Deficit Deal will Kill Jobs

redivider said:

one of the reasons so much wealth is concentrated in the US economy is because of our stable government, a government that always got the job done. no matter what. now for some reason republicans are looking for any excuse to make obama look bad.

for ex:

the internet. the government sure as hell had a hand in it's creation and it's launch....

the government didn't create ebay though....

yet ebay wouldn't be possible if there wasn't internet in place....

that should get your neurons firing....

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beardo said:

The internet and most of the jobs it has created are bullshit and part of this countries problem.
We need iron works mines and ship yards not computer experts

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redivider said:

ah yes, ironworks, mines, ship yards.... union jobs.... the type that start out 25 bucks an hour and you could work your way up to 50 bucks per hour in a few years....

full benefits... 2 days off a week.... 10 hrs per day max.... those jobs right???

you guys crack me up....

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beardo said:

Here is the MAJOR problem with your arguments- The government creating imployment is a huge part of our problem. The government can not employ everyone they can not employ a majority and they should not employ a significant precentage. The government does not create wealth. We can not improve or situation by borrowing to create employment to boost GDP because even if GDP increases because of Govt spending and Govt jobs and programs we would actually be worsening our fundamental problem.

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mame said:

Imagine government creates 1000 temporary infrastructure jobs... After the job is done in that region the construction workers are out of a job again and that's it, right? Wrong. During the time those workers are getting paychecks, they're generating demand for goods. With more demand, there's reason to hire workers; let's say there's enough demand to support 200 more jobs. Now, you'd think that once the demand from the construction workers dwindles away as stimulus fades that the 200 new jobs would just go away too - and a few of them might - but business owners have a known tendency to retain employees that they've hired and combined with the 200 jobs worth of demand left behind by the stimulus, that's all thats needed to "prime the pump". Those 200 jobs will lead to 30 more, and then next month 230 jobs will lead to 20-30 more, and on and on and on... This is what the government should be doing on a grand scale RIGHT NOW.

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mame said:

You're thinking too narrowly, I'll quote myself from another thread:

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NoDrama said:

LOL your second quote couldn't be any more erroneous if you tried. If the 200 people are laid off then there will be less demand, less demand means more people will be getting laid off. Your example seems to imply that we could all just work at McDonalds, all 330 million of us and just sell food to each other and the economy would be 100% healthy. There is no pump priming when the well is empty, you can pump it as much as you like, but the product of your labor will never be forthcoming.

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NoDrama said:

Stimulus only works while its being implemented, once it wears off things get worse than they were before the stimulus. Just like Heroin.

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Crowding in

I’m at two deficit conferences Wednesday — CAP in the morning, on what to do about the deficit, EPI in the afternoon, about why we need to run deficits now. I’m trying to organize my thoughts; in this post I’ll talk about the EPI issue, in the next the CAP issue.

So let me start with a picture, which I’ll leave hanging for a moment:

Now for the discussion. Why, exactly, do we think that budget deficits are a bad thing?

The textbook answer identifies two reasons — two ways in which budget deficits now make us worse off in the future. They are:

(1) The fiscal burden: deficits now mean higher debt later, which will have to be serviced, and that means higher taxes and/or less spending on other, presumably desirable things

(2) Crowding out: when it runs deficits, the government competes with the private sector for funds, so deficits crowd out private investment, which reduces potential growth

All this makes sense under normal conditions. But right now we’re not living under normal conditions. We’re in a situation in which the economy is deeply depressed, and monetary policy — the usual line of defense against recession — is hard up against the zero-interest-rate bound. This weakens argument (1) — and it actually reverses argument (2).

On argument (1): it’s still true that an increase in government spending raises future debt. But not one for one: because higher spending raises GDP, it leads to higher revenue, which offsets a significant fraction of the initial outlay. A back-of-the-envelope calculation suggests something like a 40 percent offset is plausible, so fiscal stimulus only costs 60 percent of what it costs.
But the really dramatic difference is for argument (2). Under the kind of conditions we’re now facing, the main determinant of business investment is the state of the economy, as evidenced by the plunge in investment shown in the figure. This, in turn, means that anything that improves the state of the economy, including fiscal stimulus, leads to more investment, and hence raises the economy’s future potential.

That is, under current conditions deficit spending doesn’t lead to crowding out — it leads to crowding in. In fact, you could argue that the worst thing we can do for future generations is NOT to run sufficiently large deficits right now.

Things won’t always work this way. Eventually we’ll emerge from the liquidity trap, and the normal rules of economic prudence will reassert themselves. But we are not there, or anywhere close to there, right now.

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The true fiscal cost of stimulus

As I get ready for the CAP and EPI events, I’ve been thinking more about the issue of crowding in. (See also Mark Thoma.) And I’m coming more and more to the conclusion that the public debate over fiscal stimulus, which views it as an agonizing tradeoff between possible benefits now and certain costs later, is wildly off base.

Just to be clear, we’re talking about fiscal stimulus in a liquidity trap — that is, under conditions in which conventional monetary policy has lost traction, in which the Fed would set interest rates much lower if it could. Under more normal conditions the conventional view of stimulus is more or less right. But we’re in liquidity-trap conditions now, and will be for a long time if official projections are at all right. So what does that imply?

First of all, as I and others have pointed out, fiscal expansion does not crowd out private investment — on the contrary, there’s crowding in, because a stronger economy leads to more investment. So fiscal expansion increases future potential, rather than reducing it.

And yes, there’s some evidence to that effect beyond the procyclical behavior of investment. The new IMF analysis of medium-term effects of financial crisis finds that

the evidence suggests that economies that apply countercyclical fiscal and monetary stimulus in the short run to cushion the downturn after a crisis tend to have smaller output losses over the medium run.
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So fiscal expansion is good for future growth. Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.

Here’s why: first, in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.

But that’s not the whole story. Crowding in raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.

I’m not proposing a fiscal-stimulus Laffer curve here: it’s probably not true that spending money actually improves the government’s long-run fiscal position (although that’s certainly within the range of possibilities.) What I am suggesting is that fiscal stimulus under current conditions, where the Fed funds rate “ought” to be around -5 percent, does much, much less to hurt that long-run position than the headline number would suggest.

And that, in turn, means that penny-pinching on stimulus is deeply, destructively foolish.

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Mame do you have ANY idea how to become wealthy? Any idea at all? It would take me less than 2 sentences to tell ANYONE in any stage of life the secret to becoming wealthy, its foolproof too.

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mame said:

Spend less than you earn; Invest your savings, etc.

I'm interested to hear your two sentences though, I've never tried to articulate "how you become wealthy" into anything that isn't wildly vague before just now.

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NoDrama said:

Its actually only one sentence with a bit of editing, but you already have it all figured out anyway.

Spend less than you earn, invest the savings into non depreciating assets.

Will the USA become wealthy by spending more than it earns? You advocate that we will become wealthier than we are now if we only spend even more than before. Isn't possible, Krugman is WRONG!!

The interest on the loans is due, where will the money come from to pay the interest? That is your liquidity trap in a nutshell.

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the evidence suggests that economies that apply countercyclical fiscal and monetary stimulus in the short run to cushion the downturn after a crisis tend to have smaller output losses over the medium run.

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NoDrama said:

Cushion the downturn? you mean "keep spending like nothing happened" right? When are you guys gonna learn that cranking out stimulus has HUGE terrible effects on the Economy?

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You can give people money and they will spend it, but it will only lead to higher prices for everything, then once the additional money is gone all you have left is less money and higher prices.

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Dan Kone said:

This idea that the deficit is a more immediate problem than jobs is insane. I understand that the republicans need to crash the economy in order to take back the economy, but it's mind boggling that people are believing this is something we need to do now.

We need another stimulus, not cuts. This is fucking crazy shit.

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beardo said:

Oil Prices Went Down?
Wow.
How much will oil be in five years? how about twenty years?
How much was it 100 years ago?
or 10 years ago?

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mame said:

Apparently you haven't been paying attention... Crude oil has in fact backed off from it's recent high of 114 per barrel; It's 98? 99? right now? Yeah, I'd call that a drop. It happened because prices cannot continue to rise indefinetly without wages following suit without running into supply/demand issues which then "corrects" the pricing. If demand is what is driving costs up, which is the long term reason to rising fuel prices - especially in the last decade - than there is no "correction" in the same sense because the "real price" is going up, not just the nominal one.

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beardo said:

So If they raise the price 500% and then temporarily lower it 10% their has been a price reduction?
Demand is not the reason for rising costs- devaluation is.
Although Growth in India and China has had and will continue to have some impact.

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mame said:

Growth in India and China make up MOST of the price changes. I've argued this extensively, I'm not going to waste my time repeating myself but I suggest you take a gander at the actual statistics... You'll find quite quickly that the cost of crude has risen primarily because of supply/demand imbalances.

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