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Old 07-02-2010, 04:25 PM   #21
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I don't think anyone here on the thread was advocating government austerity. It was more a general statement of agreement with Krugman.

You say earlier that war, not FDR, led us out of the Depression. But fighting a war is the very essence of government spending. We ran tremendous budget deficits during WWII to build the tanks and ships and planes to fight the war. It was that demand, that government demand, that put people to work and pulled the economy up from the depths. Frankly, I would rather the government demand things other than war machines, but I think this is a good example of how government demand supplementing the reduced private demand can and did pull an economy out of depression.
Government spending as a percentage of GDP increased from 10% in 1929 to 20% by the start of WWII as government programs were continually created in an effort to end the depression. For the most part they did little good. Whether it was technology advances made possible by need in fighting a war or through increasing government spending to 60 % of GDP for 4 or 5 years or rather the deaths and destruction of everyone elses workers and factories is a question I hope does not need to be retested.

We are now running at 45 percent of GDP, I don't know how much bang for the buck you get when you already own 1/2 of the bucks.
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Old 07-02-2010, 04:29 PM   #22
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Starting a war is not part of Keynesian thought. WWII was not an initiative of FDR. So, the choice of government spending on war or spending on things other than war to get out of a recession/depressions a false dichotomy. However, the USA is spending two fight two hot wars (Afghanistan, Iraq) and a "warm" war against terrorism in the USA and the world. Yet we are in a recession. Not all wars end a recession/depression.

There is no evidence or examples that the Keynesian theory of increasing deficit spending gets an economy out of a recession/depression.
No one would argue that Keynesian theory requires us to start a war or that FDR initiated WWII. Nor did I posit that there was some choice between spending for war and spending for something else. Rather, my observation was simply that that the aggregate demand level in the economy jumped due to the need to produce armaments for WWII. That increased demand by the government, regardless of its aim, caused increased employment. With respect to Iraq and Afghanistan, I will note that both were commenced during the "flush" years that Ziggy talks about -- just when we should have been curtailing spending. And right now, it is possible that the economy could be in an even deeper trough without that war demand.
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Old 07-02-2010, 04:34 PM   #23
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The Austrian school of economics might have it right. Perhaps, the system must collapse so that it can be rebuilt stronger. But gosh, as a matter of personal preference, I sure prefer the chronic pain of the Keynesian approach to the acute pain of the Austrian approach...

I don't know if 'collapse' is the correct term. Basically, we did not address the problems in the past when they were smaller (and the pain smaller) and kicked the problem down the road.

I'm hoping we can kick the problem further down the road by about 35 years - until I'm dead.

But, the longer the 'chronic' pain the greater the acute pain will be later.
What that pain will look like we can debate but there is no avoiding it.

I'm guessing -
phase 1 - 10yrs - period of deflation (high unemployment) as debt implodes. The government can not print/spend enough to change it.
Phase 2 - 10yrs - recovery - employment improves - still historically high - - constant prices - income taxes, fees increase, VAT added, middle class gets smaller and fragile, number of poor increases.
Phase 3 - Crisis - government deficit and debt becomes unsustainable - do the USA creditors force the USA to institute financial reforms as was done with Greece?
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Old 07-02-2010, 04:39 PM   #24
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The Austrian school of economics might have it right. Perhaps, the system must collapse so that it can be rebuilt stronger. But gosh, as a matter of personal preference, I sure prefer the chronic pain of the Keynesian approach to the acute pain of the Austrian approach...
A little hip-hop to the debate, A PBS program that was I thought very interesting.

Keynes vs. Hayek: Late Economists' Hip-Hop Legacy | PBS NewsHour | Dec. 16, 2009 | PBS
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Old 07-02-2010, 04:39 PM   #25
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Government spending as a percentage of GDP increased from 10% in 1929 to 20% by the start of WWII as government programs were continually created in an effort to end the depression. For the most part they did little good. Whether it was technology advances made possible by need in fighting a war or through increasing government spending to 60 % of GDP for 4 or 5 years or rather the deaths and destruction of everyone elses workers and factories is a question I hope does not need to be retested.

We are now running at 45 percent of GDP, I don't know how much bang for the buck you get when you already own 1/2 of the bucks.
US Government Spending As Percent Of GDP in United States 1903-2010 - Federal State Local

I didn't know that - thanks
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Old 07-02-2010, 04:41 PM   #26
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That site is a great resource. I may spend some time playing with it today.
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Old 07-02-2010, 05:13 PM   #27
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We are now running at 45 percent of GDP, I don't know how much bang for the buck you get when you already own 1/2 of the bucks.
Yes, interesting chart. So let's see... if what got us out of the depression was the increased Govt spending from 20% to 50% of GDP, that is just a 2.5x increase. So, apply that 2.5X to our current 45% and you get.... whoops!

-ERD50
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Old 07-02-2010, 05:22 PM   #28
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It seems to me that promoting government austerity now because we have been unable properly to pull back spending when we were flush in the past will simply compound the problem. It is the cutting off of one's nose to spite one's face.

At this point, we still need government spending to supplement private sector demand or the economy will not recover. What we should be doing is getting serious about the changes needed once the economy is back up to speed. Then, we can cut back.
Then why pass the most massive tax hike in the country history to pay for basically universal health care...

And also propose one of the biggest taxes in cap and trade....

The problem seems to me that we can not spend our way out of this recession... we have to let it run its course.... I would rather cut off my nose now than my head in a few years....

I think that more spending will be wasted... we will still have a bad economy but even more debt to pay off... and at some point and time there will be a massive tax hike to pay for this... there is no free lunch no matter what we think...
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Old 07-02-2010, 05:29 PM   #29
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The other problem that no one seems to want to talk about is our 'normal' level of gvmt (well, I guess some are)....

How much do you think the economy needs to grow until we are at a balanced budget I mean, if for some reason we just did not spend any more money tomorrow than we are spending today... nothing for increased inflation, no 'new' beneficiaries.. nothing... I suspect it would be many years and maybe a couple of decades..

We can not grow our way out of this problem... so I AM talking about austerity measures.... I am smart enough to say not right now.... but I want some kind of balance budget amendment NOW... not a 'if you elect me again I will balance the budget' speech... not a promise in 5 or 10 years... something that is hard...
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Old 07-02-2010, 05:29 PM   #30
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The question is - does the Keynesian theory of increasing deficit spending get an economy out of a recession/depression. Again, there is no evidence or examples that it does.
I remembered Krugman's argument about this, but thought that I would have a look also.
Here is the GDP and government spending from 1929 to 1950. I was expecting to see a significant bump in government expenditures from 1933 to say 1936 as the New Deal programs kicked in, but nooo.
What I do see is the WWII giant expenditures.
GSP and spending.gif
If I understand correctly, Krugman claims that the New Deal was just too small. (He is saying pretty much the same thing about economic stimulus today.)
Krugman also claims that Roosevelt lost the faith, raised taxes and tried to restrain deficit spending in 1937 leading to a second dip. The data? Meh.
GDP 1937.gif
I must admit, the idea of vastly increasing the national debt right now terrifies me.
Data from
U.S. Department of Commerce. Bureau of Economic Analysis
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Old 07-02-2010, 06:04 PM   #31
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Part of the reason you are seeing that is that from 1940 to 1948 net inflation was 67 percent so the 225 of GDP up from 1940's 80 is really an increase to 135. While in the 20's you had price deflation.

The equivalent for spending as we did in WWII would require the government spending to be the following

6 Trillion 2010
15.6 Trillion 2011
37.2 trillion 2012
56.4 trillion 2013

If you look at the Federal Government spending you will see that it went from 1.7 billion in 1929 to an excess of 5 billion by 1936. There were spending 86 billion by 1943. If you substitutte the word trillion for billion we have the same sort of scenario, these kinds of increases cannot be the basis of a sane economic policy
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Old 07-02-2010, 09:16 PM   #32
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Same data, adjusted for constant 2010 dollars.
Depression economics.gif
It does make the 1937 "austerity" show up, but it is still dwarfed by the mountain of war spending, almost 50% of the GDP at its peak. Truly horrifying numbers.
Depression spending.gif
The economy took off after the war, despite the huge war debt. Whether this was due to the Keynesian stimulus of the war spending, or the fact that we had pretty much the only manufacturing left in the world is above my pay grade.
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Old 07-02-2010, 11:03 PM   #33
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All this talk about depression is depressing me. Now, where's my cherry...
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Old 07-02-2010, 11:14 PM   #34
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Same data, adjusted for constant 2010 dollars.
Attachment 9591
It does make the 1937 "austerity" show up, but it is still dwarfed by the mountain of war spending, almost 50% of the GDP at its peak. Truly horrifying numbers.
Attachment 9592
The economy took off after the war, despite the huge war debt. Whether this was due to the Keynesian stimulus of the war spending, or the fact that we had pretty much the only manufacturing left in the world is above my pay grade.

Actually there is a theory that I had read that it was the case that we were the only intact manufacturing county after the war... so it was a big factor... then there was a lot of demand as the families started to grow at a huge rate (and we are the result of THAT fun)....
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Old 07-03-2010, 01:17 AM   #35
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All this talk about depression is depressing me. Now, where's my cherry...
If you think that you are going to lure me into asking you about losing your cherry..

You're right!

Wanna tell us all about it?
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Old 07-03-2010, 10:08 AM   #36
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Wanna tell us all about it?
......Four score and seven years ago.....
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Old 07-03-2010, 04:42 PM   #37
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Just stumbled on this interesting bookend to the Krugman piece by Robert Reich:

Robert Reich (Slouching Toward a Double Dip or a Lousy Recovery at Best)

I'd like to believe he's wrong, or at least unduly pessimistic, but it seems pretty accurate. Tough for retirees, brutal for anyone just starting to make their way in the world.
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Old 07-04-2010, 03:25 AM   #38
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The odd part about all of this is that companies need workers.

Our organization has lost many people over the last 3 years due to attrition. Yet they have a hiring freeze. We are down 5% in personnel. I know that we could replace 2% or 3% in a year if we get the approval. Our company has the money... yet they wait.

I have no doubt that this is the situation in many many organizations.

Part of the problem is in Washington. The stalemate on important legislation has cast a cloud of uncertainty.

If we get Financial Regulation behind us and that oil spill is at least plugged... the mood could change.
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Old 07-04-2010, 08:24 AM   #39
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The odd part about all of this is that companies need workers.

Our organization has lost many people over the last 3 years due to attrition. Yet they have a hiring freeze. We are down 5% in personnel. I know that we could replace 2% or 3% in a year if we get the approval. Our company has the money... yet they wait.

I have no doubt that this is the situation in many many organizations
In a job market this bad, I figure many employers are hoping to use "fear" to milk as much "free" productivity gain as they can. They may be able to *afford* more, to hire more, to give raises and whatever else, but in this market they simply have no reason to. They don't need to do it for retention and recruitment, and maybe they haven't worked their employees to the breaking point yet, and as long as you can keep them fearful of the unemployment line, let's see -- 50, 60, 70 hours a week, anyone?

Any wonder why so many of us want out?
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Old 07-04-2010, 08:28 AM   #40
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In a job market this bad, I figure many employers are hoping to use "fear" to milk as much "free" productivity gain as they can. They may be able to *afford* more, to hire more, to give raises and whatever else, but in this market they simply have no reason to. They don't need to do it for retention and recruitment, and maybe they haven't worked their employees to the breaking point yet, and as long as you can keep them fearful of the unemployment line, let's see -- 50, 60, 70 hours a week, anyone?
Zig, don't be so darned cynical. The reason is they don't want to have to go through the agony of laying anyone off should they start hiring and then things take a turn for the worse. Yeah, that's it...
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