November 25, 2008
Chinn and Collender on the Obama Stimulus Plan
I discussed current economic conditions and the prospects for the Obama stimulus plan on Kerri Miller's "Midmorning" show on Minnesota Public Radio today. Capital Gains and Games' Stan Collender was also speaking. Here's a link to the audio.
Side comment: It's an interesting world when our blog affiliations are the defining feature of one's credentials...links to both of our blogs are on the website for that show.
Posted by Menzie Chinn at November 25, 2008 08:58 AMdigg this | reddit
econbrowser, bloomberg recently indicated that 7 trillion has been pledged by the federal gov't through the fed and treasury to handle the crisis. does anyone know a place where which programs the 7 trillion is shown as coming from. i thought the fed has only done 700 billion so far in trading treasuries for bank paper.
Posted by: jed at November 25, 2008 09:28 AM
jed, Bloomberg's 7 Trillion is the some of all the new money that the U.S. govt. has pledged to guarantee. They don't expect all the guaranteed entities to go to zero, so they expect to be out that much money. In some cases they are investing funds for securities that they expect to sell later, and in other cases they only providing insurance. So the answer to what I think you are asking is that they haven't so far budgeted or accounted for 7 Trillion in any form.
Posted by: Josh Stern at November 25, 2008 11:18 AM
[quote] It's an interesting world when our blog affiliations are the defining feature of one's credentials [/quote]
The credentials for you and James speak for themselves. I really appreciate what you guys do. Thx.
Posted by: Anon at November 25, 2008 11:46 AM
jed: Josh Stern has it right -- you should look at the Fed's balance sheet to see what is going on. Here is Jim Hamilton's take, as of a month ago.
Anon: Thanks for the kind words. Good to know our writings are appreciated.
Posted by: Menzie Chinn at November 25, 2008 01:39 PM
How can you blame what is happening today on the tax cuts from 2003? I was chagrined when I heard you make this statement with no support at all.
The deficit was declining greater than projections every year after that tax cut until the Democrats took over congress. After two years of a Democrat congress we have an absolute economic disaster and you blame it on supply side tax cuts that were actually bringing in record revenues?! One of the major components of the loss of confidence is the anticipation that the Democrats will allow the tax cuts to expire.
Posted by: DickF at November 25, 2008 02:22 PM
Just for the record Bloomberg said $7.7 Trillion http://bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home the NYTimes reports that Paulson is releasing another $800 Billion today and that the total is at least $7 Trillion and the FED is about to buy another $600 billion of bad paper from Fannie and Freddie and Obama has said that another $500 billion will be needed. Also interesting is that Bloomberg points out that $7.7 Trillion is half of total production last year. I have to say that only an economist can look at these numbers without getting nauseas.
Posted by: DickF at November 25, 2008 02:35 PM
DickF: The only reason the capital gains tax cuts were not destructive to revenue was that we had the largest real estate bubble in U.S. history, possibly world history though Japan probably still has us on that. That bubble fueled a huge amount of gains in receipts not only through capital gains, but also increased earnings in the financial services sector. I seem to recall Republicans saying the only reason Clinton was able to balance the budget was because of the late 1990s bubble. Bush never even really came close to balancing the budget if you exclude Social Security surpluses that are being used to offset the horribly out of whack general fund.
The Democrats took over in January of 2007 and we started having serious signs of trouble in February with the beginning of the failure of subprime lenders. By July, it was fully underway with the collapse of two Bear Stearns hedge funds. Tell me how the Democrats caused that. The prime culprit was that the real estate bubble had already started to deflate for the better part of a year prior to the middle of 2007. The rise in defaults and fall in prices undercut the value of mortgage backed securities, both subprime and prime, and left us where we are today through the chain reaction.
What we have suffered is a classic 19th century style financial panic and the primary cause was a government that made no attempt to rein in speculative excess. It should come as no shock that a 19th century financial crisis would be the result of 19th century style regulation, or the lack thereof.
Posted by: Brian D. Quinn at November 25, 2008 02:40 PM
Not enough credit is being given to the high gas prices this past year and it's serious damage on our economy and society. That one factor alone has caused serious stress in both individuals and businesses. A record number of homes and jobs have been lost as a direct result. And, while we are doing the happy dance around the lower prices at the pumps OPEC is announcing cuts to manipulate the prices upward again. We must get on with becoming energy independent.We can't take another year like this past. There is a wonderful new book out about the energy crisis and what it would take for America to become energy independent. It covers every aspect of oil, what it's uses are besides gasoline, our reserves, our depletion of it. Every type of alternative energy is covered and it's potential to replace oil. He even has proposed legislative agenda's that would be necessary to implement these changes along with time frames. This book is profoundly informative and our country needs to become more informed and move forward with becoming energy independent. Green technology would not only provide clean cheap energy it would create millions of badly needed new jobs. The Book is called The Manhattan Project of 2009 Energy Independence NOW. Our politicians all need to read this book. www.themanhattanprojectof2009.com
Posted by: sherry at November 25, 2008 03:21 PM
There is nothing 19th century about this collapsing credit bubble. In the 19th century we had a gold standard, that enforced sharp but short corrections, with the guilty punished.
Now we have faith-based money created by the gov't (FED) to seed the credit bubbles. We have a lot of regulation, much of it bad...much of it typical gov't burearacy. This correction will not be short, thanks to all the massive intervention/bailouts (coddling many of those most responcible). In spite of the Anointed One as our Prez, look for a lost decade, a la Japan.
Posted by: algernon at November 25, 2008 08:26 PM
"The Anointed One", I suppose refers to Obama and not the short guy who used to go by "Dubya", but may no longer have an identity at all.
I must say I am at least as pessimistic as you are Algernon, about the road ahead. But I am not only going to give this new guy a chance, I'm going to help in any way I can...and labeling him "The Anointed One" is not helping Obama or you.
So Obama has succeeded with me: some inspiration...to act, to be helpful, to mobilize others to act and help. And he has not succeeded with you.
Not yet, I make it...as calmo begins his assault on Algernon.
Posted by: calmo at November 26, 2008 12:04 AM
Brian D. Quinn,
Capital gains tax cuts have always brought in more revenue after the cut than before the cut. You must understand that a capital gains tax is a direct tax on capital itself. That means that it eats away at capital formation and by extension production. It is similar to taking apart a building one small piece at a time. For example I have friends who bought property on a lake in Florida and moved there to retire. Their yearly property tax is now almost as much as the land cost when they bought it. Has the land actually changed? Just an aside, they sold their home and moved to an apartment because they are on a fixed income and could not afford the taxes. That is the essence of a capital gains tax.
The real estate bubble did finance a lot of state projects through property taxes but was not the primary source of federal tax revenue increases. For example the tax on gasoline and other oil products plus the tax on the corporate profits increased government tax revenue more than the increase in profits of the oil companies.
You may have heard Republicans saying the bubble helped Clinton but you have never heard me say that. Clinton was one of the best supply side presidents in recent history though he didn’t intend it nor know it. He probably did more for production by reducing the welfare rolls than any president in the past 50 years, and his capital gains tax cut significantly increased production and federal revenue. The Clinton prosperity was in no way financed by inflation the driver of bubbles.
To bring "Social Security financing the federal budget" into the discussion is foolish. This has been the case since Lyndon Johnson.
Democrats prevented the supply side tax cuts from becoming permanent while in the minority. They were elected in 2006 and that had an immediate negative impact on the market. Now by saying that, I do not, in any way, want to excuse the Republicans from their horrible economic policies in the 21st Century, that is why they lost big in 2006, but they only set the stage for the Democrats. The Democrat rhetoric was that the tax cuts were gone as soon as possible. Sadly in 2006 we were damned by voting either Republican or Democrat.
I don’t disagree with your analysis of the credit crisis though we probably disagree on the cause.
I have no idea what you mean by a “classic 19th century style financial panic.” Give me a hint.
Posted by: DickF at November 26, 2008 07:08 AM
""The Anointed One", I suppose refers to Obama and not the short guy who used to go by "Dubya", but may no longer have an identity at all."
Odd that on a blog full of people who ostensibly have a grasp of statistics, a guy who is two inches over the average height is described as "short."
"I must say I am at least as pessimistic as you are Algernon, about the road ahead. But I am not only going to give this new guy a chance, I'm going to help in any way I can...and labeling him "The Anointed One" is not helping Obama or you."
But savaging Bush from the start, that was helpful.
Posted by: MM at November 26, 2008 09:04 AM
Shrub has "inner shortness".
Posted by: hert at November 26, 2008 09:57 AM
Today, Obama said that we needed to increase the wages of the working classes, that this was to be a focus of his economic plan. I know it's only a distant memory at this point, but didn't we just have substantial period of low unemployment? Can someone familiar with the Obama position explain to me his theory of what factor(s) depressed wages in that environment? And, while you are at it, please explain how increasing wages helps anyone....
Posted by: DrD at November 26, 2008 12:10 PM
calmo et al,
The term 'Anointed One' refers merely to the fact that Obama was anointed by the mainstream media (ask Clinton or the Wash. Post) & isn't particularly meant as a disparagement of him.
His economic appointments are better than his rhetoric would have implied, but the credit bubble is a lot bigger than an American President. Make the most of your optimism: 98% of politicians' instincts & incentives are to make things worse, to wit, to screw with markets.
Posted by: algernon at November 26, 2008 05:48 PM
DickF - Any tax removes funds from the private sector and transfers it to the public sector. But the purpose of government is not to increase the size of the the private sector. Governments exist because they are better than a state of nature, where the guys with the most guns control the rest of us. Most reasonable people like governments.
" a capital gains tax is a direct tax on capital itself. That means that it eats away at capital formation and by extension production". Reducing the size of private capital limits production ONLY under a special condition that does not exist in the U.S. That special condition is less capital exists in the nation than can be profitably employed in the nation. The huge investments made by U.S. investors overseas shows that lack of capital is NOT the reason for reduced investment in the U.S. During the time Clinton was collecting more in Capital Gains taxes, the Net Wealth of the households in the U.S. continued to grow very satisfactorily.
I know certain people have been repeating the sentence I quoted from your post for years. Repetition does not increase its truth value.
The U.S. much increase the funds collect from taxes to balance expenditure with revenue. Think about the people who will be living in the U.S. 30 years from now. Their interests are of vital importance to me.
Posted by: W. Raymond Mills at November 27, 2008 09:45 PM
Damn that was good WRM:
I know certain people have been repeating the sentence I quoted from your post for years. *Repetition does not increase its truth value.*
But as you rightly point out not worth repeating if the intent was to increase its truth value.
Take that you marketers!
So rare to have that 30yr outlook...are you religious? New grandchildren? real estate options on tracts of Mars?
Posted by: calmo at November 28, 2008 01:59 PM
WRM, your argument appears weak.
US investors invest abroad because they envision higher profitability there than in the US. Increasing the tax on capital in the US will exacerbate that perception & thereby reduce the availability of capital to the US.
Perhaps you will want to elucidate further your special condition as it is unpersuasive as presented.
Posted by: algernon at November 28, 2008 06:27 PM
"I have no idea what you mean by a “classic 19th century style financial panic.” Give me a hint. "
There were a large number of financial panics in the 19th century in Europe and United States. A classical 19th century style financial panic was the railway panic of 1873 which was followed by another railway crisis in 1893.
There were many other financial panics in Europe like the railway mania in Enland (1847), the crisis of 1826 (caused by speculation on South American bonds) etc.
The typical financial crisis occurs when some asset is speculated on and begins rising in value. The availability of credit is usually what drives a bubble. It enables people to speculate on the asset even if they don't have any money and it drives the asset price upward because the asset is itself used as collateral to purchase more of the asset which drives its value upward in a positive feedback i.e. higher asset values drives more credit which results in even higher asset values. Easy credit is also a problem because when interest rates are low, investors start searching for higher yields and this usually drives them towards speculation. In the present panic the drive for higher yields actually resulted in even easier credit because the credit itself became an asset (in the form of AAA bonds from CDOs).
Posted by: assman at November 29, 2008 09:57 AM
"There is nothing 19th century about this collapsing credit bubble. In the 19th century we had a gold standard, that enforced sharp but short corrections, with the guilty punished."
We did not have a gold standard throughout the 19th century. Greenbacks issued during the civil war were a fiat currency. During the return to the Gold Standard in 1873 there was a massive financial depression that lasted until 1879. I don't consider that short and nobody living at the time did either. They thought the depression was endless. It was also fairly horrible.
Posted by: assman at November 29, 2008 10:25 AM
"WRM, your argument appears weak.
US investors invest abroad because they envision higher profitability there than in the US. Increasing the tax on capital in the US will exacerbate that perception & thereby reduce the availability of capital to the US".
My point is quite simple. The availability of capital to the U.S. is not the problem. The U.S. has Net Worth of 52 billion in households in the U.S. before the recent declines. Caital is available in the U.S. Reducing the capital gains tax will not change the calculations as to where is the best place to invest that money. All it will change is the perception that investors are escaping taxation and the level of taxes collected in the U.S.
There is no valid reason why capital gains should be taxed any different from other gains. If more taxes are paid from wages, that reduces the ability of the wage worker to accumulate resources that he can use to establish new small business of his own. I prefer to reduce taxes on wage earners than on capital.
Posted by: WRM at December 2, 2008 02:05 PM
Capital gains made abroad that are sent back to the U.S. will pay the same capital gains as earning made in the U.S.
Posted by: WRM at December 2, 2008 02:07 PM
"So rare to have that 30yr outlook...are you religious? New grandchildren? real estate options on tracts of Mars?
Posted by: calmo"
Thanks you, Calmo. So rare to have support.
I was raised by a Mother who took the teaching of the bible about treatment of other people very seriously, so I have always sought to defend the long term interests of the future citizens of the U.S.
Posted by: WRM at December 2, 2008 02:13 PM
Correction : Above - The Net Worth of Households and Non-profit organizations in the U.S. at the end of 2005 was 52 TRILLION (not billion). At the end of 2007 it was 58 trillion (FRB, Z1, Flow of Funds, Table B 100). Declining at last estimate.
Posted by: WRM at December 2, 2008 05:46 PM