5 ms·

Warren Buffett: 2nd Stimulus Needed, Expects Longer Recession

18 points by jakarta 17y ago

ErrantX 17y ago
People should listen to Buffet a lot more, it's been clear since the dot com bubble (and before) he knows what he's talking about.
- roc 17y ago
  What Buffett actually said was: "we could've used a stimulus in the first place and didn't get it. So, sure, we could still use one". He's backing the concept and trashing the reality in the same breath. That's not exactly a ringing endorsement of the idea that an actual government stimulus is going to get us out of this.
- anonymousDan 17y ago
  I can't work out if you're being sarcastic or not!
drawkbox 17y ago
Wow, interesting way to put it: "Our first stimulus bill ... was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in ... as if everybody was putting in enough for their own constituents," he said. "It doesn't have really quite the wall that might have been anticipated there."
bunni 17y ago
We've already had two stimulus bills...
TrevorJ 17y ago
I still can't wrap my head around the idea that the US borrowing money to give consumers can get us out of trouble caused by borrowing too much money in the first place. It's kind of like giving a skydiver a shovel so that when his 'chute fails he can just dig a hole in the ground so fast that he never has to touch bottom.
- jonknee 17y ago
  I think the idea is that everyone is nervous right now and not spending (which means business is down which means layoffs happen which means people get more nervous and spend even less), so by starting off spending the gov't is trying to restart the engine. No one wants to jump off the diving board first so to speak. I'm not an economist though, so I'm sure it's a huge over simplification.
- deleted 17y ago
  [deleted]
- asdlfj2sd33 17y ago
  It's like giving a skydiver a winged suit, so that if his chute fails he can at least glide sideways and down instead of falling straight down, perhaps he can make it to water. I agree with the shovel metaphor when it comes to the attempts to raise house prices and prop up the financial sector. It's too bad that was such a big part of the stimulus and other investment like infrastructure was such a small one.
ivankirigin 17y ago
Planning on spening money a year from now doesn't stimulate anything for quite some time. But it does increase interest rates, at a time when lending is getting killed. Buffet is a great investor and manager, but you can't map that ability to public policy magically.
- gaford 17y ago
  Good point about the inappropriate delay in spending the stimulus. That said, if fiscal policy were pushing up interest rates the Federal Reserve could simply lower them and use monetary policy in place of extra fiscal policy. This would present the risk of inflation, but if there were inflation (rather than deflation) we would not be in a liquidity trap requiring fiscal stimulus. I think Krugman has gone over all of this. It's fairly well spelled out in Keynes as well.
systemtrigger 17y ago
The interview, sans cruft and sped up a bit: http://2009.s3.amazonaws.com/buffett.mov http://2009.s3.amazonaws.com/buffett.mov
Locke1689 17y ago
This is essentially what Paul Krugman has been saying in the New York Times for a while now. Essentially the idea is this: in a bubble, or period of economic growth, large amounts of deficit spending is a bad thing. In a recession or depression, John Maynard Keynes famously argued that, counterintuitively, it may be highly beneficial to enter a short period of extreme deficit spending. The idea behind this is that in a recession or depression, the entire economic system contracts. In a period of success, everyone's a little more loose with their money: everything's goin great out there, why not take a risk? The opposite happens in a recession: people are worried, so save , save, save. Troublingly, this is the exact opposite of what is needed to get out of a recession. In order to increase employment and restore growth, spending needs to increase, not decrease. If consumer spending is at an all-time low, why would corporations hire more people, instead of less? This is where Keynes came in. He argued that, unlike corporations, the government wasn't limited by the temperamental swings of the market. In fact, the government had the ability to do what very few corporations can: go into a very large amount of short term debt. The idea behind this is to commission large projects which force corporations to rehire and increase expenditures. As such, employment increases and salary for those employees does as well. Once consumers have a sufficient amount of disposable income, the other sections of the economy are revitalized as well. There are a couple easy pitfalls with this, though. First is the debt aspect -- if you choose the wrong projects to invest in, then the government may end up in permanent debt. Consider two projects: one requires high capital investment, but it will spur greater economic growth and profits in the long run. The second also requires high capital investment, employs a lot of people, but it's essentially a one-time product. A great example of the first is infrastructure projects like the Tennessee Valley Authority. It cost a huge amount to build, but it also provided cheap electricity to the area, generating revenue, and also provided a great place for businesses to relocate to (because of the cheap electricity) and increased employment and income rates of almost everyone in the area. An example of the latter would be something like an advanced jet fighter (with no war going on). The problem is that once built, the jet fighter is essentially done. A high capital investment produced a short term investment, but it generally has a low rate of return. Of course, the reason why this worked in WWII is fairly simple: we were the world's bankers and manufacturers. Therefore, the problem thus far has been crippled because it is essentially half-hearted. Stimulus spending, to be effective, must be a large proportion of the country's GDP (around 4%). In contrast, $3.27 trillion is about 2.1% of our ~$15 trillion GDP[1]. For a more accurate (but still back of the napkin) calculation, Krugman wrote this in January of this year[2]. I believe that Krugman also overlooks many of the problems with the spending projects themselves: to be effective in the long run stimulus spending should be focused towards long term improvement projects. Infrastructure development is a great example of that, but so are things like alternative energy and scientific R&D. Too much money I think is spent on things like super-high performance military jets. While this satisfies the short term criteria, F/A 18E/F Super Hornets probably don't increase consumer spending as much as equivalent infrastructure spending over 10 years. That said, I still agree with Keynes and most modern economists that stimulus spending is probably the best way the government has to help the economy. It's not a magic bullet, but we do have a sizable amount of historic evidence in favor of stimulus spending and against other things. (Consider that Keynes's theory of economics did not come about until the late 19th-early 20th century. Prior to that, government did not go into debt. As a result of that and lack of regulation, recessions were harsher, more frequent, and lasted longer.) Of course, macroeconomics is mostly guesswork, mingled with shreds of enlightenment that don't add up to all that much anyway. [1] http://blog.heritage.org/2009/02/12/true-cost-of-stimulus-327-trillion/ http://blog.heritage.org/2009/02/12/true-cost-of-stimulus-32... Really, this is a pretty generous calculation anyway, considering that this is over 10 years and some of the stimulus will probably come back in taxes. [2] http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/ http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithme...
tybris 17y ago
No, balance the budget.
tybris 17y ago
Probably it'll last to about the end of Obama's second term. http://bigpicture.typepad.com/photos/uncategorized/100_year_dow_bull_bear_periods.jpg http://bigpicture.typepad.com/photos/uncategorized/100_year_...

18 points by jakarta 17y ago

People should listen to Buffet a lot more, it's been clear since the dot com bubble (and before) he knows what he's talking about.

roc 17y ago
What Buffett actually said was: "we could've used a stimulus in the first place and didn't get it. So, sure, we could still use one". He's backing the concept and trashing the reality in the same breath. That's not exactly a ringing endorsement of the idea that an actual government stimulus is going to get us out of this.
anonymousDan 17y ago
I can't work out if you're being sarcastic or not!

drawkbox 17y ago

Wow, interesting way to put it: "Our first stimulus bill ... was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in ... as if everybody was putting in enough for their own constituents," he said. "It doesn't have really quite the wall that might have been anticipated there."

bunni 17y ago

We've already had two stimulus bills...

TrevorJ 17y ago

I still can't wrap my head around the idea that the US borrowing money to give consumers can get us out of trouble caused by borrowing too much money in the first place. It's kind of like giving a skydiver a shovel so that when his 'chute fails he can just dig a hole in the ground so fast that he never has to touch bottom.

jonknee 17y ago
I think the idea is that everyone is nervous right now and not spending (which means business is down which means layoffs happen which means people get more nervous and spend even less), so by starting off spending the gov't is trying to restart the engine. No one wants to jump off the diving board first so to speak. I'm not an economist though, so I'm sure it's a huge over simplification.
deleted 17y ago
[deleted]
asdlfj2sd33 17y ago
It's like giving a skydiver a winged suit, so that if his chute fails he can at least glide sideways and down instead of falling straight down, perhaps he can make it to water. I agree with the shovel metaphor when it comes to the attempts to raise house prices and prop up the financial sector. It's too bad that was such a big part of the stimulus and other investment like infrastructure was such a small one.

ivankirigin 17y ago

Planning on spening money a year from now doesn't stimulate anything for quite some time. But it does increase interest rates, at a time when lending is getting killed. Buffet is a great investor and manager, but you can't map that ability to public policy magically.

gaford 17y ago
Good point about the inappropriate delay in spending the stimulus. That said, if fiscal policy were pushing up interest rates the Federal Reserve could simply lower them and use monetary policy in place of extra fiscal policy. This would present the risk of inflation, but if there were inflation (rather than deflation) we would not be in a liquidity trap requiring fiscal stimulus. I think Krugman has gone over all of this. It's fairly well spelled out in Keynes as well.

systemtrigger 17y ago

The interview, sans cruft and sped up a bit: http://2009.s3.amazonaws.com/buffett.mov http://2009.s3.amazonaws.com/buffett.mov

Locke1689 17y ago

This is essentially what Paul Krugman has been saying in the New York Times for a while now. Essentially the idea is this: in a bubble, or period of economic growth, large amounts of deficit spending is a bad thing. In a recession or depression, John Maynard Keynes famously argued that, counterintuitively, it may be highly beneficial to enter a short period of extreme deficit spending. The idea behind this is that in a recession or depression, the entire economic system contracts. In a period of success, everyone's a little more loose with their money: everything's goin great out there, why not take a risk? The opposite happens in a recession: people are worried, so save , save, save. Troublingly, this is the exact opposite of what is needed to get out of a recession. In order to increase employment and restore growth, spending needs to increase, not decrease. If consumer spending is at an all-time low, why would corporations hire more people, instead of less? This is where Keynes came in. He argued that, unlike corporations, the government wasn't limited by the temperamental swings of the market. In fact, the government had the ability to do what very few corporations can: go into a very large amount of short term debt. The idea behind this is to commission large projects which force corporations to rehire and increase expenditures. As such, employment increases and salary for those employees does as well. Once consumers have a sufficient amount of disposable income, the other sections of the economy are revitalized as well. There are a couple easy pitfalls with this, though. First is the debt aspect -- if you choose the wrong projects to invest in, then the government may end up in permanent debt. Consider two projects: one requires high capital investment, but it will spur greater economic growth and profits in the long run. The second also requires high capital investment, employs a lot of people, but it's essentially a one-time product. A great example of the first is infrastructure projects like the Tennessee Valley Authority. It cost a huge amount to build, but it also provided cheap electricity to the area, generating revenue, and also provided a great place for businesses to relocate to (because of the cheap electricity) and increased employment and income rates of almost everyone in the area. An example of the latter would be something like an advanced jet fighter (with no war going on). The problem is that once built, the jet fighter is essentially done. A high capital investment produced a short term investment, but it generally has a low rate of return. Of course, the reason why this worked in WWII is fairly simple: we were the world's bankers and manufacturers. Therefore, the problem thus far has been crippled because it is essentially half-hearted. Stimulus spending, to be effective, must be a large proportion of the country's GDP (around 4%). In contrast, $3.27 trillion is about 2.1% of our ~$15 trillion GDP[1]. For a more accurate (but still back of the napkin) calculation, Krugman wrote this in January of this year[2]. I believe that Krugman also overlooks many of the problems with the spending projects themselves: to be effective in the long run stimulus spending should be focused towards long term improvement projects. Infrastructure development is a great example of that, but so are things like alternative energy and scientific R&D. Too much money I think is spent on things like super-high performance military jets. While this satisfies the short term criteria, F/A 18E/F Super Hornets probably don't increase consumer spending as much as equivalent infrastructure spending over 10 years. That said, I still agree with Keynes and most modern economists that stimulus spending is probably the best way the government has to help the economy. It's not a magic bullet, but we do have a sizable amount of historic evidence in favor of stimulus spending and against other things. (Consider that Keynes's theory of economics did not come about until the late 19th-early 20th century. Prior to that, government did not go into debt. As a result of that and lack of regulation, recessions were harsher, more frequent, and lasted longer.) Of course, macroeconomics is mostly guesswork, mingled with shreds of enlightenment that don't add up to all that much anyway. [1] http://blog.heritage.org/2009/02/12/true-cost-of-stimulus-327-trillion/ http://blog.heritage.org/2009/02/12/true-cost-of-stimulus-32... Really, this is a pretty generous calculation anyway, considering that this is over 10 years and some of the stimulus will probably come back in taxes. [2] http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/ http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithme...

tybris 17y ago

No, balance the budget.

tybris 17y ago

Probably it'll last to about the end of Obama's second term. http://bigpicture.typepad.com/photos/uncategorized/100_year_dow_bull_bear_periods.jpg http://bigpicture.typepad.com/photos/uncategorized/100_year_...