Are republicans about to take us into a 1937 depression?

Discussion in 'Politics' started by Free Thinker, Sep 30, 2011.

  1. it seems like republicans could win the next election if obama cant grow some balls by then. the republicans have promised and already voted in some cases to decimate social programs and put the us on an austarity program. this will likely lead to a big slowdown in economic activity. the depression in 1937 is believed to have started because the government curtailed spending too soon.

    what if the answer is just the opposite? what if we need more spending on productive things. this guy thinks so and lays it out:

    A Free Lunch for America
    Courtesy of Brad Delong, Grasping Reality with Both Hands

    Former US Treasury Secretary Lawrence Summers had a good line at the International Monetary Fund meetings this year: governments, he said, are trying to treat a broken ankle when the patient is facing organ failure. Summers was criticizing Europe’s focus on the second-order issue of Greece while far graver imbalances – between the EU’s north and south, and between reckless banks’ creditors and governments that failed to regulate properly – worsen with each passing day.

    But, on the other side of the Atlantic, Americans have no reason to feel smug. Summers could have used the same metaphor to criticize the United States, where the continued focus on the long-run funding dilemmas of social insurance is sucking all of the oxygen out of efforts to deal with America’s macroeconomic and unemployment crisis.

    The US government can currently borrow for 30 years at a real (inflation-adjusted) interest rate of 1% per year. Suppose that the US government were to borrow an extra $500 billion over the next two years and spend it on infrastructure – even unproductively, on projects for which the social rate of return is a measly 25% per year. Suppose that – as seems to be the case – the simple Keynesian government-expenditure multiplier on this spending is only two.

    In that case, the $500 billion of extra federal infrastructure spending over the next two years would produce $1 trillion of extra output of goods and services, generate approximately seven million person-years of extra employment, and push down the unemployment rate by two percentage points in each of those years. And, with tighter labor-force attachment on the part of those who have jobs, the unemployment rate thereafter would likely be about 0.1 percentage points lower in the indefinite future.

    The impressive gains don’t stop there. Better infrastructure would mean an extra $20 billion a year of income and social welfare. A lower unemployment rate into the future would mean another $20 billion a year in higher production. And half of the extra $1 trillion of goods and services would show up as consumption goods and services for American households.

    In sum, on the benefits side of the equation: more jobs now, $500 billion of additional consumption of goods and services over the next two years, and then a $40 billion a year flow of higher incomes and production each year thereafter. So, what are the likely costs of an extra $500 billion in infrastructure spending over the next two years?

    For starters, the $500 billion of extra government spending would likely be offset by $300 billion of increased tax collections from higher economic activity. So the net result would be a $200 billion increase in the national debt. American taxpayers would then have to pay $2 billion a year in real interest on that extra national debt over the next 30 years, and then pay off or roll over the entire $200 billion.

    The $40 billion a year of higher economic activity would, however, generate roughly $10 billion a year in additional tax revenue. Using some of it to pay the real interest on the debt and saving the rest would mean that when the bill comes due, the tax-financed reserves generated by the healthier economy would be more than enough to pay off the additional national debt.

    In other words, taxpayers win, because the benefits from the healthier economy would more than compensate for the costs of servicing the higher national debt, enabling the government to provide more services without raising tax rates. Households win, too, because they get to buy more and nicer things with their incomes. Companies win, because goods and workers get to use the improved infrastructure. The unemployed win, because some of them get jobs. And even bond investors win, because they get their money back, with the interest for which they contracted.

    So what is not to like? Nothing.

    How, you might ask, can I say this? I am an economist – a professor of the Dismal Science, in which there are no free lunches, in which benefits are always balanced by costs, and in which stories that sound too good to be true almost inevitably are.

    But there are two things different about today. First, the US labor market is failing so badly that expanded government spending carries no resource cost to society as a whole. Second, bond investors are being really stupid. In a world in which the S&P 500 has a 7% annual earnings yield, nobody should be happy holding a US government 30-year inflation-adjusted bond that yields 1% per year. That six-percentage-point difference in anticipated real yield is a measure of bond investors’ extraordinary and irrational panic. They are willing to pay 6% per year for “safety.”

    Right now, however, the US government can manufacture “safety” out of thin air merely by printing bonds. The government, too, would then win by pocketing that 6% per year of value – though 30 years from now, bondholders who feel like winners now would most likely look at their portfolios’ extraordinarily poor performance of over 2011-2041 and rue their strategy
  2. wildchild


    It sounds like someone is worried about the Republicans taking away their EBT card.
  3. jem


    like the easy 25% return from infrastructure we got with stimulus.
    you mean the millions we have spent per job created.
    you mean solndra.
  4. I have long thought we were about to find out what would happen if Hoover had won in 1932.
    Of course, this is entirely because Obama didn't do in his first 100 days what FDR did in his: face down the banks and the rest of the financial "industry". If 2012 winds up being a disaster for the Democrats, it will be because he completely misunderstood why he won in 2008.
    It wasn't to carry out the Tea Party agenda. Far from it.
  5. American dream during Reagan administration:
    Good Job,house, car & family.

    American dream during Obama administration:
    Socialism, food stamps, section 8.
  6. I agree. Obama completely misconstrued the "anti-Bush" vote as overwhelming support for alot of his campaign rhetoric. From the beginning, I felt that if Obama had taken on the banks in a meaningful way, he would have enjoyed quite a bit of bi-partisan support. They were an open target and he could have quickly established himself as a "reformer", which is exactly what he campaigned on.

    On the other hand, that was all a pipe dream to begin with. His handlers carefully crafted this reformist image to score big points with the independents who hated the 2008 bailout. Once he took office, it was business as usual and the banking lobby wrote its own rules and told Hopey to go sit in the corner.
  7. Just guessing here but in the grand scheme of things I think most of the gov't money spent or to be spent on infrastructure mostly supports other gov't agencies. Little of the money ends up in the private sector.

    If you're going to build a road or a bridge, infrastructure money supports national transportation dept, osha, epa, state and fed engineers, etc ( to name a few).

    Read some stats the other day, I find amusing. Bike trails in NY. It cost $250k per mile to build if it's a state project. Using Fed funds $1m dollars per mile. Imagine that.
  8. i agree. that is what the market is sniffing out now. if the world led by the us republicans goes to total austarity in the middle of this recession look out below.
    it dosesnt take much imagination to understand what what the kinds of cuts the republicans have promised to do will do to final demand.
  9. Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now

    You mean that cutting federal spending in a liquidity trap, like we’re in, is absolutely counterproductive?

    Yes, it’s ludicrous and I don’t use that word too often. There’s a large range of opinions about most issues, and rightfully so. But if you are in a liquidity trap and you are advocating frontloaded austerity—

    The Tea Party is really talking about killing the economy —

    Again, it’s absolutely ludicrous. And if we need an example, we can just look across the pond and see what’s going on in Euroland. Putting somebody who is suffering from anorexia on a diet doesn’t make a lot of sense to me. But essentially that’s what the austerity folks are preaching and that’s what we’ve been grappling with here in the United States.