Warren Buffett: 2nd Stimulus Needed, Expects Longer Recession
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Troublingly, this is the exact opposite of what is needed to get out of a recession. In order to increase employment and restore growth, spending needs to increase, not decrease. If consumer spending is at an all-time low, why would corporations hire more people, instead of less? This is where Keynes came in. He argued that, unlike corporations, the government wasn't limited by the temperamental swings of the market. In fact, the government had the ability to do what very few corporations can: go into a very large amount of short term debt. The idea behind this is to commission large projects which force corporations to rehire and increase expenditures. As such, employment increases and salary for those employees does as well. Once consumers have a sufficient amount of disposable income, the other sections of the economy are revitalized as well.
There are a couple easy pitfalls with this, though. First is the debt aspect -- if you choose the wrong projects to invest in, then the government may end up in permanent debt. Consider two projects: one requires high capital investment, but it will spur greater economic growth and profits in the long run. The second also requires high capital investment, employs a lot of people, but it's essentially a one-time product. A great example of the first is infrastructure projects like the Tennessee Valley Authority. It cost a huge amount to build, but it also provided cheap electricity to the area, generating revenue, and also provided a great place for businesses to relocate to (because of the cheap electricity) and increased employment and income rates of almost everyone in the area. An example of the latter would be something like an advanced jet fighter (with no war going on). The problem is that once built, the jet fighter is essentially done. A high capital investment produced a short term investment, but it generally has a low rate of return. Of course, the reason why this worked in WWII is fairly simple: we were the world's bankers and manufacturers.
Therefore, the problem thus far has been crippled because it is essentially half-hearted. Stimulus spending, to be effective, must be a large proportion of the country's GDP (around 4%). In contrast, $3.27 trillion is about 2.1% of our ~$15 trillion GDP[1]. For a more accurate (but still back of the napkin) calculation, Krugman wrote this in January of this year[2]. I believe that Krugman also overlooks many of the problems with the spending projects themselves: to be effective in the long run stimulus spending should be focused towards long term improvement projects. Infrastructure development is a great example of that, but so are things like alternative energy and scientific R&D. Too much money I think is spent on things like super-high performance military jets. While this satisfies the short term criteria, F/A 18E/F Super Hornets probably don't increase consumer spending as much as equivalent infrastructure spending over 10 years.
That said, I still agree with Keynes and most modern economists that stimulus spending is probably the best way the government has to help the economy. It's not a magic bullet, but we do have a sizable amount of historic evidence in favor of stimulus spending and against other things. (Consider that Keynes's theory of economics did not come about until the late 19th-early 20th century. Prior to that, government did not go into debt. As a result of that and lack of regulation, recessions were harsher, more frequent, and lasted longer.) Of course, macroeconomics is mostly guesswork, mingled with shreds of enlightenment that don't add up to all that much anyway.
[1] http://blog.heritage.org/2009/02/12/true-cost-of-stimulus-32... Really, this is a pretty generous calculation anyway, considering that this is over 10 years and some of the stimulus will probably come back in taxes. [2] http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithme...
The "first" stimulus (not really first) had extremely little content that even conforms to your explanation of good stimulus spending. Thus, by Keynesian economic standards, it should have failed. It has failed so far and I see no reason under either Keynesian economics or my preferred economics to think that will change.
What will a "second" stimulus change? Will our government do an actual Keynesian stimulus, or will it pay lip service to an ideology it believes tells it to do what it wants to do anyway (always dangerous!) and just spend, spend, spend? And if your answer is the former, I ask you, on what evidence do you base this belief since all evidence seems to point against it?
Explanations of how Keynesian stimulus works are pretty irrelevant in a world where we aren't actually using them. People who think the government should cut back may be wrong in the sense that it is not optimal, but it may still be the best course that we can actually bash Congress into following. It isn't a chamber where "nuance" does very well.
I have read vast swathes of the "first" stimulus bill. I invite you to read it and come to your own conclusions about exactly how much of it is actually Keynesian. I didn't find much that was unambiguously Keynesian, much that was unambiguously not, and a lot of other things that are basically slush funds that seem pretty unlikely to go to Keynesian things.
Perhaps none of it matters. All of this assumes that Congress knows what it's voting for in the first place.
"If every member pledged to not vote for it if they hadn’t read it in its entirety, I think we would have very few votes." --Stenny Hoyer, referring to a 1,500-page health-care reform bill coming up in the House (http://www.cnsnews.com/public/content/article.aspx?RsrcID=50...)
How can any of this giant, sweeping legislation be any good?
Couldn't agree more. My post was an advocate of a Keynesian stimulus -- this was certainly not one. As to politics, I have had enough. The Democrats could have made a stand, but didn't. Probably because half of them don't even believe what they're saying and are just trying to get their hand in the pot. I don't know what it will take to implement some actual liberal thought, but I have a feeling it's not coming soon.
Not to nitpick an otherwise excellent comment, but I think you slipped a decimal somewhere in there.
Either that or you were claiming the total cost will be $3.27 trillion over 10 years, which would imply dividing by $150 trillion (10 years of GDP), which would be 2.1%. If that is the case, you might want to clarify.
I am liberal and call myself a Democrat, but I really hate the Democratic party. I feel like half of them are only Democrats because to be a Republican is to be unelectable. I would like to see some actually liberal policies put in place for a change.
I think the issue is the same issue both parties have. Some of them are true believers, but many are in it for the money and influence. They are there to cater to the interests that contribute to their campaigns and keep themselves elected. As such, they don't have a vision for accomplishing big things, they merely try to stay in office and get a piece of the pie.
It's kind of like giving a skydiver a shovel so that when his 'chute fails he can just dig a hole in the ground so fast that he never has to touch bottom.
I agree with the shovel metaphor when it comes to the attempts to raise house prices and prop up the financial sector.
It's too bad that was such a big part of the stimulus and other investment like infrastructure was such a small one.
Buffet is a great investor and manager, but you can't map that ability to public policy magically.
This would present the risk of inflation, but if there were inflation (rather than deflation) we would not be in a liquidity trap requiring fiscal stimulus.
I think Krugman has gone over all of this. It's fairly well spelled out in Keynes as well.
He's backing the concept and trashing the reality in the same breath. That's not exactly a ringing endorsement of the idea that an actual government stimulus is going to get us out of this.
"Our first stimulus bill ... was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in ... as if everybody was putting in enough for their own constituents," he said. "It doesn't have really quite the wall that might have been anticipated there."
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