Is a Double Dip Recession Likely?

[Malerin]

No. I believe Keynesian economics are simply impossible in a democracy of any kind.. No one who wants to stay popular is capable of taking the necessary steps to restrain finance during the good times. For the voters (or cronies) no times are ever good enough. We see sunshine and rainbows around the corner and we demand our politicians take us there, or else.. As a result no lasting fiscal sustainability can ever be achieved by elected politicians.

The government's plan is fairly openly "Keynesian", but IMO won't work because they've skipped the first and most important step entirely. They pick the most personally useful parts out of economic theory like it was a buffet. Similar to how many of the Jesus worshipers are so keen on passages about the gays but not so hot on giving all their possessions to the poor. It's rather central to the whole philosophy, yet it's ignored entirely.

Too many people (who should know better) keep pushing the idea that we'll just grow our way out of all this debt. It's like a person who's totally living beyond their means, maxing out credit card after credit card, and thinking it will all be OK when they land that super awesome job.

 

[Puppycow]

New Home Sales Dropped to Lowest Level on Record in May

Looks like a double-dip is a lot likelier now.

In May, new home sales sunk to the lowest level since at least 1963, when the Census Department began keeping records. They fell to an annualized rate of 300,000, down 33% compared to April. This number is much worse than the 405,000 new sales economists expected. Unlike existing home sales, new home sales more fully take into account the loss of the home buyer credit. Clearly, the housing market has taken note.

Today's report is bad in pretty much every way imaginable. Not only did May's sales set a new all-time low, but March and April were also revised downward significantly. March fell from 439,000 to 347,000 sales, and April fell from 504,000 to 446,000. If you use the previous estimate for April, home sales would actually have fallen by 40%. So really, May's numbers showed twice the 20% decline economists expected.

 

[Emperor_Gestahl]

I agree with a lot of your anti-Keynesian rant. Just don't get the idea that all these teachers are living the high life pulling in a hundred grand and untouched by the recession. My district went from 134 teachers to 108. Class size went from a max of 20 students a class in K-3 to over 30 students, per class. Nor was my district an anamoly. Every district in my area has laid off teachers. My wife's bad luck to get a teaching credential last year.

If your state balances it's budget you'll be the ones losing when the deadbeats get bailed out. The teachers in bankrupt states who aren't losing their jobs and who are being overpaid get to coast along while the sacrifices of the wiser states go unrewarded.

Similar to how honest financial institutions have to compete against what amounts to fraudulent lending practices their competitors get rewarded for having perpetrated.. Best of luck to you and yours, hopefully we find some way out of this moral hazard trap.

 

[Corsair 115]

I get paid $100k? And my district didn't lay off 25% of its teachers? So the last two years were just a bad dream?

Yes, it was, just like that episode of Dallas.

 

[drkitten]

Too many people (who should know better) keep pushing the idea that we'll just grow our way out of all this debt.

Yeah. People with Nobel Prizes in economics.

On the other hand, people with no experience or knowledge of economics can see clearly that the only way to deal with the debt is to force the economy into a deflationary spiral. It's much worse, after all, to owe 100,000 old dollars than it is to owe 50,000 new dollars --- even if the new dollar is worth twenty times what the old one is.

 

[TraneWreck]

Yeah. People with Nobel Prizes in economics.

On the other hand, people with no experience or knowledge of economics can see clearly that the only way to deal with the debt is to force the economy into a deflationary spiral. It's much worse, after all, to owe 100,000 old dollars than it is to owe 50,000 new dollars --- even if the new dollar is worth twenty times what the old one is.

I like Krugman's description of that world-view: Super-Asinine-

he case for expansionary policies in the face of a slump is intellectually difficult; Keynes described the writing of the General Theory as a painful process of discovery, and so it is. The natural instinct of almost everyone is to think that tough times require tough measures, and that if the economy is suffering, the government should tighten its own belt. It would take a clear consensus from economists to overcome that natural bias.

And that consensus has, of course, been lacking — largely because a significant proportion of the economics profession has spent the last three decades systematically destroying the hard-won knowledge of macroeconomics. It’s truly a new Dark Age, in which famous professors are reinventing errors refuted 70 years ago, and calling them insights.

http://krugman.blogs.nytimes.com/20...-asinine-the-gods-themselves-contend-in-vain/

Either you're of the opinion that we can learn something about the way the world works through reasoned inquiry or you don't.

Unfortunately people in the latter camp seem to be running things.

 

[TraneWreck]

Was that the reason though? You can't just "account for" millions of tons of bombs dropped on everyone but us. Most US hegemony the last century can likely be linked to us receiving that dramatic advantage in the postwar era. U.S. factories then were so ready to soak up world demand because they were churning out weaponry in unprecedented amounts. What's keeping our factories running? What are we churning out in record amounts? Malarkey? Malarkey doesn't count!

I don't even remotely understand your point. We industrialized rapidly for the war because of massive government (tax-payer) investment. This left us in a position to dominate the world economy for the next 25 years because all of our competitors were destroyed.

We would have been better off with the massive industrialization/production and competitors than we would have been without the production and a loss of competitors. Many other nations weren't destroyed in WWII, yet we were the only one with sufficient productive capability to take advantage. Notice that during the 30's, European nations that increased their deficits also increased their growth (see link below). They were competing with each other before the war, obviously, so the loss of competition can't explain the growth.

Additionally, if you want another example of how "hard-money" policies can lengthen a Depression, I play the Godwin card and submit one Adolph Hitler:

http://delong.typepad.com/sdj/2010/06/paul-einzig-was-wrong.html

That actually compares all of the major world economies during the Depression:

"The sooner you abandon "orthodox" concern with budget balance and reassuring markets in the hopes of gaining their "confidence," the better."

 

[drkitten]

If your state balances it's budget you'll be the ones losing when the deadbeats get bailed out. The teachers in bankrupt states who aren't losing their jobs and who are being overpaid get to coast along while the sacrifices of the wiser states go unrewarded.

Which strongly suggests that the "wiser" states are in fact, more foolish, doesn't it?

"Well, if I take this morally superior action (according to some crackpot theories of economics) I will destroy my local economy in the long run, but at least I will have the satisfaction of knowing that I did it for righteous reasons."

hopefully we find some way out of this moral hazard trap.

I'd start by recognizing that it's not a "moral hazard trap," but more simply bad, foolish, ill-advised, and self destructive policy -- on the part of the deficit hawks.

 

[Mister Agenda]

I hope this is worth at least 2 cents: It seems to me that a targeted corporate tax reduction aimed at small businesses (even a lot of mom & pop operations are incorporated) would be an effective stimulus that wouldn't outrage the people mad at large corporations. Revenue shortfalls could be covered by stimulus money.

Is this a bad idea?

 

[Trakar]

I hope this is worth at least 2 cents: It seems to me that a targeted corporate tax reduction aimed at small businesses (even a lot of mom & pop operations are incorporated) would be an effective stimulus that wouldn't outrage the people mad at large corporations. Revenue shortfalls could be covered by stimulus money.

Is this a bad idea?

How are you distinguishing between the "good" corporations ("small" businesses) and the "Bad" corporations (BP, GM and Goldman Sachs), with respects to taxation?

 

[drkitten]

How are you distinguishing between the "good" corporations ("small" businesses) and the "Bad" corporations (BP, GM and Goldman Sachs), with respects to taxation?

At least in theory, that's fairly easy. I can think of at least three ways (off the top of my head). Of course they'd need some fleshing out before they could be made into policy, but not that much.

a) Drop the corporate income tax rate by 10% in all brackets less than $500,000/year.

b) Create a 1% tax deduction/credit for all businesses employing fewer than 500 people.

c) Use the existing definition of "small business" as applied by the Federal government elsewhere (i.e. use the SBA's existing definitions).

 

[Mister Agenda]

What drkitten said. I don't personally subscribe to big=bad and small=good, but coming up with a policy that targets 'most likely to multiply investment' businesses would be very complex and involve a lot of guesswork. Given the currents of populism, I just think an incentive aimed at small businesses can be sold, and that it would be an effective economic stimulus.

 

[TraneWreck]

What drkitten said. I don't personally subscribe to big=bad and small=good, but coming up with a policy that targets 'most likely to multiply investment' businesses would be very complex and involve a lot of guesswork. Given the currents of populism, I just think an incentive aimed at small businesses can be sold, and that it would be an effective economic stimulus.

Like this?

http://www.savingtoinvest.com/2009/03/tax-breaks-in-obamas-15-billion-small.html

It's already been done, though not nearly large enough.

If we're talking about what the vapid, brain-dead American public and our silly leaders will accept, then that sort of tax-break stimulus is the way to go.

If, however, we're interested in actually stimulating the economy, tax breaks aren't the best means (they should be included, but not be the center of the program):

The pattern is striking: Direct government spending -- through unemployment benefits, food stamps, work sharing or infrastructure spending -- top the list, giving you more than a dollar's worth of stimulus for a dollar's worth of spending, while cuts to taxes affecting businesses and upper-income individuals -- such as the corporate, dividend, capital gains and alternative minimum taxes -- give you less.

http://voices.washingtonpost.com/ezra-klein/2010/06/research_desk_whats_a_dollar_o.html

There's a nice chart in that link.

 

[Emperor_Gestahl]

Which strongly suggests that the "wiser" states are in fact, more foolish, doesn't it?

In much the same was as a thief is wise for simply stealing what "fools" work hard for, yes. Condemning a state for only making promises it can keep is misguided.

"Well, if I take this morally superior action (according to some crackpot theories of economics) I will destroy my local economy in the long run, but at least I will have the satisfaction of knowing that I did it for righteous reasons."

I'd start by recognizing that it's not a "moral hazard trap," but more simply bad, foolish, ill-advised, and self destructive policy -- on the part of the deficit hawks.

It's not that the deficit hawks are "crackpots", they're simply too late. Keynesian economics calls for "deficit hawks", specifically it calls for forcibly running a surplus during boom years. If Krugman was any good as a Keynesian he would have been a deficit hawk in 2005..

I agree this is no time to slash the federal budget (maybe if we slash taxes even more), but we can't expect to still pass this test when we've already neglected to acquire a #2 pencil when we had the chance. We spent like crazy during the boom years and expect to spend like crazier to fix the eventual bust. Purchasers of treasuries have to trust us to pay out of tax proceeds, which are falling and we are clearly are in no position to levy.

I'm all for the government spending as much as it can to stimulate the economy, my opinion is that we don't have the wiggle room for this to work because we've spent the last decade "baking in" large deficits to our "business as usual" economy. If our creditors are happy to accept historically low yields while we try to move more and more paper then more power to us, but I'm not optimistic.

Basically the "conservatives" failed to convince us to cut spending when we had the chance, and the "liberals" will now fail to ratchet it up enough as a result.

Back to the pencil analogy, the "hawks" want us to up and abandon our desk to earn money for a pencil while the.. well I call then "fair weather Keynesians".. want us to stay and fill in the bubbles using pen. We fail the test either way, my position here can be summed up as fatalistic. Deck chairs on the Titanic and all that.

Keynesian economics are great on paper, but I don't think it's like Christianity where a "deathbed conversion" is all you need. There wasn't a Keynesian in sight while we were inflating a credit bubble and running deficits at the same time, Bernanke and Bush's advisers were in full-blown denial, now that it's popular suddenly everyone's a Keynesian but IMO it's too late. We don't have the tools we're supposed to have because we want to enact only the easy/popular part of our economic theory.

 

[Emperor_Gestahl]

Mildly off-topic, but we created the Fed because we couldn't trust politicians with monetary policy.. Why not create another such organization because we apparently can't trust them with fiscal policy either?

 

[Trakar]

... If Krugman was any good as a Keynesian he would have been a deficit hawk in 2005...

have you evidence that he wasn't?

 

[Emperor_Gestahl]

have you evidence that he wasn't?

I don't at that. I retract my blind criticism of 2005 Krugman, and prove myself wrong as compensation.

http://www.nytimes.com/2005/08/29/opinion/29krugman.html

I suppose Bernanke and Greenspan's flagrant denial poisoned me against Bernanke's modern-day allies. Bernanke is still in a position of authority after denying what Krugman was (apparently) pointing out as early as 2005 as (more) recently as 2007. There were some Keynesians in sight during the last decade, they just lost the battle.. against Greenspan/Bernanke. I guess even when Bernanke does "beat em" he gets to "join em" anyway.

IMO it doesn't matter now if Krugman was right in 2005, no one listened to him at the time and I still say we're screwed.

 

[BazBear]

This is certainly true.



The highest deficits in American history occured during WWII. That successfully blasted the abysmal US economy out of the Great Depression.

While true, I believe that was a singularly unique situation.

WW3 surely isn't the answer, as I am sure you agree

 

[drkitten]

While true, I believe that was a singularly unique situation.

WW3 surely isn't the answer, as I am sure you agree

I agree. But deficit spending and infrastructural investments on the scale of WW2 might well be. According to most mainstream economists, it is. In fact, it would probably be a better solution -- and would have been a better solution in WW2 if we had had that option.

WW2 had several economic benefits. It instantly produced near-full employment (in fact, we had to drag women into the labor force because the demand for labor exceeded the supply), and instantly created huge demand for industrial products at all levels from shoes to airplanes. Unfortunately, most the products weren't deployed productively -- the airplanes weren't used to transport goods and services, but instead were used to shoot down other airplanes and to be wastefully shot down themselves. The steel used to make tank engines wasn't used to improve the nation's rail transport system.

If we could magically wave our economic wand and hire everyone currently out of work to work on public construction, in two year's time we'd have a completely refurbished road network designed to modern standards that would require boatloads less maintenance than what we currently have. We'd have a set of newly repaired bridges that will be good for another fifty years. We'd have new sets of levees all across the country to make dangerous flooding a quaint historical anachronism. And we'd have lots of factories with bright shiny new equipment to produce the stuff that we need.

And we'd have another economic boom like the 1950s as companies took advantage of the lower costs created by the improved infrastructure and equipment, one that would raise the amount of money taken into the government coffers and would help retire the money we had just spent.

 

[Mister Agenda]

I would support that idea, drkitten, and I'm usually in the thrift camp. The return on that investment would pay back the cost in the not-so-long run. In a time of economic hardship and high debt, we should at least be getting our money's worth.