I Love Larry Kotlikoff(Partly Because He Can't Stand Krugman)

[Gone4Good]

But isn't the roughly 4 trillion dollars of cumulative deficits we've incurred from 2009-2011 a fiscal stimulus? It has been a while since I've take Macro, but I thought government deficit spending was a stimulus? Or is there some magic,that unless a government spending isn't lumped together and called a stimulus bill, it doesn't have any impact on the economy?

That's a fair question.

And the answer is that some is and some isn't.

The deficits we were running in 2007 (2.5% of GDP) at full employment haven't gone away. They're part of the debt we've incurred over the past three years. But they're also part of pre-recession GDP output. We can't add them again as new "stimulus." They're already baked in the cake.

What about the 4% of GDP increase in deficits due to declining revenues? That's not stimulus either. Consider someone who loses his job and moves from being a taxpayer to not a taxpayer. Does his lower tax burden increase his economic activity? Of course not.

So here we've accounted for 6.5% of GDP, out of a peak 10.6% deficit, that isn't stimulus. The balance mostly does support economic activity to varying degrees and has some stimulative impact.

But remember, too, that the ~$3T output gap projected back in 2009 already assumed much of these higher deficits. Whatever stimulative effect they have, was known even then to be insufficient.

Here, BTW, is a chart of the contribution from Government Consumption and Investment to GDP. This isn't from some liberal economist, but from the actual GDP data reported by the BEA. What you'll see is a small spike in the 2nd Quarter of 2009, which was the Stimulus Bill and then a declining trend thereafter. You'll also notice that government has been a net drag on growth in each of the past three quarters.

 

[explanade]

Remember also that they put on the books the cost of running the two wars, which had not been accurately accounted for previously.

Maybe the money being poured into those countries are stimulative over there.

 

[GusLevy]

Are you claiming that monetary policy is "fiscal stimulus." You seem to be mixing up two very different things. And no, QE1 & QE2 don't invalidate the argument. After all, the desire for fiscal stimuls arrives due to the impotence of monetary policy to influence the real economy when short term rates reach zero. (Not that it matters, but QE1 took place in 2008 before the Krugman Fed 2009 Op Ed)



I'd be delighted if you can pull out exact quotes where either of us said either of those things.

Good morning.

Mon frere, if the Fed cuts the discount rate 25bps we have monetary policy: If the Fed buys almost $2T of marketable assets via their iMacs then we have something completely different...but it ain't monetary policy. You prefer not to call it "federal stimulus" but if it runs like a rat, chews like a rat, smells like a rat...let's at least call it a hamster.

Basically each one of your posts in this current discussion - which began last yr! I did not read it then - highlights the fact that we have low interest rates as the Bearded One predicted. Implicit in his Keynesian economic view and thru the Op/Ed pieces that you linked to is clearly the fact that he believes that the economy would grow significantly and that we would get higher employment through massive stimulus - the logic is that low interest rates will be the result of stable supply and demand functions which are created by full output and full employment in the economy. We are now at least 2.5 yrs into various stimulus and hamster programs and yet the economy is perilously close to recession and unemployment is at generation highs: But we do have low interest rates so let's claim victory!

You and I both know that the "bond vigilantes" are indeed predicting higher rates when we look at Gold, Tips and forward curves. The QE programs, European crisis, recessionary domestic conditions, etc. in the near term are why we have low spot rates obviously - not exactly how the General Theory of Employment, Inflation and Money would have predicted despite all this massive stimulus recently.

I ask you: When will the economy grow to full output and full employment in the Keynesian worldview of Obama, Krugman and yourself? Another Trillion? Another $5 Trillion? More?!

I end with a quote:
“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot." - Henry Morgenthau, Treasury Secretary under FDR for two terms

 

[Gone4Good]

Good morning.

Mon frere, if the Fed cuts the discount rate 25bps we have monetary policy: If the Fed buys almost $2T of marketable assets via their iMacs then we have something completely different...

Really? How does the Fed effect a discount rate cut of 25bps? Google "Open Market Operations" and get back to me.

You and I both know that the "bond vigilantes" are indeed predicting higher rates when we look at Gold, Tips and forward curves.

Really? I see 10-yr TIPS inflation break-evens of 1.95%. I see 10-yr nominal yields near record lows. I see 30-yr treasury bonds at 3.3%. How is any of this reflective of a bond market fearing either inflation or significantly higher rates?

The QE programs, European crisis, recessionary domestic conditions, etc. in the near term are why we have low spot rates obviously - not exactly how the General Theory of Employment, Inflation and Money would have predicted despite all this massive stimulus recently.

No, this is pretty much exactly how theory envisioned things would work.

I recall hearing all of the predictions that rates would soar when QE2 ended. Some of us said no they wouldn't. QE2 ended, and rates didn't soar. Do you think anyone who thought they would has changed their minds? Neither do I?

Recessionary domestic conditions? Yup, that's exactly what everyone on this side of the argument has feared. Not 1970's stagflation, but a good old deflationary recession/depression.

Welcom to Japan.

 

[GusLevy]

Really? How does the Fed effect a discount rate cut of 25bps? Google "Open Market Operations" and get back to me.

So cutting the discount rate to member banks or the fed funds rate for member banks is the same as buying marketable securities from the member banks?! What the hell are you talking about?

When the Fed becomes an ACTIVE market participant that is Keynesian policy and not open market policy.

 

[GusLevy]

Really? I see 10-yr TIPS inflation break-evens of 1.95%. I see 10-yr nominal yields near record lows. I see 30-yr treasury bonds at 3.3%. How is any of this reflective of a bond market fearing either inflation or significantly higher rates?

1) TIPS are priced on growth expectations and inflation expectations so obviously the low break-evens suggest high growth expectations or high inflation expectations...I'll let you decide which one the market is predicting.

2) Discounting the fact that Europe is imploding and that growth is not out of 1st gear domestically, the Fed did just buy a few $Billion or so of marketable UST, did they not?!

The bond market...ahhh, those crazy vigilantes - what active manager is actually long their benchmarks these days?!

 

[Gone4Good]

So cutting the discount rate to member banks or the fed funds rate for member banks is the same as buying marketable securities from the member banks?! What the hell are you talking about?

When the Fed becomes an ACTIVE market participant that is Keynesian policy and not open market policy.

I know Google is advanced technology, but I'll help out . . .

Open Market Operations

Open market operations (also known as OMO) is the buying and selling of government bonds on the open market by a central bank. It is the primary means of implementing monetary policy by a central bank.

 

[Gone4Good]

1) TIPS are priced on growth expectations and inflation expectations so obviously the low break-evens suggest high growth expectations or high inflation expectations...I'll let you decide which one the market is predicting.

Between the last post and this one, it is pretty clear what the problem is.

I'm done.

Have a nice day.

 

[GusLevy]

I know Google is advanced technology, but I'll help out . . .

Open Market Operations

There you go again, trying to be sneaky. Open market operations have what to do exactly with the setting of discount or fed funds (which is monetary policy)? Open market operations are by definition Keynesian policy as the Govt is directly involved in the market, no?

 

[FinanceDude]

I know Google is advanced technology, but I'll help out . . .

Open Market Operations

That was not necessary.........

 

[FinanceDude]

Proof in economics doesn't exist.

Really? I think lots of laws of economic theories have been proven over the years. I suppose the law of supply and demand is made up?

I can direct you to research, but that won't suffice. Conflicting research also exists. But if you're predicting 10% treasury rates (as you did above) and if you've been making those predictions for a long while (as you have) - you may want to reconsider the underlying premise that led you to make those predictions in view of the fact that those predictions have failed for nearly three years running.

I can't ever remember a time when a Fed chairman made a blanket statement saying the Fed would not raise rates for two years. He can play all the games he wants with keeping inflation at bay. The huge rise in commodities like oil, gold, silver, etc, along with huge increases in corn and other food sources is an indicator that inflation is occuring at some level. I would rather see a small tightening of credit now than a massive whipsaw of inflation in a couple years. But hey, even if your grocery bill is up 40% from last year, and gas is $4 a gallon, its a great time to refinance your house!!

 

[Gone4Good]

I can't ever remember a time when a Fed chairman made a blanket statement saying the Fed would not raise rates for two years.

These are not usual times, and unless you're more than eighty years old, I don't think your memory is going to include any meaningful parallel.

But also, let's not overstate what the Fed actually said:

The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

"Are likely to warrant" isn't exactly a pledge. It is a condition dependent observation.

I would rather see a small tightening of credit now than a massive whipsaw of inflation in a couple years.

Would you have not said the same thing a couple of years ago? Would that have been the correct policy decision based on what we now know? What makes us more confident today that there will be a "massive whipsaw of inflation in a couple of years?" Isn't a resumption of a deflationary deleveraging cycle also a risk?

Consider the scenario where unemployment is 9.1%, job growth has fallen to zero, GDP growth has decelerated to 1% from 2.3% two quarters ago and from 3.8% two quarters before that, and 10-yr market inflation expectations have fallen from 2.5% to 1.9%. Looking at that data, do you tighten credit? If so, what measures are you using to justify that policy move?

 

[Gone4Good]

How timely to our discussion of monetary policy in the current environment.

By way of (conservative) economist Tyler Cowen, I just now happened upon this paper discussing the causes of the 1937 recession. The author blames monetary tightening, and concludes thus:

The recession of 1937-38 occurred long ago, but it does have policy lessons for today. It suggests that, in a weak recovery, a pre-emptive monetary strike against inflation (which was very low at the time, as it is today) is capable of producing a devastating recession.

Something to consider when worrying about inflation that hasn't yet made its presence felt.

 

[FinanceDude]

But also, let's not overstate what the Fed actually said:



"Are likely to warrant" isn't exactly a pledge. It is a condition dependent observation.

You're the credit expert, so let's say we print another $2 trillion and throw it at the economy, is that going to correct our fundamental problems?

Would you have not said the same thing a couple of years ago? Would that have been the correct policy decision based on what we now know? What makes us more confident today that there will be a "massive whipsaw of inflation in a couple of years?" Isn't a resumption of a deflationary deleveraging cycle also a risk?

Because you have to pay the piper sometime?

Consider the scenario where unemployment is 9.1%, job growth has fallen to zero, GDP growth has decelerated to 1% from 2.3% two quarters ago and from 3.8% two quarters before that, and 10-yr market inflation expectations have fallen from 2.5% to 1.9%. Looking at that data, do you tighten credit? If so, what measures are you using to justify that policy move?

Do you really think 25 or 50 bp increase in the fed funds rate is going to derail everything? Also, the statistics you mention above are current, and that is AFTER all the stimulus dollars we pumped in. So, in effect, those numbers show that the stimulus had a small short-term effect but little to no long-term result. We also have the highest poverty rate since the great Depression. Another strike against the Keynesian believers........

 

[FinanceDude]

How timely to our discussion of monetary policy in the current environment.

By way of (conservative) economist Tyler Cowen, I just now happened upon this paper discussing the causes of the 1937 recession. The author blames monetary tightening, and concludes thus:

Something to consider when worrying about inflation that hasn't yet made its presence felt.

Well you youself said:

These are not usual times.

Ergo, monetary policy today is not as it was in the 1930's. So, let the Fed print money and throws 6 more QEs at the problem, yup, that should fix things.........

 

[urn2bfree]

rather than make predictions about what will happen- which we won't know because tomorrow never seems to come- I would like some explanations for stuff that already happened explained please

The claim by the anti- Keynes crowd saying government spending "never works, never has" have to explain to me how the Great Depression ended.

also please explain why Japan is wallowing economically now for 20 years.

 

[Texas Proud]

How timely to our discussion of monetary policy in the current environment.

By way of (conservative) economist Tyler Cowen, I just now happened upon this paper discussing the causes of the 1937 recession. The author blames monetary tightening, and concludes thus:



Something to consider when worrying about inflation that hasn't yet made its presence felt.

Gone4Good... I like reading your posts on this.... not that I agree with you, but yours are informed posts with information that increases my knowledge of the subject, not a knee jerk liberal stand....

Now, this is from memory and about economics that I had in college... so if I am wrong... so be it...

But I remember the prof talking about the debt of a country etc. and how they would get into trouble (this was not talking about the US in particular)... but his comment went something like... 'a country can continue to borrow money at low rates until it can't'... IOW, the switch between being able to borrow and not being able to borrow occured pretty quickly and the result was high to hyper inflation as the country 'fixed' the problem...


I don't think that spending money on the infrastructure projects etc. will do much in the short or long term to get people employed.... most are more capital cost and not labor costs....

And the fed gvmt paying for local teachers, police and firefighters is just plain wrong IMO... if the local people can not continue to employe these people, why should we pay for them

I would much rather see a targeted tax credit for hiring the long term unemployed... this is still 'spending' IMO and it requires actually hiring someone.... the negative is that the people who are short time unemployed or the people who are just looking to change jobs get hurt this way...

Just as an FYI.... I think there are a number of jobs out there that are just not filled because of lack of skills... our company of 25 people have had 5 people leave to another job and we have hired a total of 7 people this year (two starting in two weeks)... Our biggest problem was finding QUALIFIED people... who could pass a background check....

 

[Texas Proud]

rather than make predictions about what will happen- which we won't know because tomorrow never seems to come- I would like some explanations for stuff that already happened explained please

The claim by the anti- Keynes crowd saying government spending "never works, never has" have to explain to me how the Great Depression ended.

also please explain why Japan is wallowing economically now for 20 years.

The answer to your first question if pretty easy (yet, some will argue)... but it was WWII that fixed the problem...

The answer to your second.... not sure... I do not think they have addressed their banking problems... IOW, I had read that a lot of the debt on the books would have been written off in our country 20 years ago... and this causes a ripple effect... it does not make sense to me because their rate is zero, so if there were money to be made it would have happened....

I will wait to see what other answers are presented...

 

[haha]

The claim by the anti- Keynes crowd saying government spending "never works, never has" have to explain to me how the Great Depression ended.

WW2.

also please explain why Japan is wallowing economically now for 20 years.

Have you looked at how much money the Japanese have thrown at everything during the last 20 years? At their interst rates? At their gvernment debt levels?

Too bad they couldn't have started a war.

Ha

 

[GregLee]

And the fed gvmt paying for local teachers, police and firefighters is just plain wrong IMO... if the local people can not continue to employe these people, why should we pay for them

I want to see solutions for our economic problems that work, and I don't feel I need to be concerned with your peculiar ideas of right and wrong. Why should we pay for them? If it fixes our economy, isn't that reason enough?

 

[Texas Proud]

I want to see solutions for our economic problems that work, and I don't feel I need to be concerned with your peculiar ideas of right and wrong. Why should we pay for them? If it fixes our economy, isn't that reason enough?

How does it fix our economy Paying for a job that will not be there in a year or two after the fed money goes away is kicking the can down the road... what we need is jobs that will be in there after the fed money is gone... and not coming back for more.... if the locals can not pay for their gvmt jobs, it should not be a job...



Edit to add... If just paying for people to work would fix the problem, then let's hire a bunch of people to dig holes and another bunch of people to fill them in the next day... lots of work, but nothing that can be sustained without gvmt help...

 

[explanade]

How is any job sustained for years?

 

[Texas Proud]

How is any job sustained for years?

They are productive...


Which means people are willing to pay for their output.... because they can sell that output for more then it cost them...


Decided to add.... back when I worked for a mega.... the HR dept had determined that any job that was created with a permanent employee lasted 50 years... so we would hire temps if we did not think the job was sustainable....

 

[GregLee]

Edit to add... If just paying for people to work would fix the problem, then let's hire a bunch of people to dig holes and another bunch of people to fill them in the next day... lots of work, but nothing that can be sustained without gvmt help...

Okay, let's pay people to dig holes and others to fill them in. If it promises to work to move our economy in a good direction, why not do it? What do you have against it? And why should I care? I think you're letting ideology get in the way of finding working solutions.

 

[Gone4Good]

Gone4Good... I like reading your posts on this.... not that I agree with you, but yours are informed posts with information that increases my knowledge of the subject, not a knee jerk liberal stand....

Thank you. High praise, especially someone not inclined to see my point of view.

a country can continue to borrow money at low rates until it can't'... IOW, the switch between being able to borrow and not being able to borrow occurred pretty quickly and the result was high to hyper inflation as the country 'fixed' the problem...

It’s certainly true that markets can go from euphoria to panic in the blink of an eye – we’ve seen it in practice. It's also true that countries who issue debt in their own currencies have some special advantages that make them less susceptible to these kinds of panics. Having said that, credible entitlement and tax reforms can go a long way to solidifying confidence in our long-term fiscal solvency. This stuff can be done without creating a near-term fiscal drag and should be put on the front burner.

Another point worth considering is that the single biggest contributor to our current deficits isn’t anything people primarily talk about (stimulus, Bush tax cuts, wars, etc); it is recession and sub-par growth. A full-employment policy is a deficit reduction policy.