Tuesday, August 23, 2011

The Elusive Growth

From Bloomberg Businessweek:

Debt: The Forgiveness Fix

For overburdened countries and consumers alike, erasing unpayable debt is a necessary step toward renewed growth

By Peter Coy, August 10, 2011

Debt forgiveness is a "necessary step". Hm. Let's see...

There is still a presumption that blood can be squeezed from a stone. That’s true in the U.S. housing market, where banks continue to insist that they will be able to collect full repayment of wacky mortgage loans that they never should have made in the first place. And it’s true in Europe, where creditor nations and banks are dragging their heels on writing down the sovereign debt of Greece, Ireland, and Portugal.

Blood from a stone, yeah. The economy is in "deleverage" mode. We are not going to get economic growth until debt is reduced to some indeterminate level. So if we want growth, the quickest and most direct way to get there is to reduce debt until the economy starts to grow. By the way, it is not government debt that must be reduced. It is private-sector debt -- the debt that everyone is trying to reduce.

Policy must help us reduce our debt. The sooner, the better.

In the absence of strong economic growth, debt burdens around the developed world will remain onerous for years to come—and yet while countries are single-mindedly focused on paying down their debts, it will remain harder for them to implement pro-growth policies.

In the absence of growth, debt burdens will remain onerous.

Yes. Strong economic growth is the necessity: the elusive necessity. But... "countries"? Does Peter Coy mean the governments, or the people? The public debt, or the private? Private, I hope.

While countries are single-mindedly focused on paying down their debts, it will remain harder for them to implement pro-growth policies.

Maybe. I guess. But before we move on, let's think about this. I mean, let's think about the "pro-growth policies". What do we have in mind? Do we want everybody to use more credit? Using more credit creates more debt, you know.

And before we implement any more pro-growth policies, maybe we should think about growth. I'm saying yeah, we need growth. But I'm asking why we don't get growth. Our pro-growth policies would work better if we understood why we don't get growth, the elusive growth.

The Big Stim

Many people say the way to get growth is to expand government spending, expand government deficits, and expand government debt. Why? Because 75 years ago, Keynes said it would work. And it did work, 75 years ago. Will it work today? No.

It will not work. How do I know? Because we tried it already. Nope, not Obama's $787 billion stimulus that is now sometimes called too small, and not Bush's $600 checks from the Summer of '08. That's not what I'm talking about.

We tried stimulus, big-time. We have been trying it since Reagan. Since before Reagan, even. All the while, we've been badmouthing government debt, sure. But all the while, we have been expanding government debt, too. To stimulate growth.

Graph #1

Graph #1 shows the gross Federal debt, in billions of dollars. After World War II, the trend-line is basically flat until, oh, 1970 or so. After that, the Federal debt just goes up and up. And up.

That big triangle there under the rising debt trend-line? All of that was stimulus.

More stimulus is not the answer.

Anyway, Peter Coy the Forgiveness guy continues:

Collectively, U.S. consumers have reduced debt by more than $1 trillion since 2008, but for some, the burden remains intolerable. Start close to home, with American residential real estate.

Okay. Well now we know for sure that he's talking about private-sector debt.

Ultimately, the best argument for debt relief is that it helps to free the productive potential of the economy. Over-indebtedness stultifies growth today, just as surely as debtors’ prisons did centuries ago. It’s time to break the locks.

Yes, exactly: Debt relief helps to free the productive potential of the economy. Over-indebtedness stultifies growth.

Peter Coy says forgiveness. I say print money and use it to pay off debt. We achieve the same objective. But -- once you accept the premise that the economy will not grow until we reduce debt -- I think you'll find my way easier and quicker.


Jazzbumpa said...

I'm not sure if you STILL have a fundamental misunderstanding of Keynes and stimulus, but what you have written here invites me to think so.

Keynes was about stimulus spending ONLY under a certain set of circumstances - which we happen to have now: low demand and high unemployment while at the zero interest bound. Stimulus is necessary because under these circumstances monetary policy is anemic or totally ineffective.

Not one penny of deficit spending between 1980 and 2009 was Keynesian - except for the Bush Sr. deficits during the '90-91 recession, and that was by accident.


Clinton was Keynesian when he ran SURPLUSES.

Federal debt due to a revenue shortfall, as we have now, is neither Keynesian nor stimulative. It is socializing the transfer of wealth from the have-nots to the haves.

Seriously - you are channeling Ron Paul. Don't go there.

Printing money is not working now exactly for the reasons Keyenes indicated - it is all getting stuffed under mattresses.

And we can't eliminate private debt (without forgiveness) unless we either increase public debt or have a positive trade balance.

We will be contracting for a long and painful time.


The Arthurian said...


You are talking about Keynes. I am talking about the economy.

Every dollar of deficit spending is "extra" spending, or stimulus. It puts into the spending stream money that otherwise would not have been spent.

Or perhaps you, like Fama and Cochrane, think that someone else would spend the money if only the government would not?

Please don't try to predict where my argument will go. Come back tomorrow and find out.

Jazzbumpa said...

Because 75 years ago, Keynes said it would work. And it did work, 75 years ago. Will it work today? No.

Sorry. I thought you were talking about Keynes.

Extra spending is not "stimulus." It is extra spending. Words have meanings.

Economic stimulus is a term used by economists to define a situation where the government changes its fiscal policy of spending and taxation in order to bolster and revive an economy that is in a recession. By spending money on state and federal infrastructure, the government hopes to provide jobs, and jump-start the failing economy.

I made no attempt to predict where you are going - and am quite surprised to see you raise that point. I was responding to what I thought I saw.

From my nodding familiarity with Fama and Cochran, I don't believe I think much of anything the way they do. I really have no idea why you would suggest such a thing.


The Arthurian said...


Extra spending is not "stimulus."


If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.


Every dollar of deficit spending is "extra" spending, or stimulus. It puts into the spending stream money that otherwise would not have been spent.

Jerry said...

Two comments:

1) I think that, if nothing else, you should expect a different (higher) "stimulus multiplier" when you put the "stimulus dollars" into the pockets of the starving unemployed, who will probably spend 100% of them to survive (during the 30s) ... versus when you put them into the pockets of your wealthy campaign contributors, who will gladly take them and then e.g. move them (along with their corporate headquarters) to Dubai. (In this latter case, the multiplier for 'benefit to the American economy' is probably about zero.) So, for that reason, the Keynesian / FDR-ian stimulus would have had a much greater effect than the Reaganian one.

2) The "stimulus dollars" should probably looked at in the context of the thing that they're stimulating (e.g. as a ratio). I'm thinking something along these lines: http://newarthurianeconomics.blogspot.com/2009/02/context-for-obamas-787000000000.html#more

So, one should expect the current "stimulus" to be much less effective than the one in the 30s.

The Arthurian said...


did you see the quote Krugman used for his post of 24 august at 5:20 pm, some half a day *after* my previous comment...??

Krugman compares the quote to his own "suggestion that a fake alien threat would end the slump" -- in other words, economic stimulus.


The Arthurian said...

For the record:

On the topic of fiscal stimulus, Krugman writes: "First of all, we did not, repeat not, have massive stimulus." As evidence, he offers a chart on the budgetary effect of one piece of legislation: the American Recovery and Reinvestment Act of 2009. Paul concludes that because this one law had an effect of 2% of GDP, total fiscal stimulus was 2% of GDP. But as I assume Paul knows perfectly well, one law doesn't summarize fiscal policy. Here's a graph showing budget deficits since the 1930s as a share of GDP. The deficits for the four years from 2009 to 2012 (9.8%, 8.7%, 8.5%, and 6.8% of GDP, respectively) are the four largest annual deficits since 1930, barring only the deficits of the World War II years. -- Timothy Taylor in Response to Krugman: More on Secular Stagnation


TTaylor thinks deficit spending is a stimulus. So do I. Jazzbumpa thinks "Extra spending is not 'stimulus.' It is extra spending." I disagree with Jazz.

Hover your mouse over my graph again. All that pink is stimulus.