The Super Secret, Mystical Recession Cure

Tuesday, November 2, AD 2010

For some reason, I found myself reading through Paul Krugman’s recent NY Times material. Perhaps it was a desire for a little mental vaunting, what with the direction the elections seem to be taking, and if so I should have come away quite satisfied as Mr. Krugman is in full Chicken Little mode. A GOP takeover of congress will be a disaster, and we should all be very afraid. Stupid people are allowing their emotions to run away with them and will destroy the world economy through getting all moralistic about debt. And of course, the reason why the entire world doesn’t see things Krugman’s way is because macroeconomics is too hard for them to understand.

Well, I’m certainly prepared to admit that Krugman’s expertise in macroeconomics is greater than my own — and I’ll even stretch and say that my understanding probably goes farther than that of the average bear.

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15 Responses to The Super Secret, Mystical Recession Cure

  • Here is what is so very difficult for this idiot (moi) to understand: why a man with a PhD that knows there is to know about economics is not a multi-billionaire?

    Posted at Instapundit: “They’ve spent the past 18 months calling you names and questioning your sanity and patriotism. But today you get to vote, and that’s all that matters.”

  • I don’t think a formerly unemployed person who gets a new government job is going to sit on his money because of some mystical economic anxiety that wouldn’t exist if it were a private sector job. A well-designed stimulus works in theory and in reality.

    After two years the program is a success, and so the wind turbine program ends. Now what happens to those workers and the capital investments in those factories? How easily are they turned to other work, and how long are they unemployed in the interim? Do we simply end up with another economic slowdown as a result of massive unemployment in the windfarm industry?

    Same could be said of the public works projects of the Great Depression. If it’s successful, the economy would pick up and there would be more demand for unsubsidized jobs.

    The way I see it, the problem with stimulus is almost entirely about your second point. The government is unlikely to create many jobs that don’t replace private sector jobs. What percentage of the unemployed can weatherize homes and make wind turbines?

    Ideally, we would’ve had a high skill jobs program in place so the unemployed can tutor kids or patrol streets. But there’s no chance of that happening now.

  • I didn’t read your article, DC, because then I’d have to read excerpts of Krugman, and that’s not going to happen. But I hope your article was good anyway.

  • I certainly don’t think that a formerly unemployed person who gets a government job won’t spend more money than they did while unemployed — but in order for the theory to work they need to not only spend more than while unemployed, but that spending needs to make the private sectore become so encouraged that they decide good times are here again, ramp up capacity, hire a bunch of people, etc. That seems pretty hard to do.

    To be honest, I would think that in our modern economy the best approach (though it doesn’t have the virtue of allowing congress to spend like a drunken sailor on all their favorite programs) would be to stick with a stimulus which consists of payroll tax relief for businesses and extended (and perhaps more generous) unemployment benefits for those actually out of work. There are those who argue that even this slows the reallocation of resources, but I’d think it’s an acceptable risk because of the human benefits.

  • Extended more generous unemployment benefits = Government jobs without the benefits of work

  • I thought you made some really good points. Particularly, that the spending needs to be focused much different in this economy than in the 1930s and that people are scared to spend b/c they’re worried about the bill they’re going to be hit with in the future. I know I am expecting taxes to be have to be raised sometime soon, so I’d be preparing if I have any money to save.

  • Paul Krugman is, to put it as nicely as possible, an idiot. Keynesian economics is a failure.

    The private sector employs the most people. The private sector is the engine of creation and ideas. Government is not. Stimulation of the private sector through lower personal income tax rates, lower corporate income tax rates, and lower taxes on investment and capital gains is what successfully stimulates an economy into recovery and increased employment. The subsequent economic growth results in increased tax revenues.

    Krugman is far too stupid to understand this. So are the Democrats and far too many Republicans.

  • Keynes was particularly annoyed that in a depression people tend to save and not spend. Guess why?

    Mr. Krugman is a product of the academy; his ideas are academic.

    Try Belloc’s ECONOMICS FOR HELEN, as a simple but accurate explanation of the public economy. As J.K. Galbraith noted, economics is not that difficult to understand – unless you burden it with unnecessary and superficial mathematics.

  • Associating current Keynesian economics with JM Keynes does the man a disservice. He was a pragmatic man who espoused government spending when it could have helped. I doubt that he would have endorsed the the policies of his noisier followers.

  • “Extended more generous unemployment benefits = Government jobs without the benefits of work”

    The difference is that unemployment pays people less than they would make working to look for a job — a government job turns someone from a job seeker into a job holder. Thus, leaving someone looking for work doesn’t involve a top down decision on specialization, it leaves emergent order to work out what sort of jobs people should train for and take.

  • RR is kidding, right?

    About the “Extended more generous unemployment benefits = Government jobs without the benefits of work?”

    That’s a joke, right?

  • Oh, sorry, he said, “…without the BENEFITS of work.”

    Perhaps it’s because it’s 1 AM, but something made me think he was saying something like, “…without the DRAWBACKS of work.”

    Never mind.

    (Of course, it isn’t just “without the benefits of work”; it’s “with the additional drawbacks of a marginal increase in the incentive for joblessness.”)

  • Te Deum laudamas . . .

  • What was Reagan’s definition of an economist? Someone who tells you why something that works in practice won’t work in theory?

  • I don’t think it’s economics as a whole that’s the problem — Krugman just happens to be one of those people who, in regard to politics, believes that if you fail at something it’s because you didn’t do more of what he wanted.

Obama To Announce New Business Tax Cuts

Monday, September 6, AD 2010

President Obama will propose several new tax cuts and incentives for businesses on Wednesday, September 8th, including one which is billed as having a decidedly right-leaning flavor:

President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.

The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. But unlike those two ideas, both familiar from Mr. Obama’s 2008 campaign, the investment incentive would embrace a long-held wish by conservative economists that had never won support from either Republican or Democratic administrations.

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4 Responses to Obama To Announce New Business Tax Cuts

  • It would encourage businesses to invest more than they otherwise would have. The big problem with Cash for Clunker was that most of the money went to people who were going to buy cars anyway. Likewise, most of the business tax break will go to businesses that will have made those investments anyway.

  • The answer to your last questions strikes me as dependent on whether companies have been putting off replacement of critical equipment en masse or not.

    The long timetable is helpful because it makes it possible for companies to decide now to replace in six months or a year. In this respect it is different from the idiocy of the “Cash for Clunkers.” It may also be different in that manufacturers with an ongoing relationship to their equipment suppliers are in a better place to avoid the price gouging of the car program. (E.g. I was interested in a truck at a dealership up the street and was watching it for a couple of months. Come Cash for Clunkers, the price went up more than $3,000. I have heard the same from other people – that the incentive was eaten up by price increases.)

    In general, I am a whole lot more supportive of this idea than its companion bill – $50 billion in new investments. I am more supportive of that – because there is at least an offer of value (infrastructure) for money rather than just tossing money into the wind like the President’s past plans.

    Perhaps the President is coming to his senses on economic policy.

  • I am not so sure I would support this idea. Is this a carrot to conservatives to support other programs in the bill they would otherwise reject? Or, is this a favor to a select voting group?

    Additions to plant and equipment require planning. Would this actually encourage the purchase? Businesses would still need to fund the cost of the purchase.

    Without the accelerated depreciation of 100% in the first year, the business would deduct the cost over several years. So, the deduction is not exactly lost without President Obama’s proposal.

    Finally, it is similar to Cash for Clunkers. Businesses would receive a tax savings up front and pay more in taxes later with the lost depreciation. (The amount they would pay later could be at a higher tax rate per the expiration of Bush’s tax cuts for partnerships, S-Corps, and sole proprietorships.) They do receive a benefit from the time-use of money. However, without permanent business tax breaks, this will result in a slow down once the benefit expires.

    Is this a carrot or is it a political tool to make this administration look good due to a spurt of growth that is set to expire? Congress should look at a more permanent solution.

  • I found this comment from Veronique de Rugy the other day to be interesting. This ‘graph in particular struck me:

    “He rightly assumes that lowering the cost of employment helps firms keep their current employees or hire new ones. He wrongly assumes, however, that tax credits are a good way to reduce these costs. I asked a small business owner during a recent radio show to explain to me why the tax credit wouldn’t work, and he confirmed my intuition. This tax credit is useful only if you have a tax liability, which you likely don’t have when business is slow.”