Friday, October 21, 2011

Spend or Tighten

It is interesting, if a bit scary, to watch Washington play out some of the economic debates of the last century.  Keynes believed that a government had to take up the slack in private sector spending to get an economy back on track in a crisis, even though it led to government deficits.  Friedman believed that as long as the government was keeping a balance between the amount of money in the system and the gross domestic product, everything would right itself eventually.  Hayek of course believed in doing nothing at all other than balancing our budget.

I doubt if even one or two people reading this post knows enough about these sorts of things to have an educated opinion, despite our self-confidence.  But the consequences are potentially quite severe, aren't they?  If Keynes was right, then the push to balance the budget right now threatens to throw us into an even worse recession.  If Friedman/Hayek were right, then we will be in for some bad times, but the government should basically let us suffer through it and do nothing to help.

16 comments:

John C. Gardner said...

Coolidge and Mellon in the twenties called for liquidation of assets(think houses) as the solution to the housing glut. This would be quite harsh. It seems to me that we need to be constantly implementing strategies where governments at all levels work with the public and private schools by providing funding, that governments provide basis research in the scienced, and that we encourage new startups which provide most of the new jobs rather than the new mantra small business. See Michael Spence's Convergence and the work of Niall Ferguson to be published in November.

Robert said...

Spending money worked for the US in the 1930's. What other concrete examples are there? Problem is, a lot of this is about ideology not what works in the real world.

Robert said...

Spending money worked for the US in the 1930's. What other concrete examples are there? Problem is, a lot of this is about ideology not what works in the real world.

Mobius Trip said...

In the absence of any complete economic theory, it would seem prudent to have more transparency in the Federal Reserve so that academics could at least speculate on its relation to our checks and balances.

FrGregACCA said...

IMHO, Keynes was proved right in the wake of the Great Depression through the early eighties, when Reagan and company began dismantling the New Deal.

JohnM said...

Now if you don't know enough to have an educated opinion you can't very well evaluate whether or not someone else does and thus cannot really say "listen to the experts", because you're not qualified to know who they are.

Of course to say (fill in the blank) works is something of an incomplete sentence. Works to accomplish what exactly? Differences in opinion are as much about the desired end result as how to get there.

Ken Schenck said...

My sense is that there are guilds of experts in every field. There are savants without degrees to be sure, but my sense is that generally the best bet on a topic is to see what the majority (especially a strong majority) of individuals with the highest degrees in a particular field think on a topic, especially if they seem to hold their opinion relatively free of bias. Not a perfect way of evaluating, but I can think of no other sounder way.

FrGregACCA said...

"Of course to say (fill in the blank) works is something of an incomplete sentence. Works to accomplish what exactly? Differences in opinion are as much about the desired end result as how to get there."

Good point. Personally, my biggest concern is the separation of economic power (wealth) from political power and this in all areas of social life, including the economic sphere. Democracy, not plutocracy.

What do you want to accomplish, John?

JohnM said...

FrGreg,

What do I want to accomplish? To try and be concise - a couple results I'd like to see:

A government that exercises self restraint, rather than hubris at massive cost, in both international and domestic policy.

Less living off debt and more learning to live within means, both on a personal day to day level and in terms of what we expect government to do.

Uncoupling power and wealth is just never the way it's going to be so perhaps our best course is diminuation of political power, period, along with wanting less of what "they" are selling.

FrGregACCA said...

"Uncoupling power and wealth is just never the way it's going to be so perhaps our best course is diminuation of political power, period, along with wanting less of what 'they' are selling."

At the moment, John, political and economic power are not the same thing. The likes of the Kochs want to change that.

"Less living off debt and more learning to live within means, both on a personal day to day level and in terms of what we expect government to do."

I don't think we expect government to do all that much now, and why have people gotten so much into debt? There are several reasons, but basically, to survive in the face of a situation in which, even while the economy grew (from the early eighties to 2007), income for "the 99%" stayed flat or even declined in constant dollars. Is that fair? No, of course it is not. No one should have to work more than one full time job to be able to survive financially and support a family.

While the government has a role tot play in fixing that, it is not an entirely direct role. One big thing would be for the policy of the Federal Government to change such that collective bargaining is encouraged. At the moment, the statutory policy is one of neutrality, as mandated by Taft-Hartley, but when a Republican is in power, this is usually interpreted in a way hostile to organized labor. Also, the provision allowing states to pass so-called "right-to-work" laws needs to go away (Mitt has proposed a Federal "right-to-work" law.) This step in and of itself would go a very long way toward fixing the problem. Also, the minimum wage should be raised.

Again, let me encourage you to investigate the German economic system. Not a lot of government involvement beyond having set the rules of the game, but having done so in a way the keeps the playing field reasonably equal.

JohnM said...

FrGreg,

My understanding is that it is true, certain incomes have stayed relatively flat over the past 25 or so years. Whatever the cause, that is a legitimate observation. However, the primary cause for personal debt, and this is something easy to see all around you, is consumerism.

I frankly don't see very many Americans going into debt for basic needs while foregoing luxuries. Not only low wage earners, but a good many people with comfortable incomes carry heavy debt. They just seem to take it for granted that if you want it and they'll accept the plastic, well, you should have it. Now I suppose I too benefited from cheap, easy credit when I bought my house, but overall I'm no fan, of it, don't need it to get by, and I refuse to carry debt on anything I expect to depreciate.

Roughly speaking, for every couple where both work to make ends meet there's another where both don't need to work to get by, but couldn't afford all their wants if they didn't. Is it just possible over supply of labor has driven down wages? I won't say it's as simple as that for sure, but I wonder.

By the way, one of the things I have read about Germans is that they have a relatively high personal savings rate. This in spite of the security of a government saftey net. If true, maybe that's something we can learn from the Germans.

FrGregACCA said...

Well,okay, John, but let's look at the double-bind here. All those purchases of "luxuries" help to drive the economy. Second, in many cases, people get stuck at a certain level of lifestyle related to having to keep up appearances secondary to what their job is: doctors, lawyers, executives at various levels. Third, why, given the overall state of the economy (up until 2007), should those below the 99th Percentile have to sacrifice when those above do not?

Do you realize that the differential these days between those in 99th Percentile and those making minimum wage is approximately 300X? Did you know that the median wage, the point at which 50% make more, 50% make less, is 26K/year? Fifty percentage of American wage earners make less than $26K/year!

Yes, the savings rate in Germany is high. Obviously, people there can afford to save (and keep their money in state-owned banks, out of the risky stock market a'la 401K's which also charge inordinately high fees). Not so much here: we simply cannot afford to save like that. Not that it has deprived our economy of investment capital.

JohnM said...

FrGreg,

The point, in part, is while it may be fine to spend money on non-necessities (I do that too) when, after a realistic assessment, you can afford it(better than miserliness I suppose) that's quite a different thing than spending money you DON'T have on things you don't need. Then wondering why you're broke and buried in debt, a condition that is surely bad for individuals and nations.

I'm unable to empathize with the need to keep up apperances and the luxury to which one may be accustomed. Again, if you don't have the money you got no business.., regardless of what "everybody else" is doing.

A 300X differential sounds like a lot, but then I don't know what it "should" be. I do know I am very far below that top one percent yet quite comfortable, with little sense that I'm sacrificing much, if I'm honest with myself. I think more Americans need to be honest with themselves.

Why should the top one percent sacrifice? I don't know as they should. I mean, it may well be they should be paying more into the system from which they have so abundantly profited, but they can do that without it amounting to any real sacrifice. What exactly do we in fact want from them? I'm certainly not carrying a torch for the hyper-wealthy, but their wealth in and of itself is not necessarily my biggest concern either.

Finally, I won't declare your median wage figure is mistaken until I know where you got it, but the numbers I've seen are quite a bit higher..so, respectfully - ??. In any case I stand by my point about the wisdom of living within means.

FrGregACCA said...

First, John: there is a limit, a normal, natural limit on how much anyone can EARN (be JUSTLY compensated for) per hour worked or per dollar invested. Thus, any income above that number, whatever it is, is a matter of hitting the lottery, actually or figuratively. Relative to the state of the economy and other factors, there is also a lower limit on this (and no, this is not synonymous with the minimum wage which is, in fact, too low at this moment).

Now, when I play Powerball, as I do from time to time, I am voluntarily putting down a couple of dollars for a chance to win a very large amount of money. When there is a winner, he or she will collect a from a pool created by all those dollars, mine and those of many, many others. We pays our money, we takes our chances.

However, in the "real" economy, things are somewhat different. Those of us at the bottom NEED a certain level of income in order survive. Take me: the only income my wife and I have comes from my $8/hour job. We both have significant health issues. Thus, while we are staying with friends, we are essentially homeless. We did not choose to play this economic lottery in which the odds are stacked against us.

"I'm unable to empathize with the need to keep up apperances and the luxury to which one may be accustomed. Again, if you don't have the money you got no business.., regardless of what "everybody else" is doing."

Understood, and this is not really an issue that I am overly concerned about either. At the same time, there are many people who believe, rightly or wrongly, that if they don't keep up appearances to one extent or another, they will lose their job.

Here is a piece regarding the median wage. Note the difference between the mean the median.

Living within one's means is a good thing. For many people today, however, it is simply not possible, and, given that those at the very top have essentially gotten there by winning the lottery and thereby collecting what others have in fact EARNED, it would be far easier for folks to do this if all were just compensated for their labor, not chronically underpaid, as has been the case for most people for the past 30 years.

FrGregACCA said...

Oops! Forgot the link. Here it is.

http://www.washingtonpost.com/blogs/ezra-klein/post/the-median-us-wage-in-2010-was-just-26363-government-reports/2011/10/20/gIQAdabX0L_blog.html

Angie Van De Merwe said...

http://youtu.be/gG3AKoL0vEs