American Jobs act

[stone]

http://www.whitehouse.gov/the-press-off ... n-jobs-act

To me Obama seems to have a sensible plan.  Benanke's Jackson Hole speech seemed to me to be an acknowledgement that monetary policy had no chance of helping and so the responsibility was handed over to fiscal policy. This plan seems to be taking on board that responsibility.
Everyone on the news seems muted about it though.

[Storm]

I think it's a very sensible plan.  I like the idea of getting a couple grand back in payroll taxes immediately.  Of course, I'll probably not do my part and will save it, rather than going out and spending it and helping the economy...

[AdamA]

Of course, I'll probably not do my part and will save it, rather than going out and spending it and helping the economy...

You and many others.

[melveyr]

The tax cuts will do next to nothing. The spending part of the plan seems good, but is so small that it can safely be ignored.

The economy needs something big, this is not even close. We have learned nothing from the Great Depression. Deficit spending is the only way out.

[AdamA]

We have learned nothing from the Great Depression. Deficit spending is the only way out.

You're joking, right?

[moda0306]

mel,

While I agree with you in general, I think payroll tax cuts are great ways of getting money into the hands of the middle class.  I agree deficits are needed but payroll taxes are a great compromise and is a great aid to all of us, not just unemployed, construction workers, etc.

[moda0306]

If you look at the year-by-year deficits during the depression and into WWII it's obvious that you can end unemployment in a heartbeat with enough deficit spending... For all of FDR's bs, he never really increased the national debt all that much until the war.

The reason it probably takes more deficit spending today to do the same thing is because of our negative trade balance creating demand for our debt and less demand for domestic goods.

[melveyr]

We have learned nothing from the Great Depression. Deficit spending is the only way out.

You're joking, right?

I am dead serious. Austerity will lead us into a depression.

In aggregate the private sector is basically insolvent because we our debts are worth more than our assets. How exactly are we supposed to create money to pay down these debts?

The private sector can create wealth (goods and services) but the private sector cannot create money. Banks can create money through loans, but with the private sector close to insolvent, demand for debt is incredibly weak.

There is functionally no way for the private sector to become solvent without deficit spending.

[moda0306]

mellveyr,

Or if we go back to bartaring... But nonetheless, do you thing a jobs bill that doesn't involve tax cut would fly, or be moral for that matter?

[melveyr]

mellveyr,

Or if we go back to bartaring... But nonetheless, do you thing a jobs bill that doesn't involve tax cut would fly, or be moral for that matter?

moda,

I see unemployment as a monetary phenomenon. Therefore a barter economy is one way to circumvent the phenomenon of unemployment, but a pretty awkward one. Hopefully our government can prevent this economic regression to a barter system by simply giving the private sector more currency, maybe not though. Austerity is apparently the "prudent" thing to do.

TBH, yes tax cuts help, because they can lead to a government deficit. But what is great about spending is that it can be targeting at putting people to work. An idle workforce is a very destructive thing. Most of the riots in England occurred where there was higher than average unemployment. The government could easily bring unemployment down by simply employing workers in minimum wage jobs.

However, with our political ideologies this will never happen. The government employee has be demonized as a societal leech. I do agree that tax cuts are the only thing that will get passed, but I bet these tax cuts will be offset by cuts to programs that benefit the lower class. I am not very optimistic about a significant deficit occurring.

I am confused about your comment about the morality of tax cuts. Can you elaborate?

[Indices]

If you want to see Austrian economics in action look to Europe. It should implode any day now.

[Reub]

"Wanna buy a bridge"?

[MediumTex]

How about we change the tax code to put a tariff on the value of any work done for a U.S. company that was done in this country within the last 25 years?

Basically, it would be a strong push to repatriate lots of jobs that have been offshored in recent years.

That would create a lot of new U.S. jobs (or at least it might).

I admit that it is very frustrating to see jobs leaving this country and the resulting profits from lower operating costs that never seem to do as much good for the overall economy as the harm that is done by creating the structural unemployment from offshoring in the first place.

What I wonder about is what happened to organized labor in the U.S.  There are strong unions in Europe that help balance out some of the issues created by the corporate impulse to offshore jobs.  I don't know how organized labor has gotten such a bad name in this country and in the process lost so much political influence and popular support.

Whether a person likes or hates unions, I would think that at some level they would see that strong unions and corporations are kind of like the two party political system--each side vigorously promotes its own agenda and through conflict and compromise we get a public policy that everyone can live with.  For the last 30 years or so, however, it's like the corporations have been completely overwhelming organized labor and what we have today shows the results of this imbalance: static wages, disappearing pension plans, two-tiered wage structures, far more temporary workers, offshoring of jobs and general anxiety among all workers that their employers would eliminate their position at any time if the job could be done more cheaply overseas, even if it took two or three foreigners to do the job one U.S. worker is currently doing.

I understand why individual companies might adopt a predatory attitude toward their U.S. workforces, but when this pattern begins to emerge across the whole economy (as evidenced by 9%+ structural unemployment), what look like efficiency gains today might look like stupid and short-sighted measures that hollowed out our economy tomorrow.

[stone]

Melveyr "There is functionally no way for the private sector to become solvent without deficit spending."

Not true IMO. Widespread debt default/forgiveness would work just as well. The Hussman website proposes a detailed restructuring plan for US home mortgages that amounts to that. There is moral hazard in forgiving debt and there is moral hazard in bailing out irresponsible lending by using deficits to make unpayable debt payable. IMO the second moral hazard is even worse than the first. IMO what is needed is to match any government spending with an asset tax .
I agree with you that deficit spending has historically coincided with effective short term fix solutions. The Nazis employed deficit spending when they transformed 1930s Germany into an economic power house/death camp. As much as I revile from the evil they did, it is also possible to marvel at the economic turn around. Once WWII started, massive deficit spending coincided with full employment in USA, Japan and UK too. It is a very different situation trying to come up with a sustainable solution rather than a quick kick up the backside.
You say unemployment is a monetary phenomenon. To my mind the amount of money is a red herring. Unemployment is a phenomenon of RELATIVE purchasing power- how much purchasing power people have RELATIVE to others and to the value of their debts. Deficits apparently work to reduce unemployment only in so far as they happen to  be deployed in a way that happens to even out RELATIVE purchasing power.

Imagine the government went in for a vast deficit program, say $50T next year, and spent it by saying that anyone with more than $1M in assets got given a $2M government hand out for every $1M they currently have. Such a deficit program would simply worsen unemployment as the consequent commodity speculation and price volatility and diversion of skills to the financial sector drained more life from the economy. Such a program is essentially what the government has been doing via bank bailouts, QE etc etc.

[stone]

Medium Tex, the problem with unioins is the same problem with government - namely that they "should" transfer power from the powerful to the less powerful BUT they all too often just themselves become a damaging concentration of power.

In the UK we briefly had some very powerful Unioins in the 1970s. The print union SOGAT was the ultimate. They insisted that all wages were paid directly to the union and the uninion then distributed the wages to the workers in whatever way the union considered appropriate. The union also chose who and how many were employed, what the working hours were etc etc. In effect there was no management. Strike pay was as high as regular pay and strikes at some local newspapers went on for over a year.

Governments at least get voted for by the wider population. In principle that could make them act in the wider interest. Unions only need to act in the interests of there own members. The print union SOGAT was acting in the interests of its own members. SOGAT members were rich as a result of SOGAT's power BUT that was at the expense of everyone else.

[Storm]

We have learned nothing from the Great Depression. Deficit spending is the only way out.

You're joking, right?

I am dead serious. Austerity will lead us into a depression.

In aggregate the private sector is basically insolvent because we our debts are worth more than our assets. How exactly are we supposed to create money to pay down these debts?

The private sector can create wealth (goods and services) but the private sector cannot create money. Banks can create money through loans, but with the private sector close to insolvent, demand for debt is incredibly weak.

There is functionally no way for the private sector to become solvent without deficit spending.

Melveyr is correct here.  When private spending stops, the public sector has to step in and replace that spending or else the entire economy grinds to a halt.  Once the economy has stopped, it's much more difficult to get going without a catalyst.

The idea that by cutting taxes and spending we can end a depression is flawed.  In a depression, people are fearful, and any additional tax cuts just get saved.  Any spending cuts increase public sector unemployment, further harming the fragile economy.

A $4-5 trillion public works program over the next few years could be enough to pull us out of it.  We could build new high speed railroads connecting north and south California, and the eastern seaboard.  We could fill every pothole and replace all of the failing bridges on our interstate highway system.

The funny thing about government spending is that because of the tax system, it just comes back a few years later.  Let's say you pay $100 billion in salaries for newly created public jobs.  30-40% of that comes back immediately in the form of income, social security, and medicare/medicaid taxes.  So, you really only spent $70 billion.  That $70 billion goes out into the economy and goes into the pockets of landlords, utility companies, grocery stores, etc.  Each one of those businesses pay taxes on their income, and pay their employees, who are taxed as well.  After a few times changing hands almost 100% of the money is back in the governments hands anyway.  We are double and triple taxed every day but nobody complains.  As long as the velocity of money is moving fast enough, and government doesn't get greedy and keep it all hoarded in a vault somewhere, the economy works.

I've said enough.  Melveyr is a great student of economics and could school a few of us who have let political rhetoric ruin our common sense.

[Gumby]

You're joking, right?

I am dead serious. Austerity will lead us into a depression.

In aggregate the private sector is basically insolvent because we our debts are worth more than our assets. How exactly are we supposed to create money to pay down these debts?

The private sector can create wealth (goods and services) but the private sector cannot create money. Banks can create money through loans, but with the private sector close to insolvent, demand for debt is incredibly weak.

There is functionally no way for the private sector to become solvent without deficit spending.

Melveyr is correct here.  When private spending stops, the public sector has to step in and replace that spending or else the entire economy grinds to a halt.  Once the economy has stopped, it's much more difficult to get going without a catalyst.

The idea that by cutting taxes and spending we can end a depression is flawed.  In a depression, people are fearful, and any additional tax cuts just get saved.  Any spending cuts increase public sector unemployment, further harming the fragile economy.

A $4-5 trillion public works program over the next few years could be enough to pull us out of it.  We could build new high speed railroads connecting north and south California, and the eastern seaboard.  We could fill every pothole and replace all of the failing bridges on our interstate highway system.

The funny thing about government spending is that because of the tax system, it just comes back a few years later.  Let's say you pay $100 billion in salaries for newly created public jobs.  30-40% of that comes back immediately in the form of income, social security, and medicare/medicaid taxes.  So, you really only spent $70 billion.  That $70 billion goes out into the economy and goes into the pockets of landlords, utility companies, grocery stores, etc.  Each one of those businesses pay taxes on their income, and pay their employees, who are taxed as well.  After a few times changing hands almost 100% of the money is back in the governments hands anyway.  We are double and triple taxed every day but nobody complains.  As long as the velocity of money is moving fast enough, and government doesn't get greedy and keep it all hoarded in a vault somewhere, the economy works.

I've said enough.  Melveyr is a great student of economics and could school a few of us who have let political rhetoric ruin our common sense.

Well said. This is exactly what a "balance sheet recession" is all about. Austerity just makes it worse (see periods of austerity in Japan).

[craigr]

The Great Depression was extended through stupid tax and regulation policies. One of the dumbest was the National Recovery Act which enacted essentially a quasi-communist production and price control system through the entire economy. Not to mention FDR's attempt to cause inflation with gold seizure and raising the price of gold from about $20 to $35 an ounce almost overnight. Socialism was very much en vogue during the 1930s and many thought that only central planning of an economy would help solve things. Instead, it made it worse.

The country never had such a long and disastrous time as the Great Depression. Deficit spending didn't end it. What ended the Great Depression was the overturning of the National Recovery Act among others and getting the govt. out of the central planning business. I also think that FDR kicking the bucket was a huge help as well.

[AdamA]

We have learned nothing from the Great Depression. Deficit spending is the only way out.

You're joking, right?

I am dead serious. Austerity will lead us into a depression.

I agree that austerity will lead us into depression, I'm just not so sure that deficit spending will help us avoid it. 

If mother nature, in the form of demographics and resource scarcity, decides we're in for a depression, then I think anything we do in the form of deficit spending is just kicking the can down the road. 

I know it's kind of cliched thinking, but it just seems hard to refute. 

[Indices]

Deficit spending is kicking the can down the road...towards a time with higher tax revenues due to lower unemployment.

[Gumby]

Everyone here is making good points. But we have the same sickness as Japan. And when Japan tried austerity, deficits actually went up (by ¥103.3 Trillion) and the economy got sicker...

Recovering From a Balance-Sheet Recession

When the Japanese government tried fiscal consolidation to slow the growth of government debt in response to International Monetary Fund advice in 1997, the results were economic contraction and an increase in the government deficit. In contrast, when the Japanese government increased government spending, the pace of recovery strengthened and the deficit as a share of gross domestic product declined.
Source: Recovering From a Balance-Sheet Recession

See also data from Richard Koo (Nomura) and Japan's Ministry of Finance (MOF):

[align=center][/align]

Even Ken Rogoff said last month that infrastructure spending is a good idea:

Infrastructure spending, if it were well-spent, that's great. I'm all for that.  I'd borrow for that, assuming we're not paying Boston Big Dig kind of prices for the infrastructure.
Source: http://globalpublicsquare.blogs.cnn.com ... s-economy/

[craigr]

The problem comparing different countries is that there are cultural differences involved. This is the same thing social scientists the world over have to deal with. The Japanese culture of spending vs. saving is much different than US views. Despite the flat stock market of Japan the past 20 years, they as a country have hardly been living in poverty and economic stagnation. While conventional economic measures should say that Japan is suffering, the reality is that Japan is an extremely advanced first world country. When you think of a country that is poor and damaged economically, Japan is not the first on the list. In fact I wouldn't think it would even make the list.

At the same time you can find countries with booming GDP growth and massive government spending but internally suffer from all sorts of problems. e.g. Brazil and Argentina.

Which is why I believe that measuring economic health in terms of spending in the economy is not correct. You can have a good economy and quality of life that conventional economic measures would say is a disaster. So these one size fits all economic solutions are not always a good idea.

Here is a chart of GDP growth from Japan and Myanamar from 1961 to today. By these gross measures Myanamar looks like a great place to live. Where the reality is that it is a third world economy with third world problems:

Japan vs. Myanamar GDP

[Gumby]

At the same time you can find countries with booming GDP growth and massive government spending but internally suffer from all sorts of problems. e.g. Brazil and Argentina.

No one says that reckless government spending is a good idea. Not to mention Brazil and Argentina were pegged to the US dollar, when their financial crises were brewing. The Myanmar kyat is also a pegged currency. Fixed-exchange-rate countries always have a risk of running out of foreign reserves. Those countries aren't applicable to our current situation.

A government, when having a fixed rather than dynamic exchange rate, cannot use monetary or fiscal policies with a free hand.
Source: http://en.wikipedia.org/wiki/Fixed_exch ... Criticisms

The dollar isn't pegged to anything, which gives us far more flexibility. We would be in big trouble if our currency was pegged. Our situation is virtually identical to Japan's in terms of a floating currency and aging demographics.

[moda0306]

mel,

I think it's immoral to talk the MMT argument (which I tend to agree with) and then proceed to take 32.5% (40% if you're self-employed) of a $50k/yr person's marginal income while paying others stimulus money in droves.  I agree that spending might be more effective macroeconomically, but I just have a problem with taxing that much of a person's income during a recession in a MMT world.

[craigr]

At the same time you can find countries with booming GDP growth and massive government spending but internally suffer from all sorts of problems. e.g. Brazil and Argentina.

Those countries you've cited aren't applicable examples by any means. Brazil and Argentina were pegged to the US dollar when they had their biggest crises. The Myanmar kyat is also a pegged currency. Fixed-exchange-rate countries always have a risk of running out of foreign reserves.

The cultures among all these countries are radically different from each other. What will work in one may not work in another. The currency pegging in these countries is the least of their problems. The Brazilian business and work culture is much different than the Japanese and will remain so no matter how the currency is managed.

A government, when having a fixed rather than dynamic exchange rate, cannot use monetary or fiscal policies with a free hand.
Source: http://en.wikipedia.org/wiki/Fixed_exch ... Criticisms

Exchange rates are not going to turn Brazilian workers into the Japanese no matter what is done. That's the fundamental problem with these theories. Nor are Greek austerity measures going to turn them into Germans. Which is why the idea of unified currencies and monetary policies across countries is a bad idea. Countries, and the people and cultures that formed them, are not interchangeable cogs.