I've taken two economics classes in my life. As I recall, I got a B+ in both classes. Not bad, considering my attendance was under 25%. But it certainly does not match up to Paul Krugman, who just won the Nobel Prize. I suspect he attended his classes and got A's.
But I do read and think about finance all the time, and I'm starting to get annoyed by the whole "stimulating aggregate demand" mantra, and I don't think I'm the only one. I'm sure that if Paul Krugman were reading this blog, he would be able to answer any questions I have for him. So I'm going to format this post as a serious of questions. Bonus points for anyone who wants to impersonate Krugman in the comments section and answer these questions.
Question Number 1:
Let's say we spend 1 trillion dollars to stimulate the economy this spring and it doesn't work. Then our national debt is 12 trillion, nearly 1 times GDP, and our economy is still in the s***er. What do we do then?
Question Number 2:
Ok, I'm guessing that the answer to #1 is to do it again. But let's say we do it again, and that doesn't work. What then?
Question Number 3:
I'm guessing that the answer to #2 is to do it again. But let's say we do it again, and that doesn't work. What then?
This brings me to my ultimate question for Dr. Krugman, which is, is there ever a point at which you stop trying to stimulate aggregate demand? Because I'm a fairly young man, and I'm starting to get nervous about how many times you're going to try this. With the ever-increasing cost of pension and entitlement benefits needed to take care of baby boomers such as yourself, I doubt that paying off our national debt is going to be any easier in 2020 than it is in 2010. And, in 2020, when we have to cancel government programs across the board to repay this fiscal stimulus, when the concept of a school bus is as quaint as a Studebaker, what effect will that have on aggregate demand?
A negative one, I presume.
Well, I'm not Dr. Krugman, but I can play Krugman's advocate.
ReplyDeleteIf GDP goes down from 14T to 12T without government intervention, then we lose jobs. Less jobs = less spending = less production = less retailers = less jobs ....
So the stimulus argument is 14T to 12T+1T of government stimulus reduces the vicious cycle of job losses which is better for our economy than a depression style 25% unemployment rate, even if it makes our fiscal situation worse.
My question for Dr. Krugman is how we help to reallocate our spending to productive uses and not continue to prop up bad investment. The 1T in government spending is more likely than not going to continue to flow to the non-optimal industries that are already using up too much of our Economic resources, such as finance, home construction, and retail sales.
Indeed. To be expected. Because the stimulus will be passed as a part of an existing political process, it will be tailored to the interests of existing political pressures, which are industries that were successful in the past, created an oversupply of their products, and will now use pressure on the government to help continue the game.
ReplyDeleteHeck, if stimulus is used to boost car production, house production, and plasma screen tv production, stimulus could exacerbate existing selling pressure, thus accelerating the deflationary spiral.
The one thing about this stimulus package that I think makes sense is infrastructure spending, especially spending that makes our country's future more sustainable like clean energy and mass transit projects. I know that Denver could use some nice electrical light rail lines and a bunch more solar panels and wind farms to power those up. At least that spending will help address the major environmental and energy concerns of this time, which if we do not address now will certainly be much more expensive to figure out once we are mired in them.
ReplyDeleteThe solution is hyperinflation. If inflation was near where Zimbabwe's is (10000%, I think) the national debt would quickly amount to nothing and be easily paid off with a few Euros no matter how much has been borrowed.
ReplyDeleteMy observation about Dr. Krugman's plan, the third quarter of 2008 saw a drop in personal debt for the first time in U.S. history. What no one can answer, did people just stop spending so much money or could they not borrow anymore? I actually, for once, believe the populous began doing the right thing and started paying down on their debts.
(Unanswerable related question: Did the banks hold on to their TARP money because they wanted to, or because no one was clamoring for a loan?)
So, is it possible that a large portion of this slowdown is necessary because the American people responsibly cut back spending? If that is so, is it possible Dr. Krugman is suggesting that the U.S. Government replace the borrowing of the American people with borrowing of its own?