Your fundamental argument appears to be that any increase in government spending will retard the recovery process. Is this a correct assessment of your view?

Not quite, but close. A “recovery” is, by definition, a resumption of economic growth. Economic growth is driven by productivity growth. Productivity growth is driven by investment, primarily in equipment (physical capital) and education (human capital). The best way to measure the effectiveness of investment is to measure its risk-adjusted net present value (NPV).

The Federal Government, because it is a monopoly with a monopoly’s incentive structure and agency problem, generates a lower NPV (with rare exception) than private investors. If you increase federal spending, you either have to increase taxes or inflate the currency (government debt is simply capitalizing future taxes or inflation). Either way, you transfer money from the private sector to the Federal Government. This lowers the NPV of that money, which lowers productivity growth, which lowers economic growth, which retards the recovery.

There are certain situations where this might not be true. For instance, if you taxed private luxury consumption and the Treasury invested the proceeds in the stock market, you might help the recovery. And there are also true public goods where private parties would underinvest because they do not capture all of the returns. Unfortunately, most politicians don’t really understand what a public good is; they think a public good is anything the government funds, when in fact a public good is a good which has a very low marginal cost and a very high cost of exclusion. In reality, though, there are very, very few of these (national defense being the most prominent).

But, with I can state with near certainty that increasing marginal income tax rates or selling $1T of government bonds to pay for “investment” will most definitely retard the recovery. Using Federal Government spending to aid an economic recovery is a fool’s game.

Unfortunately, Washington seems to be a fool magnet.

Cheers.

L3

While in many ways the current financial collapse in a classic bubble, it is more than a bubble. It was bubble pushed to collapse by a long term attack on the ethical and moral institutions and the political, financial, regulatory, legal and judicial systems by the Democrats, the left and the Islamists.

What this discussion should be about is what is the cure; the solution to this mess? To solve this mess, one must first have a correct diagnosis.

So to describe this financial collapse as a ” confluence of normal market movements” ignores the the political and financial chicanery behind much of this. Market corrections are generally the process in which the markets correct and punishes bad policies and practices. This collapse just didn’t happen out of thin air. There were causes. Multiple causes.

The apparent approach of the Obama Administration is to throw a huge fiscal and monetary stimulus package at this recession to bring the market back to where it was before the collapse so all will be well. But this approach ignores the causes in the first place. The Obama dare not search for causes because they know full well, many within the new administration will be tarred with responsibility once the full truth is known.

slade #64: ah, my boy, you’ve never tasted the thrill of waking up in the morning and seeing your $30,000 become $130,000, literally OVERNIGHT. Man, those were the days!

Anyway, while all the talk of suspect timing for the latest bubble is fun, L3 is right: most all of this is just the confluence of normal market movements — like rogue waves on the ocean. For a bit of perspective on how normal all these markets have been behaving, do some reading on Elliott Waves. Then read the classic book about the behind the scenes of the markets, Reminisces of a Stock Operator.

I think that it is the perfect storm, meaning that multiple failures compound, which is your point.

There was a housing bubble, a commodity bubble (copper is 1/2 what it was a year ago), which generated large revenues for governments creating bloated governments, there was the classic Keynesian overstimulation by the US borrowing the interest on it’s debt, and throw in reduced flexibility due to regulation, and we have a real problem.

Then throw in a generation of people who essentially have run the place all retiring, replaced by inexperienced and overqualified youth who will make the same mistakes their elders did but all at once.

And to mess it up even more, most western nations are facing crises of entitlements, where they need 4-5% growth in the economy to keep ahead.

I’m more pessimistic. 18 months, 2 years before it stops going down. Then a long stagnation. There are going to be cascading failures. Auto and housing are first, being big ticket finance driven. We will see a very large number of bankruptcies in the new year. Leveraged buyouts have stopped firms from failing; they were bought when weak. No leveraging to be had anymore, so firms will go under. I’m watching our customers with a gimlet eye, and expect some to disappear. Next is pension liabilities that will kill, already happening. Without returns, the regulators will force already cash strapped corps to pony up cash to top up their pension liabilities. Oops.

Then with severely reduced revenues, governments will be forced to do something. They will do something foolish, probably borrow or print money to create an inflationary cycle to reduce debt ratios. Or raise taxes. Count on stupidity, which will extend the mess another while.

We will see a number of countries default, and a larger number forced to devalue or cut costs because they can’t borrow. That may include the US if they intend to keep borrowing their way out of this mess.

Conspiracies require intelligence.

Derek

“What I fear with this classic-or-not argument is that blame will be disproportionately assinged to the “evil” middle class over-consumers rather than reform banking, finance, and congressional oversight institutions.”

I fully agree with you on the need for reform – better regulation and increased transparency are a must and the ideological push to deregulate in the belief that freer markets are more efficient and thus fairer is a canard. Ponzi schemes flourish in unregulated opaque markets. There is also the ‘mistake’ that Greenspan and many others made (which he now admits). That mistake being the belief that organizations act like individuals driven to self preservation, or in Greenspan’s words “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.” Nope, each organization is populated by individuals motivated by their interests and self-preservation, not the firms.

Add to that the ‘madness of crowds’ and you’ve got the mess we’re in. Is it a classic bubble? There are plenty of historical crashes to study but the go-go 1920’s followed by the depression of the 30’s does seem to have similarities to our current state. Leo’s prescription, however, seems to mirror that of what they did then – tighten money supply. Now they are printing up a storm and it’ll be interesting to see what happens as it filters through the system. The money that vaporized should mitigate some of the inflationary effects of the printing but it’ll be interesting to see what else occurs. I’d like to figure out how to get some of that newly minted stuff in my pocket…

Your fundamental argument appears to be that any increase in government spending will retard the recovery process. Is this a correct assessment of your view?

God have mercy if the American people are as stupid as this board thinks. Stupid enough to recognize that the Republican Party had disappeared in all but name. Stupid enough to go with the lesser of two evils. Stupid enough to think that regulators were serious about watching our backs. Stupid enough to think that Congress had or has any real regard for the middle class who will continue to pay while the rich remain rich and out of jail and the poor go back to being poor and out of sight.

Spot on. The fact that huge masses of the American public can in no way delay gratification is a source of many, many problems.

@Programmer: I have oft lamented that I skipped economics courses in college for other pursuits that have, in the long term, perhaps provided less benefit.

Agreed. Whatever I know about Eco I learned on my own. The larger tragedy is that the population at large understands next to nothing about economics, which makes them fall for all kinds of political snake oil. I bet if you took a poll, you’d find 30-40% of the populace, at least, thinks in some way that Bush was responsible for the oil price spike. They don’t have the slightest clue about supply and demand. Gas just comes out of a pump. For goodness sake, Nancy Pelosi didn’t even know natural gas is a fossil fuel.

Well that isn’t really economics, is it? The problem is more of a noxious brew. Americans at large don’t understand economics, basic science, the nature of the US government or history. That mix turns them into a pack of suckers for every scam from Global Warming to “stimulus spending.”