Economic thoughts on this-

Parent Cafe
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<p>More government debt is not going to work unless the funds go into things that really do cause LT growth with profits and productivity.</p>

<p>If you hire some people to upgrade a bridge or road, the ST impact is that these employed people will spend. But the project will end, and they may get laid off again, if the economy is still weak. Look at Japan. And, why didn’t the first stim program (Recovery Act) work? We do not have the back-drop of a growing economy, as we are still de-leveraging, just as the article states. But investment in LT growth is a MUST if we keep adding to the deficits and debt. It is a transfer of debt from the private sector to the public, but the public sector does ultimately have to have a way to pay it down!</p>

<p>The bigger bridge or road or xxxx needs to significantly add to productivity once it is completed. Obviously, we do need to upgraded our infrastructure to keep the bridges open and to avoid even higher maintenance expenses later. BUT these infrastructure projects are catch-up, not adding incremental growth. They also re-employ people, keep the labor stock up to date, and maybe avoid a revolution, all good, but NOT enough to turn around and revitalize and launch this economy for the next era. Pretty much dealing with deferred maintenance, and that is it.</p>

<p>In the depression, the projects that were DID significantly enhance the productivity of this country.</p>

<p>Fiscal stimulation is not enough.
Globalization has flooded our country with cheaper imports. Which we seem to be happy to buy!
Immigration is relatively open here, providing cheap labor, and also attracting bright foreigners into our universities. I am not a protectionist, at all, but this is a very very competitive situation. If we do not meet the competition in products and labor by making things well and cheaply, and creating new products that everyone everyone HAS to have no matter the price, we will not ever get going again.
To me, stimulating growth with investment in this sort of activity is an absolute requirement, as well.
Combine ST infrastructure spending with LT entrepreneurial spending and we might turn the ship around.</p>

<p>ST it would also help if the mortgage servicers allowed the banks to reduce the principal on the loans to match the prices of the homes. A bail-out of the underwater home-owners that will allow the loans to be repaid, so the banks come out ok, too, also crucial for our market economy to function. And this would really stimulate the economy as these mortgage holders will be de-leveraged and free to spend again.
Thus, another fiscal stim project would be funding local communities to get the bankers to work through all the local bad mortgages to get them re-priced: a good project for the gov to finance, IMHO. (Cutting interest rates did not work very well- it was just a ST fix- we want the homeowners to get above water, and also housing prices to stabilize. Then the construction cycle can wake up again.)</p>

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<p>There is no such thing as a mainstream economist who isn’t at least in part a Keynesian. American political discourse these days takes place on about a fourth-grade level. If that. If the Republican Party gets control of the government next year, the only thing that will keep it from plunging the nation into something far worse than it has now is the fact that at least some of them understand that they are lying every time they open their mouths. Some of them, I fear, don’t.</p>

<p>We have horrible deficits for three reasons: bad economy, two wars, lowest tax rates on high incomes in the past 70 years. Maybe four: out-of-control health care spending. We have to address all four of them. Cutting school budgets and yapping about “Obamacare” isn’t much of a start.</p>

<p>EDIT: I really like performersmom’s post. One thing I would add, however, is that part of why the ARRA stimulus didn’t work is that state governments were furiously shrinking government spending at the same time the feds were increasing it. Net, there really wasn’t a whole lot of stimulus . . . and now (state and local) government employment reduction is a huge part of what is really keeping unemployment high.</p>

<p>Also, I think in terms of long-term productivity the 30s era projects were very hit-or-miss. There are still plenty of monuments-for-monuments’-sake hanging around from that time, and some of the programs still around (like the milk marketing structure) are downright harmful.</p>

23

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<p>Housing spurs the economy in so many ways, I have to agree that our currrent economic doldrums are due in part to the lackluster housing market, which is hampered by:

  • people waiting for prices to hit bottom
  • tougher underwriting standards
  • changes in the way homes are appraised
  • increasing regulation which makes the underwriting and approval process 10 times as cumbersome and lengthy</p>

<p>Many of you will say: these changes were long overdue! If we’d had more regulation and oversight, the subprime mortgage meltdown wouldn’t have happened!</p>

<p>I agree to some extent, but the current level of restriction and regulation is making lending extremely difficult. Rates are at historic low levels. If people can’t get a mortgage when rates are in the 2-4% range, what will happen to the housing market when rates go up?</p>

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<p>So, JHS, people are voting with their pocketbooks and their “4th grade” econ ideas. What can we do about that?</p>

<p>One big problem is that the economic theories and practices of our times, at the PHD and Nobel and think-tank level, did not prevent us from getting here, so there is a crisis of confidence and a LOT of room for politicians and the media to say what they want.</p>

<p>We have an election coming up in 12 months. This is a CRUCIAL election. We Americans need to get going on serious problem-solving. The best minds are not coming up with much. The democratic political process was designed to prevent revolutions!! </p>

<p>CC is a good place to start to dissect the economy. Soapboxing is just a waste and will get locked. CC is full of good and educated minds like yours, JHS, to help move towards solutions that are new. The diversity of opinion and experience is a GOOD thing!</p>

<p>I do hope the moderators understand that de-politicizing discussions about the economy is very healthy and crucial and educational. We all have disagreements, but we need to keep learning about it.</p>

25

<p>Corporate profits are already at or near all-time highs.</p>

<p><a href=“http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd_fax.pdf[/url]”>http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_3rd_fax.pdf&lt;/a&gt;&lt;/p&gt;

<p>The problem is that our “job creators” suck at creating jobs in the US.</p>

<p><a href=“http://www.nytimes.com/2011/01/09/weekinreview/09powell.html[/url]”>http://www.nytimes.com/2011/01/09/weekinreview/09powell.html&lt;/a&gt;&lt;/p&gt;

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<p>Classof 2015:
The pendulum has swung too far the other way!</p>

<p>Take the banks: for many years, they were restricted from activities that would would put their (and their depositors’) capital at risk by the Glass Steagal Act. Then it was repealed. Then they got into BIG trouble! (Yes, and where were the regulators, the Fed, and so on??)
So, now, the banks are pretty much being treated like UTILITIES!!! Too much. Just break them up in to Commercial Banks and Investment Banks again, and let them compete with their own ilk. </p>

<p>Also, the Fed needs to add another tool to its shed: the ability to set leverage levels. To say" Time to raise the level of down payments and collateral to x." That is a little micro, a little like regulating the utilities, but it is crucial to set limits on lending at times, as we all now know… and regret…
But no real changes>>>>>>???</p>

27

<p>I had an assigned book many years ago in an undergrad class: The Politcal Economy. I don’t remember what was in the book but the title reminded me that politics has a big effect on economics.</p>

<p>The argument that we can behave badly in bad times and clean up the bad behaviors in the good times has been demonstrated in a few places and times but the temptation to grow the good and the bad in the good times is strong and hard to resist (by everyone).</p>

<p>In any kind of stimulus program, you’re going to have a significant chunk that goes towards getting people re-elected that may or may not be a good long-term investment. To those that don’t get a piece of the pie, it looks like robbery.</p>

<p>Of course I have a better solution.</p>

<p>Give me all of the stimulus and I’ll spend it and stimulate the economy.</p>

<p>That’s essentially what we do today - it’s just that it’s different persons instead of me.</p>

<p>The $USD indicates that there is room for spending. I just think that it gets us into permanent moral hazard mode.</p>

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<p>Moral hazard- I guess I thought that already sort went out the window, with all due respect.</p>

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<p>In economic theory, moral hazard is a situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk.</p>

<p>Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.</p>

<p>Economists explain moral hazard as a special case of information asymmetry, a situation in which one party in a transaction has more information than another. In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.</p>

<p>Moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.</p>

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<p>Excellent points, JHS.</p>

<p>Yes, the local govs also have to de-leverage, but some are re-leveraging! (And it does hurt our tax returns, if we have any income… and businesses are paying more and more local fees.) And most local govs are ALSO cutting back on programs and laying off employees AS WELL.So it was another poorly thought out program that really just transferred the problems elsewhere.</p>

<p>Yes, there were blue-ribbon projects and such in the 30’s. But I do think that many of these did require the USE of NEW or BETTER TECHNOLOGIES that were created to build these things, etc.</p>

31

<p>So what are examples of how we stimulate LT growth?</p>

<p>I saw an interview of the 2 economists that just won the Nobel Prize in Economics and when the interviewer asked them what we should do now to stimulate the economy, they just kinda stammered and stared at the camera…THAT was scary.</p>

<p>And I agree that it is unfortunately tied to politics.</p>

32

<p>Very educational post BCE. Thank you!</p>

<p>Now, I have a question. Is the government or its agencies or officials in any way subject to to moral hazard?</p>

<p>And is moral hazard based on just common sense, or is there a legalistic process to define and protect it?</p>

<p>In the case of TARP, was the fact that the banks re-paid the bail-out money with interest the reason it did not violate moral hazard?</p>

<p>Thanks. (just trying to get beyond my econ education holes!!)</p>

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<p>rom-
I actually still an optimist. I believe that the power of a really great idea (economics, political process) and product or service (growth) CAN trump this all, but ONLY if people listen and open their minds, and try to learn more about it.</p>

<p>When things get really bad, humans have two choices: act purely on emotion (fear, anger) , or use reason.</p>

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<p>I don’t even pretend to understand economics. The more I read and hear about it the more opaque it becomes. I think that I am not alone. I think that the overwhelming majority of Americans just don’t get it either. Even those who do get it (like several CC posters), and can talk about it at great length, with impressive detail, do not agree on what course to take. Why is that? Simply because it is not really a science, where data is measurable in the absolute sense. It is really an art masquerading as science. It uses a ‘scientific’ , ie - predictable, approach to something that is essentially unpredictable. The economy is basically the interaction of human beings with regard to materials goods. The goods may be measurable and predictable but the humans are not. To insist on one economic practise over another disregards that very important and never to be reconciled thorn in the economists’ sides. There will be disagreement to infinity. If, by some miracle, we all finally recognize this insurmountable flaw in economic theory perhaps we can start to make things better. The real (and next to impossible) challenge is to get ALL people to work together for a common goal, sacrificing their many ‘wants’ along the way. The state of the economy, as it is, is a very telling reflection of the state of humankind and how all of its ‘interests’ compete.</p>

<p>Off my soapbox now, and apologies to those hoping to see yet another ‘economic analysis cureall’.</p>

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<p>I’m an optimist too! Which is why we still own a real estate company :rolleyes:! We keep seeing signs of a recovery in the housing market, but too many stalls as well.</p>

<p>I’d also like to believe that as a country, we are too creative and innovative to just sit back and wait for the government to SOLVE the problems. I’d like to think that the government will facilitate - maybe that’s my optimism showing again.</p>

<p>I know for our business, we are trying to look for ways to work within our current situation to do business. There is just a general lack of consumer confidence - the fear of the unknown.</p>

36

<p>I can’t let the “phony” comment pass without saying that economists often make that point in their texts, although more softly… so that it isn’t examined carefully.</p>

<p>How does that viewpoint affect a holder of T bills? Should he just “cancel” the debt that he holds? I don’t think so. Debt has to be serviced, at the very least. The $50k US debt per citizen is unarguable. Its much higher per taxpayer. That’s a fact. Falls into the category of sad but true, but its still a fact. (And that’s simply the formal debt.)</p>

<p>I don’t disagree that we will have to add to it to optimize (minimize the damages) the country’s economic fortunes.</p>

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<p>Rom- that is the essence of entrepreneurialism, solving problems. Best best best of luck!</p>

<p>leanid,
Yes, economics is far from a science, but quantitative computerized modeling approach is useful (but only up to certain point, we have learned- yet it is very very seductive…) Our times are all about trusting computer-generated data. We have to learn how MUCH to trust it!! By being honest about the uncertainly of all the variables being known and inputted…</p>

<p>You might be interested in the Game Theory of economics- a relatively new branch which tries to factor in how people make decisions and actually behave. Ironically, having computers does make it easier for us to understand this enormously complex and varied variable! Up till this theory, economists’ assumed that all humans behaved and thought alike. Handling multiple variables would have been impossible until we harnessed the power of digital computing.</p>

<p>One cautionary note:
Yes, economists disagree. And so do politicians and their constituents.
But that does not excuse the expounding and use of totally erroneous policies, and the intellectually inconsistent and unexplored outcomes.
The media exploits the uncertain nature of economics beyond the point of true usefulness.</p>

<p>It does feel like managing a huge economy is a big experiment, unfortunately.
Creating new products and services that fly is also a very speculative or experimental activity- no guarantees, but you can guarantee that nothing will come of nothing.</p>

38

<p>Moral hazard is often associated with insurance and the Government often provides insurance functions.</p>

<p>Two-thirds of the US is overweight with half of those people in the obese category. If you didn’t have health insurance, would you take better care of yourself at a younger age or would you let things slide as there are all sorts of incredible medical technologies that can fix things when they break?</p>

<p>Yes, there are many that fix their health problems on their own when they don’t have to for better quality of life (see the diet and exercise thread for many examples). But it’s easy to let things go if you have someone that will fix things for you if they break.</p>

<p>Examples to stimulate LT growth: education (not specifically schools) and research. These are things that require investment with returns decades later. Inexpensive programs to improve health and decrease healthcare costs. Education and healthcare have exponentially growing costs - both look headed in the wrong direction.</p>

39

<p>The author is correct. </p>

<p>The people have been fooled/scared into thinking our gov’ts debt is a problem because it makes for good sound bites and people have been led to believe that gov’t being in debt is like an individual person being it debt.</p>

40

<p>BCE, and your post philosophically gets to the issue of waiting for the gov to solve problems.</p>

<p>Yes, growth cannot be created by government. Society and individuals do that.</p>

<p>Do you think that part of the economic problem is that the gov is in the “insurance” business? (Purely economic/incentive q here!)</p>

<p>I see that the costs of all these regulators like the FDIC, the FDA, the SEC, FERC and so forth is high, but I do not see much in the way of returns from that…
This is not a political comment- if these agencies were effective at finding and shutting down MADOFFS and CDO’s and NO-NO MORTGAGES and ENRON, that would be dandy!!</p>