May 18, 2003

More Gloom

The Financial Times's Lex gets very gloomy on the U.S. economic outlook:


FT.com Home US: April's US inflation data were surprisingly weak. As the Federal Reserve has made plain, inflation is at a level where further falls are not welcome. The trend is not encouraging. But the chief reason why deflation is a risk is that the economy has long been operating below trend. The improvement in the Michigan consumer confidence survey is welcome, but that has to be set against weak data on consumer and business spending. It looks like further monetary stimulus (orthodox or otherwise) is needed to aid recovery.

Fiscal policy will provide some help. But the focus on the size of the "headline" tax cut is backward and there will be little bang for the buck. Goldman Sachs economists estimate that when a budget is finally passed the impact will be worth up to 0.75 per cent of gross domestic product this year. The impact from the war in Iraq could raise the overall stimulus to just north of 1 per cent - or half as much as last year. There may be some impact on stock prices from a dividend tax cut, but expectations should be modest.

The point of ending the double taxation of dividends is not short-term stimulus but rather improved capital allocation in the long term. "Sunsetting" the tax cut - rescinding it in 2007 - then makes no sense, though the logic of these things is that once enacted it will be here to stay. Sadly, it is hard to see how the long-term benefits will outweigh the costs associated with the rising budget deficits. For anyone who believes that sensible policymaking contributed to strong economic performance in the 1990s, the Bush administration's record is rather deflating.

Posted by DeLong at May 18, 2003 01:13 PM | TrackBack

Comments

We have followed the course of the economic slowing in Japan closely for a decade, and firmly believe there is much to be learned from the Japanese experience. The problem is that Americans and Europeans have a tendency to view Japan in extremes, and so discount the policy initiatives that have much eased the problem in Japan over the decade.

Remember, Germany is now in recession again and Italy and the Netherlands have had negative GDP growth this past quarter. Time to look at Europe as well as America, and to learn what "helped" in Japan.

Posted by: jd on May 18, 2003 02:51 PM

I should add that Japan, against all outside advice, has tried to support internal employment with fiscal policy this past decade and that has significantly lessened the personal impact of the slow growth. I believe we make far too little of Japan's attempt to maintain high employment levels and healthy salaries.

When we are in japan and when we talk with Japanese friends, employment and healthy salaries and benefits are repeatedly pointed to as signs of strength. I believe they are surely such signs, though western economists seldom agree. I still believe we should pay attention.

Posted by: jd on May 18, 2003 03:40 PM

>When we are in japan and when we talk with Japanese
>friends, employment and healthy salaries and benefits are
>repeatedly pointed to as signs of strength. I believe they
>are surely such signs, though western economists seldom
>agree. I still believe we should pay attention.

I think there are two big difficulties with paying attention to Japan as an example to follow. The first is that their economy is still going nowhere, and they have a *severe* demographic problem coming up that will eventually force some kind of real structural change in the society. I don't know what that will be. The second major difficulty with following the Japanese example is that the nation is strikingly anti-Western in one important respect: Japan does not have anything like modern naturalization or citizenship policies. Nobody who is not Japanese can become a citizen, and, from what I have seen, citizens and non-citizens are not treated at all alike. I don't see a happy outcome here, either. Stein's Law states that "If something cannot go on forever, it will stop." Pretty clearly, Japan cannot maintain its current course forever. But what will change?

Posted by: Jonathan King on May 18, 2003 03:59 PM

Japan's "success" at maintaining high employment has come at the expense of failing to allow yet another market, that for labor, to clear. It would have been far better for Japan to have introduced a generous program of unemployment benefits and retraining; instead, companies have been forced to keep surplus labor, banks have been forced to lend to these unprofitable companies, and the Japanese Treasury has been forced to undermine public finances in order to support the insolvent banking system. All to maintain full "employment".

And then, in the end, you will have far greater economic dislocation and social pain - unless jd can explain how the Japanese approach can eventually lead back to normal growth.

Posted by: Dave Larson on May 18, 2003 06:07 PM

I am reminded that the Austrian school recommends taking on high unemployment in the short run to put the economy in recession and let it recover as opposed to monetary policy to keep the economy from falling into recession but results in a long sideways period. Maybe the Bush fiscal policy is based on the Austrian school. Let the economy founder now so it will roar back much sooner. The only problem- the Austrian school prescription is policitally unacceptable. It leads to high unemployment that is ensures that the encumbent will not be re-elected.

We really have the effects of the wealth distribution problem finally catching up with the economy. If the wealthy are far ahead of the Joneses, why should they buy more? If the Joneses have no money how can they buy more? In a climate of slack demand, why should buisness invest in the next great wave? GOP policies that lead to concentration of wealth ultimately tank economies and make both the wealthy and the middle class poorer.

Posted by: bakho on May 18, 2003 09:42 PM

Is there anyone willing to argue for a fiscal stimulus sufficient to get us back to full employment? If we need to reduce the unemployment rate by 1.5 percentage points, then by Okun's Law that requires 3 percent more GDP. With a fiscal multiplier of no more than 1.5, that means that we need an additional deficit of at least 2 percent of GDP. But people are having heart failure over a deficit of 0.75 percent more of GDP.

I know that all the good liberal Democrats think that we could solve the problem by front-loading the deficit spending instead of back-loading it. But are you willing to suggest some actual numbers, and a real path for fiscal policy? I mean, are we talking about raising the deficit by 2 percent of GDP for a year or so, and then slamming fiscal policy into reverse? Anybody want to stick their neck out and make a proposal?

Posted by: Arnold Kling on May 19, 2003 06:18 AM

The Democrats plan would create about 1 million new jobs at the cost of a little over $100 Billion. This is still too much per job ($100,000) but far better than the Bush proposal to create 1.4 million jobs with a $700+ Billion package. The problem with the Bush package is it is too backloaded.

The Democratic alternative is frontloaded and has some backloaded offsets embedded. They get a lot of bang up front where it is needed. However, the Democratic plan also has some backloaded elements. For instance, making low income tax cuts permanent. If you strip out the backloaded elements of the Democratic plan (a short term rebate instead of a tax rate cut), then the Democratic plan could be made to come in at $24 Billion or only $24,000 per job, a quite reasonable figure considering all the other positives of increased employment.

If providing a short term economic jobs stimulus were the only objective, Congress could call in the economists and come up with a simple compromise that did not bust the budget. However, President Bush is intent on coupling his long term tax cuts for the wealthy to a short term stimulus package. What we get is not enough short term stimulus and a budget busting long term package. So yes, a job creation econmoic stimulus is possible and you are correct that the dollar figure is about 2-3% of GDP.

Posted by: bakho on May 19, 2003 07:29 AM

--"Anybody want to stick their neck out and make a proposal?"--

An employment program putting people to work retrofitting federal, state and municipal government buildings to be more energy efficient, then commercial buildings, then homes. The benefits and the payoff are obvious.

Pay for this with a tax on wealth.

Posted by: IssuesGuy on May 19, 2003 01:27 PM

Why not fully fund Medicaid needs through the States? Why are the rich getting tax cuts and the poor losing benefits?

Why not fund health care needs for millions of working people who are not covered by employer insurance. Of course, there would have to be incentives for employers to continue already existing coverage, but we could help the rest and ourselves by extending such coverage.

Posted by: bill on May 19, 2003 01:49 PM

"The first is that their economy is still going nowhere, and they have a *severe* demographic problem coming up that will eventually force some kind of real structural change in the society. I don't know what that will be. The second major difficulty with following the Japanese example is that the nation is strikingly anti-Western in one important respect: Japan does not have anything like modern naturalization or citizenship policies. Nobody who is not Japanese can become a citizen,..."

Well, their islands are pretty full. More full than Europe (especially including eastern Europe) and way more full than the U.S.

http://www.jinjapan.org/stat/stats/01CEN2A.html

So the only "solution" I see is for them to work when they're *really* old.

There was an interesting 60 Minutes piece, a couple weeks ago, about people in the U.S. working well beyond the standard retirement age. One company featured was even essentially based on "post-retirement" workers. They're friendly. And dependable...at least in the sense that they don't cut out early to get the kids to soccer practice. ;-)

Posted by: Mark Bahner on May 19, 2003 02:07 PM

"Is there anyone willing to argue for a fiscal stimulus sufficient to get us back to full employment?"

Not me. ;-)

The problems with "fiscal stimulus" are: 1) it is never really temporary--we're STILL paying that @#$% mohair subsidy! :-( -- and, 2) the federal government just doesn't spend money as productively as the private sector.

http://www.washingtonpost.com/wp-srv/politics/special/budget/stories/revolt080399.htm

Rather than boosting federal spending, we should be shifting more federal spending to the private sector (or at least to the states), and allow big federal tax cuts, while still allowing the federal budget to be balanced.

Some good goals:

1) Bring all the troops back from Europe, South Korea and elsewhere away, and phase them out of the Middle East within the next 12 months. That would allow us to cut troop strength by at least 50%. It's crazy to have troops in Germany, Italy, Belgium, and Britain, when there isn't even the slightest chance those countries will be attacked.

2) Eliminate the FDA, and allow Underwriters' Laboratories or Consumer Reports-type private businesses to monitor safety and effectiveness of food and drugs.

3) Start selling federal lands. It's ridiculous to have the federal government own 1/3rd of the land in the U.S.

4) Certainly stop paying farmers not to farm! Or to farm, for that matter.

Posted by: Mark Bahner on May 19, 2003 02:33 PM

//
3) Start selling federal lands. It's ridiculous to have the federal government own 1/3rd of the land in the U.S.
//

That federal property is the reason the USA did not fall in the tyrannical ways so common South of Rio Grande.

DSW

Posted by: Antoni Jaume on May 19, 2003 03:27 PM
Post a comment