The US v. the UK on Austerity

Paul Krugman notes the following:

He writes:

[Chancellor of the Exchequer, Greg] Osborne’s big idea was that Britain should turn to fiscal austerity now now now, even though the economy remained deeply depressed; it would all work out, he insisted, because the confidence fairy would come to the rescue. Never mind those whining Keynesians who said that premature austerity would send Britain into a double-dip recession.

Strange to say, Britain’s recovery stalled soon after Cameron/Osborne began their new policies, and the country is now in a double-dip recession.

This is the kind of thing that ought to, at least, gives us pause for thought on the question of the appropriate fiscal policies going forward.  It is, after all, an actual comparative set of empirical observations as opposed to wishful thinking about how policy might actually work.

FILED UNDER: Europe, Quick Takes, US Politics, World Politics
Steven L. Taylor
About Steven L. Taylor
Steven L. Taylor is a Professor of Political Science and a College of Arts and Sciences Dean. His main areas of expertise include parties, elections, and the institutional design of democracies. His most recent book is the co-authored A Different Democracy: American Government in a 31-Country Perspective. He earned his Ph.D. from the University of Texas and his BA from the University of California, Irvine. He has been blogging since 2003 (originally at the now defunct Poliblog). Follow Steven on Twitter

Comments

  1. MBunge says:

    I wonder if that graph makes Krugman reconsider all his bitching about Obama over the last 4 years? Almost all liberal complaints about the President assume that things couldn’t be any worse than they are now, but that’s clearly not the case. The federal government could, and probably would, have enacted much more pro-austerity policies than it did without Obama in the White House.

    Mike

  2. al-Ameda says:

    I know of no instance where a regimen of austerity based cutbacks has ever resulted in increasing aggregate demand.

    It’s medieval medicine – prescribe leeches and bloodletting for a patient with severe pneumonia.

  3. @MBunge:

    Krugman thinks Obama could have done better with a bigger stimulus. I think I remember him asking for around $3T but some have accused him of wanting $4T or $5T.

  4. MBunge says:

    @john personna: “Krugman thinks Obama could have done better with a bigger stimulus.”

    The problem is that Krugman’s writing on this subject assumes a significantly bigger stimulus was not only possible but would have been rather easy to achieve.

    Mike

  5. michael reynolds says:

    I have a prediction: this data will have no impact on the opinions of conservatives.

    Yes, we are outperforming the countries that tried austerity. The UK is back in recession. Ireland is flat on its ass. Greece is a wreck. And a big part of the weakness we are suffering comes from cutbacks in government jobs.

    Once again right-wing economic theories crash and burn in the real world. And it will have no effect whatsoever on their beliefs.

  6. Having not looked into this particular data very deeply, I would advise extreme caution when Paul Krugman is this selective in showing his data. Usually (for him) this means that even the simplest research into the matter shows that his claims are not upheld by the whole data set.

  7. On the broader issue:

    It’s a tragedy of our times. The economically strong argument is politically weak. The truth is not truthy enough, or something.

  8. @Political Math:

    Technically, that is an argument from missing data. You say that you haven’t looked, but if you did, Krugman would probably be wrong.

    Of course, the GDP graphs are not from Krugman.

  9. @MBunge:

    The problem is that Krugman’s writing on this subject assumes a significantly bigger stimulus was not only possible but would have been rather easy to achieve.

    Couldn’t we say that he anchored the “big stimulus” position?

    He didn’t win, but presumably without him stimulus would have been smaller (or even absent).

  10. sashal says:

    @Political Math:
    really, really.?
    Would you care to come with a simplest one?

  11. MBunge says:

    @john personna: “He didn’t win, but presumably without him stimulus would have been smaller (or even absent).”

    Perhaps, but then instead of championing the stimulus we got, Krugman mostly talked about how much it sucked. It’s one thing to fight like mad before a policy is enacted. Once Policy X is passed, especially if Policy X is close to what you’d prefer, incessantly complaining about the problems and flaws in Policy X is extremely counterproductive. Krugman, and other liberals like him, seemed far more concerned about making sure everyone knew they were right, rather than being interested in getting the best possible policy in place. Those two things are not the same, unfortunately.

    Mike

  12. JohnMcC says:

    Actually we are having a similar austerity problem. The ‘stimulous’ — small and poorly directed as it was — is the only reason that the US performance is not as bad as the British.

    From the WSJ ‘Real Time Economics’ blog of July 31st this year: “…in the current Obama recovery…total public outlays have decreased at an annualized rate of 1.5%….In the previous five expansions, dating back to 1975, government spending grew an average of 1.9%….The current pull back in government spending….helps explain why on (an) annualized basis the the GDP has grown just 2.2%…the weakest since WW2….By comparison, federal spending grew at 3.5%…during the longer of two Reagan-era recoveries and grew at a 3.8% rate during the George W Bush recovery….”

    For which Mr Ryan (along wih Mr Cantor and many other so-called-conservatives in Congress and state governments) would be blamed if this were a fair and balanced media world.

  13. Yep. It is exactly as I suspected.

    Crunched the numbers and it turns out that, among the ten G20 countries that had very low stimulus in the wake of the 2008 recession (under 2% of GDP), the UK is the single worst performing country of the group. Only 3 of those countries have performed worse than the US economically, the other seven have beat us handily.

  14. @Political Math:

    This Chart Vindicates The Obama Economic Recovery

    According to that effort, the US is outgrowing the Eurozone as a whole.

    How does your math show us doing worse?

  15. al-Ameda says:

    @Political Math:

    Having not looked into this particular data very deeply, I would advise extreme caution when Paul Krugman is this selective in showing his data. Usually (for him) this means that even the simplest research into the matter shows that his claims are not upheld by the whole data set.

    Okay, so what are some examples where Krugman’s claims were not supported by the data he used?

  16. Stan says:

    It’s interesting to compare Krugman’s graph with a similar one showing per capita GDP during the Great Depression:

    http://en.wikipedia.org/wiki/File:GDP_depression.svg

    The present recovery is a little more robust than in the 30’s, but shows the same phenomenon of production recovering much more rapidly than employment. Is it possible that when a bubble breaks, whether in 1929 or 2007, employers learn they can make do with fewer workers? Or is there simply a time lag during which employers recover their nerve and start expanding again?

  17. neil hudelson says:

    @Political Math:

    Don’t be coy. If you’ve “crunched the numbers” surely you can share your work/results?

  18. Rick Almeida says:

    @Political Math:

    It is exactly as I suspected.

    Indeed. Anonymous commenter claims magical insights and powers, makes arguments by assertion, shows no evidence.

    Nothing new to see here.

  19. kennyb says:

    Is the UK actually trying austerity though?

    Over the last 3 full years the UK deficit has been
    11.5% 10.3% and 8.3% of gdp.

    The US’s has been 10.9% 8.9% & 8.61%.

    Doesn’t really look as if the UK ,despite what Labour and the Guardian claim, is really engaging in ‘austerity’.

  20. stonetools says:

    @Political Math:

    That is such a bad anti-Krugman argument that its not even wrong. Why don’t you come up with the missing data, genius?

  21. David M says:

    @Political Math:

    Crunched the numbers and it turns out that, among the ten G20 countries that had very low stimulus in the wake of the 2008 recession (under 2% of GDP), the UK is the single worst performing country of the group. Only 3 of those countries have performed worse than the US economically, the other seven have beat us handily.

    “very low stimulus” is not the same as the austerity in the UK, so I don’t think that comparison is very useful.

  22. @john personna: I’m looking specifically at the G20 countries (largely due to the fact that I can find collected data on the G20 stimulus responses to the 2008 recession here.)

    I then compare the GDP increases on the same 100 point scale that Krugman used running from 2007 to 2012. I then extract the countries that had “very low” stimulus (anything under 2% GDP, the UK stimulus was 1.5% GDP). These countries were Argentina, Australia, Brazil, France, Russia, Italy, India, Mexico, Turkey, and the UK.

    Among these countries, the UK was had the single lowest growing GDP. So Paul Krugman selected that one. If you follow up on his charts (especially the ones that follow very few data points) you’ll find he does this with predictable frequency.

    This data is very easy to find, I invite you to double check my work.

  23. rudderpedals says:

    @Political Math: The Brookings piece is from March 2009. Any newer data?

  24. David M says:

    @Political Math:

    Mexico and India would seem to be odd countries to include in a comparison with the US economy.

  25. KariQ says:

    Austerity cannot fail, it can only be failed.

  26. stonetools says:

    @kennyb:

    Doesn’t really look as if the UK ,despite what Labour and the Guardian claim, is really engaging in ‘austerity’.

    Whatever they’re doing, its ain’t stimulus. The Economist on the UK:

    Britain is a complicated story, in other words. Its new recession is demand driven, which suggests that government cuts are not irrelevant. A more aggressive monetary policy might have succeeded in offsetting the effect of those cuts, however, especially if British banks weren’t facing funding difficulties while struggling to deleverage.

    LINK

    The Economist seems to be saying that this is a demand driven recession, driven at least in part by Government cuts ( How it must have cost them to admit that).

  27. stonetools says:

    @Political Math:

    Crunched the numbers and it turns out that, among the ten G20 countries that had very low stimulus in the wake of the 2008 recession (under 2% of GDP), the UK is the single worst performing country of the group. Only 3 of those countries have performed worse than the US economically, the other seven have beat us handily.

    I’d kind of like to see your work, since you claim that Krugman, a Nobel Prize winning economist , is wrong and all. Thanks in advance

  28. What a fascinating comment thread. Abuse, attacks, not a single effort to follow up on any of my claims.

    One of the reasons I hesitate to post data immediately is because I research data, crunch it, plot it, examine it… and then people in comment threads post their data-free speculations about why I’m wrong. It takes me about an hour, it takes them 15 seconds. My information in based in a data reality (that is easy enough for anyone to research if they have the energy to do so), their information is based in pure speculation.

    So. Here is the GDP by country (easily found by Googling “GDP by country”). I’ve previously linked to the G20 stimulus data.

    This will be my last comment response to anyone who can’t tell me how Australia, the UK and the US compare in this data. And then let me know how the UK compares to all G20 countries.

    It’s easy to simply attack people in a comment thread. Show that you’re serious and run the numbers your own self.

    David M pointed out that there is not *necessarily* a correlation between current austerity programs and stimulus packages (an excellent example of that non-correlation being Ireland) but Paul Krugman has been on a kick attacking non-stimulus as austerity for a couple years now, so I naturally went to that data for investigation.

  29. michael reynolds says:

    @Political Math:

    Turkey? Argentina? India? Russia?

    It’s bad enough comparing Granny Smiths to Red Delicious – the US/UK comparison. Further out comparing apples to oranges — US vs. Argentina. But US vs. Mexico? That’s comparing apples and cows.

  30. Jim Henley says:

    @kennyb: Your comparative deficit numbers can’t show “austerity” or lack thereof. You have to look at changes in nominal and real taxation and spending. Remember that one critique of austerity policies in slumps is that they’re self-defeating on their own terms – themselves depressing output and employment enough to reduce tax revenues and further strain what safety-net programs remain in place, thus pushing the deficit upward despite intending to reduce it. Spain shows this pattern very clearly, for instance.

    Only allowing policies to take the name “austerity” if they showed the decline in deficits and debt that the policy makers declared as their goal would be like reserving the term “communism” for systems where the workers own the means of production and that works out great.

  31. al-Ameda says:

    @Political Math:

    This will be my last comment response to anyone who can’t tell me how Australia, the UK and the US compare in this data. And then let me know how the UK compares to all G20 countries.

    You still have not explained how Paul Krugman, in using UK data for comparison, committed an error or mislead the readers.

  32. Chris says:

    If I submitted this chart in a statistics class and tried to infer causality from it, I’d be thrown out. Anyone using it should know better but likely they rely on the ignorance of their readers – a sad and arrogant abuse of their position.

  33. anjin-san says:

    Once again right-wing economic theories crash and burn in the real world. And it will have no effect whatsoever on their beliefs.

    Ah, the intellectual universe of the right. Fox News and some talk radio shows, surrounded by reality…

  34. MoneyWatcher says:

    @Political Math: Love your videos and blog – you always do excellent work. Ignore those who are just knee-jerk defending Krugman.

    Another little factoid that I read on Dan Mitchell’s blog is that a number of these “struggling” economies not only imposed “austerity”, but raised taxes – a killer in a recovery. Plus, the “austerity” is anything but real spending cuts. Often politicians claim they are making spending cuts when all they do is cut the rate of growth – which is not a cut, it is a continuation of an increase.

    Anyway, for those of you who question math in general – try it out, it does wonders. Kruggy is a smart guy when it comes to international trade theory (heck, he got a Nobel) but not so much when it comes to other areas of Economics. He was hired as to be an attack dog and he is paid well for his work.

  35. stonetools says:

    Sorry late catching up. I’ve looked at the report, ands its pretty damned clear that Krugman is right that the UK took a wrong turn in going to austerity. The report’s finding:.

    There are legitimate questions about the effectiveness of fiscal stimulus, especially in economies where the financial system has broken down and where monetary policy can no longer play much of a supporting role. Moreover, excessive government borrowing to finance large budget deficits could itself generate instability and there are serious concerns about medium-term sustainability of fiscal positions in economies that are building up public debt at a rapid pace. Given the dire and fast-deteriorating economic situation and the lack of other tools, however, the world may have little choice but to engage in massive frontloaded fiscal expansion. The consequences of timidity, as history teaches us, could be even worse.

    Compare with Krugman’s conclusion:

    Britain is suffering from lack of demand; it could have a quick (not magical) recovery if policies were taken to stimulate demand. It’s the belief that the country can’t recover quickly, not the belief that it can, that constitutes economic mysticism.

    And the slump — which has now, in Britain, lasted longer than the slump in the 1930s — goes on.

    Seems to me Dr. K is right again.

  36. ulyssesmsu says:

    @Political Math: Exactly–a very good, precise description of how a smart person like Krugman can be so ignorant and clueless.

  37. Pants Dailyon says:

    @Political Math: @Political Math:
    So Krugman only used the cross section of the tree whose rings support his preconceived notion? I’m going to start calling him KrugMann.

  38. @Chris:

    If I submitted this chart in a statistics class and tried to infer causality from it, I’d be thrown out. Anyone using it should know better but likely they rely on the ignorance of their readers – a sad and arrogant abuse of their position.

    Except, speaking for myself, I did not try to infer causality, I said it ought “us pause for thought”–which is all I could possibly expect from a very brief post that provided two variables in a two case comparison. This isn’t stats class, it is an attempt to encourage a “pause for thought.”

    I would note that the Cameron government has engaged in policies not dissimilar to the suggestions of the GOP and it has not resulted in the results that they claimed would be the case.

    Now, it is quite possible there are any number of confounding variables that would explain this, and certainly I am happy to entertain those possibilities.

    However, the notion that if the government would simply deal with spending that confidence would be restored and the economy would right itself, seems to lack empirical confirmation to date.

  39. Ben Wolf says:

    @Political Math: Firstly Argentina, Australia, Brazil, Russia, Italy, India, Mexico, and Turkey did not suffer directly from a debt-fuelled financial crash.

    Secondly you haven’t taken into account these countries’ trade balances. A current account surplus is just another form of stimulus.

    Thirdly you haven’t considered differences in automatic stabilizers across political systems.

    Fourthly you are comparing developing nations with developed nations.

  40. rudderpedals says:

    @Political Math: What a fascinating comment thread. Abuse, attacks, not a single effort to follow up on any of my claims.

    You forgot avoidance and that’s what you’re doing.

    Your data stops at the end of the recession. It’s meaningless to discuss three years of austerity as implemented with a reference set that excludes the more than three years that have passed. You need newer data.

  41. @Political Math:

    One of the reasons I hesitate to post data immediately is because I research data, crunch it, plot it, examine it… and then people in comment threads post their data-free speculations about why I’m wrong. It takes me about an hour, it takes them 15 seconds.

    On the one hand, you have a point: commenters, as a general proposition, often do respond in a data free way and often will make glib responses that take no time at all to try and argue with something that took an hour or more.

    On the other, I don’t understand the notion of doing the calcs and then being unwilling to share, especially if one is basing an argument on those numbers.

    As an aside: wouldn’t a G8 comparison be more helpful than a G20?

  42. stonetools says:

    One of the reasons I hesitate to post data immediately is because I research data, crunch it, plot it, examine it… and then people in comment threads post their data-free speculations about why I’m wrong. It takes me about an hour, it takes them 15 seconds. My information in based in a data reality (that is easy enough for anyone to research if they have the energy to do so), their information is based in pure speculation.

    I appreciate your work and all, but the report you referred us to concludes that major fiscal stimulus is the correct course of action for countries to take in light of the current recession. This is what Krugman has been saying from day one. I can’t really fathom how that makes your case that Krugman is misleading us. Please explain it to me , because I’m not seeing it.
    As for Australia, this might be interesting:

    Japanese and Australian stock futures rose after Federal Reserve Chairman Ben S. Bernanke signaled further monetary easing. Gains in Asian equities may be limited after China’s manufacturing unexpectedly contracted in August and the yen’s rise to a three-week high against the dollar weighs on Japanese exporters.

    LINK

    Seems Australians WANT us to engage in more stimulus.

    Moreover, Australia has engaged in TWO rounds of stimulus. The result?:

    The March quarter national accounts showed that the Australian economy grew by 0.4%,[18] a number not foreseen by many until the positive balance of trade statistics released the day before. The main contributors to this result were the large fall in the current account deficit and increasing household consumption. Apart from the manufacturing sector, the Australian economy avoided a technical recession. Reserve Bank economists endorsed the first two phases of stimulus a year later, saying it was “undeniable” that government spending had supported the economy.[

    LINK

    Maybe Mr. Political Math needs to do more work.

  43. Gustopher says:

    And that is with England’s Olympics spending as a chunk of stimulus.

    However, had we elected McCain, the Republican congress would have wanted to support the President, so there likely wouldn’t have been a call for austerity at all in the US. And, many of Europe’s conservative parties may have been following the US conservative’s lead.

    So, I think we might have been better off economicly with McCain — align the goals of the hostage takers with the American people.

  44. Andre Kenji says:

    1-) The United States is not Europe. The problems that the Europeans face does not have to do with Austerity or lack of austerity. Note that the European countries that are doing relatively well are the countries that invested in manufacturing.

    2-) Krugman said that debt in the United States was not a problem because Italy ahd a debt to GDP ratio of 120% and it was Italy.

    3-) The idea of austerity is not promoting growth. The idea is that you should have your house in order so you can grow in the future. That´s what usually is done to fight inflation, for instance. A small recession in 2001 could have avoided the Disaster in 2008.

    The idea that we should NEVER have recessions is insane;

  45. Andre Kenji says:

    Krugman @Steven L. Taylor:

    I would note that the Cameron government has engaged in policies not dissimilar to the suggestions of the GOP and it has not resulted in the results that they claimed would be the case.

    No, they did not. Cameron took tough actions regarding the deficit and the debt: he even RAISED TAXES and cut defense spending. The austerity that Republicans defend is a fantasy;

  46. @Andre Kenji:

    he even RAISED TAXES and cut defense spending.

    Fair enough. A legit point.

    The austerity that Republicans defend is a fantas

    On this we can agree.

  47. Chris says:

    @Steven L. Taylor: One chart is not sufficient empirical evidence and as you say, there are other variables at play which aren’t considered. Plus I’m not sure that you fully understand the Republican position on the deficit. It’s primarily to re-vamp entitlement programs, lower tax rates and cut government spending all in an effort to stimulate lasting demand rather than short-term “stimulus” demand.

  48. @Political Math:

    (Been away for a while, forgive the delay)

    OK, that is greater specificity, but you are suggesting that we argue from a different data set.

    Up top Krugman used Britain. I added the Eurozone as a whole. You are suggesting “the ten G20 countries that had very low stimulus in the wake of the 2008 recession”

    What we need, is a scatter chart to make sense of it all. Like this one, from Mr. Krugman.

    I actually think this one from National Review works as well. The regression line is badly perturbed by equally weighting for Estonia (and to a lesser extent, Iceland). Without the flyers, it concurs with Krugman.

  49. Console says:

    @Andre Kenji:

    1) the UK isn’t Europe either, which is why it’s a perfect example. They control their own monetary policy and don’t have to submit to unnecessary austerity. But they did.

    2) The point of bringing up Italy isn’t it’s gdp/debt ratio, it’s the fact that it was running a primary budget surplus and it still managed to get caught up with the rest of the PIIGS. It’s a point on the stupidity of having a fixed currency

    3) That’s what makes the Italy point salient. For the PIIGS, it really isn’t enough to get their fiscal house in order. Spain is also exemplary of this. The more obvious point is that you can’t shrink your way to good credit. Recessions aren’t some wholly separate issue from the subject. Recessions literally mean that the economy is shrinking. A shrinking economy means a government will have LESS ability to pay it’s debts. We can pretend that the UK will be in a better position in the future, but even that’s up in the air.

  50. Ben Wolf says:

    @Chris:

    It’s primarily to re-vamp entitlement programs, lower tax rates and cut government spending all in an effort to stimulate lasting demand rather than short-term “stimulus” demand.

    Cutting taxes on high-income earners who will simply save it, and reducing spending cannot stimulate demand. If you’re so certain there is such a thing as “long-term demand” then you should have no difficulty telling us how long austerity must be maintained before we see it.

    @Andre Kenji

    We did have a recession in 2001, when the dot com bubble burst. Recessions do not limit debt-driven boom/bust cycles, and no, we should never tolerate recessions. The notion that downturns have some sort of positive long-term economic effect has absolutely no empirical support, it’s just more anti-government ideology.

  51. @Ben Wolf:

    The notion that downturns have some sort of positive long-term economic effect has absolutely no empirical support, it’s just more anti-government ideology.

    Does that assertion rely on there not being miss allocation of resources?

    Should the 50’s tract homes in my neighborhood have kept going past $1.2M?

  52. Ben Wolf says:

    @Steven L. Taylor:

    However, the notion that if the government would simply deal with spending that confidence would be restored and the economy would right itself, seems to lack empirical confirmation to date.

    There are some exceedingly basic concepts that proponents of austerity do not seem to consider. One is that incomes are derived from spending. Spend less and incomes fall creating unemployment, which decreases revenues, which increases spending by stabilizers and defeats the budgetary goal of reducing deficits. The UK’s budget deficit is high because of this very relationship, not because it has secretly embraced stimulus as one or two in this thread have suggested.

    I’ve found it near maddening how resistant people can be to evidence.

  53. Ben Wolf says:

    @john personna: The problem in what you write is your assumption that a financial bubble can only be corrected by a downturn in the real economy. This is not so.

  54. Andre Kenji says:

    @Console:

    1-) No, it´s not a good example. Britain is not a continental country and economically speaking very different from the US. You can do all the austerity: the social safety net in Britain will be bigger than in the US, and the US has a much bigger military spending budget.

    Besides that, foreign countries aren´t meant to be used as poitical football.

    2-) Italy is known for years as one of the industrialized countries with higher debt to GDP ratio. Krugman was using Italy as an example that you could have a high debt to GDP ratio without facing major problems, months before creditors began to raid Italy´s credit rating.

    And I think that the problem is not only whether austerity can provide foundations for future growth, but that ´s very difficult to have any economic future when servicing the debt is the biggest expense that you have(And we are not talking about interest rates). That´s the calculation that Cameron did: he came to the conclusion that 10% deficits weren´t sustainable.

    And, please, we are not talking about Ryan. Bill Clinton showed us the path, not Ryan.

  55. @Ben Wolf:

    Explain that to me. I wouldn’t think that our home prices are purely a “financial” bubble. They are also part of an asset bubble affecting most Americans.

    How would you correct it?

  56. @Andre Kenji:

    For what it’s worth, I think the scatter charts I link above have a pretty fair method. They look at changes from previous government spending.

    Some kind of trend-weighted “change from expected spending” would be even better.

    (I think Britain is similar to the US in demographics and employment sector profile, which matters.)

  57. Ben Wolf says:

    @john personna: Those over-valued homes are a result of the final stage of what Minsky identified as a financial instability cycle, the ponzi stage. The moment debt ceases to accelerate the value corrects and the bubble bursts. It’s inevitable, but there’s no reason to allow the process to bleed over and through people out of work. The destroyed financial assets the real economy needs to function are easily replaced. There are many ways government can intervene to keep the country working during the correction process. It can spend in the traditional fashion, it can give the unemployed jobs, it can pay off everyone’s debts, it can supplement wages, etc. The assets value correction doesn’t have to bring the economy to a halt to happen. The end of the debt cycle will cause that on its own.

  58. Andre Kenji says:

    @Ben Wolf:

    We did have a recession in 2001, when the dot com bubble burst.

    Yes, that was a small recession, and then Greenspan enacted artificially low interest rates and then Bush cut tax rates to fix it. it worked pretty well.

  59. Console says:

    @Andre Kenji:

    Meh, the US isn’t the only country in the world. Not to say Greenspan or Bush was right but monetary policy nor tax cuts really give you the 2008 recession. The neo-liberal consensus on economics that conveniently forgot all the lessons of the great depression though…

  60. @Ben Wolf:

    What you said originally was:

    The notion that downturns have some sort of positive long-term economic effect has absolutely no empirical support, it’s just more anti-government ideology.

    That’s what made me ask about misallocation of resources.

    What you said most recently was:

    The destroyed financial assets the real economy needs to function are easily replaced. There are many ways government can intervene to keep the country working during the correction process.

    So, those missalocated resources I asked about would be destroyed, and then the government would dig in again to replace them.

    That sounds a lot like the dot-com bubble followed by the housing bubble followed by .. ?

  61. @Andre Kenji:

    “The stock market crash of 2000–2002 caused the loss of $5 trillion in the market value”

    Not small.

  62. @Console:

    The 2008 recession was world-wide. Obviously underlying causes were trans-national. That said, different countries were set up for it in better or worse conditions.

    Bush’s tax cuts and monetary policy had been working to wring growth out of the economy in the last few years prior. I think they did fuel growth, but too much was unnatural growth, principally in the housing sector.

    In those years loans were being made to place granite counter tops in millions of homes. I asked “is this productive investment?” Some actually argued that yes, the market knows best.

    Well, I think not, and once the global downturn came, it was that much harder with all the zero-down homes, reduced savings, and a consumer society saturated with cheap credit.

  63. Overall, what I’m suggesting is that while government has a real role to play in recessions, there should be limits. A simple counter-cyclical spending plan, centered around real needs would be safest. Build nothing you don’t really need.

    When you think you can have as much growth as you want, when you want it, I think you risk perturbing the economy and creating a field of white elephants. That can’t last, and so it crashes. Then that crash has to be dealt with, begin again.

  64. bill says:

    since when do we want to be england? the empire has lost nearly all of it’s manufacturing jobs, it’s auto industry is gone, they have socialized medicine and horrible teeth. tourism is nice i guess but i won’t even delve into the welfare system over there….we’re America, we lead- we don’t want to be what we tried so hard to get away from.

  65. @bill:

    I will give you a serious answer, bill. We actually have been “losing’ manufacturing jobs since the 50’s. This plot of manufacturing jobs as a percentage of employment is important.

    I mean, really important.

    To me it means there is a possibility that “mature economies” mature in similar was. Part of that is that as industry becomes more mechanized (and now roboticized) we have to find new things to do.

  66. Ben Wolf says:

    @john personna: That’s the thing: government didn’t replace lost financial assets, it responded by making debt less expensive and compounding the problem. Policy makers never seem to understand that while loans expand the money supply, at some point the supply will contract as loans are paid back.

  67. Andre Kenji says:

    @john personna: I think that´s more complicated. A economy is not something like a car, where you can press the gas pedal or the brake. it´s much more complicated than that, as the stagflation of the 70´s show.

  68. @Ben Wolf:

    I think we agree that government can spur growth, but that you see fewer limitations on government in that regard. Post Dot-Com I think government should have done some things, like good unemployment and health protection for unemployed workers. Beyond that though I don’t think it could/should have done much. Trying to drive various markets with low rates was bad.

    Do you agree, or do you think even then government had more options?

  69. @Andre Kenji:

    Well, for better or worse every central bank in the world owns a gas pedal, and does their best to use it wisely.

    NGDP targeting is now the rage as a way to do that, and who knows, it may be. I can follow it a bit before it goes over my head.

  70. Andre Kenji says:

    @john personna: More or less. The stagflation in the 70´s proved that a scenario of easy money and low interest rates with low growth was possible. People talks like if governments can easily choose recessions…

  71. Ben Wolf says:

    @john personna: Government has many more fiscal options than monetary. We rely on the latter far too often. More and more I think the best policy to deal with an economic downturn is to enact a permanent Jobs Guarantee. This would create a solid anchor for price stability, employment and economic growth by purchasing from the bottom of the wage structure the labor of those the private sector does not wish to employ.

  72. @Ben Wolf:

    A Jobs Guarantee doesn’t sound bad to me.

  73. bill says:

    @john personna: i know, it’s obvious to most aside from the “sent jobs overseas” crowd that thinks we will someday revert to making trinkets for the world again! of course, becoming a banking/farming state isn’t all that wonderful to look forward to.

  74. @bill:

    The overseas bit is part of it though. I mean, how can we not notice when Apple tops the market as the most valued company, while having most of “it’s workers” in China?

    People on the right who want to cut taxes and regulations until jobs come home don’t quite understand how low they’d have to go. Apple isn’t coming home until they can pay people $2/hr, and enjoy “feed suppliers” who pollute the hell out of land, air and water.

  75. Andre Kenji says:

    @john personna:

    People on the right who want to cut taxes and regulations until jobs come home don’t quite understand how low they’d have to go. Apple isn’t coming home until they can pay people $2/hr, and enjoy “feed suppliers” who pollute the hell out of land, air and water.

    Look, as a foreigner I can say that the problem is that the cost of living in the so called developing world is much lower than in the US(And Brazil is becoming very, very expensive). If Apple produced their stuff in the US they would be trounced by the Asians. Samsung can produce smartphones cheaper than Apple because they control the whole process, Apple does not.

    And as RIM and Nokia discovered trying to compete with the Asians on price is suicide. The Germans and the Swedes manage to have a robust manufacturing sector because they have an industrial policy. Like, their schools prepares people to work in factories. The days where people could get high wages for jobs with no qualification in the industry are gone.