Monday, January 19, 2009

Waiting for Superman

"Is it overwhelming to use a crane to crush a fly? Good time for Superman to put the sun back in the sky." -- W. Coyne


On the day before Superman swears on the Lincoln Bible, I'm troubled by the almost universal use of the Great Depression (GD)) as the frame of reference for our current situation (CS).

The initial phase of the GD was a stock market crash and financial panic. So far, so good. However, the follow ups to those events in the GD were massive bank failures and persistent deflation. In my opinion, we have avoided these follow ups in the CS. Despite Bernanke's early role as Greenspan Jr. in perpetuating overly loose and regulatorily negligent monetary policy, he has to be given credit for helping to ensure that we avoided GD like financial follow ups to the initial crash.

Now we come to the real side of the economy where, as you all know, we are looking at a new "new deal" consisting of possibly a $ 1 trillion plus fiscal stimulus. However, the new deal was a lot more than public spending. It was also a policy of explictly allowing business collusion, and repeatedly raising taxes on private economic activity.

The new deal of course didn't really work at least in terms of ending the GD on any time frame that could be considered politically acceptable (unemployment in 1938 was 19%!!!!). However, this is not to say that the fiscal stimulus part of the new deal didn't work or that a fiscal stimulus in the CS wouldn't be effective in raising measured GDP.

I don't think a massive fiscal stimulus is warranted on business cycle grounds because we have already avoided the horrendus monetary followups to the GD and Obama seems fairly likely to avoid the counter productive fiscal parts of the new deal (now Reid and Pelosi are a different story but for now my $$ is on Obama to at least kind of get what he wants).

In other words, I do not think the GD is a valid frame of reference for our CS because either we did not make, or are unlikely to make, the post crash mistakes that were made in the GD.

In other words, I think this recession is a "normal" one that we likely would have had after the bursting of the housing bubble even if the financial crisis had not also hit us. GD like policy responses are simply not warranted on business cycle grounds. And once we take the doomsday scenario out of play, all the well known objections to normal use of counter-cyclical discretionary fiscal policies (as opposed to automatic stabilizers) come into play.

If this post prompts Brad Delong to call me an ethics free Republican hack, maybe Steve Horowitz can send me a copy of his new office door decoration!

5 comments:

Dirty Davey said...

"...the follow ups to those events in the GD were massive bank failures and persistent deflation. In my opinion, we have avoided these follow ups in the CS."

I would point out that, so far, significant infusions of federal money have been required to stave off massive bank failures, and it is likely that much more additional money will be required before we can safely say that the failures have been avoided.

Angus said...

Thank you so much sir. I was completely unaware of the spending of the first $350 billion of the TARP and the request made for releasing the second $350 billion. I also had no idea about the quantitative easing being undertaken by the Fed. I really thought it was just George Bush's infectious laugh that had saved us from disaster and I am so sorry my post gave everyone that impression.

brad said...

Sorry. If you want to be an ethics-free Republican hack you have to try harder than that--Steve Horwitz, Kevin Hassett, and company can give you pointers.

You make an argument--that this is still a normal recession, and that the standard arguments (recognition lags, implementation lags, leakages, crowding out, et cetera) against discretionary fiscal policy still apply. That's an honest argument that can be made honestly. I think it's probably wrong--I think the recession is going, absent fiscal policy, to be significantly worse than normal. And we can't lower interest rates any more, can we?

But if you want to be a hack, you are going to have to make a dishonest argument dishonestly.

Brad DeLong

Dirty Davey said...

re: "I was completely unaware of the spending of the first $350 billion of the TARP and the request made for releasing the second $350 billion."

I am sure you are aware of the TARP. I just wanted to point out that you write as if the TARP has allowed us to avoid bank failures, whereas I suspect it has merely delayed them somewhat.

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