Keynesian economics

[Interesting Post]

My "understanding" of this is that when governments are up against the zero interest rate barrier the conventional option of cutting interest rates to spur the economy is unavailable. Keynes says that the government should spend to address the shortage in demand and increase employment levels. After a certain time the economy recovers, interest rates go up, and conventional controls become viable again.

So "stimulus" is useful when the economy is up against the zero interest rate barrier, but should be paid back during times when the economy is relatively healthy and growing.

So why is this stupid again?

[JUICE]

Why is zero interest rate a barrier? Buy now for $100 or make ten payments of just $9.50 each!!

[Atropellador]

Government tends to neglect the part about cutting spending.

[Dr T Non-Fan]

Government could also cut taxes, giving money directly to people instead of through third parties (who make bank on such government spending).

[notreallyme]

Government tends to neglect the part about cutting spending.

This, it only works if in good times u reduce gov't spending, that never happened.

I would not blame someone for using their credit card to buy groceries if they arevwaiting for a check. If they never pay back the cc that's a problem.

[Interesting Post]

How do you cut taxes more when they are already at historical lows?

[Interesting Post]

This, it only works if in good times u reduce gov't spending, that never happened.


This is not true.

But I agree about the credit card point. That seems to be his argument. Government increases it's spending as a stopgap measure.

[Interesting Post]

Why is zero interest rate a barrier? Buy now for $100 or make ten payments of just $9.50 each!!

Because you can't cut interest rates any more when you are at zero.

[Gyudon]

Because you can't cut interest rates any more when you are at zero.

Not that it's intelligent policy but are you sure about that? Do you think we're at zero now?


but should be paid back during times when the economy is relatively healthy and growing.

When does this ever happen?

[Interesting Post]

Not that it's intelligent policy but are you sure about that? Do you think we're at zero now?



When does this ever happen?

We are about as close to zero as you can get.

Happen? Didn't Clinton cut spending and raise taxes during a healthy economic time period?

[Baron Von Raschke]

How much of our current unemployment is due to inadequate aggregate spending? The unemployed are disproportionately in regions and sectors of the economy that were related to the housing boom and bust. Do you think a ton of extra spending is likely to provide work for those people? How. Isn't it more likely to increase prices of things those people might want to buy, leaving them even worse off?

What if the new money gets funneled to speculation without making a dent in the real economy?

The ideal is that the spending be done on infrastructure projects that will pay off in the long run using cheap labor. Shovel ready projects have been harder to come by that expected.

[Gyudon]

We are about as close to zero as you can get.

Happen? Didn't Clinton cut spending and raise taxes during a healthy economic time period?

I think you're only considering short term rates.

There were tax increases on richer citizens and some spending restraint during the Clinton years. People claim this led to the "Clinton Surplus" but I wonder how much of that was really due to the increased revenue from a booming economy.

The big question is how do you prevent the bulk of "stimulus" from going to connected friends of Congress or state government? How do you quantify what is "good" and "bad" stimulus?

[CantGoogleMe]

How do you cut taxes more when they are already at historical lows?

Define "historical lows"...

[notreallyme]

We are about as close to zero as you can get.

Happen? Didn't Clinton cut spending and raise taxes during a healthy economic time period?

As long as we are printing money we are no where near zero.

Ps if u buy t-bills you do not get 0% return.

[Wigmeister General]

How do you cut taxes more when they are already at historical lows?

Simple. Everyone get a full refun of all tax payments they've ever made.

[1695814]

We are about as close to zero as you can get.

Happen? Didn't Clinton cut spending and raise taxes during a healthy economic time period?it depends on how you define :qunq:cut spending:qunq:.

According to reliable sources (http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms#Federal_s pending.2C_federal_debt.2C_and_GDP), spending under Clinton rose every year he was in office. Mind you, it was at a lower rate (usually) than Reagan, Bush I, and Bush II.

As for taxes, I'm not doing any more digging than this (http://ntu.org/tax-basics/history-of-federal-individual-1.html). The top rate was raised from 31% to 39.6%...but so was the starting point of that tax bracket (86.5k was moved up to 250k and then it continued to increase).

[whisper]

Politicians treat Keynes as the mediocre guy that they'd bang when there is no better options.

A key element to Keynes idea is that governments, in times of plenty, build up a surplus of funds that they draw down from when there is a down turn. This money creates a stimulus which helps the market recover.

Now, the past 100 years, the government spent less than what it took in 25 times - with 13 of those years occuring in the 1st 20 years. So, a key element of Keynes theory - just isn't there in practice.

[independent]

Why is zero interest rate a barrier? Buy now for $100 or make ten payments of just $9.50 each!!
Because you can't cut interest rates any more when you are at zero.

Mankiw had an interesting column on this:

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Or, they can do it the old fashioned way:

If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

http://www.nytimes.com/2009/04/19/business/economy/19view.html

Note that his thoughts were not popular:I should note that, economic logic aside, the "optics" of negative interest rates are not very good. I received more hate mail from my NY Times article on the topic than from anything else I have ever written.

I assume that NRM was talking about inflation here:
As long as we are printing money we are no where near zero.

Ps if u buy t-bills you do not get 0% return.

Last time I checked, the TIPS vs. nominal Treasury 10 year spread was 2-2.5%. So that's a rough measure of expected 10 year inflation among big bond buyers.

[Standtall]

How do you cut taxes more when they are already at historical lows?

Is this a serious question?

[independent]

Government could also cut taxes, giving money directly to people instead of through third parties (who make bank on such government spending).

Sometimes, "tax cut" vs. "increased spending" is strictly a word game. For example, a tax credit for R&D spending is the same economically as writing a check for some percent of R&D spending. But some people think the first is a "good" tax cut and the second is "bad" increased spending.

Sometimes spending gives money directly to people (extended unemployment benefits, paying the COBRA premium for unemployed workers). Sometimes it's a pretty short path (grants to states on the condition they are used to keep teachers employed).



The big question is how do you prevent the bulk of "stimulus" from going to connected friends of Congress or state government? How do you quantify what is "good" and "bad" stimulus?
I've got the same question for tax cuts.

You look at what's the chance the money will be spent (assuming you think the problem is not enough consumption demand, so unemployment benefits are better than tax cuts for the wealthy), what's the chance of getting some long term benefit besides just the stimulus (infrastructure), and how much does this help people who are really hurting today?

It's not an exact science whether you're talking more spending or more tax cuts, but it seems that some ranking is possible.

[notreallyme]

Interest rates don,t go up when they are fake.

[nonlnear]

My "understanding" of this is that when governments are up against the zero interest rate barrier the conventional option of cutting interest rates to spur the economy is unavailable. Keynes says that the government should spend to address the shortage in demand and increase employment levels. After a certain time the economy recovers, interest rates go up, and conventional controls become viable again.

So "stimulus" is useful when the economy is up against the zero interest rate barrier, but should be paid back during times when the economy is relatively healthy and growing.

So why is this stupid again?
While accepted as conventionally true that interest rates can't go negative, it's not true. There are ways to make rates effectively negative, and even explicitly negative.

Frankly I'm surprised that thy haven't been discussed more openly in economic circles over the last few years, but one of them has been discussed tangentially. All this talk about how the evil banks are sitting on bags of cash and not lending could be laying the political groundwork for an explicit cap on reserves. Think about why anyone would want to cap reserves. Consider what policies you would need in place in order to make the fed discount rates go slightly negative without exploding the system.

[Gyudon]

I've got the same question for tax cuts.

You look at what's the chance the money will be spent (assuming you think the problem is not enough consumption demand, so unemployment benefits are better than tax cuts for the wealthy), what's the chance of getting some long term benefit besides just the stimulus (infrastructure), and how much does this help people who are really hurting today?

Nothing is going to "stimulate" the economy as many people would wish, tax cuts included. You just can't make unemployment vanish and instantly restructure a damaged economy back to peak production overnight. No one wants to hear it but deleveraging takes time. Recovering from the housing boom and adjusting to life with less credit will be painful and slow. That's the nature of financial crises.

That being said, the long run track record of private spending is terrific. Money in the hands of people has historically done a great job of creating employment and improving everyone's quality of life. Are tax cuts great during recessions and during deficits? Perhaps not in every case but giving out free checks to the poor to reward not working is worse. It sounds great in theory but there are always unintended consequences. I knew plenty of friends that were on the "Obama Plan" not looking for work until they maxed out their unemployment benefits. IMO large unemployment benefits actually increases unemployment and prolongs recessions.

[independent]

Nothing is going to "stimulate" the economy as many people would wish, tax cuts included. You just can't make unemployment vanish and instantly restructure a damaged economy back to peak production overnight. No one wants to hear it but deleveraging takes time. Recovering from the housing boom and adjusting to life with less credit will be painful and slow. That's the nature of financial crises.

That being said, the long run track record of private spending is terrific. Money in the hands of people has historically done a great job of creating employment and improving everyone's quality of life. Are tax cuts great during recessions and during deficits? Perhaps not in every case but giving out free checks to the poor to reward not working is worse. It sounds great in theory but there are always unintended consequences. I knew plenty of friends that were on the "Obama Plan" not looking for work until they maxed out their unemployment benefits. IMO large unemployment benefits actually increases unemployment and prolongs recessions.

Your "plenty" of friends may have ridden the system. But they freed up jobs for people who wanted/needed them more. With 14 million unemployed and 3 million job openings, simply cutting unemployment benefits may change the faces in the jobs, but isn't going to increase the number of people working.

I think we've got the classic long term vs. short term conflict. Yes, more generous unemployment benefits increase the "natural" unemployment rate (they may also improve job matching efficiency) that's a long term economic condition. But the sudden jump in unemployment that we've seen wasn't caused by the increased unemployment benefits, and isn't being materially extended by them.

Similarly, our economy normally works just fine as a closed cycle in which production => wages => spending => more production => .... But it's obvious that isn't working well now and hasn't been for the last couple years. Something is slowing that cycle down, the labor market doesn't clear in the short term. The only big 20th century example of something like this in the US didn't end until the gov't started spending in huge quantities.

Will the economy eventually recover? I hope so. But, there's a lot lost economic output while we're waiting that we will never get back. In some cases, that converts into real human misery.

[jared]

Dean Baker's blog is about as Kenesian as you can get:

http://www.cepr.net/index.php/beat-the-press/

Other big Keynesians whose writings and interviews can be found on the web are are Krugman, Robert Reich, Galbraith & Stiglitz

Baker makes sense much of the time. For example,

The Post noted the weak sales in existing homes for May reported yesterday, as well as the drop in prices, and told readers:

"The housing market is still struggling to recover from a historic slump, according to industry data released Tuesday."

Of course it is not struggling to recover from a historic slump. It is correcting an unprecedented bubble. There run-up in nationwide house prices between 1996 and 2006 was a break with a hundred-year long trend over which nationwide house prices just kept even with the overall rate of inflation. Over this period, they outpaced the overall rate of inflation by more than 70 percent.

It was the collapse of this bubble that gave us the huge economic slump than the country now faces, but apparently the Post still hasn't heard about the bubble. House prices have to fall another 8 percent or so to get back to their trend level. Rather than expecting a rebound, we should be expecting a further decline.


http://www.cepr.net/index.php/blogs/beat-the-press/is-anyone-ever-going-to-tell-the-washington-post-about-the-housing-bubble

[Baron Von Raschke]

The only big 20th century example of something like this in the US didn't end until the gov't started spending in huge quantities.

Are you talking about the New Deal or WW2?

Will the economy eventually recover? I hope so. But, there's a lot lost economic output while we're waiting that we will never get back. In some cases, that converts into real human misery.

Lots of lost output of what exactly? Houses being built? Loans being originated?

[Paul Krugman]

Keynesian Economics is that is hard. Believing the confidence fairy will reward you with a recovery for putting tax cuts for the rich under your pillow is easy.

[whisper]

Keynesian Economics is that is hard. Believing the confidence fairy will reward you with a recovery for putting tax cuts for the rich under your pillow is easy.

Sure, governments can't seem to keep the surplus that Keynesian economic theory requires. Pretending that the surplus isn't important to the Keynesian economic theory though is easy - thousands of people and businesses manage to spend their way to bankruptcy every year. As we see in Europe - governments can do it too!

[yoyo]

PK said "Keynesian Economics is that is hard."

English is hard too.

[Standtall]

How do you cut taxes more when they are already at historical lows?

How can you raise spending when it is already at a historical record high? :tup:

[Dr T Non-Fan]

Happen? Didn't Clinton cut spending and raise taxes during a healthy economic time period?

I'll need to see some bill that came in to law that increased taxes during Clinton's time in office.
Now, tax revenues might have increased, but this happens in healthy economic periods without congressional help.

I thought one of the problems with Keynesian Economics is that the increased spending (or tax decreases) must be temporary, but the participants in the economy have to think that they are permanent.
And our current government spending problem is that we have way too much spending on permanent programs that cannot be touched in practice by career politicians.

[FormLetter]

The Keynesian Economics approach also requires that the government has some level of wisdom with which they are able to figure when the right moment is for setting aside surplus and when is the right moment for spending that surplus.

Naturally the desire to win votes by handing out goodies would cloud their judgement when attempting to employ that wisdom, even if you assume they have it in the first place.

[JUICE]

Ok, let me get this straight:

Keynesian Economics advocates saving of capital during good times and release of that capital in bad times. What again does that have to do with government?

[whisper]

Ok, let me get this straight:

Keynesian Economics advocates saving of capital during good times and release of that capital in bad times. What again does that have to do with government?

Keynes noted that during downturns, economic participants may opt to hoard capital instead of deploying it. This hoarding of capital helps prolong downturns and aggravates their impact.

Keynes solution to this problem is for the government to hold surplus during good times, and release the reserves during a recession. With capital flowing (from the government), it will help alleviate the impact of the recession.

There are two issues with his analysis:
1.) Is governmental spending fungible with non-governmental spending? In other words, just because the government is spending money does that mean said capital helps alleviate the downturn?
2.) Is governmental borrowing fungible with government held surplus funds? If the government borrows money instead of releasing reserves, do the same impacts happen?

A lot of people (rightly) criticize that borrowing money is the broken window effect. It is shifting money that would be used elsewhere into something else. That doesn't create a stimulus - in fact it may have a negative impact (because of the interest rate paid on the borrowed money).

Another problem with the government spending is that money doesn't necessarily get deployed well. As Obama discovered, there aren't that many shovel ready projects. Stimulus money also went to corporations - who hoarded the money completely negating the whole point of the Keynesian theory.

The problem with Keynesian economic theory is that it posits the government is wise (and perhaps it requires that the government actually be wiser than the market) - a questionable belief.

[notreallyme]

Keynesian ALSO assumes the Gov't is spending money on creating jobs via infrastructure, not just giving it away in entitlements.

[JUICE]

Sounds like Keynes was pretty irresponsible with his little theory. Imagine if someone today published a paper where the fundamental assumption was that government has better self control than the private sector :lol:

[independent]

Are you talking about the New Deal or WW2?

Lots of lost output of what exactly? Houses being built? Loans being originated?

WW2.

Good question. We built the Hoover Dam in the Depression. The people who worked on it would probably have been unemployed if they hadn't been building the dam. So that's something we got by using labor that would have been "wasted" if they had stayed home. Maybe we should be building windmills this time.

Are you saying that American workers don't really produce anything anymore. So if they stay home, there is no loss? So much of our economy is services that it's hard see what gets lost.

An unemployed architect doesn't take a vacation, a hotel cuts staff, the unemployed asst manager doesn't go out for supper, the restaurant cuts staff, the unemployed cook drops his cable service, the cable company cuts back on its advertising budget, the ad agency drops an admin asst, who doesn't get her nails done, leading to .... Everyone consumed less in terms of things that are measured by GDP, but did we really lose any "output"? That vacation, cable TV service, nail beautification, are all things that people want, which they will never get back, but is that a "bad thing"?

Maybe they all lay awake at night worrying about how they will pay their bills, one of them declares bankruptcy, are those psychological hits important?

[jared]

Debts don't matter (Keynesian perspective)

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/if-its-not-different-why-do-we-need-economists


5th paragraph from bottom:

The proponents of the predestination view often point to the large amount of debt that was accrued in the boom that led to the bust. And of course there is a vast amount of debt, especially among households, but this also implies that there is a vast amount of wealth corresponding to this debt. One person's debt is another person's asset. The role of economics is to devise ways to ensure that those with the money either spend it, or that wealth somehow shifts from those who have it but won’t spend it, to those who would spend it, but don’t have it.

[whisper]

Debts don't matter (Keynesian perspective)


1.) This isn't Keynes thought, it is someone who is defending the extension of Keynes ideas.

2.) And of course there is a vast amount of debt, especially among households, but this also implies that there is a vast amount of wealth corresponding to this debt. One person's debt is another person's asset.

This assertion argues that all debt are equivalent.
That going into debt to buy an extravagant wedding is of equal value as taking a loan out to expand a business.

As a lot of people with mortgages in excess of their home values and the banks holding such mortgages - debt doesn't necessarily equal wealth.

[independent]

A lot of people (rightly) criticize that borrowing money is the broken window effect. It is shifting money that would be used elsewhere into something else. That doesn't create a stimulus - in fact it may have a negative impact (because of the interest rate paid on the borrowed money).

.

I think the standard Keynes response would be that crowding out is real in a healthy economy, but it doesn't happen when we've got lots of excess capacity.

This was the first thing that popped up when I tried Google:

http://krugman.blogs.nytimes.com/2011/05/11/the-doctrine-of-immaculate-crowding-out/

There's probably a string of earlier posts.

[Baron Von Raschke]

WW2.

OK, so what year did the "recovery" happen? During the war or after the war?

Good question. We built the Hoover Dam in the Depression. The people who worked on it would probably have been unemployed if they hadn't been building the dam. So that's something we got by using labor that would have been "wasted" if they had stayed home. Maybe we should be building windmills this time.

Are you saying that American workers don't really produce anything anymore. So if they stay home, there is no loss? So much of our economy is services that it's hard see what gets lost.

An unemployed architect doesn't take a vacation, a hotel cuts staff, the unemployed asst manager doesn't go out for supper, the restaurant cuts staff, the unemployed cook drops his cable service, the cable company cuts back on its advertising budget, the ad agency drops an admin asst, who doesn't get her nails done, leading to .... Everyone consumed less in terms of things that are measured by GDP, but did we really lose any "output"? That vacation, cable TV service, nail beautification, are all things that people want, which they will never get back, but is that a "bad thing"?

Maybe they all lay awake at night worrying about how they will pay their bills, one of them declares bankruptcy, are those psychological hits important?

I am certainly not saying Americans produce nothing. The issue as I see it is multi-fold:
1) Many people started down a career path with unsustainable demand. Think most things real estate and/or credit bubble related. I could go through a long list of things that this includes, from people building the houses, to people selling them, to people furnishing them, to people selling overpriced gelato to people who feel rich because their house is worth twice what they paid for it. Many of those jobs are now gone and not coming back any time soon, no matter what. A lot of them are faced with having to take a worse job than they had or hold out for something else. How many of them have the skills necessary to build a windfarm or some other useful infrastructure? My guess is not many. And if they did, what are they going to do once the windfarm is built?
2) Unskilled workers are increasingly uncompetitive against both foreign competition and machines. This will continue to be the case whether or not demand increases.
3) People spent money they didn't really have on stuff they didn't need (and some stuff they did need). Demand got pushed forward. You can't continually push in forward (or can you?).

As far as the psychological trauma - people have lost their jobs in huge numbers throughout the history of the country. It's just that usually they can find another. Maybe it's the actuary in me, but I think that being more cautious and thrifty will be better for the country's collective psyche in the long run.

[whisper]

I think the standard Keynes response would be that crowding out is real in a healthy economy, but it doesn't happen when we've got lots of excess capacity.

That's not what I'm referring to.
What that is referring to is that since the government took money (ie- taxes) business don't have money. What I'm referring to is that if you spend $X on one thing, that money is no longer available to spend on other things.

[Gyudon]

Maybe it's the actuary in me, but I think that being more cautious and thrifty will be better for the country's collective psyche in the long run.

It's interesting to speak with someone who grew up during the GD and their perspective on debt and saving.

[jared]

It's interesting to speak with someone who grew up during the GD and their perspective on debt and saving.

I was in South Beach (Staten Island, NY) and viewed a sign on the attractive boardwalk that said the boardwalk was built in the late 1930's under FDR's Works Progress Administration, with the purpose of creating jobs for depression era workers. If we are going to pay people unemployment insurance, food stamps, etc., how much worse would it be to take that same money and pay people to renovate?

[Gyudon]

If a project was not worthwhile when government revenues were high, what makes it so worthwhile when money is tight and deficits increase?

[Dr T Non-Fan]

If a project was not worthwhile when government revenues were high, what makes it so worthwhile when money is tight and deficits increase?
Votes for incumbents. The incumbents work together to assure their mutual re-elections.

Economically? Not related to current economic situation.

[DanielSong39]

Keynesian economics in theory:

(1) Engage in rampant deficit government spending when the economy is in a depression to give it a jump start.
(2) Pay off the debt and reduce government spending when the economy is booming in order to slow it down.

Keynesian economics in practice:

(1) Engage in rampant deficit government spending.

It remains to be seen whether Keynesian economics works in theory. However, it's been proven beyond a doubt that it will never be carried out in practice and people will use it as an excuse to spend money they don't have.

Until both sides agree to face reality I'm afraid we won't make much progress on this issue.

[jared]

If a project was not worthwhile when government revenues were high, what makes it so worthwhile when money is tight and deficits increase?

It's not. But we are paying these people anyway.

[whisper]

If a project was not worthwhile when government revenues were high, what makes it so worthwhile when money is tight and deficits increase?

That is not Keynes argument.
The projects are worthwhile to do in both good and bad times. The problem in recessions is that companies hoard money instead of deploying capital in good projects due to the uncertainty. The government invests in those projects, deploying capital and spurring the economy.

[notreallyme]

I'm very libertarian but this country needs infrastructure.

Problem is you can't afford it in any scenario when u are overspending on entitlements and defense.

[oirg]

I'm very libertarian but this country needs infrastructure.

Problem is you can't afford it in any scenario when u are overspending on entitlements and defense.

Privatize infrastructure, and the market will take care of it.

[yoyo]

If we are going to pay people unemployment insurance, food stamps, etc., how much worse would it be to take that same money and pay people to renovate?surely you don't think the welfare payments would stop once the make work projects began

[MichaelTurner]

Privatize infrastructure, and the market will take care of it.
I don't think this is one of those things where "the market" will take care of it. Infrastructure lends itself quite well to natural monopolies. There was once a time where private railroads would build their own (often redundant) rails. The result was a hodgepodge of disconnected and mismatched rail lines that didn't serve anybody particularly well.

There are also a number of physical constraints. There are a limited number of viable bridge/tunnel locations and only so many roads that can be built. Same thing goes for electricity, water, sewer, and telecommunications lines. It just doesn't make sense for each competing provider to run its own system. The infrastructure should be built publically and leased to those who seek to use it.

Furthermore there are number of positive externalities to a socialized infrastructure that either aren't priced for or can't be recovered by a public company. There's also a very long time period (if ever) for a private company to recoup its investment losses and turn a profit. WRT things like high speed rail, the general public enjoys fewer carbon emissions, less reliance on foreign oil, higher property values, less wasted (parking + driving) space, increased tourism, etc.

[MichaelTurner]

surely you don't think the welfare payments would stop once the make work projects began
They should. If you're an able bodied individual, there should be a government job you must work in order to qualify for welfare.

[Gyudon]

It's not. But we are paying these people anyway.

So hire people primarily to keep them employed and a paycheck going their way. I would support temporary tax credits for vocational retraining programs before that happened. Though that has its own issues.

[FormLetter]

Since when are higher property values a great thing? That amounts to higher housing prices, and you don't hear anybody clamoring about how they wish the price of something would go up - unless it's something they plan on selling.

[MichaelTurner]

Since when are higher property values a great thing? That amounts to higher housing prices, and you don't hear anybody clamoring about how they wish the price of something would go up - unless it's something they plan on selling.
You're conflating value and price.

All else equal, a nearby train station is going to make my house a more desireable place to live. It adds real value because I now have a greater selection of transportation options. The price will increase to reflect the added value.

[FormLetter]

You're conflating value and price.

All else equal, a nearby train station is going to make my house a more desireable place to live. It adds real value because I now have a greater selection of transportation options. The price will increase to reflect the added value.

When people say "protect property values", they are talking about price. No bones about it.

[MichaelTurner]

Let me rephrase. Having a quality infrastructure is valuable. Nearby property values will reflect that.

[independent]

OK, so what year did the "recovery" happen? During the war or after the war?
The recovery happened as soon as we got back to "full" employment - looking at BLS data, that seems about 1942. The important fact is that the Depression didn't return as soon as the war ended, as many people expected. Somehow that period of full employment restarted the economy.

I am certainly not saying Americans produce nothing. The issue as I see it is multi-fold:
1) Many people started down a career path with unsustainable demand. Think most things real estate and/or credit bubble related. I could go through a long list of things that this includes, from people building the houses, to people selling them, to people furnishing them, to people selling overpriced gelato to people who feel rich because their house is worth twice what they paid for it. Many of those jobs are now gone and not coming back any time soon, no matter what. A lot of them are faced with having to take a worse job than they had or hold out for something else. How many of them have the skills necessary to build a windfarm or some other useful infrastructure? My guess is not many. And if they did, what are they going to do once the windfarm is built?
2) Unskilled workers are increasingly uncompetitive against both foreign competition and machines. This will continue to be the case whether or not demand increases.
3) People spent money they didn't really have on stuff they didn't need (and some stuff they did need). Demand got pushed forward. You can't continually push in forward (or can you?).
All true.

1) If people who were skilled workers don't have the skills for the next decade, it seems we should be re-training. What can electricians, plumbers, carpenters, real estate agents, etc. learn to do that will be useful in the near term? Some of them could learn how to build schools and sewer systems and windmills. As long as they are sitting at home, they aren't producing anything.

It's also true that lots of currently unemployed people have skills that are still useful, the general slowdown in economic activity means that we temporarily need fewer of them. Every time we get one of those electricians back to work, we increase demand for other people.

2) Yes, we've got a real problem with workers who will never be skilled. Fortunately, there are some unskilled jobs that can't be outsourced. I've said in other threads that our immigration policies should be changed so that we don't import (often illegally) so many new unskilled workers. I don't get much support here. That seems like a better idea to me than simply lowering the minimum wage.

3) I'm uncertain about the impact of paying off consumer loans. Somewhere there's a lender who gets repaid and can't find a new borrower. What happens to the money? I think the Keynesian answer is that if this is a dramatic short term issue, the gov't borrows that money and employs people with it.

As far as the psychological trauma - people have lost their jobs in huge numbers throughout the history of the country. It's just that usually they can find another. Maybe it's the actuary in me, but I think that being more cautious and thrifty will be better for the country's collective psyche in the long run.

I can make the obvious comment and say that people have died of epidemics throughout history, but that doesn't mean we ignore those that happen in our time.

The thread title is Keynesian Economics. I think we all know that one of the problems Keynes had was convincing people that thrift, which is normally a key step in increasing productivity, is counter-productive in certain unusual situations.
So, yes, gratification deferrers like actuaries just know in their guts it must be wrong. It could be wrong in general. It may be that our debt and structural deficits were too big going into this event to give the gov't any room to work. But it seems we shouldn't think with our guts on this one.

[Baron Von Raschke]

The recovery happened as soon as we got back to "full" employment - looking at BLS data, that seems about 1942. The important fact is that the Depression didn't return as soon as the war ended, as many people expected. Somehow that period of full employment restarted the economy.


Making people join the military is certainly an one way to reduce unemployment. I think most people who lived through the rationing of WW2 probably weren't feeling like they were experiencing an economy had recovered. We have no way of knowing whether full employment somehow "jumpstarted" the economy or it was something else like ending rationing, bringing the productive workers home, return to business as usual, or something else.

[FormLetter]

Perhaps it was related to the money supply.

[JUICE]

Perhaps it was related to the money supply.

Shh! JSAs can't handle simple, fundamental truths. Especially when they're slightly opaque and far more boring than the "war ra ra" talk.

[Dr T Non-Fan]

Since when are higher property values a great thing? That amounts to higher housing prices, and you don't hear anybody clamoring about how they wish the price of something would go up - unless it's something they plan on selling.
Owners vote more than renters?
Higher home prices in a specific area (relative to other areas) will keep out less-desirables.

[oirg]

I don't think this is one of those things where "the market" will take care of it. Infrastructure lends itself quite well to natural monopolies. There was once a time where private railroads would build their own (often redundant) rails. The result was a hodgepodge of disconnected and mismatched rail lines that didn't serve anybody particularly well.

There are also a number of physical constraints. There are a limited number of viable bridge/tunnel locations and only so many roads that can be built. Same thing goes for electricity, water, sewer, and telecommunications lines. It just doesn't make sense for each competing provider to run its own system. The infrastructure should be built publically and leased to those who seek to use it.

Furthermore there are number of positive externalities to a socialized infrastructure that either aren't priced for or can't be recovered by a public company. There's also a very long time period (if ever) for a private company to recoup its investment losses and turn a profit. WRT things like high speed rail, the general public enjoys fewer carbon emissions, less reliance on foreign oil, higher property values, less wasted (parking + driving) space, increased tourism, etc.

Michael, for the most part I agree with this. My comment was a dig on hard-core free marketeerism.

[Dr T Non-Fan]

The thread title is Keynesian Economics. I think we all know that one of the problems Keynes had was convincing people that thrift, which is normally a key step in increasing productivity, is counter-productive in certain unusual situations.

If one's economy is geared toward making goods for other economies, saving is a good thing, as is government spending on infrastructure to make exportation more efficient.
We stopped being one of those economies decades years ago.

[Baron Von Raschke]

1) If people who were skilled workers don't have the skills for the next decade, it seems we should be re-training. What can electricians, plumbers, carpenters, real estate agents, etc. learn to do that will be useful in the near term? Some of them could learn how to build schools and sewer systems and windmills. As long as they are sitting at home, they aren't producing anything.

It's also true that lots of currently unemployed people have skills that are still useful, the general slowdown in economic activity means that we temporarily need fewer of them. Every time we get one of those electricians back to work, we increase demand for other people.

I assume by "we", you mean "we the government". Do you think the government knows what sectors "should" grow, even if it is at the expense of the other sectors? How?

Public infrastructure is a nice thought, but "we" spent remarkably little on it in the first stimulus package for some reason. Makes me think there aren't as many shovel ready projects out there as we would like to think.

[oirg]

I assume by "we", you mean "we the government". Do you think the government knows what sectors "should" grow, even if it is at the expense of the other sectors? How?

Public infrastructure is a nice thought, but "we" spent remarkably little on it in the first stimulus package for some reason. Makes me think there aren't as many shovel ready projects out there as we would like to think.

Public infrastructure projects usually require significant planning, so there wouldn't have been a quick boost that the stimulus packages was supposed to provide.

[notreallyme]

Privatize infrastructure, and the market will take care of it.

I hear this far more from liberals trying to claim that the 'small Gov't' type say this than I hear the 'small Gov't' type say it.

[FormLetter]

Owners vote more than renters?
Higher home prices in a specific area (relative to other areas) will keep out less-desirables.

Yeah I can identify those that benefit easily enough. But the notion that protecting property values is a good thing has shown up in news articles about the "foreclosure crisis" lots of times without it coming directly from somebody living in a particular neighborhood whose property values were negatively affected by foreclosure. News anchors have made the claim, along with journalists. I always think "excellent for the buyers".

[notreallyme]

Michael, for the most part I agree with this. My comment was a dig on hard-core free marketeerism. unicorns

If you are going to make up a group that doesn't exist why not use Unicorns instead of implying that it is reality?

I was surprised someone gave your post which was completely void of any thought an answer that involved thought.

[Baron Von Raschke]

Public infrastructure projects usually require significant planning, so there wouldn't have been a quick boost that the stimulus packages was supposed to provide.

Indeed. The Hoover Dam was actually authorized in 1928, pre-depression, after many years of discussion.

http://en.wikipedia.org/wiki/Hoover_Dam

[Aaron Brachowitz]

My "understanding" of this is that when governments are up against the zero interest rate barrier the conventional option of cutting interest rates to spur the economy is unavailable. Keynes says that the government should spend to address the shortage in demand and increase employment levels. After a certain time the economy recovers, interest rates go up, and conventional controls become viable again.

So "stimulus" is useful when the economy is up against the zero interest rate barrier, but should be paid back during times when the economy is relatively healthy and growing.

So why is this stupid again?
Keynesian clowns, monetarist clowns...you change the makeup a little bit but ultimately they're both still clowns.

[Baron Von Raschke]

If you are going to make up a group that doesn't exist why not use Unicorns instead of implying that it is reality?

I was surprised someone gave your post which was completely void of any thought an answer that involved thought.

Just because you aren't one doesn't mean they don't exist.

www.mises.org

[whisper]

Just because you aren't one doesn't mean they don't exist.

www.mises.org

That doesn't really qualify for what you're talking about.

Take cellular technology in EU. Most of the governments didn't invest a penny into the infrastructure, all of it was done by private businesses. What the government did do was prevent the private businesses from holding a monopoly on the infrastructure. As a result, there is more competition, better service and cheaper costs to European citizens than U.S.

It's not just free market type you're referring to, it really is the anarcho-capitalists that you're railing against. Not a big group.

[notreallyme]

Just because you aren't one doesn't mean they don't exist.

www.mises.org

Big website your going to have to direct me to the part that says they believe infrastructure will be built as a result of the free market and Gov't should not be involved in road building and / or other infrastructure.

[Baron Von Raschke]

Example...

http://mises.org/daily/3416

I advocate the complete, total, and full privatization of all roads, streets, highways, byways, avenues, and other vehicular thoroughfares. And I am serious about this, deadly serious.

[Dr T Non-Fan]

Big website your going to have to direct me to the part that says they believe infrastructure will be built as a result of the free market and Gov't should not be involved in road building and / or other infrastructure.
I can see the government providing authorization for where such roads shall be built, then auctioning off the ownership of the roads.
Roads have a limited competitive market, in practice.

[notreallyme]

Example...

http://mises.org/daily/3416

Thaks :tup: OK so some people think that way, but they are definetely the minority.

Usually people don't make references to small fringe groups when trying to make a dig on someone but OK :shrug:

You know like Christians who love it when gay people get AIDS.

[notreallyme]

I can see the government providing authorization for where such roads shall be built, then auctioning off the ownership of the roads.
Roads have a limited competitive market, in practice.

It may work, but I am fine with Gov't doing it.

As much as Gov't shouldn't do things just cause it can in those cases where it is the best option it should be used. :shrug:

Flat roads would be no problem, you would have issues with the expensive ones (the 35W bridge here for example just got rebuilt after falling, not sure how that would have worked if it was private). Maybe it would work :shrug:

[whisper]

Example...

http://mises.org/daily/3416

Also, understand his argument:

If the highways were now commercial ventures, as once in our history they were, and upward of 40,000 people were killed on them annually, you can bet your bottom dollar that Ted Kennedy and his ilk would be holding Senate hearings on the matter.

http://www.walletpop.com/2010/05/07/crib-deaths-prompt-drop-side-crib-hazard-warning-by-cpsc/

At least 32 infants have suffocated or strangled in drop-side cribs in the past nine years, prompting the U.S. Consumer Product Safety Commission to issue a warning about the "deadly hazards with drop-side cribs."

One Crib recall after another in recent years has been due to hardware or assembly problems with the once-standard drop-side cribs. Just in the past five years, more than seven million of these cribs have been the subject of 11 recaIls.

Three of the recalls were issued in the past week: Graco and Simplicity brands on the same day, and then C&T and Sorelle a few days later.

Pressure has been mounting on the child products manufacturing industry to stop making the cribs.

The government accepts it's own failure at a level it would find unacceptable by others.

It's why private insurance companies are heavily regulated, but different standards are held to public insurance vehicles.

[independent]

If one's economy is geared toward making goods for other economies, saving is a good thing, as is government spending on infrastructure to make exportation more efficient.
We stopped being one of those economies decades years ago.

I think increased productivity is a Good Thing even for a closed economy. I can't think of any time that we were "geared toward" export. Total exports have always been a small portion of our GDP.

[independent]

Making people join the military is certainly an one way to reduce unemployment. I think most people who lived through the rationing of WW2 probably weren't feeling like they were experiencing an economy had recovered. We have no way of knowing whether full employment somehow "jumpstarted" the economy or it was something else like ending rationing, bringing the productive workers home, return to business as usual, or something else.

Sure, those people would have been well ahead if they had built cars and sold them for half the cost of production instead of building tanks and destroying them in Europe. Lots of Americans wanted cars in those days and couldn't afford one.

It's hard to find controlled experiments in macro economics. So we will never know for sure. We can reason a little. It wasn't "bringing workers home", those workers had been home before the war and they couldn't find jobs. The big deal was that they didn't return to business as usual before the war, something changed. I can't think of any reason that ending rationing put people to work. Certainly, there was plenty of low consumption before the war, that didn't start the economy.

International economists can look at other countries that go through bank crises and try to find patterns of whether austerity or spending gets them restarted. But of course no two countries or circumstances are identical, so we can still say that nothing is ever proved.

[Dr T Non-Fan]

It's hard to find controlled experiments in macro economics. So we will never know for sure. We can reason a little. It wasn't "bringing workers home", those workers had been home before the war and they couldn't find jobs. The big deal was that they didn't return to business as usual before the war, something changed. I can't think of any reason that ending rationing put people to work. Certainly, there was plenty of low consumption before the war, that didn't start the economy.

Perhaps during the war, in the course of making planes and tanks and other weaponry, creativity resulted in goods made after the war with the knowledge (and R&D paid for by the US Gov) discovered during the war.
Computers. Plastics. etc.

[independent]

I assume by "we", you mean "we the government". Do you think the government knows what sectors "should" grow, even if it is at the expense of the other sectors? How?

Public infrastructure is a nice thought, but "we" spent remarkably little on it in the first stimulus package for some reason. Makes me think there aren't as many shovel ready projects out there as we would like to think.
Yes, I meant government. I think some things are more or less monopolies and it doesn't matter much if they are done by gov't or private actions (My local electric company is owned by the city. I don't think it's inherently less efficient than other companies that are "private".) That's true even in good times.

But, in good times most decisions should be left to a reasonably well-functioning private sector. You're assuming some crowding out of private activities, but that's not an issue in depressions. When the private sector is functioning badly, even a slightly inefficient government may be better. Who knows if the Hoover dam would have been cheaper if it had been built with private borrowing? I'm pretty sure that if they had waited for private money, it would have been the 1950's instead of the 1930's. Doing it sooner was better (it didn't crowd out other construction, like it would have in the 50's).

The 2009 "stimulus" was the result of political reality. It wouldn't pass unless it had lots of tax cuts (that was the anti-Keynsian faction's demand), so 1/3 of the total wasn't "spending", it was tax cuts. It wouldn't pass if the total bill was $1 trillion, so they couldn't put in things that would take 3 or 4 years to develop, like many infrastructure projects. There was the immediate idea of keeping teachers and other local workers employed. You can say that teachers are useless and we didn't get any long term benefit from keeping them employed, but others will say that was a fine "investment" that required remarkably little overhead.

Saying the 2009 act didn't have much building activity is a comment on political realities, no on the value of building stuff.

[Gyudon]

Saying the 2009 act didn't have much building activity is a comment on political realities, no on the value of building stuff.

So due to the bolded, Keynesian economics fails.

I want to share an anecdote relating to unemployment benefits. A friend of mine worked at a large bank in "Alternative Investments" and made a boatload of money prior to the crash. Once the crash came, virtually everyone in his department, including him, was laid off.

Given his impressive resume, he could easily have taken a 30%-40% pay cut and moved to another good but not nearly as lucrative position in finance. Because he loved what he did and loved the compensation, he held out as long as he could. His unemployment benefits together with his savings allowed him to "wait until demand returned" for his skills. Two years later, his savings and benefits ran out despite careful control of expenses and the "demand" never came back. He ended up taking the same pay cut he could have taken earlier, only later.

In other words, unemployment benefits helped him prolong not accepting the reality that the market no longer desired his old skill set. Once he ran out of money, he was forced to take a lower paying job to survive.

[Baron Von Raschke]

Imagine all the demand he could have created if his overpaid job had lasted forever! :wink:

[Gyudon]

Enough tax revenue to overpay someone else! Cheers all around.

[independent]

So due to the bolded, Keynesian economics fails.

I want to share an anecdote relating to unemployment benefits. A friend of mine worked at a large bank in "Alternative Investments" and made a boatload of money prior to the crash. Once the crash came, virtually everyone in his department, including him, was laid off.

Given his impressive resume, he could easily have taken a 30%-40% pay cut and moved to another good but not nearly as lucrative position in finance. Because he loved what he did and loved the compensation, he held out as long as he could. His unemployment benefits together with his savings allowed him to "wait until demand returned" for his skills. Two years later, his savings and benefits ran out despite careful control of expenses and the "demand" never came back. He ended up taking the same pay cut he could have taken earlier, only later.

In other words, unemployment benefits helped him prolong not accepting the reality that the market no longer desired his old skill set. Once he ran out of money, he was forced to take a lower paying job to survive.

The comment was on the fraction of the 2009 bill that was "infrastructure".

But, there's a line of "reasoning" here that says because people's guts tell them that spending is a bad thing, we didn't do nearly as much, or the particular things, that Keynesians recommended. We didn't get a quick recovery, therefore Keynesians "failed". The K's say that's a strange sort of "logic". Much like someone who keeps his 401k in a money market fund for 40 years, doesn't have a very big retirement fund, and says DC pensions "fail".

I'll believe your anecdote that unemployment benefits allowed your friend to extend his unrealistic hopes. In normal times, it can happen that ue benefits allow the worker to pass on the first job, hold out for a better match, and find one. That increases economic efficiency.

But we're not in normal times. If your friend had taken the first job, someone else would have been squeezed out. (We're in a temporary situation where the lump of jobs fallacy isn't a fallacy.) So although the ue benefits allowed him to avoid reality a little longer (maybe a few months, given the ratio of boatload of money to ue benefits), they didn't increase the unemployment rate. Someone who wanted the job more got it.

[Loner]

So due to the bolded, Keynesian economics fails.

I want to share an anecdote relating to unemployment benefits. A friend of mine worked at a large bank in "Alternative Investments" and made a boatload of money prior to the crash. Once the crash came, virtually everyone in his department, including him, was laid off.

Given his impressive resume, he could easily have taken a 30%-40% pay cut and moved to another good but not nearly as lucrative position in finance. Because he loved what he did and loved the compensation, he held out as long as he could. His unemployment benefits together with his savings allowed him to "wait until demand returned" for his skills. Two years later, his savings and benefits ran out despite careful control of expenses and the "demand" never came back. He ended up taking the same pay cut he could have taken earlier, only later.

In other words, unemployment benefits helped him prolong not accepting the reality that the market no longer desired his old skill set. Once he ran out of money, he was forced to take a lower paying job to survive.

Yes, and unemployment benefits enabled my brother to continue to make his child-support payments abd pay his rent until he found a job again. Most unemployed, by definition, are less impressive than your friend.

[Gyudon]

Yes, and unemployment benefits enabled my brother to continue to make his child-support payments abd pay his rent until he found a job again. Most unemployed, by definition, are less impressive than your friend.

Agreed, but that's an argument for charity.

[Gyudon]

The notion that government should protect you from any and all disease, unfavorable demand for your skills, lack of saving for retirement, and guarantee the payment of expenses for children regardless of whether or not you should have had them, is relatively new. None of these are a right.

For the vast majority of human history you had virtually zero protection. In some cases, it was even worse, some dude could come knock on your door and take the bulk of whatever food you and family managed to harvest through hard work.

I would a million times rather be born here today than in any other time on this continent's history. But, I'm not opposed to any and all charity. The problem is that you can't even have a discussion about it when there's literally no money to give. Government must first prove it can be even a tiny bit responsible with money then a discussion of stimulus and charity seems more reasonable.

[Baron Von Raschke]

Questions: according to Keynesian theory, Does Gyudon's friend now have an "output gap" of 30-40% between his potential and actual production?

[independent]

Questions: according to Keynesian theory, Does Gyudon's friend now have an "output gap" of 30-40% between his potential and actual production?

I'll bite. AFAIK, Keynes didn't say anything special about that, but I'm no Keynes biographer. This is just ordinary market stuff. Mankiw had a blog entry on the topic once.

I think the standard reply would be that if the friend has two job offers, and job A pays 30% more than job B, then he must be more "productive" in job A - after all, somebody values whatever he's doing in A 30% more than B.

If he has spent time and energy developing the skills for A, but there isn't enough demand to employ all the similarly skill people, then that seems to be a waste of his time and energy in developing those skills. If something happens to increase the supply of A jobs, and he moves back up the ladder, that's a gain in total output.

The "standard" reply assumes perfectly functioning markets.

[Baron Von Raschke]

Continuing with my argument, it seems like lots of people had skills that were in particularly high demand during the credit boom. Lots of those people are now unemployed or working lower paying jobs. I find it difficult to look at that change as a huge loss in productivity. If anything, I think it's probably a step towards a better allocation of resources. When I see economists with graphs showing an "output gap" as an argument for stimulating demand, I wonder "output of what"?

[JohnLocke]

I wonder "output of what"?

Overaggregation

[dfunkhou]

My "understanding" of this is that when governments are up against the zero interest rate barrier the conventional option of cutting interest rates to spur the economy is unavailable. Keynes says that the government should spend to address the shortage in demand and increase employment levels. After a certain time the economy recovers, interest rates go up, and conventional controls become viable again.

So "stimulus" is useful when the economy is up against the zero interest rate barrier, but should be paid back during times when the economy is relatively healthy and growing.

So why is this stupid again?

The interest rate is more for the Fed to worry about - adjusting interest rates is one particular tool it has to manage the short term business cycle.

[sweetiepie]

At least 32 infants have suffocated or strangled in drop-side cribs in the past nine years, prompting the U.S. Consumer Product Safety Commission to issue a warning about the "deadly hazards with drop-side cribs."

One Crib recall after another in recent years has been due to hardware or assembly problems with the once-standard drop-side cribs. Just in the past five years, more than seven million of these cribs have been the subject of 11 recaIls.

Three of the recalls were issued in the past week: Graco and Simplicity brands on the same day, and then C&T and Sorelle a few days later.

Pressure has been mounting on the child products manufacturing industry to stop making the cribs.
These kinds of comparisons are less about government and more about car-addiction. People are a lot more happy to die by traffic accident. If people really cared that they're more likely to die by car than by all the other things they're so careful to avoid, they would drive less.

[whisper]

These kinds of comparisons are less about government and more about car-addiction.

Not at all. Look at how much attention car product problems get from Congress (Firestone, Prius, etc.) - all problems created by the private sector in regards to cars.

[ubernerd]

My "understanding" of this is that when governments are up against the zero interest rate barrier the conventional option of cutting interest rates to spur the economy is unavailable. Keynes says that the government should spend to address the shortage in demand and increase employment levels. After a certain time the economy recovers, interest rates go up, and conventional controls become viable again.

So "stimulus" is useful when the economy is up against the zero interest rate barrier, but should be paid back during times when the economy is relatively healthy and growing.

So why is this stupid again?

It was stupid when Keynes said it. It continues to be stupid today when Krugman says it.

[independent]

Continuing with my argument, it seems like lots of people had skills that were in particularly high demand during the credit boom. Lots of those people are now unemployed or working lower paying jobs. I find it difficult to look at that change as a huge loss in productivity. If anything, I think it's probably a step towards a better allocation of resources. When I see economists with graphs showing an "output gap" as an argument for stimulating demand, I wonder "output of what"?

Up to a point, this makes sense. We expect an efficient economy to be constantly destroying jobs and forcing people to find different productive work.

The Keynesian question is how much of this we can handle in a short timeframe. You're expecting a step that doesn't seem to be happening on this graph http://gregmankiw.blogspot.com/2011/07/disappointing-recovery.html

Most of our unemployed people weren't involved in residential construction. Presumably their skills aren't obsolete. If the construction/real estate sector workers had stepped into new jobs, these other workers would be employed. So whatever they were doing is now "lost output". Or do you see that differently?

If the problem is that we have workers who are skilled in the wrong things, where are the new skills they don't have but could learn? I don't see employers saying "There are lots of former carpenters and real estate agents out there, let's hire and retrain them in this high demand skill we can use."

[Baron Von Raschke]

Maybe this will help...

http://globaleconomicanalysis.blogspot.com/2008/12/krugman-still-wrong-after-all-these.html

Here's the punchline...

The artificial credit boom created huge malinvestments (overcapacity) in shopping centers, residential housing (inventory and falling prices are the tells), restaurants, strip malls, commercial real estate, trucking, autos, etc, etc. The liquidation of those malinvestments is bound to create rising unemployment.

[independent]

Maybe this will help...

http://globaleconomicanalysis.blogspot.com/2008/12/krugman-still-wrong-after-all-these.html

Here's the punchline...

Help with what? I had a couple question marks in my post, do you think the answers to those questions are buried somewhere in that long Mish piece?

Yes, easy credit plus a bubble mentality resulted in more construction than we would have had otherwise. I'd say the primary reason we had the easy credit was fraud (in fact, if not precisely illegal) in a series of financial system transactions (underwriting loans, bundling and selling loans, rating bonds, insuring credit). The bubble mentality was the old-fashioned "If it went up in the past, it's bound to go up in the future" variety.

Then we had a credit crunch in other areas when we had a run on the shadow banking system.

How much "excess" construction did we have? Add up all the people employed in building houses (including the truckers who transport new furnaces) and you get x million workers. What's x? Does Mish know? I couldn't find the number.

Auto sales fell when the bubble deflated. Those cars weren't all being used in the construction industry. My comment was that the people who make cars didn't suddenly have obsolete skills just because house construction fell. They don't need to be retrained. How many of the disappearing jobs are like the autoworkers? Mish doesn't seem to notice them.

So, where do we go from here? Where's the "creative" half of "creative destruction"? I didn't see that answer from Mish.

[Baron Von Raschke]

I will try to answer the questions.

So whatever they were doing is now "lost output". Or do you see that differently?

Lost output of goods and services that people don't want as much as they used to.

If the problem is that we have workers who are skilled in the wrong things, where are the new skills they don't have but could learn? I don't see employers saying "There are lots of former carpenters and real estate agents out there, let's hire and retrain them in this high demand skill we can use."

Unfortunately, "we" don't know. The market process knows better than you, Mankiw, or I ever could, imo. I wouldn't expect that adjustment to happen overnight.

[Gyudon]

If the problem is that we have workers who are skilled in the wrong things, where are the new skills they don't have but could learn? I don't see employers saying "There are lots of former carpenters and real estate agents out there, let's hire and retrain them in this high demand skill we can use."

This is precisely the point. Businesses have not figured out a way to profitably use all these unemployed people. I suspect this is due to many reasons, but here are a few that come to mind:

- Many, some of them helped through unemployment benefits or remaining savings, hold on to a desire to maintain a standard of living similar to what they had prior to the crash. This is not realistic.
- Those at the lowest rung of the income chain can't get jobs because at minimum wage, these people are unprofitable to train and hire.
- The people who lose jobs are not just home builders but the bankers who financed their projects. Also the geniuses that bundled those loans. Also barbers and doormen of these geniuses, and so on. Much of the wealth created during the last decade never really existed due to a large and unsustainable boom in finance and housing.

Fixing deep structural flaws in the economy takes time. It would be great if there was a shortcut but there isn't. The government artificially propping up asset prices (especially when there is no longer a free-falling downward spiral "negative feedback loop") or employing "underutilized" workers doesn't really help either, if anything it prolongs the pain.

So credit markets are no longer frozen, and capital is flowing much more smoothly than post crash right? How come businesses are not "investing" in these workers? What makes you think politicians can actually figure out how to use these workers, and even if they could, what makes you think they actually will have the incentive to effectively do so?

[sweetiepie]

Continuing with my argument, it seems like lots of people had skills that were in particularly high demand during the credit boom. Lots of those people are now unemployed or working lower paying jobs. I find it difficult to look at that change as a huge loss in productivity. If anything, I think it's probably a step towards a better allocation of resources. When I see economists with graphs showing an "output gap" as an argument for stimulating demand, I wonder "output of what"?

Suppose that, after witnessing a slight rise in profits, a factory manager decides he wants to raise production and sales to new levels. He uses iffy methods to convince investors and consumers of the value of his product. Overtime though, consumers over-buy and investors over-invest. Sales drop, consumers return their products, and investors bailout. Even though the factory was profitable for years, it is suddenly a sinking ship. Should the manager cut his losses and close shop, or should he take out loans to keep his long-term workers on the payroll until the storm passes?

I don't know what the recession has meant to you, but for me it meant flipping burgers for 1.5 extra years before being able to start my career as an actuary.

[independent]

I will try to answer the questions.
Lost output of goods and services that people don't want as much as they used to.
I guess that's the disagreement here. You seem to think that car sales went down because people no longer want cars "as much as they used to". I think they went down because people are worried about their jobs and aren't willing to make big financial commitments. The desire is still there, the means are missing.

Unfortunately, "we" don't know. The market process knows better than you, Mankiw, or I ever could, imo. I wouldn't expect that adjustment to happen overnight.

We (people who can read statistics) know that other employers aren't rushing in to hire the unemployed auto workers and carpenters. We (people who have learned about how perfect markets balance supply and demand) also know that wouldn't be true if the US labor market were perfect.

The point of Keynes argument is that in some circumstances, the market breaks down. The "market" never knows anything. People want things and market prices/quantities usually reflect those wants. Keynes says the macro economy sometimes doesn't work well, there is no divine edict to say that it should.

[independent]

This is precisely the point. Businesses have not figured out a way to profitably use all these unemployed people. I suspect this is due to many reasons, but here are a few that come to mind:

1 - Many, some of them helped through unemployment benefits or remaining savings, hold on to a desire to maintain a standard of living similar to what they had prior to the crash. This is not realistic.
2 - Those at the lowest rung of the income chain can't get jobs because at minimum wage, these people are unprofitable to train and hire.
3a- The people who lose jobs are not just home builders but the bankers who financed their projects. Also the geniuses that bundled those loans. 3b Also barbers and doormen of these geniuses, and so on.
3c Much of the wealth created during the last decade never really existed due to a large and unsustainable boom in finance and housing.

4 Fixing deep structural flaws in the economy takes time. It would be great if there was a shortcut but there isn't.
5 The government artificially propping up asset prices (especially when there is no longer a free-falling downward spiral "negative feedback loop") 6 or employing "underutilized" workers doesn't really help either, if anything it prolongs the pain.

So credit markets are no longer frozen, and capital is flowing much more smoothly than post crash right?
7 How come businesses are not "investing" in these workers?
8 What makes you think politicians can actually figure out how to use these workers, and even if they could, what makes you think they actually will have the incentive to effectively do so?

Haven't we had this conversation before?

1 - You're imagining that there are jobs going begging because workers prefer unemployment. So we have employers who are advertising jobs but can't get any qualified applicants. Meanwhile, there are qualified people sitting at home refusing to apply. And this is happening in a world with 3 million job openings, 14 million unemployed, 7.5 million of whom are collecting unemployment benefits. That means the ratio of unemployed people not getting benefits to all job openings is above 2:1. IMO, the numbers contradict your theory. (And don't forget the 2.5 million working at part time jobs that say they want full time work.)

2 - If there were a lot of jobs available somewhere below the minimum wage, I'd expect lots of jobs paying exactly the minimum. I don't see that.

3a - Yes, and I have no problem with these people taking pay cuts to get back to work.
3b - Also everyone else who provided goods or services indirectly to them. Auto workers, teachers, etc. These jobs haven't become obsolete, but these people are losing jobs.
3c - "Wealth" has many definitions. The real productive capital - buildings, equipment, technology, is all still here. The problem is that we're not using it. Maybe you were using one of the other definitions of wealth.

4 - What's the "deep structural flaw"? I can think of a number of structural inefficiencies in our economy, but those words sound really serious.
5 - If you're talking about house prices, I'd agree. I think Keynes talks about incomes and production, not about asset prices.
6 - Many of those workers had nothing to do with the construction industry, and we'll want to employ them again at the same jobs IF we ever get to higher employment. How does paying teachers prolong the pain?

7 - Well, it's not because they don't have applicants for open jobs, and it's not because businesses have business models that could use lots of sub-minimum wage workers. Those seem to be your theories. Mine is that businesses don't see customers with money walking in the door.
8 - If you mean that both the politicians and the voters have decided that the most important thing to do when we have high unemployment is to balance the budget, then I'm quite sure politicians have no incentive to use Keynes. So I think we agree on that.
On the "which jobs", Keynes famously said it doesn't matter. I think we'd say the standard stuff like gov't already employs some people, don't lay them off. If lots of the unemployed were involved in construction, probably we should find something to build.

[Gyudon]

Haven't we had this conversation before?

1 - You're imagining that there are jobs going begging because workers prefer unemployment. So we have employers who are advertising jobs but can't get any qualified applicants. Meanwhile, there are qualified people sitting at home refusing to apply. And this is happening in a world with 3 million job openings, 14 million unemployed, 7.5 million of whom are collecting unemployment benefits. That means the ratio of unemployed people not getting benefits to all job openings is above 2:1. IMO, the numbers contradict your theory. (And don't forget the 2.5 million working at part time jobs that say they want full time work.)



It's not black and white. Some people are holding out to avoid seeing a decrease in standard of living and unemployment helps them to do this. Others have skills that are no longer demanded by the economy. How do your figures contradict that? Keynes essentially says you can a priori know that all these people can be efficiently employed. This I believe is a very difficult point to prove. Harder still is showing that it is feasible to actually make use of this "knowledge" in the real world.


2 - If there were a lot of jobs available somewhere below the minimum wage, I'd expect lots of jobs paying exactly the minimum. I don't see that.


Think about it, this is false. All the workers below the minimum wage won't be hired at exactly the minimum wage, the # of workers below doesn't affect that number. Let's say 30 million workers are only profitable to hire at $5 and 10 million at $7.25. Now 60 million workers are profitable to hire at $5 (but no more). The number at the minimum wage does not budge.

ETA: This applies to jobs as well. Those jobs below the minimum never even get posted or filled because they are only profitable below the minimum.

Not trying to make it personal and we can agree to disagree but IMO this is Keynesian economics in a nutshell:

"We have people who really want to work and empty stores / factories that can be filled! This must be inefficient, we must act and throw cash in that direction ASAP. If we don't have money, keep borrowing money until we have enough customers and 'aggregate demand' is where it should be."

Our market, which has given us the incredible luxuries and free time to even be able to debate these issues, is founded on there being winners and losers. Keynesian economics sounds terrific because no one ever loses their job or experiences pain. Unemployed? You must be useful, let's give you a job with taxpayer money. No one wants your expensive crappy car? That can't be right.

[Baron Von Raschke]

I guess that's the disagreement here. You seem to think that car sales went down because people no longer want cars "as much as they used to". I think they went down because people are worried about their jobs and aren't willing to make big financial commitments. The desire is still there, the means are missing.

Sure lack of "demand" is never really the problem. There are a ton of things I would love to buy if I had twice as much money as I do, even more if I had 10x as much. Many people's behavior a few years ago was based on thinking they were richer than they were. Now that they know otherwise and instead of buying a car sooner, they are waiting. To me the Keynesian solution seems to be to recreate the behavior that existed during the bubble.


We (people who can read statistics) know that other employers aren't rushing in to hire the unemployed auto workers and carpenters. We (people who have learned about how perfect markets balance supply and demand) also know that wouldn't be true if the US labor market were perfect.

The point of Keynes argument is that in some circumstances, the market breaks down. The "market" never knows anything. People want things and market prices/quantities usually reflect those wants. Keynes says the macro economy sometimes doesn't work well, there is no divine edict to say that it should.

Resources were severely misallocated. Lots of projects were started and people employed doing things that were based on easy credit. Those days are gone. The market is now correcting those mistakes, with unemployment being one consequence. The "break down" happened during the boom.

[Eimon Gnome]

Think about it, this is false. All the workers below the minimum wage won't be hired at exactly the minimum wage, the # of workers below doesn't affect that number. Let's say 30 million workers are only profitable to hire at $5 and 10 million at $7.25. Now 60 million workers are profitable to hire at $5 (but no more). The number at the minimum wage does not budge.
Cannot parse this one out. It sure seems like your talking about the balance of capital and labor.

Doesn't capital investment make for more productive work? You know, buy the machine to replace the workers, increase output, and all that. Are you arguing that there isn't enough capital? There's lots of low paying jobs out there that go unfilled because of the minimum wage. Must be a lack of capital that creates all these low wage positions, I guess. And that should lead you to advocating issuing debt to raise more capital....

Been there, done that.

[Gyudon]

By definition, there are pretty much no legal jobs under the minimum wage besides contracting or maybe freelance work because of the the minimum wage. I was making the simple observation that:

large # of potential jobs below minimum wage => seeing large # of jobs precisely at the minimum wage

is false. Also, I'm not sure there really are very few workers at the minimum wage.

[Gyudon]

There's lots of low paying jobs out there that go unfilled because of the minimum wage.

This is exactly how I feel. The minimum wage unfairly punishes the young, elderly, and unskilled workers.

[Eimon Gnome]

This is exactly how I feel. The minimum wage unfairly punishes the young, elderly, and unskilled workers.

Just not clear where these jobs are..and why there is no capital investment in those sectors.

What's your theory on that?

[Gyudon]

Not sure I quite understand your question. We are in agreement that there are unfilled positions because of the minimum wage.

I was making no comment on the capital / labor balance, but I will say there are jobs which are still significantly cheaper to have a person do than a machine.

[Eimon Gnome]

Just wondering if we can generalize about what sector those low wage jobs occupy.

For instance, babysitting seems perfect. Surely plenty of folks willing to babysit at below minimum wage. Low skill, no equipment required, etc.

But where might they be in a business other than a sole proprietor like babysitting. It would have to be something where there is no option to use capital to improve the productivity, right?

[Gyudon]

I imagine that almost all businesses that hire minimum wage workers could potentially be threatened by competitors not held to the minimum wage restriction.

[Wigmeister General]

This is precisely the point. Businesses have not figured out a way to profitably use all these unemployed people. I suspect this is due to many reasons, but here are a few that come to mind:

- Many, some of them helped through unemployment benefits or remaining savings, hold on to a desire to maintain a standard of living similar to what they had prior to the crash. This is not realistic.
- Those at the lowest rung of the income chain can't get jobs because at minimum wage, these people are unprofitable to train and hire.
- The people who lose jobs are not just home builders but the bankers who financed their projects. Also the geniuses that bundled those loans. Also barbers and doormen of these geniuses, and so on. Much of the wealth created during the last decade never really existed due to a large and unsustainable boom in finance and housing.

Fixing deep structural flaws in the economy takes time. It would be great if there was a shortcut but there isn't. The government artificially propping up asset prices (especially when there is no longer a free-falling downward spiral "negative feedback loop") or employing "underutilized" workers doesn't really help either, if anything it prolongs the pain.

So credit markets are no longer frozen, and capital is flowing much more smoothly than post crash right? How come businesses are not "investing" in these workers? What makes you think politicians can actually figure out how to use these workers, and even if they could, what makes you think they actually will have the incentive to effectively do so?

You overlooked one significant fact -- about 5% of people are dead wood. They should be unemployed.

[oirg]

Just wondering if we can generalize about what sector those low wage jobs occupy.

For instance, babysitting seems perfect. Surely plenty of folks willing to babysit at below minimum wage. Low skill, no equipment required, etc.

But where might they be in a business other than a sole proprietor like babysitting. It would have to be something where there is no option to use capital to improve the productivity, right?

How about agriculture where some crops can't be harvested mecahnically?

[independent]

It's not black and white. Some people are holding out to avoid seeing a decrease in standard of living and unemployment helps them to do this. Others have skills that are no longer demanded by the economy. How do your figures contradict that? Keynes essentially says you can a priori know that all these people can be efficiently employed. This I believe is a very difficult point to prove. Harder still is showing that it is feasible to actually make use of this "knowledge" in the real world.

Your claim is that our high unemployment rate must be caused by people who are aren't taking jobs because they have unemployment benefits. I have no doubt that "some" people are holding out, looking for something better. But, as long as there is one qualified applicant for a job, it gets filled. It doesn't matter if there are two more who didn't apply. The number of unemployed is 4x the job openings, the number of unemployed without unemployment benefits is 2x the job openings. How low would the unemployment rate be if every unemployed person took the first job they could find?

Think about it, this is false. All the workers below the minimum wage won't be hired at exactly the minimum wage, the # of workers below doesn't affect that number. Let's say 30 million workers are only profitable to hire at $5 and 10 million at $7.25. Now 60 million workers are profitable to hire at $5 (but no more). The number at the minimum wage does not budge.

I think you're assuming the current wage provides no profit margin. I'm assuming that businesses expect to have a margin on workers. Studies of changes in state minimum wage laws indicate that a 10% increase in the minimum wage decreases the hours available to min wage workers by 1%. That says that 99% of workers earning the original minimum wage are still profitable if you pay them 10% more. The workers who had been earning above the original mw, but below the new mw, should now be piled up in a lump at exactly the new minimum. Empirically, that lump is very small.

I'm also assuming that the "ability to contribute to the bottom line" is distributed on some skewed normal curve. As you go down from the modal wage (about $20 an hour), you find fewer and fewer workers. If there are X who are barely employable at $7.25, there are even fewer who are barely employable at $5.00. Both of these indicate there are few job modestly below the minimum.

I suppose that, in theory, if we eliminated a minimum wage laws, unemployment benefit, and employers were sure this wasn't a temporary move, then employers would restructure their businesses to use workers at something above the Chinese average wage (eg shoe manufacturing comes back to the US). The important thing for this discussion is that employers have to believe that's a permanent change, it's not something you'll get much leverage with if it's "Let's drop for while unemployment is high, then raise it again in a couple years".

If we did that, we'd be looking at a long term situation with full time workers earning, say that's $1 per hour or $2k per year? Would that be "success"? Could those workers afford to live indoors in your neighborhood, or any place in your city?

ETA: This applies to jobs as well. Those jobs below the minimum never even get posted or filled because they are only profitable below the minimum.

Not trying to make it personal and we can agree to disagree but IMO this is Keynesian economics in a nutshell:

"We have people who really want to work and empty stores / factories that can be filled! This must be inefficient, we must act and throw cash in that direction ASAP. If we don't have money, keep borrowing money until we have enough customers and 'aggregate demand' is where it should be."

I think you've got two things here. One is whether it's possible to get people back to work when an economy seems to be in a negative feedback loop. The second is whether we can afford it when we went into this particular cycle with big structural deficits.

Keynes says it's possible to speed up the re-starting process. I'm not sure if we have the borrowing capacity to do it this time around. If the title of the thread had been "Keynes was right, but that's irrelevant", we might get to the same conclusion even though we disagree on the reasoning.

Our market, which has given us the incredible luxuries and free time to even be able to debate these issues, is founded on there being winners and losers. Keynesian economics sounds terrific because no one ever loses their job or experiences pain. Unemployed? You must be useful, let's give you a job with taxpayer money. No one wants your expensive crappy car? That can't be right.

I've never heard a claim that Keynes thought there would be no winners or losers, or that the market economy doesn't work well most of the time (including ongoing restructuring), or that zero unemployment is a realistic goal. Politicians may say those things, but I think you'd have a hard time finding a US economist who would.

[independent]

Sure lack of "demand" is never really the problem. There are a ton of things I would love to buy if I had twice as much money as I do, even more if I had 10x as much. Many people's behavior a few years ago was based on thinking they were richer than they were. Now that they know otherwise and instead of buying a car sooner, they are waiting. To me the Keynesian solution seems to be to recreate the behavior that existed during the bubble.

Resources were severely misallocated. Lots of projects were started and people employed doing things that were based on easy credit. Those days are gone. The market is now correcting those mistakes, with unemployment being one consequence. The "break down" happened during the boom.

It seems that Americans "should" be able to afford everything they can produce. Wages and profits should always be adequate to purchase all of our output. I think you're saying that "deleveraging" reduced demand. But when people pay off their debts, some lender ends up with money that can't be re-loaned. What happens then?

The breakdown also happened when we had a run on the shadow banking system, which wasn't supposed to exist. I suppose the question is "How long should this take?" AFAIK, Keynes believed the market would eventually sort things out, the question was how long. His most famous quote was "In the long run we're all dead", which I've assumed was a response to someone who said "In the long run, this will correct itself."

[notreallyme]

You overlooked one significant fact -- about 5% of people are dead wood. They should be unemployed.

5%? You have a lot more faith in ppl than I do.

[johnny storm]

:iatp:

I just assumed that his "0" key was stuck.

[Eimon Gnome]

You overlooked one significant fact -- about 5% of people are dead wood. They should be unemployed.

More than that. Look where the people "work" By Sector (http://www.bls.gov/emp/ep_table_201.htm)

There's more folks employed in "leisure and hospitality" than agriculture, mining, and construction combined. Clearly most folks are employed making things we may want - but not things we need.

The issue of unemployment has to be taken in the context of a consumer driven, service economy. This is a wholly different world than the one Keynes lived in. I'm not sure that stimulating more output for things people don't need and that we cannot trade to the rest of the world is really going to solve anything. When society only needs 10% of the population working to fill the society's needs, then a whole of time and energy is going to be used to fuel the consumerist end of things. Take away the consumerist angle, and you end up with a whole lot of unemployed people - because they aren't required. Their jobs provide leisure and "nice to have" things.

Personally, I don't care if these extras are 60" TV screens, playing SS for the Yankees, or teaching ballet a the University of Indiana. Just a matter of taste. One's not objectively better than the next. Bottom line is: you'll have to feed the consumerist beast or remake the society in a wholly different way.

[Gyudon]

Your claim is that our high unemployment rate must be caused by people who are aren't taking jobs because they have unemployment benefits.

I don't think that's quite what I said. I claimed that some are by holdouts, others had jobs whose prior demand may no longer be sustainable going forward. Their unemployment may be part of a healthy, though undoubtedly difficult for them, correction.


I suppose that, in theory, if we eliminated a minimum wage laws, unemployment benefit, and employers were sure this wasn't a temporary move, then employers would restructure their businesses to use workers at something above the Chinese average wage (eg shoe manufacturing comes back to the US).

If we did that, we'd be looking at a long term situation with full time workers earning, say that's $1 per hour or $2k per year? Would that be "success"? Could those workers afford to live indoors in your neighborhood, or any place in your city?


You make it sound like this is a bad thing. To me this is taking what we feel "ought to be", a social concern, and impose this upon the market. I would rather make $4 or even less an hour if I dropped out of high school and just got a GED then be unemployed in the current market with literally no income. You may in your heart "feel" that this is wrong but some could argue that's insulting to people who manage to live on significantly less (interestingly you don't mind benefiting by buying cheap shoes from workers making $1 a day but you mind if they do and live in your neighborhood). Still, even with your social concerns, using the minimum wage as a subsidization mechanism is inefficient. A direct subsidy to those with lower incomes, which obviously has its own problems, would be much better.




I'm not sure if we have the borrowing capacity to do it this time around. If the title of the thread had been "Keynes was right, but that's irrelevant", we might get to the same conclusion even though we disagree on the reasoning.


I agree here. Except I think it's challenging to effectively be able to "speed it up" any time around given the reality of politics (but also claiming to be the Wizard of Allocation and be able to deem which skills are still "desirable" and which are now in relative excess).


I've never heard a claim that Keynes thought there would be no winners or losers, or that the market economy doesn't work well most of the time (including ongoing restructuring), or that zero unemployment is a realistic goal. Politicians may say those things, but I think you'd have a hard time finding a US economist who would.

Well, I've definitely heard Keynesians say anything above their acceptable rate to be too high, where they get to determine what is high and "inefficient" unemployment. Sounds like they think unemployment, i.e. people who lose in the process, to be bad.

[Eimon Gnome]

You make it sound like this is a bad thing. To me this is taking what we feel "ought to be", a social concern, and impose this upon the market. I would rather make $4 or even less an hour if I dropped out of high school and just got a GED then be unemployed in the current market with literally no income. You may in your heart "feel" that this is wrong but some could argue that's insulting to people who manage to live on significantly less (interestingly you don't mind benefiting by buying cheap shoes from workers making $1 a day but you mind if they do and live in your neighborhood). Still, even with your social concerns, using the minimum wage as a subsidization mechanism is inefficient. A direct subsidy to those with lower incomes, which obviously has its own problems, would be much better.


Well thought out, well said. Tricky part is getting a large enough majority to see the trade off between abolishing the minimum wage and the direct subsidy.

[jared]

When society only needs 10% of the population working to fill the society's needs, then a whole of time and energy is going to be used to fuel the consumerist end of things.

You have made an interesting observation. People need food, housing, clothing, healthcare and education. It must take more than 10% of the population to provide these, but let's say the 10% is the correct number. Then each person could work only 10% of his life, and everyone's needs will be satisfied. Let's throw in entertainment as a need, and say it requires another 10% of the population. Then each person could work only 20% of his life, and everyone's needs will be satisfied.

Of course, we wouldn't get that. We would have 40% unemployment, and the rest of the people would work full time. So we have a dilemma, which could be solved by govt spending (welfare to the 40%). A better idea would be to redistribute the work instead of the wealth. Germany is already doing this to an extent. I don't think this is a bad dilemma, but if we hit this road, we will face some challenges. We're not there yet.

Link about work sharing.
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/work-sharing-a-full-employment-plan-too-simple-for-the-wonks

The role of economics is to devise ways to ensure that those with the money either spend it, or that wealth somehow shifts from those who have it but won’t spend it, to those who would spend it, but don’t have it.

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/if-its-not-different-why-do-we-need-economists
quote is 5th paragraph from bottom

[Eimon Gnome]

You have made an interesting observation. People need food, housing, clothing, healthcare and education. It must take more than 10% of the population to provide these, but let's say the 10% is the correct number. Then each person could work only 10% of his life, and everyone's needs will be satisfied. Let's throw in entertainment as a need, and say it requires another 10% of the population. Then each person could work only 20% of his life, and everyone's needs will be satisfied.

Of course, we wouldn't get that. We would have 40% unemployment, and the rest of the people would work full time. So we have a dilemma, which could be solved by govt spending (welfare to the 40%). A better idea would be to redistribute the work instead of the wealth. Germany is already doing this to an extent. I don't think this is a bad dilemma, but if we hit this road, we will face some challenges. We're not there yet.

Link about work sharing.
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/work-sharing-a-full-employment-plan-too-simple-for-the-wonks



http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/if-its-not-different-why-do-we-need-economists
quote is 5th paragraph from bottom
Nice link. A possible road out of this. I hope we get this thinking into the national dialogue.

And when you toss in Healthcare, I'd go to about 20 or 25%. today, its just a tad under 9% by headcount, higher if you use %of GDP. Hard to say how much of that is need and how much is want, though. I struggle with putting hair replacement and viagra in the need column.

Hard choices ahead.

[Gyudon]

Well thought out, well said. Tricky part is getting a large enough majority to see the trade off between abolishing the minimum wage and the direct subsidy.

Ftr, I support neither a direct subsidy nor a minimum wage since both are bad. A minimum wage is just worse than a direct subsidy.

[Baron Von Raschke]

You have made an interesting observation. People need food, housing, clothing, healthcare and education. It must take more than 10% of the population to provide these, but let's say the 10% is the correct number. Then each person could work only 10% of his life, and everyone's needs will be satisfied. Let's throw in entertainment as a need, and say it requires another 10% of the population. Then each person could work only 20% of his life, and everyone's needs will be satisfied.

Of course, we wouldn't get that. We would have 40% unemployment, and the rest of the people would work full time. So we have a dilemma, which could be solved by govt spending (welfare to the 40%). A better idea would be to redistribute the work instead of the wealth. Germany is already doing this to an extent. I don't think this is a bad dilemma, but if we hit this road, we will face some challenges. We're not there yet.

Link about work sharing.
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/work-sharing-a-full-employment-plan-too-simple-for-the-wonks



http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/if-its-not-different-why-do-we-need-economists
quote is 5th paragraph from bottom

In my experience, wants and needs have a way of growing to (at least) match the ability to satisfy them.

Try proposing universal healthcare, except only with technology up to 1985. Something tells me Nancy Pelosi wouldn't be amused.

[Gyudon]

People tend to forget that unemployment in the summer of 2005 was around 11.5% in Germany while it was around 5% in the US.

Also, Germany has about 6% now partially because it very much benefited from the Euro and its export boom (while clearly it has not benefited everyone else).

http://www.nytimes.com/2011/04/23/business/global/23charts.html

[independent]

I think the difference here is long run vs. short run. Keynes said they aren't the same. (I think I've already used this example. In the long run, the Lump of Jobs theory is correctly called the Lump of Jobs Fallacy. However, it's true over the short run.)

I don't think that's quite what I said. I claimed that some are by holdouts, others had jobs whose prior demand may no longer be sustainable going forward. Their unemployment may be part of a healthy, though undoubtedly difficult for them, correction. I'd say that unemployment benefits tend to raise the baseline unemployment rate.* Where "baseline" has been called "non-inflating" or "natural". But, other factors determine whether our current rate is above (or slightly below) that rate. I thought you were saying that our current 14% unemployment rate is somehow caused by unemployment benefits. I'd say that when we had 5% unemployment, some of that was caused by unemployment benefits. Some of the 14% is also caused by unemployment benefits, but no more than whan the rate was 5%. All the increase was caused by short term effects. Does that clarify anything?

(* But note that this is not necessarily a bad thing. To the extent that in normal times unemployment benefits allow people to hold on and find a better match, we may make up the lost labor through greater productivity.)

You make it sound like this is a bad thing. To me this is taking what we feel "ought to be", a social concern, and impose this upon the market. I would rather make $4 or even less an hour if I dropped out of high school and just got a GED then be unemployed in the current market with literally no income. You may in your heart "feel" that this is wrong but some could argue that's insulting to people who manage to live on significantly less (interestingly you don't mind benefiting by buying cheap shoes from workers making $1 a day but you mind if they do and live in your neighborhood). Still, even with your social concerns, using the minimum wage as a subsidization mechanism is inefficient. A direct subsidy to those with lower incomes, which obviously has its own problems, would be much better.
Again, I think the time frame is relevant. I agree with your statement that "using the minimum wage as a subsidization mechanism is inefficient". If we choose to subsidize low wage workers, it would be better to do it through some version of the EITC than through a minimum wage (But I think this is a small issue because - stop, that's a tangent.) I think you'd have a lot of trouble living in the US on $8k per year, but that doesn't mean a minimum wage is the only solution.

Where we disagree is that I thought you were saying the high current rates of unemployment are caused by the minimum wage. Maybe 1% of the baseline 5% unemployment is due to mw. If so, then 1% of the current 14% is still caused by the mw. The excess 9% is caused by other stuff that doesn't go away if we suddenly change the mw.

I agree here. Except I think it's challenging to effectively be able to "speed it up" any time around given the reality of politics (but also claiming to be the Wizard of Allocation and be able to deem which skills are still "desirable" and which are now in relative excess).
The political timeframe is largely driven by the number of people who know in their guts that spending money can't possibly improve things. If everybody thought that Keynes was the right, we'd have much faster action. Speed is also relative. I don't think it's the Fed's job or Congress's job to eliminate run-of-the-mill recessions. Sometimes we need to let individuals who took a lot more risk than their neighbors (and probably got compensated for it), take their losses. It is their jobs to prevent depressions which result from negative feedback loops putting us into downward spirals that could last __ years. Since the relevant timeframe for depressions is years, there's time to do something.

(Note that Keynes did not say we need to be wizards of allocation. He said that if we buried cash in coal mines we'd still get a positive effect, but that reasonable people could come up with better ideas.)


Well, I've definitely heard Keynesians say anything above their acceptable rate to be too high, where they get to determine what is high and "inefficient" unemployment. Sounds like they think unemployment, i.e. people who lose in the process, to be bad.

Again, in normal times some of the baseline unemployed are "losers" - people whose skills became obsolete due to new technologies or who took a chance on a business that failed.
I don't think the K's think the baseline unemployment rate should be zero. They do say that if you look at today's extra unemployed workers, there are lots who don't fit either category.