January 31, 2009
The Consumption Collapse Continues
Jim covered the salient aspects of the 2008Q4 advance release in an earlier post. A few additional points: (i) exports for sure are not adding to growth, (ii) the positive contribution from decreasing imports does not augur well for future growth, and (iii) nonresidential investment has now followed residential investment with vigor. But the key point is consumption is now collapsing at a rate comparable to the 1980 recession...
Figure 1: Log consumption (blue) and durables consumption (red), in billions of Ch.2000$ SAAR. NBER defined recessions shaded gray (2007 recession dates assume recession has not ended by 2009Q1). Source: BEA NIPA advance release of 30 January 2009 and NBER.
Note that the drop in consumption was not manifested in the last recession. Indeed, a longer perspective confirms the depth of this drop off in consumption.
Figure 2: Four quarter growth rate of consumption (blue) and of durables consumption (red), in billions of Ch.2000$ SAAR. NBER defined recessions shaded gray (2007 recession dates assume recession has not ended by 2009Q1). Source: BEA NIPA advance release of 30 January 2009, NBER, and author's calculations.
So, while GDP annual growth has not yet plumbed the depths recorded in the early 1980's, consumption is right there...
By the way, the behavior of consumption has some implications for the debate over the proper course of fiscal policy. If consumption is falling because the marginal propensity to consume out of disposable income (MPC) is declining (the b parameter in this post), then -- in terms of maximizing the impact on aggregate demand arising from a dollar's worth of budget deficit -- it makes sense to favor government spending on goods and services, as opposed to tax rate cuts. In the extreme, if MPC were zero, then the multiplier is 1 for government spending, and 0 for tax cuts (assuming accommodative monetary policy). Hence, those who argue that the MPC is small and in favor of general tax cuts as a means of stimuluating the economy are not providing an internally consistent argument.
Further, if the decline in the MPC is concentrated on the non-liquidity constrained households, then whatever tax cuts (or transfers increases) occur should be aimed at the most liquidity constrained households.
Posted by Menzie Chinn at January 31, 2009 10:00 AMdigg this | reddit
But something as unarguable as this:
If consumption is falling because the marginal propensity to consume out of disposable income (MPC) is declining, then -- in terms of maximizing the impact on aggregate demand arising from a dollar's worth of budget deficit -- it makes sense to favor government spending on goods and services, as opposed to tax rate cuts.
is not recognized by the opponents, the Republicans, who need it pasted to them with civil disobedience...the "unrest" that will come to their doorstep in a few months.
Those seasonal volatile auto sales (clearing out unsold inventory to make room for the new models...and bonuses for executives of course) that were brought forward creating troughs in demand? Times a thousand for this economy that I'm beginning to think does not have the right half of that "V" recovery...not the "U" nor Kasriel's "W" either.
Posted by: calmo at January 31, 2009 10:19 AM
Professor, mortgage defaults started moving northward over two years ago. To me, that was the first hint -- failure to repay debt -- that a decline in consumption was coming.
Why would a decline in consumption follow from increasing defaults? Two reasons: (1) banks cutting off credit to those with a now demonstrated poor repayment record or (2) defaulters -- 'once burned, twice learned' -- now staying clear of debt.
Seems to me that the falling MPC is due to the terrible household debt load.
If that is the case, to meaningfully restart consumption, one must must write down the household debt.
Cranking up government spending in an attempt to substitute for private consumption will not do the trick. In '08, government spending was a 'positive' contributor to GDP in each and every quarter, while growth in consumption was weak then falling.
Write down the debt and you will see consumption restart. Debtors outnumber creditors, and they have a higher MPC.
Posted by: jg at January 31, 2009 01:01 PM
A direct way to stimulate consumption/investment is for the Federal Reserve to send every American a credit card with a (say) $50K limit subject to two conditions:
(a) any unused credit expires within one year; and
(b) any used credit (plus interest) is repayable through the tax system if the person's taxable income exceeds (say) $100K (e.g., 10% of the debt is repaid each year that taxable income exceeds $100K).
The credit may be used to buy anything (consumables, durables, education) but not financial products.
This stimulates consumption/investment because:
(a) it reduces any contraction in consumption particularly among the newly unemployed or those fearing unemployment; and
(b) it is a source of "low risk" credit for funding investments (e.g., in education, to buy durables, invest in a small business).
The stimulus should have a low impact on the government budget. It is effectively a stimulus with a built in repayment schedule. Interest can be charged at the Treasury bond rate. Some credit will have to be written off. But overall, this scheme should have a large "bang for the buck" ratio.
The stimulus is also a form of monetary stimulus (quantitative easing and qualitative easing). If the credit is issued by the Federal Reserve, it will expand the balance sheet to include semi-risky assets. The risk of default is minimised through the tax system. If for some reason inflation returns as a significant threat, the Federal Reserve can contract money supply by offering to buy back any outstanding credit at a discount.
Posted by: Anonymous at January 31, 2009 01:25 PM
I find, as an individual, that I am in opposition to every economist and analyst I read, including yourselves.
At first glance, the fundamental issue over stimulus appears to be a version of "The Tragedy of the Commons" (TTOTC) in which individuals maximizing the number of cows they individually graze ion a common pasture – the commons – end up destroying it.
Individuals want to repair or improve their personal balance sheet by not consuming but saving and/or paying down debt. They may also be hedging the risk of loss of job by improving their cash position (liquidity or savings). This is the prudent strategy from an individual basis.
The problem economists see is that a personally optimal strategy, in this case, does not increase spending, thus failing to lift the economy out of recession. Hence the commons is the economy in this case.
Some commentators reject tax cuts on the basis that people will stick the money in a mattress. A few paranoid individuals will go this route, but will likely do it under any conditions. People who choose not to spend directly but to save either by paying down debt or placing the money in a mutual fund or bank account are simply returning it to circulation for others to spend.
Therefore the only argument that can be made about tax cuts is the government cannot control its ultimate disposition. Its stimulus effect is no less than directed government spending, and probably significantly more efficient. It is certainly more effective on an individual basis.
The puzzle then is in my argument above; the money does not seem to appear in the economy as consumption. So where does it go (NOT UNDER MATTRESSES)? I suspect much of it ends up being washed through investment vehicles into Treasuries. This places a primary root of the problem at the financing of existing government debt and, ironically, the deficit created in creating the stimulus itself.
The recession, however, is not an actual case of TTOTC. In the latter, the commons is destroyed. The recession is more a case of a properly managed commons in winter. If individuals are allowed to act prudently, they will reach a point where they not only have the confidence to consume again, but the means at hand to do it with – something they largely lack at the moment.
A properly timed stimulus can prime the pump of recovery and speed it up, but priming the pump when the well is dry simply wastes the priming water.
The real TTOTC is past. It was the period when a large number of individuals borrowed and refinanced to maximize their personal consumption. The resultant damage to the economy was, ironically excessive growth and development – the opposite of the exhaustion of the grass in the pasture.
But I’m not an economist.
Posted by: Ian Nunn at January 31, 2009 01:27 PM
"is not recognized by the opponents, the Republicans, who need it pasted to them with civil disobedience..."
Gonna have to gong you on this one. The Republicans are virtually powerless and will be so for some time. You don't get to "bring anything to their doorstep" or wring your hands in glee at the prospect of shouting them down. Everything rests in the hands of the Democrats, and has for over a week now as this discussion, the numbers and the rhetoric have ratcheted up.
If you wanted to relive the 60s, or were aching to have your own 60s moment where you got to stand up to the old white men, blame them for everything, and yet offer nothing but criticism - well, you just had nearly a decade of a chance.
Feel free to point a finger at past Republican "policies" under Bush (despite Democrats managing the gatekeeping branch for the last two years during which things went from so-so to uh-uh).
Posted by: MM at January 31, 2009 02:45 PM
It doesn't matter what form the 'stimulus' takes. But for your sake, Menzie, I hope they do it your way, so that you can prove to your satisfaction that neither Keynesian nor monetary stimulus will work.
Of course massive deficit spending & money creation didn't work during the 1930s nor in Japan in the 1990s, so apparently evidence will never be sufficient.
I suppose you can improve GDP numbers for a particular quarter or 2 with massive government spending or monetization, but you are thereby distorting the price system which is fundamental to resolving the problems generated by the global debt bubble.
A problem caused my too much credit creation being treated by more debt (gov't borrowing) & printing money isn't too far removed from the physician treating the sick patient by bleeding him.
Posted by: Bryce at January 31, 2009 03:21 PM
"Hence, those who argue that the MPC is small and in favor of general tax cuts as a means of stimuluating the economy are not providing an internally consistent argument."
that's correct, imo, basically, the free market economy is sick, out of whack, after a 60 year inflationary boom, the authorities should acknowledge that, instead of trying to 'stimulate' it again, it must be given time (many years) to 'cure' (savings up, debts down, asset prices down)
meanwhile the government must step in, with big infrastructure works, and help for the unemployed,
it's only once the free market is 'cured' (much lower debt/gdp number f.i.), that the free market economy should be 'stimulated' again,
efforts to do that now, will fail miserably, and people will loose confidence in their leaders,
the seeds of a long depression are being sown right now, by the very people who try to prevent the onset of such a depression
Posted by: koen at January 31, 2009 03:21 PM
Bryce: I think you misread history on two counts. With respect to the Great Depression and fiscal stimulus, see various posts by Brad Delong, as well as this one. Regarding Japan, one salutory lesson from that episode is that one needs a system that can reallocate resources from low productivity to high productivity activities -- i.e., an operating financial system. So I would say that fiscal stimulus is not in itself sufficient, and I don't think proponents of fiscal stimulus think that alone is sufficient. (NB: in the first months of the Bush Administration, I was involved in the USG-GoJ dialogue on structural reform of the Japanese economy, including bankruptcy and banking system reforms.)
Posted by: Menzie Chinn at January 31, 2009 04:18 PM
How worried are you that this recession may surprise the general public on the downside. I am worried that the US population under 40 years old has no experience with the kind of recession we are about to have.
Have you changed your own behavior, ie changed your personal investments allocation?
Posted by: MikeR at January 31, 2009 07:11 PM
BTW menxie, I created a wikipedia page on you which promotes this blog. As with wikipedia, anyone can change or delete it.
Posted by: MikeR at January 31, 2009 07:17 PM
Thanks for the link: Admittedly the Hoover & FDR tax increases were anti-Keynesian; and FDR's NRA, extreme taxation of retained earnings, & unionization push, etc. were enough to throw huge wrenches into any experiment on the power of deficit spending & monetary stimulus.
I'm glad to hear you say "I would say that fiscal stimulus is not in itself sufficient." And I readily agree that many structural features of Japan were significant.
You are not saying, are you, that Japan didn't engage massiviely fiscal & monetary stimulus?
Posted by: Bryce at January 31, 2009 07:55 PM
ONE THING THAT I THINK IS MISSED IN THE ANALYSIS ABOVE IS THE BEHAVIOUR OVER THE NEXT QUARTERS OF WAGE&SALARIES (THE MOST PROMINENT PART OF PERSONAL INCOME).
UNTIL NOW HOURLY EARNINGS HAVENT DECLINED SO MUCH. I ASSUME EMPLOYEES' COMPENSATION IS SET TO FALL CONSIDERABLY DURING 09-H1. AND IT SHOULD TURN OUT TO BE BAD FOR THE WHOLE ECONOMY.
Posted by: JL at February 1, 2009 12:58 AM
jg says ... send a cheque for 50k and only way to use it is to spend
does he really think it will work
let us assume it does ...
what does it do in effect .. create artificial demand since this money is conjured out of thin air... so this leads to more production, more jobs ...
now comes the question what happens next year , does fed send you another cheque? and who picks up the tab ...
so in effect jg is saying fed is a perpetual conjurer of money our of thin air..
is the above clear that you cannot consume your way to prosperity.. you have to spend less than you earn, save whatever you can and channelise the savings into investments ...that is the way to go .... and if people are paying down their debts, they are doing the right thing
Posted by: killben at February 1, 2009 01:07 AM
What exactly is your assertion when you say "the New Deal didn't work"? In what way? GDP did recover significantly, taking out its pre-1929 high by 1936 and did not fall below it during the 1937-38 recession either. Growth in domestic private investment was not slowed by government spending either as it grew at rates sometimes exceeding 80% during the recovery.
It is true that unemployment remained sticky, but there is absolutely no doubt that it did in fact decline significantly. Depending on your measure it fell by either 36% or about 50% before we began massive levels of military spending. The improvement may have actually been better than that because unemployment statistics at the time were extremely poor at picking up quality of employment measures. I could say just as easily that Reagan was ineffective at reducing unemployment in his first term if I want to be disingenuous with the numbers. His tax cuts were passed with unemployment at 7.4%. 4 years after that unemployment was also at 7.4%. I could argue also that Reagan's economic recovery had more to do with the massive decline in the Federal Funds rate and an easing of the money supply.
Furthermore, if you are a critic of Keynesian policies I would assume you are a proponent of supply-side policies. I would like you to explain to me then why Bush's economic growth rates have been so tepid. Before accounting for 2008, his average growth rate was only 2.3%. Jimmy Carter even had a 3.3% rate and Republicans equated him with Herbert Hoover, Nixon had 2.9%, and Clinton had 3.7%. The fact that he had probably the worst economic growth record of any president since Hoover(I would have to check on Truman because 1946 was such a poor year it may ruin it for him) does need explanation. It especially needs explanation since there was the most significant credit bubble in U.S. history fueling much of the personal consumption growth we saw.
How did Bush's decidedly supply-side policies improve growth? I do not see it. Even Gross Domestic Private Investment, the area targeted by supply-side policies, grew at lesser rates than under Clinton or many other previous presidents. Once 2008 is fully revised, I will like to see where this measures up.
Posted by: Brian Quinn at February 1, 2009 07:48 AM
Have economists really learned nothing at all? Any kind of stimulus is obviously the wrong thing to do. It is absolutely foolish to attempt to inflate the bubble again. The bubble was artificial; it was caused by bad government policies. Credit was too loose. It caused an unsustainable upward spiral in economic activity. The bubble is now popping and the economy is resetting.
A portion of our economic activity was false; it was an illusion. It was there only because the federal government's policies. We are now removing this false portion of the economy and getting back to real sustainable levels.
There should be no attempt at a stimulus. That is wrongheaded. If we do anything at all, it should simply be to lessen the restructuring pain and provide a safety net for the people who are affected by this government-caused problem. The people should not lose sight of the fact that the government caused this problem in the first place.
We need to move to a system that features sound money and sound banking. If we design the system properly, there would be no need for a central bank at all and no need for deposit insurance. Such as system will prevent the type of massive systemic bubbles which are ALWAYS coupled with widespread misery when those bubbles collapse.
Posted by: nobubbles at February 1, 2009 07:50 AM
So this is a government caused problem because the government did not intervene enough to prevent the bubble from occurring?
Blaming bubbles on the government is fairly odd given the history. While we had many bubbles in the 19th and early 20th centuries, the period from 1933-1980 was fairly devoid of bubbles. This is a period that is usually associated with far too much government intervention by conservatives. We have since had at least 3 bubbles of significant orders. All of them are associated with too little government action. The present situation was not caused by Fannie Mae, Freddie Mac, and the Community Reinvestment Act, like many conservatives claim. The biggest problem was not overpriced urban real estate in depressed urban neighborhoods. The greatest increases were in suburban areas and in condo developments in wealthy sectors of cities. This is where the real problem is and the greatest amount of the housing downturn is occurring. The government had very little to do with this other than not intervening enough to stop it.
Posted by: Brian Quinn at February 1, 2009 08:29 AM
These sorts of general arguments by economists are just getting silly. The basic belief is that somehow these things work in the aggregate: The red line is declining; we must restore the red line.
When your car runs out of gas, pouring more gas on the hood is pointless.
Until you tip the whole banking system over and clean out the people who corrupted it and then rewrite - and enforce - clear rules, confidence will not return. You can pass trillions of dollars out the door of the Fed and Treasury, but it will stimulate nothing but hoarding UNTIL this is done.
Posted by: wally at February 1, 2009 09:16 AM
The numerous pre-Keynesian booms/busts were sharp but short. 1920 is an excellent example coming off the WW1 credit expansion. The price system was allowed to work. People & institutions suffered largely in proportion to how irresponsibly they had behaved--in marked contrast to the present. (Not to say that innocent people didn't suffer too.)
So I would argue that the Great Depression & Japan since 1990 are unique in 2 particular ways: their extended length & massive governmental responce of deficit spending & money creation.
I am not asserting that you cannot get an effect from massive deficit spending & money creation, but I am amazed that anyone would think that these things are conducive to the long term health of an economy.
The tepidness of the Bush economy that you mention a case in point. Bush's tax cuts (which can be deemed as temporary since they were accompanied by spending increases) & Greenspan's money creation were indeed Keynesian responces to the Dotcom Bubble collapse--& even sold in those terms to an extent. Had we not thereby short-circuited the Dotcom recession, we would not now be experiencing collapse.
BTW, gov't central banks are the sine qua non of these bubbles. Intervene is there middle name. Market participants may have responded stupidly to easy money, but that is a normal responce to a distorted price. And gov't regulation of the credit rating entities caused their failure because of the method of payment required & their gov. imprimatur.
Posted by: Bryce at February 1, 2009 09:42 AM
Bryce: Er, wasn't there a depression in 1893?
Posted by: Menzie Chinn at February 1, 2009 10:05 AM
Brian Quinn:"Furthermore, if you are a critic of Keynesian policies"
Brian, let's take an alternate argument...suppose that you are in favor of Keynsian policy. The policy dictates than you can (and *should*) have the government spend our way back to prosperity, in order to restore the economy to 'full employment'.
However, remember that Keynsian policy also dictates that during the boom times, you need to increase taxes and reduce government spending. What had we done prior to this mess? EXACTLY THE OPPOSITE. So, by Keynsian philosophy, the economy circa 2005-2006 was a hyper-stimulated economy (with both debt-fueled hyper consumer spending/speculation AND government fueled deficit spending). As far as I know, Keynsian doctrine doesn't advocate even more spending in order to get back to the "Goldilocks Economy" fueled by deficit spending by both governments AND consumers.
Now, had we followed the Keynsian rules of higher taxes and reduced government services during the "Goldilocks Years", we might have found out that the "natural" unemployment rate was much higher than the 4% we were experiencing.
What I am trying to point out is that even under Keynsian philosophy, you can't and shouldn't spend your way back into a debt-fueled orgy of an economy in order to achieve a 'fake' full level of employment. Those levels of 4% unemployment were only a mirage, fueled by all to easy credit.
Posted by: Tim Geithner's Mom at February 1, 2009 10:23 AM
"If consumption is falling because the marginal propensity to consume...declining...it makes sense to favor government spending on goods and services"
However, if MPC was too high by historic and logical standards (I make an extra $1, so I spend an extra $1.50 because, well, times are good and my house is 'worth more'), then it makes perfect sense for MPC to decline. Not only is it reasonable and expected for MPC do decline in relation to the past 5 years, but it is what has to happen! I assume that no one here is advocating tricking consumers into falling back into a negative savings rate again, which by historical standards was unprecedented! MPC is falling because people (in aggregate) took on too much debt in order to by consumables and 'assets', and now they need to pay down that debt. Each additional dollar consumers take in is already partially spoken for, due to previous debt fueled purchases! The excess consumption of the past was borrowed from the consumption of the future. Is it any wonder that MPC is (and should) go down?
Posted by: Tim Geithner's Mom at February 1, 2009 10:34 AM
I second Bryce's comments.
Posted by: jg at February 1, 2009 11:19 AM
Eat to live or live to eat?
As long as those in charge believe the latter we are in for upheaval. Live to eat is unstainable for most people.
Isn't the consumerist economy largely "live to eat"? Isn't it almost certainly environmentally unstainable? Why in the world try and restore your cancer to health rather than say good riddance? Why would anyone who has been hit by the piranha like bank fees and interest hikes ever want to use a credit card again?
The train wreck is fascinating and inevitable.
Posted by: poor country lawyer at February 1, 2009 11:58 AM
I blame Reagan more the GW Bush. Enough said about Republicans. However they do have a lot of power esp. in the media. (more Republicans are on most network news stories condemning Obama than are Democrats defending Obama of late).
also, the govt's unemployment numbers are pretty phony (elimination of self-employed unemployeds, part-timers, discouraged workers: all statistical manipulations during Reagan's era). There are several indices and I'd use the most conservative and embracing one that says current unemployment is about 12 percent not some 7-8 percent when all those 'discouraged workers' are added. Our stats are like the false CPI ones that eliminated mortgage payments as an inflationary index...(also another Reagan-era manipulation of statistics to make things seem rosier than they are..)
ah, trickle down, trickle down.
Posted by: datadave at February 1, 2009 01:23 PM
Consumption was out of line with ability to pay ie the ballooning of debt in the US. The world created overcapacity (cars steel electronics etc). Wall Street especially and FIRE in general failed miserably in what should have been its primary job of allocating surplus (capital) to the most productive uses. In fact, FIRE began using Enron accounting practices to generate obscene bonuses. Others began using Mafia style practices to gut companies = on a small scale how they used to force their way into a restaraunt run up debt skim off the gross and leave a bankrupt hulk. More sophisticated bankstertypes used shorting and stock manipulations. The whole hedgefund, derivitives with their CDOs and MBSs and ... soon became a Ponzi scheme bigger than Madoff's that popped beginning with subprime. FIRE degenerated into a system of skimming off more and more from the stream of money generated by the real economy for itself and the elites who already had more money than they needed.
The fact is with a bloated military waging wars in 2 different countries, a huge fiscal and trade deficit we already have a faux Keynesian stimulus already. We really shouldn't be using more debt to generate more growth in areas where there is already overcapacity. We don't need to build more shopping centers and residential houses or get automobile production up. Economists are just not getting that the old system is broken. Yesterday's gone. You can't get it back. What needs to be done should be figuring out what worked and needs to be saved. It isn't Goldman Sachs.
Posted by: gepay at February 1, 2009 02:52 PM
Indeed the Panic of 1893 was deep and long, but not rivaling the Great Depression. Furthermore, with the Sherman Silver Purchase Act of 1890 the protectionist McKinley Tariff of 1890, the government was not uninvolved.
I believe that the banking system was evolving & maturing to develope rules to minimize credit bubbles. Progressivism arrested that evolution & so we'll never know.
Nevertheless, if you compare the record of economic growth with minimal inflation from 1865-1914 to the period since with the Great Depression, the stagflation of the 1970s, the US$ being worth $.03 in 1914 dollars, & now this catastrophe, it is clear which system had a better record AND trajectory.
Posted by: Bryce at February 1, 2009 05:40 PM
Never in the late 19th century did we have a period of truly sustained growth like you suggest. We had panics in 1866, 1873, 1884, and 1893, all of severe magnitudes. The 1873 depression is commonly accepted as having lasted about 5.5 years, until 1879. The Depression of 1893 lasted at least five years: http://en.wikipedia.org/wiki/Panic_of_1893. Unemployment did not get below double digits for years.
We also had the panics of 1901 and 1907 along with a short depression in 1910-1912.
I really don't think it is up for dispute that the economy grew very well in the 1933-1970 period in the aggregate. That is an unusual period of economic stability particularly considering the events that took place. There is evidence to suggest that perhaps over-regulation as well as over-stimulation of the led to inflationary pressures in the 1970s and I may concede that. However, deregulation of the banking sector has led to several severe, 19th century style financial panics including the savings and loan fiasco and the present malady.
Don't you find it interesting that nowhere in previous economic history can you find the stability of the banking system that we had between 1933 and the S&L crisis and now we have had the same catalog of bank crises that we had in the unregulated system? I do not believe that is an accident.
Posted by: Brian Quinn at February 1, 2009 06:46 PM
The 1866-1914 period had numerous corrections, but if you look at the huge increase in wealth & lack of inflation, it excells the post progressivism period handily.
There was a lot to be worked out in the pre-WW1 era, but progress was being made. Corruption in Wall St. & the judiciary was corrected not by gov't but by agents outside of gov't such as Bar assns & Wall St participants. Markets of voluntarily interacting people (with a gov't of laws to minimize fraud) will over time quench bad behavior. The banking system admittedly had a ways to go.
Brian, not even FDR Democrats thought the 1933-38 period was any kind of economic success. The economy stunk until WW2 loosened the union-induced rigidities.
Posted by: Bryce at February 1, 2009 08:46 PM
MPC will not stay constant, even after a quick step downward. It will neither continue downward predictably nor upward predictably, but will respond to big events, such as major new memes, which can't be predicted entirely.
What is somewhat predictable on the other hand is that if among the large number of jobholders with relatively more secure jobs who are paying off credit cards -- such will indeed progressively finish paying off their cards in increasing numbers. It's a good guess that at that point in time for each individual household, they will not then continue to save at that same aggressive rate, as paying off a credit card is a different psychology vs savings. It would seem more likely that most would decrease somewhat their rate of savings at that point. So payroll or "middle class" tax cuts would likely bring forward more MPC, progressively, by this mechanism.
For more see my blog.
Posted by: halbhh at February 1, 2009 08:56 PM
This is for Tim Geithner's Mom.
Would you please have Tim hire someone to do his taxes this year? Why is it that dems whant higher taxes, but have such a hard time paying their own? First it was Rangel, then Timmy, now Daschle.
What next, Al Gore burining fossil fuels in a private jet like some hot shot CEO?
Posted by: MikeR at February 2, 2009 07:28 AM
MikeR: I am indeed worried that comparisons in recession metrics fail to capture fully the psychological element. 10% unemployment would be a shock to those who have never seen a labor market with double digit unemployment. But I do not see how to easily quantify that effect, aside from looking at many metrics at once.
I haven't changed my allocations at all. Minimal assets simplifies life.
Thanks for setting up the Wikipedia page! Unfortunately you (or some other tech savvy person) will have to demote me from a former "member" to former "senior economist" or "staffer" on the CEA..."
Posted by: Menzie Chinn at February 2, 2009 07:39 AM
A decrease in consumption and an increase in savings is exactly what is necessary for Americans to collectively rebuild their personal ballance sheets.
If by sending out rebate checks, all you do is allow people to pay off their credit card balances and whatnot, is that so bad? You're helping people do what they already want to do.
Perhaps, after rebuilding their balance sheets, they will be in a better position to consume in the future?
More likely, the industries of consumption were overbuilt, and should NEVER be restarted. Something else needs to take over their place as the engine of economic growth.
A more realistically valued dollar, driving exports, would be a good place to start.
Generally speaking, a stimulus bill that combined cutting marginal tax rates, a rebate check, and increases in spending on infrastructure, but lacking the pork of this current bill, would get broad support from Republicans.
Posted by: Buzzcut at February 2, 2009 09:15 AM
I am curious about the color of the sky on your planet.
Posted by: GWG at February 3, 2009 08:34 AM
You should all read Devil Take the Hindmost about the collapse of the speculative investment bubble in 1929 and its subsequent aftermath. It is like watching a replay in slo mo. In fact, it was the defanging of the Glass Steagal act by our friend "it's a recession in your head" Phil Gramm. In other words, Republican policies and harping on deregulation pretty much created the conditions for an outsized speculative investment bubble and that is where we are today. Banks and investment trusts will fail and people will be out of work and hopefully the Democrats can put back the policing and regulation that FDR smartly instituted since liars lie and cheaters cheat. Bubbles are human nature, what needs to happen is heavy regulatory oversight
Posted by: ksmiami at February 3, 2009 09:23 AM
"Bubbles are human nature, what needs to happen is heavy regulatory oversight". Good point ksmiami. After all there were no bubbles in the Soviet Union.
Posted by: GWG at February 3, 2009 10:07 AM