Matthew Yglesias » The American Recovery and Reinvestment Act Cut Taxes Substantially

Matthew Yglesias » The American Recovery and Reinvestment Act Cut Taxes Substantially: "the main problem facing right-of-center and left-of-center proponents of fiscal stabilization alike, namely that the political mechanism of enacting discretionary stimulus through congress is extremely clumsy and leads to bad policy outcomes. The most helpful thing to do before the next downturn would be to establish in advance a reasonably streamlined way of preventing state and local government from hiking taxes and cutting services in the middle of a recession.

Super-Economy: Japan's problem is supply, not demand (updated)

Super-Economy: Japan's problem is supply, not demand (updated)
...Let's first look at the lost decade, 1991-2000. When the rest of the world was having rapid, IT-fueled growth, Japan was stagnating. Here are the growth rates in real GDP between 1991-2000:

For all the nice years Japan had 9.6% growth compared to 38.7% for the U.S and 22.7% for the EU.15. The U.S grew by an average of 3.7% per year, Japan only 1.0% per year.

But as most of you know Japan is undergoing a rapid demographic transition. The country was and is aging. Because the old and children cannot work, when we want to compare countries with very different demographic characteristics instead of calculating GDP per capita, it makes sense to calculate GDP per working age adult (people aged 15-65).

Whereas the number of potential workers in the U.S increased by 13% during Japans "lost decade" (1991-2000), and by 3% in for example France, the Japanese potential workforce actually shrank during these years. Adjusting for this, the growth in Japan was 9.8%, compared to 16.9% in Germany, 17.3% in France, 16.3% in Italy and 23.2% in the United States. The U.S grew by twice, not four times of Japan (remember that these were the best years of the U.S and the worst years of Japan).

The importance of the demographic transformation in Japan is even more clear if we include the entire 1990-2007 period.

In non-population adjusted figures, Japan's real GDP grew by 26% in total these years, the lowest in the OECD. In comparison the figures are 63% for the U.S and 44% for the EU.15.

But during this period the U.S saw it's potential labor force (the number of people between 15-65) increase by 23% and the EU.15 by 11%, while Japan had a decrease of 4%.

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical!

Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.


Also notice Italy (who does better than we think) and Ireland (who does worse, much of the growth was due to their young population).

Nor did productivity grow any slower in Japan than Europe.

The Triumph of the Stupidly Optimistic

The Triumph of the Stupidly Optimistic
How many jobs are there where being wrongly optimistic for ages gets you promoted? I offer you ... equity analysts, who have, on average, overestimated S&P 500 earnings by 2x for a generation.

A Cross Of Gold - Paul Krugman Blog - NYTimes.com

A Cross Of Gold - Paul Krugman Blog - NYTimes.com
I’d add another point: the 19th-century economy had much more flexible prices and wages than later came to be the case — not, primarily, because of different institutions, but because it was still largely an economy of small, self-employed farmers. More than half of US workers were in agriculture up until the 1880s. Peter Temin has told me — I can’t find it in a quick search — that the United States didn’t start having modern recessions, with large declines in real GDP, until the Panic of 1873; Britain started having them much earlier, because it became an industrial economy earlier.

High Income Disparity Leads to Low Savings Rates « naked capitalism

Citigroup Plutonomy reports in 2005 and 2006 by Ajay Kapur, Niall Macleod, and Narendra Singh as reported by Yves Smith:

In a plutonomy, the rich drop their savings rate, consume a larger fraction of their bloated, very large share of the economy. This behavior overshadows the decisions of everybody else. The behavior of the exceptionally rich drives the national numbers – the “appallingly low” overall savings rates, the “over-extended consumer”, and the “unsustainable” current accounts that
accompany this phenomenon….

Feeling wealthier, the rich decide to consume a part of their capital gains right away. In other words, they save less from their income, the wellknown
wealth effect. The key point though is that this new lower savings rate is applied
to their newer massive income. Remember they got a much bigger chunk of the
economy, that’s how it became a plutonomy. The consequent decline in absolute savings for them (and the country) is huge when this happens. They just account for too large a part of the national economy; even a small fall in their savings rate overwhelms the decisions of all the rest.

Yves here. This account rather cheerily dismisses the notion that there might be overextended consumers on the other end of the food chain. Unprecedented credit card delinquencies and mortgage defaults suggest otherwise. But behaviors on both ends of the income spectrum no doubt played into the low-savings dynamic: wealthy who spend heavily, and struggling average consumers who increasingly came to rely on borrowings to improve or merely maintain their lifestyle. And let us not forget: were encouraged to monetize their home equity, so they actually aped the behavior of their betters, treating appreciated assets as savings. Before you chide people who did that as profligate (naive might be a better characterization), recall that no one less than Ben Bernanke was untroubled by rising consumer debt levels because they also showed rising asset levels. Bernanke ignored the fact that debt needs to be serviced out of incomes, and households for the most part were not borrowing to acquire income-producing assets. So unless the rising tide of consumer debt was matched by rising incomes, this process was bound to come to an ugly end.

The US shows a negative relationship between income concentration and savings (data points 1929-2002, with 1940-1944 excluded, which is defensible, given widespread wartime rationing):

Canada shows the same downward sloping relationship, as does the UK (although the authors have to massage the data a bit more, with one downward sloping line for the period before 1990, with a shift for the 1990s period).

Debt Is A Political Issue - Paul Krugman Blog - NYTimes.com

Debt Is A Political Issue - Paul Krugman Blog - NYTimes.com: "one audience member asked a really good question: if the problem is that interest rates are at the zero lower bound, why should we worry about government borrowing? After all, doesn’t that mean that the government can borrow at a zero rate?

Now, part of the answer is that you really don’t want governments financing themselves largely with very short-term debt — that makes them too vulnerable to liquidity crises. But even long-term rates are low — the real interest rate on 10-year bonds is below 1.5 percent.

And if you do the arithmetic of debt service, that really does seem to suggest that debt isn’t a problem. To stabilize the real value of debt, all the government has to do is pay the real interest on it. So suppose that we add debt equal to 100 percent of GDP, which is much more than currently projected; servicing that debt should cost only 1.4 percent of GDP, or 7 percent of federal spending. Why should that be intolerable?

And even that, you could argue, is too pessimistic. To stabilize the debt/GDP ratio, all you need is to pay r-g, where r is the real interest rate and g the economy’s real growth rate; and right now r-g looks, ahem, negative.

And this benign view of debt isn’t just hypothetical: countries have, in reality, run up immense debt/GDP ratios without going insolvent: see the history of Britain, above.

So what’s the problem? Confidence. If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.

So what determines confidence? The actual level of debt has some influence — but it’s not as if there’s a red line, where you cross 90 or 100 percent of GDP and kablooie; see the chart above. Instead, it has a lot to do with the perceived responsibility of the political elite."

Grasping Reality with All Six Feet

Grasping Reality with All Six Feet: "It is important to note that effective expansionary fiscal policy requires two things:

*Lots of people need to be involuntarily unemployed--to have a productivity of zero--so that when the government hires people to do things, a substantial chunk of the people it hires do have their productivity go up by a lot. Otherwise--if there aren't a lot of involuntarily unemployed people--you are going to boost the flow of nominal spending but not production (or employment).
*The bonds that the government sells to finance its hiring program need to have only a small effect on interest rates--if they have a large effect on interest rates, then private businesses that were hiring people to expand their productive capacity will lay them off, their productivity will drop to zero, and we won't have gotten anywhere."