Cut your cutting

OECD cautions over austerity cuts

That's to say to America, that yes, Obama is on the right track. Spend! spend! spend! And to warn Europe, that no, the economic recovery is not yet well established and it needs more than faith. It needs spending! spending! spending!

I like the way how everything can be solved in macroeconomics by shoving it with money when there's low inflation. Sounds like irony, but it isn't.

+1 for team Keynes

Obama

-1 for team Keynes

Keynes is theory, theory, theory. When we see application of the theory, it follows with failure. And then the excuse is always "we/they haven't REALLY followed Keynesian economics" blah blah blah. Economics is highs and lows. When things are high, everybody justs adjusts their expectations. When things are low, they over-react, mostly because of politics.

LOL! You definitely got your theories switched. Every time a mainstream strategy fails, it is because we were not "faithful" to the theory: the state intervened, it acted too soon or too strongly or someone did something it shouldn't or a natural disaster got in the way.

Keynesian economics is very straight-forward. The only thing that we can complain about is how much needs to be spent. I don't remember the figures, but I do know that the stimulus package wasn't big enough to reduce the output gap to 0, and from what I've heard, it hasn't been used at a fast rate.

Economic growth has its ups and downs, but for the past decades they've been subdued due to the development of macroeconomics. A society is better off that way.

As someone who actually has a degree in economics, I don't think it is as simple as spend, spend, spend.

That WOULD be true if the problem was a lack of demand. However, the problem is a lack of credit.

This is why the Federal Reserve has been trying to get people to LOAN, LOAN, LOAN. By providing money to banks, etc.

Every dollar, however, that the federal government spends is a dollar of money that is loaned to the federal government, RATHER, than being loaned or invested in the private sector.

Since the problem is one of credit, the best thing the government can actually do is to stop borrowing money. Government debt is taking money AWAY from the private sector and preventing the creation of jobs.

So, the solution is not to spend more money the government doesn't have. It is actually to spend less money, so that investers will be forced to invest in the market and create jobs, rather than spend money on government bonds.

Keynesian economics is NOT straight forward in a global economy. If the US stimulates its economy, a good portion of the multiplier goes overseas.

Likewise, if stimulation of the markets from government spending, is offset by the government borrowing the money to do it, there is a corresponding loss to match the gain.

If the government simply creates new money from thin air to stimulate the economy (true, pure Keynesian economics in the most simple form), it would not work as Keynesian predicted because the government debt market is not a compeditive market. A few key players, mainly China, own a substancial portion of US government debt, and an action to significantly reduce the value of that debt, would lead the the responce of a dumping of that debt. That, in turn, would significantly raise interest rates on the debt and such an action would, at the best cause a depression, and at the worst a situation far worse than the great depression.

Bottom line is that Keynesian economics ONLY WORKS in THEORY and only in a CLOSED or mostly-closed market that is compeditive.

In real life, it is not that simple.

In my opinion, the best thing the government can do for the economy is balance the budget.

The US cannot balance the budget. Even if they did it temporarily, already existing programs like Social Security will offset anything as the years melt away and is already destined to be bankrupt. The Republican party has thrown around the idea of killing SS programs and pushing the age up 5 years. But without an alternative, Greece will look like flag football in comparison to what will happen in the United States, and so will the Govt Response from Greece look like a flag football game.

Really balancing the budget in the US has more to do with redistribution of wealth than any conservative who wants the budget balanced will ever admit.

What is really killing the budget? Social Programs like Social Security, Welfare, Medicare and Medicaid. Excessive poverty in the country will only continue ballon these non negotiable benefits. Without more wealthy citizens, there will be no more private sector investment. Small Business made up an extremely important part of our economy. Why can't Obama produce Jobs? Because I cannot go to the bank without adequate collateral, or get an SBA loan for a new start up that will produce jobs. The Republicans are blocking the SB Loan guarantee bill which will continue the trend of freeze lending.

What is the Alternative? Of course, more govt spending. Why you ask? Because the Govt is the only one that can get money without credit. It's paper. Just print it. Govt Stimulus will create Govt jobs that will put money in people's pockets and allow them to secure loans from private banks and then banks get their deal out of mortgages, people start spending money in the stores, stores start reporting better results and now they can start hiring people and replacing Govt jobs slowly. It has to be a cycle where the Govt kicks off the ball. We've been stuck in this lending freeze loophole for two years and at best all we can produce is a flat economy.

If Republicans win the congress or house or both, stimulus will be a pipe dream and the markets will recognize that and tank for the double dip everyone is talking about.

It is really unfortunate that we have faulty roads, and bridges that collapse, need for improved high speed public rail transportation, yet The republicans won't even work with Obama on that part of a limited stimulus if anything at all.

I think the real problem is that there are too many fine print inclusions in bills tagged with 'healthcare reform' and "Financial Reform' and 'Stimulus'.

Obama is painting with too broad a brush. Republicans persistently stifle anything getting done because among 20 issues covered in a bill, at least one or two of them will give a conservative an excuse to say no, behind the 'balance the budget' slogan. It is not realistic.

Chrysostom, I don't have a degree in economics, but since you do, I am positive that you know the way our banking system is setup, there is NO WAY the budget can be balanced EVER. If you differ on that opinion let me know. I'll give you a link to something they probably don't mention in big print in your text books.

In real life it is not that simple, you are correct, but what you propose cannot be done. So the real question? It is which is easier to accomplish and will produce a result now, when we need it? Stimulus, or Balancing the Budget?

The choice is very clear. At least to me. But then again, I'm a dumbass lol.

I remember why I don't like discussing economics with americans all that much now. Then again, I started this thread to get you guys to talk. So, on that spirit:

Some people do what is necessary, some do what is right, and others prefer to act under ideology.

Loans are the problem? Does anyone feel like taking a loan right now? No! Yet, interest rates are at an all time low. They don't want to contract a loan because they fear for the future, they do not trust on a good outlook. Households, firms, the State, everyone, are trying to reduce their debt to remove some liabilities. This collectively is... depressing. Like japanese depressing.

You can't lower your reference interest rate to stimulate private investment and spending, so what are you going to do? Well... you can increase expected inflation, thus lowering the real interest rate and making those investments look mighty attractive, and jump-starting the economy.

How can you increase expected inflation? Having the state contract a nice debt near its citizens and allocating it to public/government investment would be a nice usage and increase demand, and if enough, inflation. Plus, if inflation rises and rests at a rate higher than of the interest paid, the real value of the debt decreases. It's good business.

From here on end, it's the usual business. Just don't forget to increase those interest rates later on.


The Keynesian model doesn't work for small economies. But it does the job for large economies like the USA and comme ci, comme ca when the European Union works in unison. And, quite possibly, in a couple of years for China.

Just because an economy is open it doesn't invalidated it. It means the effect of multiplier is dissipated. In turn, that means you need a bigger chunk to accomplish your goals, or you need to coordinate with efforts abroad. Just like it was and continues to be done.


Now, who is this bloody blaggard that keeps saying that keynesian economics only works in theory in the USA? We europeans heard similar nonsense throughout in the 90s days on end - "macroeconomics needs assisted suicide" and whatnot. The guys who used to said that have been awfully quiet lately.

Oh, I like what Wendy said:
"Puts money in people's pockets."

That's far more reassuring than asking a bank for a loan.

Something that you can't accurately shove into a model is what Keynes called animal spirits. And those spirits seem to be lacking.

Laguna - as you are European, I'm sure you know that Germany is fairing well during this crisis and they have NO stimulus plan. Perhaps that is an example that will help prove how the stimulus can backfire.

Likewise, I'm sure you know that the EU places a requirement for a semi-balanced budget for its members.

Further, I'm sure you are aware of the damage done by the Greece debt.

Face reality or don't. Your choice. Europe is a prime example.


Wendy - your whole post shows what you know. The federal government does NOT build bridges. State governments do. Nor does the federal government build roads. States do. The SMALL funds from the federal government for the roads not really meaningfull in terms of what you're talking about. We are comparing a mountain and a mole hill. The REAL problem with road funding is all the wasted money on mass transit and on education that is eating away at the road portion of transportation budgets.

Your statement about the republicans not working with Obama is a joke. The Democrats have FULL control of the House and the Senate. They can do whatever they want. Blaming the republicans is illogical, as the republicans have no say and can be outvoted easily by the huge democratic majorities.

Temporary government jobs do NOT boost the economy because people KNOW they are temporary. As a result, it does not have much of a multiplier.

Furthermore, the larger the government debt, the LESS willing people in "stimulius jobs" are to spend money. They MORE they expect the jobs will be done when the stimulius is done.

Census workers are a perfect example. Since they know the job will end, they plan based on that.

All the states are broke, that was part of the stimulus to get them to break even at least instead of defaulting their credit ratings, making borrowing even more expensive. The fact that they are broke, is the very reason that Obama has to create some jobs this way because the states simply cannot afford it.

Only two states are not in the red, out of 50.

Crysostom, Google procedural votes and stalling tactics.... its not all as simple as you say.

There are safeguards to stop a simple majority from say, abolishing the Supreme Courts, or making the president a dictator. In a perfect World you are right, we would have a public option. But, House Rules are House Rules.

I'd really love if I could have these conversations on my blog... Simoleans need to get out more!

http://madrantz.net/BlogRantz
New Look, its updating almost hourly!

LG, message waiting for you on LU.

A Keynesians best tool is a drawn out monologue to bore you to death. They can't win on historical evidence or logic, it's all a play on emotions. We can watch country after country (Argentina, Greece, Spain) spend spend spend itself into oblivion, yet there are still those people out there who say they're doing it right. Government spending only helps so much until it has major future consequences or outright failure because countries stop lending.

And Chrysostom, ignore Wendy. She knows absolutely nothing about economics and she'll prove it as passionately as she can.

The blog looks awesome wendy

Great, the infinite republican/democrat 'debate' reaches SimCountry. Is anything sacred anymore?

<!-Quote-!>Quote:

Great, the infinite republican/democrat 'debate' reaches SimCountry. Is anything sacred anymore?<!-/Quote-!>

Misinformed statement is misinformed.

Yes I will BC. I don't need a degree in economics. Would that make a difference. The best economic minds are behind every single decision from g8 to g20 and the world's economy is f@$#ed.

Am I any less qualified than any of them at this point? I don't see you giving lectures at any university on economics BC.

You can ignore me if you want.
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And Thanks Doubletar.

Simple practical solutions are what is needed right now. Print the money that doesn't exist.

Need I say more?

<<<<<no opinion (do have one but don't want in on this debate).

Why argue about it? All money is debt anyway.

Because LG brought it up for debate/argument. We've been through this in chat before. No minds ever really change.

So BC, you are going to sit there and act like this isn't one big

*MONEY*CONSPIRACY*
*CREDIT*CONSPIRACY*
*DEBT*CONSPIRACY*


?

*CONSPIRACY!!!!!!*

Go ahead BC, deny it! Deny it if you can. Yeah you can't! Call me crazy, get off the wheel and wake up man!

Finally a stimulating debate on SC!

All of your points are valid and the different points of view is what makes a great debate. Just because someone has a degree in economics does not make them an expert, but your points are very well made. I make my living independently investing in the stock market, watching very closely what the US does every single day. I don't have a degree or read theories, I invest real money and by far am no expert. I agree with Laguna, the US is Japan all over again. I live in Canada, so we are very tied to the US economy, but have not been effected nearly as bad as the US.

I believe the biggest thing the United Sates gov't and its citizens have to do is change the attitude, bigger is better. It does not matter how much the gov't pumps money into the economy, citizens can not handle any more debt. They are up to their eyeballs with mortgage payments, car payments and credit card debt and can not afford to take on any more debt without sinking (foreclosures). The US economy will never take off until the citizens can feel safe about spending money again. It is not a right for people to own 5000 sq. ft. house, or have 2 or 3 fancy cars or a 60 in. TV in every room, but the attitude of some Americans is that it is their right to own all those things and pay for them later. The US economy will not take off until people feel financially secure again.

Federal and State gov't programs are fine for a quick boost, but it will take a very long time for the US economy to recover to its former glory. The idea of saving dying companies is extremely flawed and needs to be stopped. It's just a Band Aid over a bullet wound! Let the weak die and let the strong take them over and grow stronger. Gov'ts should not pick and choose who survives and who dies, let the companies decisions, good or bad, decide their own future.

China is the place to be and its going to take the US a very, very, very long time to recover.

For the Europeans that are here, they might remember that last year there were many - and some even urgent - meetings between the economic and finance ministers of each member state, the so called Ecofin. In those meetings, to put an halt to the financial crisis and following economic crisis, it was decided that all member states would extend and increase financial guarantees for banks, loans and deposits. It was also agreed among those meetings, that member states could and should increase their deficits beyond 3% without being penalized under the Stability and Growth Pack (SGP).

As a result, Germany has increased it's government consumption expenditure more than the US between the last quarter of 2007 and the first quarter of 2010 - 7,3% vs. 4,4%. Government consumption expenditure rose 4,7% in the euro area during the same time.

So no, Europe isn't an example that a stimulus plan isn't necessary. We operate our own way with essentially the same tools. And mind you, we were talking about the USA and not Europe.


There is an important factor we haven't touched in this thread: high unemployment rate. This is a shadow that hovers and threatens the economic recovery. Money is concentrating on the hands of financial institutions and enterprises, and yet they do not hire or invest. The unemployed cannot live forever off social security and spending will decrease. So, we are producing below potential output, which explains the low inflation and it might get worse.

Second, austerity cuts also reduce spending. And that is what everyone is trying to do at the same time. Again, having everyone trying to reduce their debt at once depresses the system. Even the OECD noticed that and launched a warning to have caution when cutting.

So, again, the nice solution would be for your government to increase spending to reinforce - not to say save - your economic recovery.

Wake up and smell the java.