Fiscal Stimulus Is Wrong No Matter How The Economy Responds

John Taylor puts a wet blanket on the recent pick up in GDP. He feeds the GOP criticism about the failure of the "Keynesian stimulus". He compares the more rapid recovery from the 1981 recession with our current recovery and shows that GDP is still well below trend. Other conservative economists, e.g. Barro have made similar comparisons with more recent recoveries. They conclude that it proves that fiscal stimulus does not work. The other possibility is that this recession is really different. We have a balance sheet recession as a result of the bursting housing bubble, and we had a financial crisis on top of the recession. Long recovery periods are common under those conditions. Curiously, I earlier posted a critique of another attack on Keynesian theory by another conservative economist (Tyler Cowen) who argued that our recent growth in GDP proved that Keynesian theory has been disproven. Poor Keynes, he loses no matter what happens in the economy.

An interesting debate is also also going on about the long term trend in GDP growth. Our current output is still well below the long term trend. Policy is directed toward reducing the "output gap" between current output and the trend. Some argue that the long term trend may have to be reduced. They argue that the trend was inflated by the housing bubble and that the loss of wealth from the collapse in housing will have a permanent effect on the GDP growth trend. Therefore, it is a mistake to base policy on reducing the output gap. We should be more concerned about the potential for inflation that might result from Fed policy than about reducing unemployment. Bernanke believes that inflation and unemployment should be equally weighted. Others argue that unemployment should have a larger weight.

Terrible Transportation Bill From GOP House

The transportation bill written by the GOP House is bad for the environment and it is bad for public transportation. It is good for their campaign contributors in the energy sector, however, and that is their constituency.

Greek Politicians Agree To Austerity Package

It looks like a deal has been struck between Greece and the troika. The austerity package will include pension cuts and reduction in the minimum wage to 586 euro's/month. That will reduce all wages in Greece that are geared to the minimum wage. While all of the details are not clear, it appears that creditors will take a 70% haircut on the debt that they hold when the bond swaps are done. The Greek economy has been in recession for 5 years. The austerity measures are bound to depress the economy further in the short run. In the long run, it assumed that the structural reforms will make the economy more competitive. Public reaction, however, may make the reforms difficult to implement.

Two Views On The Ability of The Eurozone To Respond To Its Crisis

This article provides two points of view on the ability of the eurozone to deal with its crisis. One view is positive and the other is negative. I found the negative view more compelling because the eurozone is heading into recession and it has limited means to deal with its problems as the economy worsens.

Spain May Be A Greater Threat Than Italy To Eurozone

This article argues that Spain represents a greater threat to the eurozone than Italy. Spain was running budget surpluses prior to the crisis and household debt increased by a factor of three during the real estate bubble. The bursting of the real estate bubble led to an unemployment rate exceeding 20% and rising. Youth unemployment is even worse. 50% of Spain's youth under age 25 are unemployed. This will make its workforce less productive the longer that they remain unemployed. Government austerity measures are making matters worse. Raising taxes, and cutting government spending at the same time that consumption is falling, has led to a drop in GDP. The debt/GDP ratio has worsened as a result.

To make matters worse, Spain has only had a democracy since Franco died in 1975. If the economy continues on its current path it may present a social and political threat that will be difficult to contain. Spanish democracy may be at risk as well.

Moral Decay In The White Middle Class Is The Cause Of Our Economic Problems

David Brooks recently wrote an op-ed in praise a book by Charles Murray that I decided not to criticize in a post because I was tired of wasting my time showing how wrong David Brooks is about most everything. This article provides a critique of Murray's book and has caused me to to pay more attention to it because its message is being widely distributed by the conservative media. That should not be surprising because Murray is on the payroll of the conservative American Enterprise Institute. The essence of this critique is that Murray's book is another screed on blaming the victim. Since the decadent 1960's we have seen a decay in the moral values of the white middle class and the erosion of family values. That is why we have unemployment, lower social mobility and a rise in inequality in America. This critique provides a strong argument against that view and it also shows how Murray distorts the data that he used to support his argument.

An Interpretation of Germany's Support For Fiscal Austerity In The Eurozone

This is a description of one person's view of the prevailing wisdom within Germany that have led to its predisposition towards the imposition of fiscal austerity as the solution to problems in the eurozone. Among other things, Germany imposed austerity on itself and it worked. They are now reaping the benefits of their painful restructuring. They also fear hyperinflation more than deflation. They believe that the US and the Uk are setting themselves up for rampant inflation because of policies designed to curb deflation. Moreover, it has been politically difficult to redistribute money from the wealthy parts of Germany to the less wealthy northern and eastern parts of Germany. There is no way that Germany will use taxpayer money to bailout the irresponsible nations that are in financial trouble. They can do what Germany did successfully if they have the will.

One of the implications is that restructuring the eurozone by paving the way for a less disruptive exit for some countries is on the horizon. There is no easy way to fix things in the eurozone without making austerity work. The author of this article has the view that the global economy is troubled by a lack of demand that can employ the excess of labor and capital that exists. He is predisposed to dealing the problems of inadequate demand rather than structural changes.