be a regional or world-wide thing).
- jbooth 17y ago
  Government debt is an entirely different product than private debt. Different interest rate and all of that. Regarding the sovereign debt defaults, did we have one of those after the great depression? Sovereign debt defaults are associated with financial panics. Don't bind up intermediate (correct or incorrect) steps with the root cause.
  - hga 17y ago
    It may be a different product but it's still in the same market for people who want to lend out their money. The different interest rates are because of different perceived levels of risk; normally a government can offer less because they're viewed as more likely to return the money. If they aren't in the market or to the degree they are less so, investors have no choice but to put their money elsewhere. As for your question, I don't think we can easily say. E.g. the BLS says the dollar lost 28% of its (CPI) value from 1940 to 1946 ... but I'm not willing to assign blame due to the discontinuity of WWII. If Japan defaults in its 3rd Lost Decade, will that be the cause of the initial '80s panic or decades of the wrong medicine to deal with it?
    - jbooth 17y ago
      IMO decades of the wrong medicine in Japan's case. In the case of an Argentina where a ton of crap hits the fan and they default a year later, it's a lot harder to blame the medicine. (regarding Japan -- the consensus is that they didn't do enough stimulus, and that in addition to their high savings rate is why they fell into a deflationary spiral. the government printing money and handing it out with coupons for blow and hookers would have been a better strategy than what they did)
jbooth 17y ago
1) They can indeed create money : wiki "Quantitative Easing" (edit: and reduce it, too! that's the federal reserve's fundamental job) 2) Stagflation is much worse than recessions and bounceback with low interest rates. See: the 1970s. There have been a lot of recessions and a lot of livelihoods ruined over the last 100 years or so to reach our current understanding -- it's likely not perfect, but it is based on experience. 3) That's not what I'm advocating in the slightest, I advocated for targetted government spending to help create/retain jobs, specifically on things that have high externalities for the country. We don't need any more candlesticks or buggy whips, but every state is laying off teachers like crazy and we could certainly use some new bridges and high speed rail. Regarding your last statement -- a lack of sufficient stimulus up front is the most universally agreed upon reason for the protracted nature of BOTH of those downturns. Like, all of the literature says the exact opposite of what you're saying. Maybe they're all wrong, I dunno. I do know that in both cases, decision makers were motivated by feelings of avoiding borrowing as a fundamental value, which is the right approach all of the time except for specifically during a panic or the beginning of a recession.
- byrneseyeview 17y ago
  1) They can print dollars, reducing the value of existing dollars. 2) The government was growing massively in the 50's, 60's, and 70's. If government growth was the solution, why did we get so much of it before the problem? 3) Is the government more likely to subsidize new, growing industries, or old, stagnant ones? Government subsidies will "save" the most jobs when they target industries with low capital requirements (like the ones that rely on cheap labor) rather than ones with high capital requirements (like high-end manufacturing). Venture capital is a tough job; deciding that some guy in DC is going to do an even adequate job at it is a stretch. It is not "universally agreed." I think we can all agree that both of the cases I cited included an unprecedented level of government spending, coupled with an unprecedented recession. "I was healthy, then I sneezed and you demanded that I start using leeches. I've never been sicker." "It is universally agreed that the problem is insufficient leeches."
  - jbooth 17y ago

hga 17y ago

WRT to #1, before you get to the "or" items, government borrowing crowds out private, since a national government (or at least ours) is viewed as a much safer creditor in the earlier periods of economic trouble. In the longer term, sovereign debt defaults, explicit or implicit (your "or" items, including the inflation tax), inevitably follow this type of counter-cyclical spending (statistically, since this tends to be a regional or world-wide thing).

jbooth 17y ago
Government debt is an entirely different product than private debt. Different interest rate and all of that. Regarding the sovereign debt defaults, did we have one of those after the great depression? Sovereign debt defaults are associated with financial panics. Don't bind up intermediate (correct or incorrect) steps with the root cause.
- hga 17y ago
  It may be a different product but it's still in the same market for people who want to lend out their money. The different interest rates are because of different perceived levels of risk; normally a government can offer less because they're viewed as more likely to return the money. If they aren't in the market or to the degree they are less so, investors have no choice but to put their money elsewhere. As for your question, I don't think we can easily say. E.g. the BLS says the dollar lost 28% of its (CPI) value from 1940 to 1946 ... but I'm not willing to assign blame due to the discontinuity of WWII. If Japan defaults in its 3rd Lost Decade, will that be the cause of the initial '80s panic or decades of the wrong medicine to deal with it?
  - jbooth 17y ago
    IMO decades of the wrong medicine in Japan's case. In the case of an Argentina where a ton of crap hits the fan and they default a year later, it's a lot harder to blame the medicine. (regarding Japan -- the consensus is that they didn't do enough stimulus, and that in addition to their high savings rate is why they fell into a deflationary spiral. the government printing money and handing it out with coupons for blow and hookers would have been a better strategy than what they did)

jbooth 17y ago

1) They can indeed create money : wiki "Quantitative Easing" (edit: and reduce it, too! that's the federal reserve's fundamental job) 2) Stagflation is much worse than recessions and bounceback with low interest rates. See: the 1970s. There have been a lot of recessions and a lot of livelihoods ruined over the last 100 years or so to reach our current understanding -- it's likely not perfect, but it is based on experience. 3) That's not what I'm advocating in the slightest, I advocated for targetted government spending to help create/retain jobs, specifically on things that have high externalities for the country. We don't need any more candlesticks or buggy whips, but every state is laying off teachers like crazy and we could certainly use some new bridges and high speed rail. Regarding your last statement -- a lack of sufficient stimulus up front is the most universally agreed upon reason for the protracted nature of BOTH of those downturns. Like, all of the literature says the exact opposite of what you're saying. Maybe they're all wrong, I dunno. I do know that in both cases, decision makers were motivated by feelings of avoiding borrowing as a fundamental value, which is the right approach all of the time except for specifically during a panic or the beginning of a recession.

byrneseyeview 17y ago
1) They can print dollars, reducing the value of existing dollars. 2) The government was growing massively in the 50's, 60's, and 70's. If government growth was the solution, why did we get so much of it before the problem? 3) Is the government more likely to subsidize new, growing industries, or old, stagnant ones? Government subsidies will "save" the most jobs when they target industries with low capital requirements (like the ones that rely on cheap labor) rather than ones with high capital requirements (like high-end manufacturing). Venture capital is a tough job; deciding that some guy in DC is going to do an even adequate job at it is a stretch. It is not "universally agreed." I think we can all agree that both of the cases I cited included an unprecedented level of government spending, coupled with an unprecedented recession. "I was healthy, then I sneezed and you demanded that I start using leeches. I've never been sicker." "It is universally agreed that the problem is insufficient leeches."
- jbooth 17y ago