Thursday, December 4, 2008

Dead Keynes Blogging

by the Sandwichman

The Sandwichman is still wondering how economists make up their guesses about how $x billion dollars of fiscal stimulus (AKA "deficit spending") will create y million jobs.

Yves Smith says they find them on the back of an envelope. Greg Mankiw says econometrics doesn't always confirm the predictions of textbook Keynesian models. Martin Wolf mentions something about how "deficits aimed at sustaining demand will be piled on top of the fiscal costs of rescuing banking systems bankrupted in the rush to finance excess spending by uncreditworthy households via securitised lending against overpriced houses." Don't you love that house-that-Jack-built volute?

Whew! It can be easy to forget that the issue here is unemployment. As Paul Krugman notes, the US employment report comes out tomorrow, Friday. "The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month."

Coming Soon: The Sandwichman Stimulus Plan. I'll show you my back of the envelope calculations.


TheTrucker said...

I will say again that the absolute best stimulus plan is to adopt a Canadian style universal health insurance system here in the USA. The current employer funded health and retirement systems in the USA are the primary inhibitors of wage increases. Until the individual can tell the boss and the union to stick it where the sun don't shine there will be no real wage increases.

I have no idea what the problem is for Canadians. But I do know what it is in the USA. Instead of spending money on roads and bridges we need to immediately spend money on health insurance for all thus granting every working person a pay raise and every retired person an increase in disposable income. How to collect a tax to fund this stimulus can be discussed later.

Just do it.

Theodore M. Seeber said...

Trucker's right, but the real key is to get away from M3 spending and get back to M1 spending.

In other words, dump the FED, let the Treasury print money directly, and replace taxes with inflation. As the government spends, that will put money into the economy, and we'll see inflation return instead of this deflationary cycle. And the sooner the better, as it is high time we returned to the real purpose of the economy which is to FEED THE CITIZENS, not make a few oligarchs rich.

TheTrucker said...


That is blasphemy. That is crazy, That is insane. But it is also a rational reaction to the current situation.

I proposed the same thing in 1978: to eliminate the Fed and return to the tax code of 1956. The best solution now isn't really much different than it was then, but the elimination of the Fed is not actually necessary. At present the Fed is sorely needed to do pretty much what it is doing. The Fed should be the lender of last resort and protector of the COMMERCIAL banks. According to my understanding of the Fed's charter, the Fed should not be rescuing insurance underwriters. It may be that this lack of authority was the reason for the $700B bailout appropriation. The Fed was, indeed, operating outside its charter if it rescued an insurance outfit. Was this action authorized as a result of repealing "Glass-Steagall"? If we can't tell the difference between commercial banks and stock brokers any more then does that grant license to the Fed to operate as the bailout king for the entire "financial sector?

The politicians should be held accountable for their actions. No more whining about the Fed. If they cause flation then they are accountable for it.

Monetary policy should not be anything other than a vernier control to address seasonal problems in the fluctuation of dollar value. It can sometimes be used to address "price shocks" when things like an oil embargo disrupt the economy. The idea in that sort of thing is to equalize the pain across the people as opposed to "fixing" the real problems. The economy is the bailiwick of the elected government and primarily the House of Representatives that controls the purse and the tax code.

But the Fed can serve a very legitimate purpose and should be doing so now. It is like having a "unitary executive" in control of the military. The need for "swift action" in the face of threats to the nation is real. Longer term actions should, however, be sustained, terminated, or restrained by the Congress. The reality is that the Fed was chartered by the Congress and it would seem the Congress can "re-create" the Fed whenever necessary.