Did Gary Becker Really Argue Complete Crowding-Out?

Conservative criticism of the Obama fiscal stimulus plan seems to be reverting to mischaracterizing what certain economists have said. Brad DeLong is calling one foul on this score:

Is there any way to interpret Greg Mankiw's Sunday New York Times other than as an elbow to Chtistie's ribs while he thinks the ref's eye is elsewhere? Christie certainly does not believe that tax multipliers are twice the size of spending multipliers.

Greg Mankiw is now citing Gary Becker as one who thinks any increase in public infrastructure will have almost no aggregate demand effect ala crowding out but let’s review the portions of Gary’s statement that Greg left out:

If the government increased its spending on infrastructure when the economy has full employment, its main impact would likely be to draw labor, capital, and raw materials away from various other activities. In effect, increased government spending under these employment conditions would "crowd out" private spending ... Of course, the present situation is not one of full employment but of underemployment and excess unemployment, and employment is still falling. How does one adjust the full employment analysis in the first paragraph to account for the presence of unemployed labor and capital? One extreme assumes no crowding out of other private spending when governments increase their spending with significant underemployment in the economy. Increased government spending through a stimulus package under these conditions might even have a "multiplier" effect that would greatly increase, not crowd out, other private spending. The reason is that the recipients of the government spending in turn would increase their spending, and thereby stimulate other activities. Intermediate assumptions assume partial crowding out of other private activities, so a stimulus package would still increase employment and GDP.

Gary presents us the standard reasoning and then asks us to apply it to the current situation. It is true that Gary makes the following argument:

For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending.

In other words, he starts with the intermediate position and then tilts towards the full employment view but my reading of Romer-Bernstein suggests we are likely closer to the view held by the no crowding-out crowd.

We should welcome a real debate on this issue but cherry picking quotes is not exactly the best way to make a point.

Dick Cheney on the Recession – Does He Have a Point?

When Dick Cheney was Vice President-elect, he prematurely said we were in a recession. Now he is saying things are not that bad:

Appearing Sunday on the last broadcast of CNN's Late Edition, Vice President Dick Cheney defended the administration's handling of the recession and argued that its premature to call it the worst economic crisis since the Great Depression. "I can't say that. I don't think we know that yet. I think certainly if you look at some earlier periods in our history, I remember back in the late '70s when we had a high rate of inflation, stagflation in effect and a high rate of unemployment," Cheney said. He added, "We've had some difficult times. Is it the worst since World War II? I can't say that. I don't believe the data shows that yet but it is clearly a serious recession."

Late 1970’s? Oh – another dig at President Carter. Of course, the unemployment rate during his tenure never reached the 9% hit during May 1975. Of course, that was during Ford’s tenure when Cheney was chief of staff. And we certainly have not reached the 10.8% unemployment rate that we saw during the end of 1982. But Cheney can’t criticize Saint Reagan – can he?

I certainly hope we don’t reach 11% unemployment but only a Pollyanna would predict that we will not exceed the unemployment rate during Carter’s tenure. Of course, the rightwing will likely try to pin this recession on President Obama somehow. After all – the Bush-Cheney Administration was not responsible for anything that has happened over the past 8 years.

Good Jobs? Green Jobs?

Fifty years ago, John Kenneth Galbraith addressed a forum of Resources for the Future with the following question and observation:

If we are concerned about our great appetite for materials, it is plausible to seek to increase the supply, to decrease the waste, to make better use of the stocks that are available, and to develop substitutes. But what of the appetite itself? Surely this is the ultimate source of the problem. If it continues its geometric course, will it not one day have to be restrained? Yet in the literature of the resource problem this is the forbidden question. Over it hangs a nearly total silence. It is as though, in the discussion of the chance for avoiding automobile accidents, we agree not to make any mention of speed!

In the half-century since Galbraith made those remarks, many scientists and economists have asked the "forbidden question" about restraining growth. It becomes perplexing, therefore, when the old silence re-asserts itself, as it apparently has in the announced program of the Good Jobs, Green Jobs National Conference.

Clearly cleaner technologies, greater efficiency and renewable sources of energy are part of any solution to the problems of limited resources and adverse environment effects of industry. But another, essential part of a comprehensive green strategy has to focus on developing alternatives to the imperative of economic growth. Ultimately, the technological responses have to be integrated with the ethical and social responses.

One of the alternatives to economic growth is the reduction of working time. Economic growth was adopted as a policy objective in the 1950s and 1960s because it was viewed as a means to the end of full employment. In the 1960s, the AFL-CIO urged "creating jobs through shorter hours," recognizing that "even if other economic policies are successful in stimulating greater growth in the period ahead, the rate of advance in technology and other labor-displacing changes is gathering such momentum that, unless part of the gains in efficiency are distributed in reductions in hours, it is virtually inevitable that it will show up in persistent and increased unemployment" (Economic Trends and Outlook, American Federationist, November 1962).

Not only do shorter work hours present a strategy for creating good jobs, they are better for the environment. David Rosnick and Mark Weisbrot of the Center for Economic and Policy Research looked at the potential environmental effects of other countries adopted U.S. style long working hours in a report titled "Are Shorter Work Hours Good for the Environment: A comparison of U.S. and European Energy Consumption." They found that the levels of carbon emissions could increase substantially if workers in other countries worked as much as U.S. workers do. Conversely, if the U.S. adopted working times closer to the European average, energy consumption could be reduced significantly.

In his speech, Galbraith went on to inquire whether our happiness would be greatly impaired by more modest consumption. It is not unreasonable to expect that happiness could be enhanced by more generous leisure time.

How Bruce Webb And I Helped Save Social Security (Maybe)

A few days ago Obama was quoted as saying that "getting entitlement spending under control" would be part of the effort to deal with budgetary problems. Most think he is focusing on getting rising medical care costs under control, which was part of his platform. But the question of maybe he might do something with or to social security has arisen, and with Larry Summers whispering in his ear, who wanted to go after the program under Bill Clinton, this may be worrisome. As it is during the campaign, Obama opposed any cuts in benefits or moves to privatization, with his only proposal being to possibly implement fica taxes on those making more than $250,000 per year starting in 2019, if the program needs financial shoring up at that time, with the widely publicized mid-range forecast of the system having that being a year or so after the program is scheduled to start running annual deficits rather than the (large) surpluses it has been running, and will continue to run forever if the very unpublicized low-cost scenario comes to pass.

This is where Bruce Webb and I came in last spring. While the system did not do so last year and certainly will not this year, in a majority of years over the past decade it has done better than that low cost scenario, raising the likelihood that the system may in fact never run a deficit. It may not need any fixing ever, and is just fine as it is. Ain't broke and don't need no fixin'. Initially Obama was proposing to implement his added fica tax immediately after taking office. At a certain point, Bruce and I composed a memo laying out the above facts and some others that was sent through channels I shall not discuss to the highest levels of the Obama campaign. Soon thereafter came the change in position to move this proposed change off to 2019, although this decision may have had little to nothing to do with our memo. But I still hold to the position of that memo and hope that Obama is not listening too closely to Summers now on this matter. The system is doing just fine and should be left alone as it is for the duration of his presidency, however long it proves to be.

Obama’s Own Estimate of Employment Growth is Underwhelming

Reuters reports:

President-elect Obama said Saturday an analysis of his stimulus proposals shows that between 3 million and 4 million U.S. jobs could be saved or created by 2010, nearly 90% of them in the private sector.

Employment as of December 2008 was about 3.3 million jobs less than it was as of November 1007 according to the household survey. The employment-population ratio has declined to 61.0%. Even if we had an additional 3.5 million jobs today, the employment-population ratio would be only 62.5%. Now when they start talking about an additional 7 million new jobs, I’ll be impressed as that might get us closer to the 64% employment-population ratio we enjoyed in the late 1990’s.

David Brooks: Mendacity on Fiscal Policy

Brad DeLong is not happy with the latest from David Brooks. Brad writes:

David Brooks quotes Christina Romer out of context--taking her 1994 argument that monetary policy is more flexible and effective at ending small recessions and misinterpreting it to apply to big recessions like today, which are too big to end via monetary policy alone.

I also found this comment weird:

All the administrations, Democratic and Republican, resisted large-scale fiscal stimulus plans. They didn’t believe they could time a stimulus correctly. They didn’t trust Congress to pass the bills quickly or cleanly. They decided they shouldn’t be making policy in what Kennedy administration economists called “an atmosphere of haste and panic brought on by recession.”

But we did have tax cuts in 1964, 1975, 1981, and 2001. Those weren’t fiscal stimulus plans?

Update: The source for the “haste and panic” quote appears to be the 1963 Economic Report of the President on page XIII. And guess what? Brooks has misrepresented the context of this as well.

Job Market Continues to Deteriorate

The BLS lead sounds bad enough:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

But notice that the household survey reported employment losses of 806,000 with this:

The employment-population ratio fell by 0.4 percentage point to 61.0 percent over the month and by 1.7 percentage points in 2008.

Our graph shows the employment-population ratio and labor force participation over the past 10 years. As the latter has declined, the rise in the unemployment rate understates to the true decline in the ratio of employment to population.

This news should tell Congress that we need a big stimulus package ASAP and one that has a lot of bang for the buck. On this score, I think the Senate Democrats have it right:

President-elect Barack Obama's proposed tax cuts ran into opposition Thursday from senators in his own party who said they wouldn't do much to stimulate the economy or create jobs … Sen John Kerry, D-Mass., said, "I'd rather spend the money on the infrastructure, on direct investment, on energy conversion, on other kinds of things that much more directly, much more rapidly and much more certainly create a real job."

Update: Bruce Bartlett provides a very interesting discussion on the effectiveness of various fiscal stimulus proposals.

Can the Fed Target Interest Rates Below the Zero?

Yes. I have posted here previously on how we have actually seen nominal interest rates below zero, including recently for both the actual federal funds rate and certain Treasury bill rates. During August to November of 2003, the repo market rates regularly went negative, this being the market the Fed normally uses for controlling the federal funds rate. And Japan had negative rates off and on in the late 1990s. Thus, if actual rates were to go negative and stay, the Fed could push the target rates below zero. This situation might well arise if the economic crisis worsens severely, and we fall into deflation. This would open up a new tool for the Fed, overcoming the limits of the liquidity trap.

The main theoretical argument for why interest rates cannot be negative, or not over a sustained period, as it is now clear that they can be so for at least short periods of time, has been the argument of cash as an alternative. That there was a lot of cash around in the 1930s may well have been why we never saw negative interest rates during that period of deflation and extreme economic decline. However, now cash is a tiny fraction of the money supply and of wealth more generally. It is not a meaningful alternative to government securities on a large scale for serious wealth holders, and such alternatives as checking accounts or CDs are all ultimately backed by government securities anyway, if the FDIC were to go under in a general further wave of bank collapses. Under such circumstances, the negative interest rate tool may be the only way out, especially if this follows a failed fiscal expansion.

Does Andrew Sullivan Think State and Local Government Don’t Tax Us?

If Andrew Sullivan knows that that state and local governments do tax us – then why is he touting certain silliness from Greg Mankiw?:

These figures include all federal taxes, not just income taxes.

Also excluded from these effective tax rate calculations are the deferred taxes being piled up by those Bush deficits that I’m sure Sulli knows about.

Good Jobs? Green Jobs? Shorter Hours!

by the Sandwichman

A contest announcement arrived in the Sandwichman's inbox yesterday. It was from Working America, the "community affiliate" of the AFL-CIO:

Working America is going to be sending two grand prize winners and up to three honorable mention winners to the Good Jobs, Green Jobs National Conference, to be held Feb. 4–6, 2009, in Washington, D.C. Winners won't just get a free trip (up to a value of $1,500), they'll get an opportunity to hear from activists and experts from around the country on how we can create jobs and help the environment at the same time.

To enter, go here and answer the question: "Why do you want to fight for a green jobs economy and why are you the right person to represent Working America's members at the Good Jobs, Green Jobs National Conference?"

So the Sandwichman visited the conference website and perused the agenda. M.S., B.S., Phd. (more of the same BS piled higher and deeper). To remedy the apparent lack of analysis besetting the GJGJ conference, the Sandwichman is offering a prize of his own to contest entrants pointing out the contribution that the reduction of working time can make to a greener economy (see for example, the CEPR paper by David Rosnick and Mark Weisbrot and "Are Shorter Work Hours Good for the Environment? A Comparison of U.S. and European Energy Consumption").

The Sandwichman will award copies of Peter Victor's book, Managing Without Growth: Slower by design, not disaster to up to six contest entrants who make the environmental case for shorter hours. One of those prizes will go to the entry I like the best and up to five book prizes will go to any shorter hours entries that are selected as finalists by Working America. Just send a copy of your entry to the Sandwichman at "lumpoflabor(remove this)at(this too)telus(ditto)dot(ditto)net".

By the way, entries arguing against shorter working time will also be eligible for the prize, if anyone is so inclined! Here's the Sandwichman's own entry (not eligible for the prize):

The name "Good Jobs, Green Jobs" rings a bell. It recalls the theme of an issue of the Canadian environmental magazine, Alternatives, from 2001: "Green Jobs, Good Work." One of the articles, "Good Work, Less Toil" by Anders Hayden, explored the relationship between work, consumerism and the environment. As Hayden pointed out, "much of our work today feeds unsustainable forms of production that torment the planet." That article was concerned with more than just the tension between the slogan of "jobs, jobs, jobs" and the environment. It also addressed the time famine that many over-worked North Americans endure even while others remain underemployed or out of work. Sharing the work is thus an indispensable part of sparing the planet.

The dream of cleanly, efficiently and renewably retrofitting an economy addicted to unlimited growth is seductive but futile. As the 19th economist W. Stanley Jevons predicted -- and American experience in the wake of the energy crisis of the 1970s confirmed -- increasing energy efficiency alone leads to more, not less, total consumption. Similarly, green technologies can indeed lower emissions of greenhouse gases per dollar of output. But it is total emissions -- not just the intensity of emissions -- that need to be reduced. Urgent targets for reducing total emissions are only achievable by combining greener technology with slower or no economic growth.

In Managing Without Growth, Peter Victor, an ecological economist at York University in Canada modeled the effects on the environment, poverty and unemployment of various economic-growth scenarios. If we rely on economic growth averaging 2.5 percent annually to supply jobs, greenhouse gas emissions will increase by around 75 percent over the next 30 years even if the intensity of emissions continues to decline at a rate consistent with the historical trend. Even so, poverty and unemployment will creep upward. Simply ceasing economic growth, however, would result in catastrophic increases in poverty and unemployment. Only by slowing economic growth, reducing working time and targeting investment and regulatory policy on greenhouse gas reductions in combination can the goals of environmental protection and reduction of poverty and unemployment be approached simultaneously.

But how does the reduction of working time square with the goal of creating good jobs? Eighty years ago, economist Raymond Henry Mussey wrote that, "no student of American labor history can fail to be struck with the extraordinary importance of the eight-hour issue in union thinking during the formative years of the American Federation of Labor." Mussey affirmed that the shorter hours theory ideally fit the organizational needs of the labor movement. Indeed, in the face of the depression of the 1930s and concerns about job loss to automation in the 1950s and 1960s, the labor movement returned again and again to the issue of the shorter workweek. Today, what needs above all to be understood is that the reduction of working time creates opportunity for greater freedom and enjoyment through leisure and not a grim necessity to be borne with regret and resignation.

Another day in the forests of Indonesia

“On Thursday, 18th December 2008, mobile police brigades in Riau, together with ordinary police officers and 500 paramilitaries stormed the settlement of Suluk Bongkal in order to evict the population. The background is the claim which the plantation company PT Arara Abadi is making on the land, and the company’s support by sectors of the government.” “The settlement of Suluk Bongkal, Beringin, in the district of Bengkali, Riau Province, Sumatra has been attacked by security forces. Two toddlers have been killed. 400 villagers have fled into the mountains and 58 people remain in the village. They are under extreme psychological pressure.” “State security forces, which are supposed to serve the population, have committed a crime against human rights with their attack on the population of Suluk Bongkal. There are strong indications that the violence was planned: Police and paramilitaries even used a special incendiary bomb in order to burn the village, they used fire arms and tear gas and a helicopter which appears to belong to PT Arara Abadi.” Since 1984 twenty six conflicts have been registered between local Indonesian populations and the ‘forestry’ corporation Arara Abadi. “The main cause is land rights conflicts. People are losing the right to their land, without receiving fair and timely compensation.” [1] Arara Abadi holds forestry and land concessions for around 3000 km2 in the Riau and Jambi provinces in Sumatra – an area covered by peatland forests that represent an enormous store of global carbon. This company feeds the paper mills of Asian Pulp and Paper (APP). Both companies are controlled by the Sinar Mas Group, one of Indonesia's largest conglomerates with a network of paper mills and land holdings that extends into China, India, Cambodia, Papua New Guinea. Sinar Mas Group is owned by Eka Tjipta Wijaya [2] the prominent Chinese entrepreneur. “according to data published in November 2007, its customers include Unilever, Proctor & Gamble, Henkel, Pizza Hut, McDonalds, Burger King, Danone, AAK and Cargill [3] . Other customers are the Swedish corporations of Cellmark, Ekman and Elof Hansson [4]. No doubt these companies are amongst many other corporations and their conglomerates around the world.

My bet is that, as long as we continue to consume the products of these corporations, the violence will continue.


[1]‘End the violence on pulp and paper plantations’ by Ade Fadli. 22nd December 2008.
http://www.eng.walhi.or.id/kampanye/hutan/konversi/pulp_arara/

[2] Forestry Giant Lobbying for Huge Plantation
By Luke Reynolds. The Cambodia Daily, Story of the Month, September 15 2004
http://www.camnet.com.kh/cambodia.daily/story_month/September-15-2004.htm

[3] Golden Agri-Resources, 2007. Company Presentation. November 2007 as quoted in Greenpeace Briefing ‘SINAR MAS: Indonesian Palm oil menace’. Published by Greenpeace Southeast Asia – Indonesia.

[4] www.swedwatch.org/swedwatch/content/download/277/1408/file/Summery.doc

Raising Tax Rates on the Well to Do: Lane Kenworthy Gets It

I have been arguing that cutting taxes for households who are not borrowing constrained will NOT increase aggregate demand. Lane Kenworthy takes this argument one step further:

It’s unlikely to delay economic recovery by reducing consumer spending, since most of those affected will still have sufficient income to be able to spend as much as they desire. The tax-rate increase is small enough that it should have little or no adverse impact on investment; when the rate was 39.6% in the late 1990s, investment didn’t suffer. And the added tax revenues could be used either to boost the size of the stimulus package or to reduce its impact on the federal deficit.

Well said!

Obama Goes For Tax Cuts

Jonathan Weisman and Naftali Bendavid report:

President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs. The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.

Will this appeal to a bipartisan approach going to reduce the effectiveness of the fiscal stimulus? I have made this argument:

If one is a believer of propositions such as the life cycle model of consumption or the Barro-Ricardo equivalence proposition, one would dismiss out of hand this notion that we can accelerate aggregate demand by passing a tax cut today that will one day have to be financed by a tax surcharge.

But this is weird:

Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it.

HUH? If “strapped consumers” means those facing borrowing constraints, it is precisely these households that are more likely to consume rather than save a tax cut.

Update: Mark Thoma weighs in on this issue and provides us another story by Peter Baker and Carl Hulse that notes:

The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.

So only half of the tax cut will go to borrowing constrained households with the rest being given to corporations who are not likely to invest anything extra during this period of weak aggregate demand. Ahem!

Wonk v. Wank II: The Big Picture

by the Sandwichman

Not all economic models lack "any connection with reality". In "Managing Without Growth: Slower by Design, not Disaster", Peter Victor used a model called LowGrow "to explore different assumptions, objectives and policy measures" regarding the Canadian economy. I suppose the biggest difference between LowGrow and Paul Krugman's Optimal Fiscal Policy in a Liquidity Trap model (I'll call it OptiTrap) is that LowGrow uses actual data to explore possibilities while OptiTrap assumes consumers who "maximize an intertemporal utility function".

In other words, OptiTrap leaves all the important qualitative decisions to a bunch of spectral rational agents tucked away in a black box. The obvious question would be: if those agents were so rational how did they get into such a liquidity trap mess in the first place?

The point of LowGrow is to make the nature of qualitative choices that must be made and the variety of outcomes based on different choices as transparent as possible. There is not a single, "optimal solution" in LowGrow. Nor is there a single, "big bang" policy prescription that issues from it -- like OptiTrap's "So let's get those [spending] projects going." Instead, multiple runs of tLowGrow using different assumptions are made to tease out an array of complementary policy recommendations.

At first glance it may seem that OptiTrap ignores such issues as climate change, peak oil, poverty, mass unemployment and happiness. Not so! It just assumes that its intertemporal utility-maximizing rational agents will deal with that shit.

All OptiTrap needs to worry about is how to get the damned economy moving again. Once it's back on the good old growth track those rational agents -- who, incidentally, bought all those overpriced houses with securitized sub-prime mortgages and voted for George W. Bush twice -- anyway, as I was saying those rational agents will take care of the ah... er... nevermind.

But if you'd like to view a cogent discussion of the disappointments of economic growth, the limitations of natural resources and how it may be possible to avoid both environmental and economic disaster and possibly even live richer fuller lives, please watch the video of Peter Victor's lecture at the Royal Canadian Institute for the Advancement of Science from November 23, 2008.

Wonk v. Wank I

by the Sandwichman

A few days ago on his blog, Paul Krugman offered up an "unreadable little paper" with a "fully-specified model" to examine the case for "big government spending in the face of a liquidity trap". The bottom line: "When the economy is depressed and monetary policy can’t set it right, the true opportunity cost of government spending is low. So let’s get those projects going."

Unreadable as Krugman's little paper may have been, seventy or so readers managed to comment on it insightfully. It's too bad Krugman doesn't reply to his commentators. I suppose it's the custom of simplistic economic model building to hide behind the abstract generality, simplicity and unreadability (to non-wonks) of the model. Nevertheless, several commentators had little difficulty identifying what was missing in Krugman's "fully-specified" model: The Big Picture.

Below are excerpts from several of the comments:

Umm… while we’re at it, Dr. Krugman, perhaps you could please explain just why consumption has to be so high to prevent economic meltdown.

... why does the economy require that people spend money they can’t afford on stuff they don’t need now, in order to keep the economy moving at all?

Better, surely, to have the government buy public goods that are at least needed–education, insulation, health care, efficient transportation.

But when, if ever, can we enter Keynes’ vision of a world at leisure, with plenty of time, jobs with family-compatible hours, and enough goods to keep us smiling? Will our economic system ever permit it? Can we use a crisis as a time to think about the possibility?

Can you please explain. Fiscal stimulus forever - or only until consumer spending resumes? Earlier this year you wrote in the NY Times that “weak spending is treatable and the economy could be saved”.

In the last 6 years everyone bought new cars, new computers, new mobile phones, new houses! These will last at least 10 years.

What now? Perpetuate the spending Greenspan ignited?

Consumer spending on “exotic” upgrades? - replacing a perfectly good car or computer with a more expensive model? $400 sun glasses, $300 joggers, the latest mobile phone? Is that the idea - spend like we use to? Maybe the government should stimulate advertising! Maybe brainwash the people - they really do need to buy these goods!
Or make it compulsory to have all cars, computers, TVs etc. destroyed if they are older than say 5 years. Then people will have to buy new ones! Creative destruction!
Spending restored and economy saved!

Keep people employed making and selling things we don’t really need = full employment in jobs nobody likes. Is that it?

The problem you face is convincing people that since excessive debt got us into this mess, even more debt (Federal this time) will get us out of the mess. And you have to do it without math.

Is there any chance that a liquidity trap is actually a manifestation of any or all of the following:

Too much debt; wealth/income inequality; and/or negative real earnings growth for most people

Why do almost all economists assume that preventing price deflation requires MORE DEBT??? I DO NOT believe that the solution to too much middle and lower class debt is MORE DEBT (whether gov’t debt or not)!!!

As was forwarned , the paper was too tough to follow. I have an equally difficult time understanding why complex wonkish academic theory and analyisis trumps and ignores common sense and the more obvious. What is right before our eyes is the fact that no matter what we do to stimulate the economy our major downfall is our lack of manufacturing ability which we gave away to China and the like. Sadly our national focus and young talent has migrated to financial ( funny money) engineering from engineering that creates new technology. And for too long the foundation of our new economy has been based on borrowed money and not on import income from making quality things. The more we borrow ( which we now have no choice but to do ) the more we dig our selves down into the black hole which may now be too deep to ever to get out of . The wonkish analysis seems to ignore what is obvious to the lesser intelligent people. Me and most of my friends who are about as equally unintelligent as me, were able to see the crazy mortgage/housing bubble and also the fact that our economy was a house of cards because it is based on borrowed and funy money. And this was obvioius to us several years ago while the wonkish lot ( ie economists such as Greenspan and company) were producing analytic outcomes that suited themselves so as to perpetuate the massive wealth accumulation for the very wealthy.

As I see it, full employment is not a binary predicate in any real economy.

You will always have sectors with over-full employment, sectors with full employment and sectors with less than full employment. The same is true for different geographic areas. There is plenty of skill and location stickiness that ensures that this is always true.

This means that there is no point in time in which you reach full employment in the whole economy, which also means that at no point in time does anything dramatic happen. The cost curve will never become a discontinuous function.

Rather, for every new job that is being added, there’s an increasing chance that the next job will appear in a tight part of the job market. As long as you have non-perfect distribution of new jobs only to the sectors and regions that have less than full employment, you will see the marginal cost increase for every created job, and from the start you’ll see faster than linear cost growth.

With government programs, it’s likely that certain sectors are stimulated more than others. Due to skill stickiness this will mean that the mismatch between available skills and requested skill grows. I believe this means that it’s highly likely that the cost curve crosses the benefit curve well before the mythical state of full employment.

Maximization of consumption is totally different from sustainable consumption. Your model is not comprehensive and tough only some parts of economy.

But the biggest point is we think only maximization but that is not sustainable. We have over consumption and over debts. The more government uses, the more the next generation will have to pay tax and the less the next generation will have to consume.

All optimization economic models we contribute cannot bring the sustainability of economy. We may look back to see Ramsey model to find why we have too much consumption, too much debts and low saving because we use optimization of consumption model that is all wrong in concepts.

Government can bring the full employment in short term to optimize consumption like we did for nearly 70 years on Keynesian tools but we cannot sustain full employment in the long run if the government and private debts stay at unsustainable high level.