Can Anything Cure the Ailing American Economy?

[GG]

By: Peter S. Goodman
The New York Times

The American economy is once again tilting toward danger. Despite an aggressive regimen of treatments from the conventional to the exotic — more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve — fears of a second recession are growing, along with worries that
Recession-themed newsprint cuttings
the country may face several more years of lean prospects.

On Friday, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move, acknowledged that the economy was weaker than hoped, while promising to consider new policies to invigorate it, should conditions worsen.

Yet even as vital signs weaken — plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent — a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.

It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects.

The patient — who started in critical care — was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.

This is where the Great Recession has taken the world's largest economy, to a Great Ambiguity over what lies ahead, and what can be done now.

Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.

The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s.

Then, as now, trouble began when a speculative real estate frenzy ended, leaving banks awash in debts they preferred not to recognize and hoping that bad loans would turn good (or at least be forgotten). The crisis was deepened by indecisive policy, as the ruling party fruitlessly explored ways around a painful reckoning — boosting exports, tinkering with accounting standards.

"There are many ways in which you can see us almost surely being in a Japan-style malaise," said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. "It's just really hard to see what will bring us out."

Japan's years of pain were made worse by deflation — falling prices — an affliction that assailed the United States during the Great Depression and may be gathering force again. While falling prices can be good news for people in need of cars, housing and other wares, a sustained, broad drop discourages businesses from investing and hiring. Less work and lower wages translates into less spending power, which reinforces a predilection against hiring and investing — a downward spiral.

Deflation is both symptom and cause of an economy whose basic functioning has stalled. It reflects too many goods and services in the marketplace with not enough people able to buy them.

Read more:  http://www.cnbc.com/id/38902509

[GG]

I certainly hope the source meets the approval of the more critical. 

A New York Times report posted on CNBC, what a combination.   

[GG]

I think the last sentence of the article sums up what is going to be happening, due to the mid term elections coming up and the likely result of those elections.   

By default, muddling through has emerged as the prescription of the moment.

[guido911]

Can Anything Cure the Ailing American Economy? Not until we do something about this:

http://gatewaypundit.firstthings.com/wp-content/uploads/2010/08/govtatwork.gif

[nathanm]

By default, muddling through has emerged as the prescription of the moment.

Which completely contradicts the idea that drastic measures are being taken yet the economy isn't recovering. The problem is precisely that we have refused to use the drastic measures necessary after the initial shock wore off. Credit crises have a long history of keeping spending down for prolonged periods absent significant intervention. And when I mean significant I mean "significant relative to the scale of the problem."

Also, we've been rather lucky in that there hasn't been a lot of deterioration so much as stagnation. It's not getting much worse (largely thanks to extended unemployment benefits keeping laid off workers out of catastrophic circumstances), but it's not getting any better, either.

The irony about the sudden debt hawkishness is that deflation and an economy in the toilet makes our debt load much more onerous than it need be. With recovery, the debt load will be easily manageable. Counterintuitive, to be sure, but blasting our way out of this with government debt would make the government debt easier to pay off thanks to increased tax receipts and GDP. The meltdown has cost the federal government over half a trillion dollars a year in tax receipts.

The stimulus hasn't really increased overall government spending that much, either, thanks to the savage cuts being made at the state and local levels.

[BKDotCom]

In my mind, the main issue is simple and can be seen here
http://www.usdebtclock.org/

The national debut is 13.4 Trillion
debt / us citizen:  $43,175  or  debt / tax-payer:  $120,640

spending is taking us down...

[nathanm]

In my mind, the main issue is simple and can be seen here
http://www.usdebtclock.org/

Our debt as a percentage of GDP is much lower than that of many other nations, even those who are considered to be in a good position. This is reflected by the ridiculously low interest rates Treasuries are yielding at the moment.

I'd rather it be lower, to be sure, but it's not really an issue at present. Continuing to do nothing will only lower our GDP further and make the debt load more onerous.

[we vs us]

Why, BK?  I'm actually really very curious.  I haven't seen an economist anywhere who thinks that we need to do this and yet it's the popular (and Republican) response to a possible double dip. 

Why, amongst all the different things we could do, should we do this now?  Will it help stop us sliding back into recession?  Will it accelerate our recovery? If so, how?  Not trying to pick on you, just genuinely curious what the rationale is.

[Red Arrow]

Both sides believe they are correct.  Maybe we should try the methods of the left and if the country and economy go to (a bad place) we will know that is not the correct path.  I only hope that if they do, they will be corrected within about 6 years when I hope to retire.

[Conan71]

Why, BK?  I'm actually really very curious.  I haven't seen an economist anywhere who thinks that we need to do this and yet it's the popular (and Republican) response to a possible double dip. 

Why, amongst all the different things we could do, should we do this now?  Will it help stop us sliding back into recession?  Will it accelerate our recovery? If so, how?  Not trying to pick on you, just genuinely curious what the rationale is.

Did we not learn anything from why the financial melt-down happened?  A bunch of borrowing to support essential and non-essential spending with no hope of ever paying it back.  How essential are a lot of the programs and bureaucracies our Congress signed us onto the last 18 months as a fix for the economy?

I really don't care about deficits:GDP ratios it's all theory and doesn't take into account what happens when the holders of our debt decide to call the notes in and we don't have the cash or other means to pay up.  At the rate our government is spending money, it's hard to fathom we can ever pay it back.  The interest which will be paid is something else to consider.

[nathanm]

Did we not learn anything from why the financial melt-down happened?  A bunch of borrowing to support essential and non-essential spending with no hope of ever paying it back.  How essential are a lot of the programs and bureaucracies our Congress signed us onto the last 18 months as a fix for the economy?

Yeah, that's not really what happened. A financial panic caused by derivatives losses after mark to market rules came into effect combined with a tiny uptick in foreclosures shut down the credit market, forcing layoffs and causing people and businesses to go into cash-hoarding mode, which has continued apace since.

The banks (including former investment banks) would love for you to think it was all the irresponsible homeowners. A more proximate cause was insurance (CDS) being written without sufficient reserves. When AIG and others couldn't pay, everyone looked around suspiciously and became unwilling to lend overnight, which fairly predictably led to massive disinvestment in the stock market, just as it has with every other panic since the end of the Civil War.

Housing pulled the trigger, but was not the gun.

Obama should be fighting tooth and nail for another trillion and a half in stimulus, just based on the logic used for the first.  It obviously did some good while it was still in full swing. Note that as stimulus spending is tailing off, so is GDP growth. It was the right size for the optimistic forecasts they were using. Too bad they turned out to be about 4-5% too optimistic on unemployment.

Krugman and others argue that being a deficit hawk in times such as these is shooting yourself in the foot. You lose more in future receipts than you do in interest payments on debt incurred to lift us out of the morass. 1937 was an object lesson in this. Premature fiscal and monetary contraction led to a rebound in unemployment because the private sector wasn't yet in a position to pick up the slack. History: it's not just a dusty book on a shelf.

[we vs us]

Did we not learn anything from why the financial melt-down happened?  A bunch of borrowing to support essential and non-essential spending with no hope of ever paying it back.  How essential are a lot of the programs and bureaucracies our Congress signed us onto the last 18 months as a fix for the economy?

I really don't care about deficits:GDP ratios it's all theory and doesn't take into account what happens when the holders of our debt decide to call the notes in and we don't have the cash or other means to pay up.  At the rate our government is spending money, it's hard to fathom we can ever pay it back.  The interest which will be paid is something else to consider.

I don't think anyone disagrees that the deficit is a long term problem and that it has to be addressed.  But while balancing the budget right frickin nowmay feel right, I haven't heard anyone actually defend it from an economic sense.   That's what I'm looking for.  For instance, let's say we do what Boehner has suggested and we immediately raise the Social Security retirement age to 70.  What will that do to the average paycheck?  What will that do to the unemployment rate?  What will that do to Medicare/Medicaid, and what will it do to the poverty level?  Will corporations see that as us injecting stability into the system or instability?  Will it encourage them to invest and hire and quit sitting on all of their cash?  

That's my point.  What will any of it do to help us right now?  Because it's becoming more and more clear we need it.

[bokworker]

There is no way to balance the budget "right frickin now" and you are correct that forcing it would cause a massively deflationary debt liquidation cycle. Here is the thing in my mind, we need to have more revenue, that is inescapable, but, from the perspective of someone that is going to be source of this additional revenue then I want a show of faith that we can be more responsible with what we do with that revenue. it isn't just revenue or spending cuts, it has to be both. I am willing to accept that I am going to have less disposable income if we can just take a reasonable look at the expenditures of the government and take out what most any person would deem to be ridiculous. In other words, show some frickin progress. Both sides of the aisle are right, and both sides of the aisle are wrong. can we please have an adult discussion about an issue that each and every one of us has to deal with in out personal lives.

By the way, raising the retirement age to 70 doesn't do a damn thing to the deficit because SS isn't in the deficit. What it is though is unsustainable in its current form. We have tied benefits to the CPI forever but have not tied the age to receive benefits to extended life expectancies. We should. I'd even support removing the cap on income for FICA tax to assure myself that if I live long enough that I will get a return on my investment.Absent the willingness to do one, or both, of these steps wil require a "means test" of some sort in which case those that were responsible enough to not lean on SS as their only retirement income will not get any SS.

[nathanm]

By the way, raising the retirement age to 70 doesn't do a damn thing to the deficit because SS isn't in the deficit. What it is though is unsustainable in its current form. We have tied benefits to the CPI forever but have not tied the age to receive benefits to extended life expectancies. We should. I'd even support removing the cap on income for FICA tax to assure myself that if I live long enough that I will get a return on my investment.Absent the willingness to do one, or both, of these steps wil require a "means test" of some sort in which case those that were responsible enough to not lean on SS as their only retirement income will not get any SS.

Social Security is not insolvent unless you presume the government will refuse to pay its debts. Medicare, on the other hand, is in the toilet as it stands. Part D saw to that. (fantastic idea, creating a new benefit in the most expensive way possible and not funding it)

Also note that while life expectancy has grown significantly in the past 80 years, most of that gain is from reduced infant mortality. Life expectancy from age 65 is up only a few years. Among white females, who have the highest life expectancy in the US, the gain has been 3 years since 1970, to 20 years from age 65. Among black males, there has also been a gain of about 3 years (I'm looking at a chart, not raw numbers), to about 15 years from age 65. It seems to have leveled off in the last few years, just looking at the chart.

[bokworker]

Borrowing money to pay off your debt holders is the definition of unsustainable... we call that a ponzi scheme. If any private company ran their defined benefit plan in the manner that the Federal government runs SS they would be thrown in the clink. Repectfully Nathan, when benefits paid begin to exceed revenues funding the plan then the end is assured. I'll agree with yoru assessment of life expectancy but even small changes can have huge impacts and as such, cannot be ignored when faced with the reality we have today. Raise the full benefit retirement age at a minimum. Raise or uncap the income limitation to assure solvency.

If it takes the printing press to pay the benefits then the money is worhtless anyway.