Another help for those mortgages underwater.

The whole idea of these "stimulus packages" is based on thoroughly discredited economic doctrine. .) Originally Posted by CaptainMidnight

What economic doctrine has not been discredited at one time or other?

Krugman is correct, the stimulus was too small. It's a simple matter of finding the effective consumption rate and calculating how much stimulus is needed to replace a given amount of economic activity in the economy. 1/(1-CR) = your multiplier. So if you know the amount of economic activity that you're seeking to replace and the consumption rate, it's a simple calculation.

I do agree that the stimulus package could have been better designed and Krugman (and Joe Stiglitz speaking of other Nobel Prize winning economists) have both written on this. Especially at the time the package was passed. That being said, you have to live with some compromises to get the package passes. No matter how well designed you make a stimulus program, it isn't worth a damn unless it can get 60 votes in the Senate.

And you are wrong about the brokers having different interests than their employers. Their interest was in huge compensation packages even if it took a risk of bankrupting the company. The company would prefer they do well, but not at the substantial risk of bankruptcy. Even if the company had know ahead of time that they would be bailed out, they still lost huge equity. Yet the yearly compensation of the executives is not clawed back during those years in which they took the risks that ultimately bankrupted the company. If you'll look at agency cost issues, one of the solutions often proposed is deferred compensation -- say over a 5 - 10 year period -- contingent of the continuing performance of the firm. Another proposed solution is stock options issued at a market strike price with a substantial lock up period.

As for neo-Keynesian economics being discredited, that's what the fools who got us into this thought. The more honest of those, including Greepspan, have now admitted that their model doesn't fit the data. If anything is now discredited, it is those who ignore Keynes and recent advances in behavioral economics and who instead believed in fairly tales like the efficient market hypothesis.

As for neo-Keynesian economics being discredited, that's what the fools who got us into this thought. The more honest of those, including Greepspan, have now admitted that their model doesn't fit the data.... Originally Posted by TexTushHog

TTH,

Since the data didn't fit "their model", looking at the data, just what model do you think, in hindsight, does apply?

Let's see how the real world data of the last 30 years can be shoe horned into your Keynesian model and be forced to look like Keynes was right.

Krugman is correct, the stimulus was too small. Originally Posted by TexTushHog

I couldn't disagree more. The only thing a larger "stimulus package" would be likely to stimulate is the angst of international credit market participants, notably including PBOC officials. Perhaps even worse, it would simply divert resources from activities desired by investors, entrepreneurs, and consumers to those preferred by politicians.

Aren't our fiscal deficits already big enough for you?

It's a simple matter of finding the effective consumption rate and calculating how much stimulus is needed to replace a given amount of economic activity in the economy. 1/(1-CR) = your multiplier. So if you know the amount of economic activity that you're seeking to replace and the consumption rate, it's a simple calculation. Originally Posted by TexTushHog

No, it is NOT a simple matter of doing anything of the sort! The effect of Keynesian fiscal multiplers has a way of being vastly overestimated by economists, especially those on the left who want to retain the ear of big-spending politicians seeking their analysis for political cover.

This stuff always looked good in the Samuelson textbooks of the 1960s and '70s, and on the blackboards in economics classrooms of the day, but it just never seems to work well in the real world. History is replete with examples of abject failure.

Large increases in government spending have all too often produced the net result of making the economy worse, not better.

And you are wrong about the brokers having different interests than their employers. Their interest was in huge compensation packages even if it took a risk of bankrupting the company. The company would prefer they do well, but not at the substantial risk of bankruptcy. Even if the company had know ahead of time that they would be bailed out, they still lost huge equity. Yet the yearly compensation of the executives is not clawed back during those years in which they took the risks that ultimately bankrupted the company. If you'll look at agency cost issues, one of the solutions often proposed is deferred compensation -- say over a 5 - 10 year period -- contingent of the continuing performance of the firm. Another proposed solution is stock options issued at a market strike price with a substantial lock up period. Originally Posted by TexTushHog

I agree with you that compensation should be long-term-results-based, at least for those compensated with equity rather than commissions on settled trades. But my point earlier was that traders and executives, even those in the CEO's office and with lots of equity, saw themselves as being on the same team -- thus exacerbating the problem, as we were to see later. No one had any disincentive to plunge full-bore into speculative excess. They didn't consider that there was a substantial risk of bankruptcy, so the principals clearly did not see themselves as having interests at odds with their agents.

If anything is now discredited, it is those who ignore Keynes and recent advances in behavioral economics and who instead believed in fairly tales like the efficient market hypothesis. Originally Posted by TexTushHog

Are you suggesting that those who "ignore Keynes" must automatically be a believer in the validity of EMH? Your use of the word "instead" suggests that. But those are two completely separate issues.

...believed in fairly tales Originally Posted by TexTushHog

If you like fairy tales, may I suggest a collection of stories about Keynesian stimulus packages acting as a magical elixir for an ailing economy?

And lets also remember that for everyone who sells at a loss, someone buys a bargain. Originally Posted by pjorourke

The "reduced" price is not necessarily a "bargain." Even if it sold for $500K, and you can buy it at $300K, that doesn't mean you won't get stuck selling it for $150K.

I didn't like the fact that the global warming religion had the trade ins crushed. Originally Posted by Marcus Aurelius

In theory, if the "clunkers" had not been crushed, they would have tended to depress sales and prices of new cars later because there would be a larger pool of used cars available. Used car prices would drop and quality would go up, so people would tend to buy fewer new cars.

In theory then B should simply make a business decision and hand in the keys to the mortgage holder. Of course the mortgage holder will scream about the morality of reneging on an obligation but if its all about money then I can't see what they are complaining about. Make sense PJ? Originally Posted by discreetgent

I always chuckle when someone whines about it being "immoral" for someone to default on a loan. If it's an interest bearing loan, the person who provided the loan charged you interest to cover their risk that the value of the collateral would drop and they'd be stuck recovering less than the principal on the loan.

It's like paying money to an insurance company. If you have an accident in your car, do you feel immoral for submitting a claim to the insurance company you've been paying insurance premiums to?

Of course, you have to figure out the financial consequences of defaulting. Do you have to pay an income tax on the "gain?" What does it do to your credit record and what does that mean to you? Do you live in a state where they can come after your other assets? Do you have a second mortgage or a home equity loan that will not be discharged by the foreclosure?

TTH,

Since the data didn't fit "their model", looking at the data, just what model do you think, in hindsight, does apply?

Let's see how the real world data of the last 30 years can be shoe horned into your Keynesian model and be forced to look like Keynes was right. Originally Posted by LazurusLong

I think that Milton Friedman type monetary policy work for the most part. However, there are times when it does not. I'm not sure that we know every case where it breaks down, but one clear case where it does is when interest rates are near zero and there is a need to stimulate the economy. In fact, most people over look the fact that Keynes thought that substantial (say over 2-3% of GDP) deficit spending should take only under these conditions. While I'm not sure that is true, I do think that the circumstances when substantial deficit spending is warranted are fairly limited.

The other issue that has to be dealt with, and that I think will be a major focus of economics over the next decade or two, is the concept of market failure. The Efficient Market Hypothesis boys from Chicago were clearly wrong on this account and anyone with a lick of sense should have seen that they were wrong. I think that the role of behavioral economics is interesting, but that ultimately they won't have a lot to say about the outcome in this area. I think you're going to see a lot more work on information asymmetry, agency costs, moral hazard, black swan event, etc. and see this being view less in isolation in the micro context and more in terms of what it may imply in the macro context.

I think what will emerge will very close to the neo-Keynesianism or neo-classical synthesis of the 60's and early 70's with a dash of Chicago school monetary policy grafted on and with some insight from behavioral economics. i don't know enough about Dynamic stochastic general equilibrium models to say what role they will play. That is something that has come out since I've had the opportunity to keep up with the field. But I've heard some people I trust say good things about them.

In fact, most people over look the fact that Keynes thought that substantial (say over 2-3% of GDP) deficit spending should take only under these conditions. While I'm not sure that is true, I do think that the circumstances when substantial deficit spending is warranted are fairly limited.

. Originally Posted by TexTushHog

Correct.....Keynes thought that in fact one should pay down the national debt when the economy was rolling. People that discount Keynes (Captain LOL) do not look at his complete picture. I like RJ Barbera book, The Cost of Capitalism, discussing the different forms economic thought.

Once upon a time there were three little pigs and the time came for them to leave home and seek their fortunes.
Before they left, their mother told them " Whatever you do , do it the best that you can because that's the way to get along in the world.




The first little pig built his house out of straw because it was the easiest thing to do.
The second little pig built his house out of sticks. This was a little bit stronger than a straw house.
The third little pig built his house out of bricks.
One night the big bad wolf, who dearly loved to eat fat little piggies, came along and saw the first little pig in his house of straw. He said "Let me in, Let me in, little pig or I'll huff and I'll puff and I'll blow your house in!"
"Not by the hair of my chinny chin chin", said the little pig.
But of course the wolf did blow the house in and ate the first little pig.
"Let me in ,Let me in little pig or I'll huff and I'll puff and I'll blow your house in" "Not by the hair of my chinny chin chin", said the little pig. But the wolf blew that house in too, and ate the second little pig.
The wolf then came to the house of bricks.
" Let me in , let me in" cried the wolf
"Or I'll huff and I'll puff till I blow your house in"
"Not by the hair of my chinny chin chin" said the pigs.
Well, the wolf huffed and puffed but he could not blow down that brick house.
But the wolf was a sly old wolf and he climbed up on the roof to look for a way into the brick house.


The little pig saw the wolf climb up on the roof and lit a roaring fire in the fireplace and placed on it a large kettle of water.
When the wolf finally found the hole in the chimney he crawled down and KERSPLASH right into that kettle of water and that was the end of his troubles with the big bad wolf.
The next day the little pig invited his mother over . She said "You see it is just as I told you. The way to get along in the world is to do things as well as you can." Fortunately for that little pig, he learned that lesson. And he just lived happily ever after!



Some one should have informed that poor pig that one day his house of brick would be under water, and the poor wolf had no part in it.

...Keynes thought that in fact one should pay down the national debt when the economy was rolling. People that discount Keynes (Captain LOL)... Originally Posted by WTF

When Keynes wrote The General Theory in the 1930s, major nations generally ran budget surpluses during normal times, or at least near-balanced budgets. You are correct to believe that it's a mistake to consider Keynes some sort of wild-eyed radical who would be likely to endorse a Krugman-sized stimulus package. In fact, I believe he would simply be horrified at the gargantuan size of our structural (not cyclical) fiscal deficit, and the fact that no one in the political leadership seems the slightest bit serious about addressing it.

So it's not so much a matter of "discounting Keynes", but rather a concern that those promoting a destructive agenda invoke B.S. arguments in his name.

Perhaps the aforementioned Paul Krugman is the head cheerleader for this sort of extremism. He used to be a respected economist, but seems to have decided to check out of the world of rational debate.

Anyone who doubts that should just take a look at some of his columns. For instance, there's this from 2003:

http://www.nytimes.com/2003/03/11/op...l?pagewanted=1

Krugman was correct to express concern about our fiscal situation at the time -- and you might note that he wrote that before passage of the huge new prescription drug entitlement bill later that year. But 10-year CBO budget deficit estimates were then less than 1/3 what they are today.

Yet Krugman now seems blissfully unconcerned about today's fiscal outlook and recommends running up even more debt!

Just two months ago, there was this:

http://www.nytimes.com/2010/02/05/op...05krugman.html

Now he recommends taking a much "calmer view" of deficits.

Hypocrisy, anyone?

Most run-of-the-mill political hacks know very little about economics, so it's not much of a surprise that they actually believe most of the pablum they are spoon-fed. But Paul Krugman is a widely-published Ph.D. economist.

That's why I said that he should know better.

I like RJ Barbera book, The Cost of Capitalism, discussing the different forms economic thought. Originally Posted by WTF

WTF--Is this Barbera of Hanna-Barbera fame?

The difference, Captian Midnight, is that you can't cut budgets in times of recession and near depression. I'm sure Krugman is aware of the structural deficit and believes that it should be addressed. But only after we are out of the woods on the current economic catastrophe. It's going to take lots of growth to fund the taxes that will be necessary to pay down the deficit. You can't start taxing now, or even cutting back, or you get a double dip recession or worse, a depression.

Great move, defer addressing the structural deficit but make them worse to the tune of about 200+B a year. Its leadership like that that made the Byzantine Empire the power it is today.

The difference, Captian Midnight, is that you can't cut budgets in times of recession and near depression. Originally Posted by TexTushHog

Did I say anything about cutting the budget? That's obviously not going to happen.

What we were discussing was whether it would be wise, as Krugman suggests, to enact a far larger "stimulus package", running our aggregrate debt levels into even more dangerous territory.

Take a look at this excerpt from Krugman's column of two months ago:

"The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do. If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs." (end of excerpt)

Huh??

The deficit should be even bigger than $1.5 trillion?

Krugman apparently feels that deficits create jobs and prosperity. Nothing could be further from the truth.

What in the world can government possibly do to create sustainable, productive jobs, other than to set a favorable climate for business? The administration and congress have now made it clear that they're intent on doing just the opposite. No wonder we're having a virtually jobless "recovery."

Just wait until American taxpayers are presented with the bill for all this stuff.

Consider the severe recession of 1920-21. Production declined even more precipitously than during the first year of the Great Depression. We had a year-over-year deflation of well over 10%. If Krugman had been around then, he would have said that we needed massive government intervention and a huge stimulus package in order to keep the economy from falling into a dark hole from which it might not recover.

But that sort of "sophisticated" idea had not occurred to anyone at the time. The president and congress actually responded by cutting government spending (from the already low levels of the day). Krugman probably would have gone apoplectic!

The economy quickly began a very robust recovery, ushering in a period later to be known as the "Roaring '20s." It was eight years later that a perfect storm of government and Fed bungling turned what should have been an ordinary recession into the Great Depression, and those policies had nothing to do with the events of the early '20s.

But look at what happened in the 1990s when the Japanese government followed the Krugman prescription of massive spending increases. After the bubble burst in 1990, Japan spent years tripling its debt/GDP ratio, running it all the way up to about 2:1 in one misbegotten attempt after another to stimulate economic growth by implementing huge spending initiatives. It didn't work, and that's why we often refer to the 1990s as Japan's "lost decade." They're now working on a second lost decade of stagnating economic growth. Unfortunately, some people never learn from mistakes of the past.

Instead of listening to left-wing quacks like Paul Krugman, why not engage in a reasoned study of economic history?

Can I suggest buying this for your kids and grandkids?

http://www.rosettastone.com/learn-chinese

Afterall you'll want them to understand their boss

Krugman wasn't proposing "massive" increases in the deficit. He wanted the stimulus to be $1.2 -1.4B, up from $700M. Just an extra $500 - 700M in spending. And it's not the deficit that creates the jobs, it's the spending.

And paying the deficit back isn't that hard. We're going to have to raise taxes to the same level that everyone else in the world pays. The U.S. presently has a effective taxation rate of about 27% of GDP. Most other countries are around 35 -37%. We can't go on trying to keep up with the other countries of the industrialized world on the cheap. We have inferior health care, we have an inferior education system, an inferior transportation system. Our pension system is in near ruin. And for what? To keep taxes low for the wealthy few. That's ridiculous and short sighted.