There was no stimulus
nytimes.com
nytimes.com
Government can pay one set of people to dig holes and another set of people to fill them up. Surely, it would create jobs but is this what we want?
We all agree that government needs to create 'productive' jobs otherwise there is no point in spending money.
From his article, he notes that state government laid off school teachers (the productive people) when the budget ran tight instead of firing the bureaucrats who shuffle papers. Why does he expect that if Government were to spend more money they would somehow create productive jobs and not more bureaucracies which waste our hard earned money?
Reminds me of this quote:
"The curious case of economics is to demonstrate to men, what little they know, about what they THINK they can design."
If government spends wisely then it can lead to more jobs, a better society, and a more secure future for the country. Of course, government might spend unwisely and have the opposite effect. It depends on the quality of the leadership of the government.
That an investment into the country's infrastructure might lead to misguided projects is not an effective argument against the belief that proper investments in our infrastructure will pay off.
That's the BIG 'If' right there. If wishes were horses....(fill in your own dream..)
I certainly don't think they belong on Hacker News. Any more than mises.org or reason.com or other political/economics opinion sites.
Zing.
Also, you complain about laying off school teachers while retaining bureaucrats. What exactly do you think the ratio is between the two? Because I'm guessing it's a lot higher than you expect, so given the size of the budget deficits, there wasn't a ton of choice.
I am from NJ and they are trying to build up rail tunnel to connect to NY and here's the cost comparison:
"Lotschberg Base Tunnel, world’s longest land tunnel, dug under a mountain at the peak of the world economic boom and completed in 2007; 21.5 miles long, about $4.5 billion (might be 1998 dollars, though); cost per mile: $209 million
Gotthard Base Tunnel, when completed in 2017 will become the world’s longest railway tunnel; at least 35.4 miles plus additional tunnels, shafts and passages totaling 94.3 miles, about $10.2 billion; cost per mile: $288 million
Channel Tunnel or “Chunnel”, connecting France and England, world’s longest undersea tunnel; 31.4 miles, opened 1994, cost $7.4 billion (might be 1985 dollars and the cost overruns did lead to bankruptcy); cost per mile: $235 million
Wushaoling Tunnel, traveling through four regional fault zones; 13 miles long, opened 2006, cost $845 million; cost per mile: $65 million
New Jersey-New York Mass Transit/ARC Tunnel, scheduled for completion in 2018; 3.5 miles long, cost $11-14 billion; cost per mile: $3.7 billion (I used $13 billion for this calculation)"
From http://blogs.law.harvard.edu/philg/2010/10/08/new-jerseys-ca...
Exactly how many jobs do you think infrastructure jobs will create? And what about all those people who are not in infrastructure sector? What about the school teachers which he keeps talking about?
Also, how does increasing social safety net CREATE new jobs? You are simply handing out money.
1. http://www.voxeu.org/index.php?q=node/1541
2. http://www.nber.org/papers/w10784
Whichever interpretation one places on it, it strikes me that the arguments for against payments are fundamentally identical to those regarding tax cuts.
A quick google search suggests the average household income of $70k in greater LA. Treating low income households as earning $15k (an overestimate) and treating all other households as earning $70k (an underestimate, since low income households are excluded), we find that high income households spend 2x more as a result of stimulus. (Rough numbers, but it's the best I can do. They don't provide all necessary data to get precise numbers.)
Link 2 is gated, I can't get in.
See also this paper, which shows the same effect happened in the current recession.
http://papers.nber.org/papers/w16246
(Ungated: http://ow.ly/2Fx1i )
Apples and oranges. Yes, they're all train tunnels, but the Lotschberg and Gotthard tunnels were/are being built using tunnel boring techniques in relative remote areas. ARC is going to require tunnel boring and submerged tunnel techniques in one of the densest and busiest city and waterway in the world (not to mention that the Lotschberg tunnel is single-tracked).
Exactly how many jobs do you think infrastructure jobs will create? And what about all those people who are not in infrastructure sector?
Large infrastructure projects suck in people from a variety of sectors including construction, engineering, architecture, IT, GIS, environmental, archaeological/historical, construction materials, office supply, delivery services, transportation, PR/media, law, police & fire, security, retail, and food preparation (and that's off the top of my head).
What about the school teachers which he keeps talking about?
Again, infrastructure projects get money moving again, which increases tax receipts and provides more budget for essentials like schools.
"Tyler: Thanks for the insider’s perspective on this. You imply that this new tunnel is an exceptionally challenging project, more challenging than the Swiss tunnels, for example, and hence the staggering cost. I’m having a hard time understanding this. The NJ/NY tunnel is billed as necessary to replace and/or augment a “100-year-old” existing rail tunnel. Page 6 of http://www.arctunnel.com/pdf/deis/4_1_0013.pdf makes it look like tunneling under the Hudson means going through sand and mud. This was apparently well within the capabilities of civil engineering circa 1910.
http://en.wikipedia.org/wiki/Gotthard_Base_Tunnel says that the maximum overburden of the new Swiss tunnel is 2500m, i.e., there are 8200′ of rocks pressing down on the tunnel (generates a lot of water pressure if nothing else). http://www.swissinfo.ch/eng/Specials/Gotthard_base_tunnel/Th... talks about the granite that they are tunneling through in places."
http://blogs.law.harvard.edu/philg/2010/10/08/new-jerseys-ca...
In any case, the money paid to people for infrastructure, results in those people spending the money, that (a) helps lift the economy (b) increases tax revenue, which results in more state/local funds to hire teachers.
What's your best guess about the ratio?
Total Employees: 135,000 (from: http://schools.nyc.gov/Employees/default.htm) Teachers: 80,000 (from http://en.wikipedia.org/wiki/New_York_City_Department_of_Edu...)
40% bureaucrats. That's Forty Percent!
And for Federal Department of Education, look at the org chart:
http://upload.wikimedia.org/wikipedia/commons/6/6f/Ed_gl_org...
From the org chart,
WH Initiative on Historically Black Colls & Univs Staff - What the heck is that?
International Affairs Office - For what?
And there are two more offices, Office of the Under Secretary and Office of the Deputy Secretary! This is worse org structure than I would have imagined at a Fortune 500. [BTW, this does look like successful job creation to me, though I am not sure about the value add]
And despite having the highest spending per student, everyone still complaints about the US public school system.
In closing, Sir, you simply have too much faith in government's ability to spend money wisely.
You seem to be assuming that there are only two types of employees in NYC schools - teachers and bureaucrats. There are in fact many types: teachers and bureaucrats sure, but also janitors & maintenance staff, security, IT staff, librarians, health staff, sports coaches, etc.
WH Initiative on Historically Black Colls & Univs Staff - What the heck is that?
http://www2.ed.gov/about/inits/list/whhbcu/edlite-index.html
International Affairs Office - For what?
http://www2.ed.gov/about/inits/ed/internationaled/index.html
To be honest, I don't know the breakdown of the 135k numbers. Could you please find the breakdown for me? Also, why is it so hard for me to find this information? Why can I not see a simple, easy to see employees and budget numbers.
E.g.
Teachers: 85,000
Officers : 30,000
IT Staff: 15,000
Others: 10,000.
Total: 135,000
Expenses:
Teachers Salary: 6200 million
Other Salary: 3000 million
Infrastructure: 5000 million
Others: 4000 million
Total: 18.5 Billion
Total Budget Amount from http://schools.nyc.gov/AboutUs/funding/overview/default.htm
I could not find that information anywhere. I would really appreciate if anyone can find that information for me OR give me some pointers about where I can find it. I think once everyone gets to see those numbers, they will change their mind about government spending. I am willing to spend my own personal time to find the breakdown of the numbers but I am not sure where I should start.
And about WH Initiative, thank you for linking to that page. From the link to Budget on that page:
They have a budget (http://www2.ed.gov/about/overview/budget/budget10/summary/ed...) of half a billion dollars with line items like:
Strengthening Institutions: 80 million
Strengthening Historically Black colleges and universities: 238 million
Other line items...
Total: 588 million.
So the main initiative (Historically Black colleges and universities) takes up 40% (238 million out of 588 million) of the budget. Where does the other 60% go? Who approved it? And if certain colleges were 'historically' black, why do we have to spend 240 million in 2009 to strengthen them?
And here's my biggest concern: How do you evaluate if you are getting worth for your 538 millions? There is no way you can evaluate how successful someone is at 'Strengthening' something, anything.
All of them? Probably not. Some of them? I'd be shocked if they didn't - our much smaller urban school system certainly does, and they are up to the eyeballs in cleaning up messes. I'd presume that NYC's janitorial staff would be that much busier.
Could you please find the breakdown for me?
Here you go: https://www.nycenet.edu/offices/d_chanc_oper/budget/exp01/y2...
And about WH Initiative, [..] Where does the other 60% go?
The other line items - "Strengthening Alaska Native and Native Hawaiian-serving Institutions," "Strengthening Asian American and Native American Pacific Islander-serving Institutions," "Strengthening Native American-serving nontribal institutions," etc (summing up all those line items gives you $588.9 million)
Who approved it?
Presumably Congress.
And if certain colleges were 'historically' black, why do we have to spend 240 million in 2009 to strengthen them?
Huh?
And here's my biggest concern: How do you evaluate if you are getting worth for your 538 millions?
Having been on the ass-end of an FAR audit, I can guarantee they've found some metric to evaluate the results of the spending.
Deleted comment
Absolutely they do. Most (all?) schools in NYC have (at least) a full-time custodial engineer and a full-time janitor. And they do a heck of a lot more than mop the floor.
>Why can I not see a simple, easy to see employees and budget numbers.
Because the NYC Dept of Ed. is one of the largest and most complicated bureaucracies anywhere, simply by virtue of what it does. There are more students in the NYC public school system than there are people in almost every other major city in America. Add to this the fact that each principal has a fair amount of autonomy in how the school's budget is spent, and breaking out costs system wide becomes a much harder problem than it at first sounds.
I would also point out that besides janitors, IT staff, etc, there are also a ton of staff who work directly with students but still aren't teachers: para-professionals, social workers, guidance counselors, the list goes on and on.
How about some historical data on this ratio? (I'd agree that the security needs may be higher now, but IT is supposed to reduce the number of people needed and the others should be flat.)
Historical data may not be of much use given how much schools have changed in the last 20-30 years with mainlining, foreign-student integration, increases in poverty, ADA, etc.
IT is supposed to reduce the number of people needed
Heh. IME I've always seen the opposite - computers were supposed to reduce the number of people needed for a task but small business need to hire an IT guy to take care of the system, thereby increasing the payroll.
the others should be flat
Only if you assume that all else stayed the same, and things clearly haven't.
The recent mainlining of the "challenged" is just reversing a fairly recent trend towards seggregating them.
Poverty hasn't increased, it has decreased - we've moved the line and we're providing much more assistance that we don't count.
> Heh. IME I've always seen the opposite - computers were supposed to reduce the number of people needed for a task but small business need to hire an IT guy to take care of the system, thereby increasing the payroll.
The NYC school district isn't a small biz.
But that's a huge part of the problem with his arguments (and that of many others sharing the same political views). If we gave this {money|power} to the government, they could do these wonderful things.
Maybe they could do wonderful things, but by-and-large, they don't. They find some way to mess up the details. Perhaps they'll simply be mistaken about the end effects; or maybe they'll implement it badly; at best, a few years down the line, regulatory capture will ensure that the good that was intended is turned around, and the program is turned into a tool for the establishment's rent-seeking, rather than of benefit primarily to the people.
I'm sure I sound cynical and jaded, but I challenge you to cite something -- anything -- that the government has done, that's more than a couple of years old that's an unqualified success.
For example, gov't will build a bike trail. The private sector is a lot less inclined to, unless the trail goes through shopping center or is a toll trail.
There's just different types of motivations. And in a recession where ROI is hard to get, gov't can be more effective in putting money back in the hands of people who will spend it.
The other problem with aggregate metrics is that no matter how well you craft them they ignore motivation - for example, I can conceive of situations where high unemployment isn't so bad. Call me a traditionalist, but maybe our society would be better if family units could afford to have one parent stay at home and take care of the children, or the elderly, hell, maybe even pitch in to help take care of kids of single parents in a co-op kind of arrangement.
(to be followed by trite retort about how unemployment is measured)
False. Middle and upper middle class individuals [1] are the most likely to spend, the poor are least likely to spend.
http://www-personal.umich.edu/~shapiro/TaxRebates.pdf
[1] The actual rich are not separated out by this study, the highest cutoff is $70k/year+ income. This group, and the $50-70k/year group are the most likely to spend stimulus money.
[edit: fixed link. My bad. Thanks solutionyogi. Weird, 2 upvotes when I'm providing no evidence whatsoever. Herd behavior in politics articles, I guess.]
Economy goes into a depression, so there's stimulus, to give jobs to either government positions or favored private entities. The requisite money printing causes inflation. Inflation causes the cost of living and operating businesses to go up, which either sends jobs overseas (prompting government to inflate more to create a better trade balance) or corporations (esp. small businesses which are more sensitive to price indices and less likely to get stimulus) to close shop. If jobs are lost, government must inflate more to pay for new jobs or create more stimulus.
Rinse, wash, repeat.
All things being equal, I'd rather have a deflationary spiral, which can have a levelling effect - as inflation erodes saving power - hitting the poor far far harder than the rich.
Additional government stimulus has little to do with it at this point, that will only come into play when inflation actually hits. When things change and people become more tolerant of risk and less tolerant of low returns, all the government deficits that have been accumulated will become a huge issue. When lenders to the US government start demanding 5%+ on their money, the interest payments on our debt will skyrocket.
As that proportion increases (that is, how much of government revenue is spent just on paying for past debt, rather than anything productive), the likelihood of some threshold being crossed increases. But until that point, the government is able to sweep it all under the rug.
If you depend on a fixed nominal income, then inflation is bad for you, since the prices of everything around you go up while your income does not.
I think poor and lower-middle-class people are more likely to be in the first group than the second.
Let's say you're poor, and spending 90% of your income on day to day needs. Versus if you're rich, and spending 20% of your income on day to day needs.
a 10% inflation (absent corresponding wage inflation - which lags, but I'll omit it to keep things simple, the numbers have been rounded to make the math easy anyways) takes the poor person to 99% day to day and the rich person to 22% day to day.
That represents a 90% decrease in ability to save or pay off debt. Versus the rich person who has lost 2.5% ability to save or pay off debt.
Now. With a 10% inflation, your real debt burden has gone down 10%. Would you trade a 10% loss of debt burden for a 90% loss of ability to pay off the debt? I would not.
Who is it that has promulgated this myth that inflation is good for poor people? I keep hearing it everywhere, and it appalls me that no one has really stopped to think about it.
If, for example, I spend 30% of my income on a fixed-rate mortgage, and both wages and prices go up by 10% across the board, then I would end up spending only 27% of my inflated income on the mortgage, and the nominal value of my house would go up by 10%.
I think my argument is sound. All I'm saying is that the blanket statement that inflation is beneficial to poor people is flat out wrong. Consider also that poor people aren't getting fixed rate mortgages (more like variable rate ones - which are worse) and aren't investing in stocks or bonds which at least have a chance of beating inflation (if you play it right and get out before crashes). If you want to critique my argument, plug in real numbers and show me I'm wrong in our current situation. I believe that the numbers will hold up in my favor.
I read, in a reliable journal, that Kunta Kinte, was accepted at Harvard for a PhD program. He turned it down and was quoted as saying, "There's only so much you can ask a man to do for nothing in return."
It doesn't just keep things simple, it changes things. You can't leave out wage inflation. Of course inflation is bad if your wages don't keep up, but what if they do? That's the actual question. Inflation also lags, printing money doesn't instantly create inflation, it takes time for the market to adjust to the new circulation.
http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...
Also please consider that I'm not taking into account the mechanism of inflation, just inflation as a policy. I don't care if it's done by printing money or by relaxing reserve requirements, or by smelting impurities into the gold.
Consider this: With continual slight inflation, in order to keep up, society is pressured to keep expanding exponentially. Well, I'm sorry to tell you son, but we live on a finite planet, and exponential expansion at some point is going to hit a limit.
> With continual slight inflation, in order to keep up, society is pressured to keep expanding exponentially.
True, but this assumes no corrections, like the one we're currently in. Ideally there'd be no inflation or deflation, but that's just not practical as wealth is not fixed nor can the money supply be. So the balancing act either tries to stay centered or slightly to one side or the other.
> continual slight deflation is the best option.
Deflation increases the value of my debt load putting me in deeper and deeper and reduces the value of my assets; how is that good? Deflation increases the value of saved cash. If anything, that sounds way worse for the poor than slight inflation. If I'm rich I just keep all my wealth in cash and steal from the poor via deflation.
Under continual inflation, I can't do that, I have to convert my wealth into hopefully appreciating assets-and I could easily bet wrong-and the poor have continually decreasing debt as long salaries keep up with inflation. Sounds like a better deal to me.
> Deflation is the natural order of things,
That's not an argument, being natural doesn't equal being good.
> Anything more inflationary than natural deflation (of course society will go through occasional inflationary bouts) is effectively stealing the fruits of societal progress from the poor, and reappropriating it to the rich or politically connected.
You assert that, but I don't see any proof or evidence of it. You've shown me why you think inflation is bad, but now why you think deflation is good; you just assert it is.
The value of your assets is untouched, the value of your assets relative to money goes down. There's nothing wrong with that. Who told you to go into debt in the first place? Islamic Finance, for example, doesn't allow for interest bearing fractional reserve debt, and Indonesia largely rode out the most recent economic crisis? I think with modest deflation, borrowing will not cease, but will largely be confined to collateral-backed loans (like car and home loans) and investment loans (like a loan to start out a second restaurant where the first succeeded). Revolving debt will disappear, and I don't really have much of a problem with that.
I'm also unclear as to how deflation steals from the poor. If I am rich, and spending 20% of my income on day to day expenses, and there's 10% deflation, I will be spending 18% of my funds on day to day. That's a 2.5% increase in discretionary spending/investing power (80%-82%). If I'm poor, and spending 90% of my income on day-to-day expenses and there's 10% deflation, I will then be spending 81% of my income on day to day expenses. That is a 90% increase in my discretionary spending/investing power (10%-19%). Sounds to me like a good deal for the poor.
> Under continual inflation, I can't do that, I have to convert my wealth into hopefully appreciating assets-and I could easily bet wrong-and the poor have continually decreasing debt as long salaries keep up with inflation. Sounds like a better deal to me.
1) any situation where you feel like "have" to do something is generally a red flag, if you ask me.
2) Who told the poor to go into debt in the first place? Under continual inflation, you encourage financiers to seek out more and more predatory loans (so they can make money off of the delta-interest and exert the strong arm of the law against the poor to wring the last of their money out). In a deflationary environment, instead of having to borrow money, from ever more-centralized banks, and when people get in trouble you will see them seek help from decentralized, local, institutions, like families, churches, charities, and mutual aid societies. This naturally limits the spread of risk. In a debt-based society, a catastrophe (like say, katrina, or say a meteor hits NYC) ripples throughout the debt network, as the victims are unable to repay their immediate lenders, whose power to pay back their lenders also gets hurt, and so on like dominoes. In a savings based society, the damage done by a catastrophe is largely a sunk cost.
3) I went over the mathematics of how the endebted poor are not helped by inflation many, many, posts up. The gist of it is the erosion of amortization power far far outstrips any benefit gained from loss of real debt value... And the reason for it is:
>as long salaries keep up with inflation
They don't.
>You assert that, but I don't see any proof or evidence of it.
Well, the two mechanisms of inflation are printing money (which sends money to the politically connected) and debt expansion (by lowering fed rates or by loosening reserve requirements) which sends money to the financiers, or rich people.
That's my point. It's not the naturalness of deflation that makes it good, but the fact that inflation is a policy choice with bad results that makes inflation bad. It is possible to have natural, secular inflation, if population expands faster than technology can accomodate feeding mouths and housing the new people - and I'm more neutral on that situation.
But a side effect of secular, natural, deflation is that we live in a savings-based society, which is more stable. I consider this to be good. There will also be a natural redistribution of wealth to the poor. I consider this to be fine. Artificial deflation can be catastrophic, and even kleptocratic, as happened just prior to the great depression as well as in argentina during the 70s.
If you can't see why deflation is 'natural' consider any technology where government has not instituted price controls. You would be hard pressed to argue that there hasn't been "price deflation" - a phrase I cringe to use because it's a malignment of the concept - in computers, TVs, cars, voluntary medical procedures like lasik or breast implantation...
Which is a depreciating asset. We trade in money, the value in money has gone down, I've lost money.
> Who told you to go into debt in the first place?
Irrelevant. We're talking about people, and people are not rational actors, they are in debt, so any solution needs to accept that as a fact.
I can see now that you're not talking about our economy, but some idealised economy you've envisioned.
> In a deflationary environment, instead of having to borrow money, from ever more-centralized banks, and when people get in trouble you will see them seek help from decentralized, local, institutions, like families, churches, charities, and mutual aid societies. This naturally limits the spread of risk.
It also limits the availability of help; that approach doesn't scale as well as debt does to all classes of people.
> In a debt-based society, a catastrophe (like say, katrina, or say a meteor hits NYC) ripples throughout the debt network, as the victims are unable to repay their immediate lenders, whose power to pay back their lenders also gets hurt. In a savings based society, the damage done by a catastrophe is a sunk cost.
We don't have a savings based society, and we're unlikely to, so this is just intellectual masturbation; the world runs on debt and credit now, we're not suddenly going to go back no matter what happens.
>> as long salaries keep up with inflation > They don't
They do, if you lose the idea of staying in one place too long. Change jobs every few years and you'll have no problem keeping up with inflation.
> I went over the mathematics of how the endebted poor are not helped by inflation many, many, posts up.
That's not relevant if they are hurt by deflation even more.
> I'm also unclear as to how deflation steals from the poor. If I am rich, and spending 20% of my income on day to day expenses, and there's 10% deflation, I will be spending 18% of my funds on day to day. That's a 2.5% increase in discretionary spending/investing power (80%-82%). If I'm poor, and spending 90% of my income on day-to-day expenses and there's 10% deflation, I will then be spending 81% of my income on day to day expenses. That is a 90% increase in my discretionary spending/investing power (10%-19%). Sounds to me like a good deal for the poor.
Because you continue to ignore debt. Your arguments assume ideal conditions rather than actual conditions. In this country, in this time, most people are carrying a good amount of debt and deflation hurts them because of that debt. You can't fix that by saying they shouldn't have borrowed in the first place.
> If I'm poor, and spending 90% of my income on day-to-day expenses and there's 10% deflation, I will then be spending 81% of my income on day to day expenses. That is a 90% increase in my discretionary spending/investing power (10%-19%). Sounds to me like a good deal for the poor.
It's also a good example of how to lie with statistics. For a 50k salary, my expenses dropped 4500 a year, nice, but my 200k house just went 20k in the hole as it's now worth only 180k but I still owe 200k. I can throw the entire 4500 savings at paying down the debt, but the net effect is that I'm still down 15.5k; ouch. Debt and deflation do not mix well.
It looks all fine when you're just talking percentages, but plug in actual numbers and the size of the debt load makes a big difference; it's like leverage in reverse, and it's specifically those on lower incomes who will suffer the most as they're the ones who's debt load is going to kill them the most with deflation.
If you're just saying we shouldn't be a debt based society, well ok, I agree that'd be nice, but it's also a fairy tale, because we are a debt based society. And in a debt based society-which isn't going to change-continual inflation is the best option.
Actually, I'm not, because last I checked, debt was amortized in nominal terms.
>It's also a good example of how to lie with statistics. For a 50k salary, my expenses dropped 4500 a year, nice, but my 200k house just went 20k in the hole as it's now worth only 180k but I still owe 200k. I can throw the entire 4500 savings at paying down the debt, but the net effect is that I'm still down 15.5k; ouch. Debt and deflation do not mix well.
What? No. The assumption there is that you are going to resell the house. If your plan is to keep it, then your amortization is still done in nominal terms. So what, (I know home mortgages are usually 30 years but let's make it 20 with a fixed 5% interest so the math is easy), your annual payment is gonna be 20k without deflation and 20k with deflation. Backtracking your math... The person was spending 45k on day to day expenses, so each year was going in the hole (45 + 20 - 50) = -15k per the first year. The next year the day to day goes up to 49.5, so 49.5 + 20 - 50 = -19.5k. Maybe minus a smidgen on the interest... Too lazy to figure it out. Nonetheless it's getting worse.
With deflation, the first year the person is going -15 k in the hole that first year, and the next year (41.5 + 20 - 50) = -11.5k in the hole the next year. In a few years the person has a net positive cashflow and that debt (or savings loss) that they accumulated in the first two years will be smoothed over pretty fast.
With inflation, why the hell did someone sell that 200k house to the person, unless there was a crazy idea that the nominal value of the house would monotonically go up at a rate that beats inflation.
With deflation, it was probably still a stupid sale, but well at least there's a chance s/he'll pull out of it, if they don't sell the house from under, as indeed the nominal value has gone down. I feel like home tenancy (versus default, eviction, and turnover) creates for a stabler society, and I'm all for that.
Now, if I made a mistake in my math somewhere, let me know.
>And in a debt based society-which isn't going to change-continual inflation is the best option.
You haven't convinced me of that. I think continual inflation is the best option if you're a banker. Or a politician. The math I've written up above bears out the notion that deflation is good, even for those who are in debt, unless you are really rearing to sell your assets and jump like a hyper meerkat on arbitrage opportunities. There are reasons why deflation is considered 'bad', namely that it appears to coincide with the loss of jobs, and I think that's mostly because the broad-stroke reason why jobs are lost is because of technology and because technology causes deflation, and indeed, deflation is the mechanism by which technology causes the loss of jobs.
https://spreadsheets.google.com/ccc?key=0AnuVSPZl-I22dHBiRmx...
In the deflation scenario, even though the house has lost nominal value from $200k to $27k, our family spent only a total of 8 years in debt and, amazingly, at the outset of 20 years accumulated 2 millions dollars in real (year 0) value.
In the inflation scenario, although the house has gained nominal value from $200k to $1M, our family spent all those years in debt. Towards the last 8 years, the appreciating nominal value of the home was no longer able to suffice as an investment to counter the loss of spending power, and the family wound up in the hole... 100k in (year 0) value. There was only one year that cashing out on the house would have made nominal sense (year 1) and even so, that represented a net real value loss.
Hell, I was a nice banker and didn't charge interest on the bank debt.
(update: I threw in wage inflation, too, lagged it behind half a year). Now things are looking a bit better for our scrappy family and they come out at the end with a real net worth that's only down about 9k in year zero dollars. But at least they're not in the hole! Of course, that 9k can also be thought as 54k, or probably better, a quarter of the the year's wage.
If I work in a widget factory and the price of widgets goes down because of deflation, while my nominal wages remain constant, then my wages as a share of that price goes up. That situation can’t continue for very long. The factory’s shareholders want a real return on their investment, especially since they could just cash in their stock, put the cash under a mattress, and wait for the price of everything to go down further. If the factory itself is in debt, the creditors will be demanding the same nominal payment as before, further squeezing the shareholders.
So either I have to accept a cut in my nominal wages, or I have to make more widgets per hour for the same nominal wage, or I get laid off. And when I and lots of people like me have less money to spend, the people who manufacture all the things that we buy have to reduce their prices further, thus increasing the squeeze on their employees’ wages, etc., etc.
You also have to consider why the price of widgets is going down because of deflation. If it's going down because the widget is obsolete relative to other technologies, then either the manufacturer is beating margins by improving efficiencies (and growing the scale of the company), leaving it okay for the employee to be paid the same nominal wage... Or else, yes, the person will lose a job. But if it's the case that the manufacturer isn't able to keep up with developing technology, then not even inflation will help that person keep a job, or at the worst, it's just keeping a person in a job that is inefficient for the economy and society.
All this hoarding stuff is nonsense. If people keep hoarding money, then in order to compete with saving, (absent a centrally-decided interest rate) banks have to issue loans at lower interest rates... Which, of course, expands the money supply, and creates competing inflation.
http://en.wikipedia.org/wiki/Panic_of_1873
The fear of deflation, however, is misguided and I think founded on a deception. I'm not sure the deception is intentional or not.... but politicians certainly benefit from it because it allows them to get away with more inflation.
Deflation can happen in two ways. The first way is that there simply are no customers out there and so businesses start lowering prices desperately to cut inventory because of inventory carrying cost. In this age of just in time manufacturing, there is less of a risk of this... This is a bad situation and we can call it desperate deflation. But this kind of deflation is due to a serious structural problem in the economy, and it is not solved by monetary inflation. Keynes believed it could be, helped with short periods of monetary inflation, but nobody is actually following keynes prescription (Which calls for the government not running deficits and for the inflation to be absorbed when good times come back, which is effectively monetary deflation in good times.) Anyway, this "Bad deflation" is very rare, and is a symptom of another problem.
The other form of deflation is the increasing purchasing power of money. This can happen in a robust economy, in fact it often happens in a robust economy. Imagine a country on the gold standard. The economy is growing well, but gold is coming out of the ground slowly (which it always does) so monetary inflation is low, while GDP growth is high. This means each year a given amount of gold will buy more stuff.
Businesses make more profits, even as they lower prices, consumers can buy more for a given amount of gold, and the economy continues to grow, in large part because prices are going down.
This is a good thing, and in fact this is the natural state of affairs in a free market, because productivity increases are always being created and technological advances are always being discovered, which means every decade the efficiency of the economy should be going up creating an increase in purchasing power.
Governments, on the other hand, operate by promising programs to people in exchange for getting power. These programs are often not well managed because they are not subject to market forces. Further, since government has turnover of less than a decade, there are constantly new faces who want to make a name for themselves with new programs.
Goernment thus has a strong incentive to inflate (because taxation is politically dangerous) to pay for these ever increasing new programs (they can't cut old programs because that's as politically dangerous as taxation.)
Thus the governments spokesmodels (like Paul Krugman) are always pushing the idea that inflation is good and deflation is dangerous. Though it isn't difficult to see why the opposite is true.
We get inflation only if taxes aren't at a later date raised to pay for the new spending. Right now we have very low borrowing costs as a nation. Therefore, if we are ever going to shore up our infrastructure now is the time to do it. It has the added benefit of employing lots of people and causing a stimulus to the economy. Taxes on the wealthy are at very low rates right now and there is no reason to suspect that regressing to the mean of tax rates on the wealthy will have a detrimental effect on the economy in the future.
I generally agree with you, and yes, Krugman-the-columnist is an ass (as opposed to Krugman-the-economist of days gone by).
However, there is something (small) to be said for inflation.
Behavior econometrics shows us that in some areas, our economic behavior is not what rationality would suggest. One of these areas is around wages: we expect upward movement of wages, and won't tolerate nominal decreases, even when buying power is increasing so that real wages are increasing.
Maintaining a constant low level of inflation allows us to create an illusion that counters the irrational behavior, so that employers are still able to exercise a small degree of control over wages, at least over longer periods.
I guess, as a libertarian, my position is that irrational behavior is just that. It's going to happen, there's no reason to believe that government is going to be any less irrational than individuals, and on the balance, giving people freedom (to screw up, too) is more important, more sustainable, than imposing order and control over the populace.
One thing that opened my eyes was this notion that a lot of what we do is totally a misjudgement of probabilities. If you have a game that 99.9999% of the time makes you a 100% return and .0001% of the time puts gives you a negative 10^1000 fold loss, you can wind up severe sample biasing that leads you to think that you're churning out awesome returns, when the equilibrium position is way bad.
Of course, the solution that we as a society seem to have been headed toward is centralization of responsibility and insurance - which, IMO, has the potential to put everyone in the hole - when, instead we should possibly be embracing solutions of insulating risk and decentralizing, personalizing responsibility, combined with, you know, forgiveness. Seems to me like a more sustainable, humanizing way to handle things.
I'm also a libertarian, so philosophically I agree with you.
I'm also a bit of an armchair economist, and here I was just noting what economic theory tells us.
To be sure, Milton Friedman would tell us that not only isn't inflation not fooling anyone, but it also represents a real transfer of funds into the hands of those who manage to first get their hands onto "new" dollars.
On the whole, we are irrational creatures most of the time. Humans are easily manipulated and duped. None of us is an expert in everything and so proper regulation of markets is necessary.
Do you have any basis for a belief that the government will make better decisions than the people? Part of any answer to this must be an explanation about how those regular people, subject to being "easily manipulated and duped", will wise up and do the right thing once put in power.
Second, it should be obvious to members of a community such as HN, that progress demands the freedom for people to try out new solutions, risking failure. Protecting us from this will, at best, impede progress.
One potential reason this might be true (which I point out more to observe than to advocate) is that the rules and proceedings of regulatory agencies are systematic, and tend to outlast individuals' terms of office. Agency rules generally require prior public consultation, are subject to the scrutiny of judicial review, and so forth. This rulemaking process exists to bring some objectivity to the subject of policy.
Of course, it fails frequently or we'd never have any bad policies to worry about. The process has inherent shortcomings; but then again, so do all the alternatives. There are many examples of business disregarding externalities leading to entirely avoidable tragedies of the commons.
Well both of your examples are ones where one person is harming another. I mean if you wanted to argue that government prevents people from "harming" themselves, like assisted suicide or drug use, you might have an argument, but I think you will find the libertarian position to be rather consistent on those matters. (And also very tolerant of individuals stepping in to help each other out).
If enough bad economic decisions are allowed to take place it can affect the whole country. A society has an interest in preventing such a thing from occurring. It's one of the roles of government.
How about not having rules in place that created the mess? Why, for example, was the interest rate so low, making it artificially easy to take on mortgages? Why were home mortgage payments tax-deductible?
You think that these economic decisions are made in a vacuum, but you really ought to look in to the political decisions that were made to push people en masse into a series of economic moves that were probably unsustainable. The notion that the most recent economic crises were a failure of the market is completely laughable.
Ironically, it's exactly the notion that government is supposed to "prevent bad economic decisions" that has resulted in centralization of economy (via the fed, via subsidization of bank risk, by subsidization -i.e. stealth corporate welfare- of retirements through 401ks, IRAs) - so that instead of a few bad actors getting punished for poor choices, risk is socialized and we all have to bail out the rich guys.
It would be a bad decision on my part if I knowingly made unsafe products and sold them to people. Government does its best to prevent me from making this bad decision.
1. How does a government official become wiser and less susceptible to manipulation or being duped? How is it that's he's got an edge over my decision-making skills?
2. If government is acting as a nanny, how can we prevent that from becoming an obstacle toward innovation (which is just another word for "risky behavior")?
Trite and silly replies don't make these concerns go away.
There are lots of examples of where government has stepped in to regulate affairs to protect people from making bad or ill informed decisions. Before seatbelt use became popular or considered by the population as necessary government forced car manufacturers to put them in cars even though it increased the price of a car.
Most people can't make an informed decision on what constitutes safe food. Consumers rely on government to have adequate standards that are enforced. Without such standards people would make bad decisions.
Bullshit. What government agency prevents us from having exploding lightbulbs. There isn't one. It's done by Underwriter's Laboratory. There is no good reason why we can't have an Underwriter's laboratory for food. Or an underwriter's laboratory for medicines, instead of the FDA. In fact we are seeing en mass rebellion against the USDA (particularly in the organic-certification area) where the USDA is seen as basically an agent that prevents upstart food producers and entrenches big-food interests that can afford to pay for extremely expensive certification.
You know what, the FDA screws up big time, too. Remember how we had an e coli outbreak? So what are you going to do when 'government standards' are 'inadequate'?
FDA does screw up big time. It's what happens when their efforts at enforcement are hampered. It's what happens when regulatory capture occurs. It's an example of the necessity for a functioning government that looks after the interests of society.
Government isn't 'the regulator of last resort'. In this case, it's suppressing the ability for private monitoring agencies to come into play. Except for a few corner cases, I think it would be incredibly difficult to create a competing, private monitoring agency. Why? Because government regulatory agencies are privy to the money spigot. They can print their own money.
And the notion that there will be zero tolerance for regulatory failure is absurd. It's going to happen. Private or not. Here's the difference. If there's a scandal in a private monitoring agency, then there's a good chance that word will spread and nobody will trust it anymore. And someone else will step in. Look man, government can get away with slapping a gps device on a kid car just because he's egyptian - a blatant violation of the rules that it itself wrote. Even after that, nobody is calling for the FBI to be disbanded.
I won't dispute that some effect along these lines might have been measured. But please realize this is a reaction (irrational or not) to the state of affairs at the time the reaction had.
In a deflationary environment, the reaction may well be quite different. And in fact, I expect it would.
What you've identified is a reaction to inflation-- that is, people knowing they need to keep getting more money to keep even-- that isn't irrational at all.
But it doesn't justify inflation, or show that inflation is good.
In a deflationary environment, I'm pretty sure this effect would not be there.
They are not a very useful form of "stimulus," and it wouldn't make any sense to judge the efficacy of tax cuts, or that of government spending on jobs, based on the results of TARP.
They are also government spending which the NYT article claims hasn't happened. The exact statement in the article is:
"Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending."
The fact of the matter is that the stimulus money went exactly where it was intended. Government works programs and questionable "initiatives" (Unless those signs I see every 10 miles are made up).
It just didn't work so the new tactic is to claim "It wasn't enough" or "It wasn't actually spent".
Funding safety net programs is not really a "misuse of funds;" it was built into the legislation. (Maybe it's a poor use of funds, but that's Congress's fault more than the White House's.)
If you want specifics on how money was distributed, just go to the source: http://www.recovery.gov/ It looks like a bit more than a third of the money allocated actually went toward "contracts, grants, and loans," which is the category that one would expect to be creating jobs.
His current argument is that there has been no recent expansion in federal government spending. His logic is that federal money given to states should not be included in federal spending figures. Too bad the debt holder won't agree.
His argument (very plainly written in the article): there was no stimulus. The exact quote is, "There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need."
He then provides details: net government employment has fallen. There haven't been any big infrastructure projects. State spending has fallen severely. Much of the stimulus spending was tax cuts, which probably don't affect employment much and we know well to not have the highest employment multipliers of all possible spending choices. He carefully differentiates between federal and government spending.
So, to summarize: you misstate his argument. You misstate the supporting details. Either you can't read or you didn't understand anything he wrote. Who exactly isn't serious?
Oh, I suppose I should disclose that my research job at the University of Maryland was underwritten with ARRA money? I suppose I'm a bit of a hypocrite, then, for taking the job when I was opposed to ARRA, but when I signed on to the job I really did think that the project was funded by the american cancer society, and I felt too obligated to the boss and too much in need of a salary to give it up when I found out the truth.
The problem is that Krugman is counting 'stimulus' by number of jobs. Well, the fact of the matter is that the money was spent, leaving it to do its horrible inflationary magic. Throwing money at a solution can either create jobs, or pad the salary of people who already have money. Now, if I were an employer, and got a fat wad of cash to do X, would I really distribute the money to create jobs? Or circle the wagons and give myself and my current employees a pay hike in anticipation of the inflation that's coming down the pike?
Stimulus or no stimulus, cone zones are a part of ongoing maintenance, emergency repair, or infrastructure expansion. We could outlaw all construction, but in 10 years or so, you won't have any roads left to drive on.
(isn't there a reason why trolleys became obsolete in the mid-20th
Yes: http://en.wikipedia.org/wiki/Great_American_streetcar_scanda...
"Now, if I were an employer, and got a fat wad of cash to do X, would I really distribute the money to create jobs?" That depends on the situation and climate you are in. You would spend the money to create jobs by expanding your business if it made sense to do so.
No doubt. Government spending and debt expansion has up till now largely been counterbalanced by private debt contraction. Also, as a poster below explained, it takes time for money expansion to manifest itself as increased prices. (hence my statement "coming down the pike").
Of course, private debt contraction will become increasingly harder as inflationary pressures raise the cost of living and make borrowing money (apparently) less painful over the short-and-medium runs.
Not so. Inflation-adjusted spending at the federal level rose 29 percent between 2007 and 2009. The White House Office of Management & Budget estimates that this spending will rise another six percent in 2010 and three percent in 2011 -- meaning that, since 2007, Uncle Sam's spending is on course to rise by nearly 40 percent over the course of a mere four years.
He goes on to quote a correspondent's email:
Governments at all levels spent 4.1 trillion in 2006, 4.4 trillion in 2007 (when this recession began), 4.7 trillion in 2008, 5.0 trillion in 2009, and were on track to spend 5.2 trillion in 2010. This equates to 27% growth over a period in which we’ve had 8% inflation.
He also links to a WSJ article (http://online.wsj.com/article/SB1000142405274870335850457554... ) which I'll quote briefly:
Spending rolled in for the year that ended September 30 at $3.45 trillion, second only to 2009's $3.52 trillion in the record books. But don't think this means Washington was relatively less spendthrift. CBO reports that the modest overall spending decline results from three one-time events.
The costs of TARP declined by $262 billion from 2009 as banks repaid their bailout cash, payments to Fannie Mae and Freddie Mac were $51 billion lower (though still a $40 billion net loser for the taxpayer), and deposit insurance payments fell by $55 billion year over year. "Excluding those three programs, spending rose by about 9 percent in 2010, somewhat faster than in recent years," CBO says.
Somewhat faster. You've got to laugh, or cry, when a 9% annual increase qualifies as only "somewhat faster" than normal.
...The 21.4% federal spending increase in two years ought to put to rest any debate about the nature of America's fiscal problem.
The article's reasoning that %40 of the spending does not count because it was tax cuts is nonsensical. The tax cuts were meant to stimulate the private sector. Why was the bill signed if %40 of it was being misappropriated?
The article's reasoning that the payments to states and local governments should not be counted is also flawed. At the time the bill was passed people like Krugman were praising the payments to the states as the fastest way the money could be put into circulation and start "stimulating". If the money was mis-used by the state and local governments well whose fault is that but the federal government for lack of oversite.
If he wants to state that the stimulus had little effect or was too small to be worthwhile fine. The statement that there was no big expansion of government spending is false.
The fact that nothing was done with the money doesn't erase the fact that the money was spent and an unnamed future generation now has a $600 billion bill to pay.
So sadly yes, the man is a shrill who long ago lost his objectivity and value as a commentator.