Roubini: “We Are in ‘Worse Situation Than in 2008”

[SK in CV]

[quote=EconProf]Actually you are right, SK, tax cuts are Keynsian in the sense that they aim to spur aggregate demand by consumers. Conservatives would argue that if you must have demand stimulus, do it with tax cuts rather than new permanent government programs and handouts.
Tax cuts aimed at businesses are more aimed at stimulating investment in new plant and equipment.[/quote]

And you’re really a professor? Go back and read what Keynes said about when tax cuts were appropriate and when they weren’t. The early Bush tax cuts? Maybe, at least the argument could be made. And it was made back in 2001 and 2002, mostly by the left, pointing and laughing at Bush.(Since most of the cuts didn’t go to where the money would be spent, the argument could also be made that they weren’t Keynesian at all.) The elimination of those tax cuts in 2004 to 2007 that never happened? Not Keynesian. The infrastructure spending that didn’t happen in 2000-2002? Not Keynesian. Wars that weren’t paid for during in a stable economic environment? Not Keynesian.

Keynes argued for tax cuts during a recession, in order to get more money into the hands of consumers, and to spur investment. The problem is that the tax cuts have been mostly misdirected. And that there is no shortage of capital for investment, so tax cuts on those that may invest, won’t help. They already have capital to invest and they’re not doing it. And it has zero to do with government policies and regulations. Big companies bitch and moan and deal with regulations. It doesn’t stop expansion. It has everything to do with uncertain demand.

It hasn’t been Keynesian policy for the last 10 years. It’s been failed supply side, the biggest fraud of the last 40 years.

[EconProf]

You are making this much more complicated, and ideolgical, than it needs to be. Keynes advocated stimulating aggregate demand, whether consumption, investment, or government during the Great Depression, i.e., when output fell well short of potential. His theory was that to expand output when there was so much slack in the economy would not be inflationary–indeed deflation was the problem back then. There is increasing debate among economists now as to how well that really worked (See Amity Schales’ book, The Forgotten Man). After all, unemployment was still 17% in 1939.
Today’s politicians latch on to Keynesian theory as an excuse to expand government and give it a theoretical justification. But we are increasingly looking at the behavioral effects of government policies and discovering that they can be both large and harmful. Looking back at two years of TARP, cash for clunkers, subsidies for GM, green initiatives, proposed tax hikes, we can see that businesses and consumers are rightfully afraid of their future. Businesses can’t predict their future costs or regulatory environment, so they sit on their cash hoard. Yes, they are fraidy-cats.
From your comments we would agree that the boom of the Bush years was an artificial one–fueled by easy money, overleveraging by consumers, banks, businesses and other assorted culprits. Plenty of blame to go around. And our current problems are prolonged and deep because we are in the painful deleveraging process.
We’d also probably agree that capitalists want to do what it takes to maximize profits in the future–that’s what makes for hiring and spending if conditions are right. Which is why I don’t understand your statement that “…it has zero to do with government policies and regulations.” If you believe that then you probably have never started a business or hired a work force.

[SK in CV]

[quote=EconProf]You are making this much more complicated, and ideolgical, than it needs to be. Keynes advocated stimulating aggregate demand, whether consumption, investment, or government during the Great Depression, i.e., when output fell well short of potential. His theory was that to expand output when there was so much slack in the economy would not be inflationary–indeed deflation was the problem back then. There is increasing debate among economists now as to how well that really worked (See Amity Schales’ book, The Forgotten Man). After all, unemployment was still 17% in 1939.
Today’s politicians latch on to Keynesian theory as an excuse to expand government and give it a theoretical justification. But we are increasingly looking at the behavioral effects of government policies and discovering that they can be both large and harmful. Looking back at two years of TARP, cash for clunkers, subsidies for GM, green initiatives, proposed tax hikes, we can see that businesses and consumers are rightfully afraid of their future. Businesses can’t predict their future costs or regulatory environment, so they sit on their cash hoard. Yes, they are fraidy-cats.
From your comments we would agree that the boom of the Bush years was an artificial one–fueled by easy money, overleveraging by consumers, banks, businesses and other assorted culprits. Plenty of blame to go around. And our current problems are prolonged and deep because we are in the painful deleveraging process.
We’d also probably agree that capitalists want to do what it takes to maximize profits in the future–that’s what makes for hiring and spending if conditions are right. Which is why I don’t understand your statement that “…it has zero to do with government policies and regulations.” If you believe that then you probably have never started a business or hired a work force.[/quote]

Last things first, I’ve started businesses, run businesses for others, and been paid pretty handsomely to tell others how to run their businesses. Currently I’m the CFO for a small business whose clientele is exclusively big business because small business rightfully can’t justify spending millions on IT. I can’t afford to be bound by ideological thinking. Whether it’s politics or religion or economics, to quote Robert Langdon, faith is a gift I have yet to receive. I deal in empirical evidence. Anything less would be a disservice to my employer.

In the last 2 weeks I’ve spoken with 3 CFOs and CIOs for billion dollar companies. All had proposals in their hands for us to do work for them. All 3 said their plans had been put on hold despite issuing RFPs with immediate start dates within the last quarter. All 3 said their plans had been put on hold because of uncertain consumer demand. Not regulations. Not health care reform. Not tax uncertainty. Not political uncertainty. Businesses deal with government demands. It can eat into their margins. But it doesn’t keep them from doing business. Lack of customers does.

As to the high unemployment that remained in 1939, you conveniently didn’t mention Roosevelt’s mistake in ’37, which was instrumental in creating a new recession. Wasn’t very Keynesian of him.

And yes, I think the boom in the middle of the last decade was somewhat artificial. War is a temporary expansion of the economy. The tax cuts from the early part of the decade did little to build the economy. They, along with a couple trillion spent on wars, (in addition to the criminal expansion of consumer debt) set the wheels in motion for the pop culture debt crisis we have today. I have no way of knowing for sure, but I suspect that higher top marginal tax rates, slightly higher interest rates, and no unneeded wars would have lead to a much more stable economy entering the new decade.

[DomoArigato]

[quote=EconProf]Businesses can’t predict their future costs or regulatory environment, so they sit on their cash hoard.[/quote]

Wrong.

None of the business owners complained about regulation in their particular industries, and most seemed to welcome it. Some pointed to the lack of regulation in mortgage lending as a principal cause of the financial crisis that brought about the Great Recession of 2007-09 and its grim aftermath.

Read more: http://www.mcclatchydc.com/2011/09/01/122865/regulations-taxes-arent-killing.html#ixzz1X1LiASzJ

[EconProf]

[quote=SK in CV][In the last 2 weeks I’ve spoken with 3 CFOs and CIOs for billion dollar companies. All had proposals in their hands for us to do work for them. All 3 said their plans had been put on hold despite issuing RFPs with immediate start dates within the last quarter. All 3 said their plans had been put on hold because of uncertain consumer demand. Not regulations. Not health care reform. Not tax uncertainty. Not political uncertainty. Businesses deal with government demands. It can eat into their margins. But it doesn’t keep them from doing business. Lack of customers does.

As to the high unemployment that remained in 1939, you conveniently didn’t mention Roosevelt’s mistake in ’37, which was instrumental in creating a new recession. Wasn’t very Keynesian of him.

.[/quote]

You are kind of making my point here, SK. The lack of consumer demand your clients cite is because of a lack of jobs, no confidence by consumers and businesses in the future, and a fear that the failed policies of the past few years will merely be increased. The very “stimulus” programs that have indeed pumped money into the economy–in great part to failed programs and wasteful bailouts–have cast a dark cloud over investors and consumers. The Keynesian multiplier that arguably worked somewhat during the Depression is now nearly nonexistent. But the negative incentive and confidence effects of this “stimulus” are very real and offset any multiplier benefits.
BTW, Republicans can be just as guilty of an over-reliance on Keynesian economics as Democrats. The regulatory burden of Sarbanes-Oxley was passed, I believe, during the Bush presidency, and we know much of the stimulus was begun in his last months in office before being continued and greatly increased under Obama.
As to the “mistake” of FDR that led to a second phase of the Great Depression, perhaps you are referring to his attempt to “pack” the Supreme Court by boosting its membership so as to make it more compliant with his more extreme proposals, which by then were getting quite alarming to the general public. In fact, his business bashing did a lot to sap employment throughout the 1930s, and even Keynes advised FDR and his Treasury Secretary to ease up on the rhetoric if the US wanted to see a recovery. As Keynes put it, you need to preserve “animal spirits” in order to keep capitalism going.
BTW, Keynes was generally for a balanced budget over the course of business cycles. He felt governments should maintain surpluses during good times and run deficits during recessions. His revolutionary thought at the onset of the Depression was to deliberately run an excess of government spending over tax revenues. IOW, deficits are OK. But he would be appalled at our current 40% of government outlays being borrowed now, with little hope of a balanced budget in the future.

[CA renter]

[quote=EconProf]CAR: I agree with you about the importance of demographics in shaping economic outcomes. But I doubt the impact of the baby-boomers was as big as you suggest in boosting the economy during the Reagan years.
Reagan’s supply-side policies aimed to increase output by freeing up businesses and workers to produce more in a free market environment. In contrast, the Keynesian demand-side policies of the past ten years pump out monetary stimulus and government spending in hopes that the economy recovers. We now have great empirical evidence contrasting the two approaches. Reagan inherited a recession and inflation in some ways worse than Obama, with inflation peaking at about 13% in 1980, and unemployment peaking at 10.8% in November of 1982. Yes, that was two years after Reagan got elected, but supply-side policies were not fully in place yet, and Volcker’s harsh (and necessary) tight monetary policy was still wringing inflation out of the economy. But real GNP growth resumed as the economy bounced back like a coiled spring and unemployment steadily fell to 5.5% in 1988.
The demand-side policies of recent years have served to drive us deeper into debt and sapped our appetite to hire and expand production via the exact opposite of supply-side incentives. Businesses and entrepreneurs are afraid of the EPA, looming Obamacare costs, and Dodd-Frank compliance costs, among other job-killing laws. Of course they are moving jobs overseas! Worse yet, the new programs, handouts, and government agencies are entrenched now in our economy, and will be impossible to pare back, as demonstrated by the recent budget debate that achieved so little. The new recipients of the largesse, whether banks, car manufacturers, “green” companies, or those getting 99 weeks of unemployment will fight to keep the money coming.

The Reagan-Obama comparison above is imperfect in many ways, as nit-pickers will point out. But there are plenty of lessons we could learn from that era, and I suspect the coming months will give us a fuller debate about the contrast between supply-siders and Keynesian demand-siders. I
welcome it.[/quote]

EconProf,

SK in CV made the same points I was going to make, but will add a few more here.

At first, I wondered how you could characterize the past ten years as being Keynesian or demand-side, but upon further reflection, I can see you you might make that point. We just disagree on HOW demand is spurred, and whether or not it’s healthy or sustainable. Expanding credit for consumption (which is how one can make the argument that 2000-2010 is an example of “demand-side” policies) is neither healthy nor sustainable over the long run because at some point, that debt PLUS INTEREST needs to be paid back, which means that there will be a drag on growth at some point in the future. I’ve always criticized the Fed for lowering rates at the beginning of the decade and for lowering them in the past few years as well.

Lowering tax rates when starting wars is completely reckless and irresponsible. Not only that, but taxes were lowered primarily for speculators/investors, not so much for workers. If you believe that tax policy can change behaviors, then how would you justify rewarding gambling over productivity?

It’s also important to distinguish between what I see as two types of “investing.” One type of investing is when we invest in a company that produces goods or services needed by society. This takes work, but provides a benefit to society and to our economy, in general. This creates jobs and creates growth in a way that does not impoverish one group in order to make another group rich.

The other type of investing is what I call “speculating.” This consists of buying up assets that are already in existence, with no intention of adding value or using them for personal consumption. These “investors” simply buy assets with the intention of making money on price movements. This adds no benefit to society or our economy. It is behind the boom-bust cycles that we so often see in history, and it impoverishes one group in order for another group to become wealthy (zero-sum).

The monetary and tax policies of the past ten years have not distinguished between these two VERY different types of investing. Since starting an actual business that employs people and makes things requires very real WORK, people will not do it if they can just as easily “invest” in assets and sit back while the Fed does their bidding. This is one of the many reasons we’ve not seen real job creation during the past few years.

If it were up to me, I would increase top marginal tax rates on ALL income, and have lower taxes on labor than on investment income (we want to encourage productivity and work, right?). I would differentiate between capital gains earned from asset price speculation and gains earned from directly investing in businesses that build things. I would enact tariffs on things that are cheaper only because of labor explotation, low/non-existent environmental protections, and foreign govt subsidies, and would use those tax revenues to rebuild infrastructure and increase spending on basic research in healthcare, alternative energy, and energy conservation (among other things). I would reduce unnecessary regulations and ENFORCE necessary regulations that help level the playing field, ensure decent working conditions, and protect the environment.

Both Democrats and Republicans are guilty of destroying our economy, so I don’t buy into the notion that one side or the other will save us. I’d like to see a system where we vote for individuals instead of parties. It would require people to actually do RESEARCH on the candidates, and it would prevent those who seek to concentrate power from dividing us with silly emotional rhetoric while they loot us from behind.

[EconProf]

I second your comment about increased government debt in the 2000 – 2010 era being an especially large burden when the future interest burden is factored in. And given that today’s 10-year bond interest rate is 1.99% and likely to rise some day, we could really get walloped when that happens. Our “short-termism”, whether practiced by HELOC’d consumers or governments at all levels is coming back to haunt us.
The word “investing” is much abused by politicians. It sounds good to invest in infrastructure, until we find out it is something like that bridge to nowhere in Alaska, or, equally foolish, high speed rail for California. (The latter, by the way, is doomed according to every outside analysis of the subject.) As for me, I am planning on investing in a steak dinner tomorrow.
We part ways when you suggest raising marginal tax rates on the highest earners. I am all for cutting certain loopholes and privileges, though some like the benefits to homeowners will elicit howls. But the top rates already exceed 60% when you factor in federal (about 39%) Ca (about 11%), FICA, and a bunch of miscellaneous taxes. It may feel good to sock it to the rich, but they include the creaters, inventors, and hirers. Right now 47% of Americans pay NO income taxes, and a good share of them actually get money back through the earned-income tax credit. That big part of the electorate is certainly not going to vote for a leaner government

[SK in CV]

[quote=EconProf]
You are kind of making my point here, SK. The lack of consumer demand your clients cite is because of a lack of jobs, no confidence by consumers and businesses in the future, and a fear that the failed policies of the past few years will merely be increased..[/quote]

The first part I have no problem with. The bolded part is pure speculation without evidence. There’s no evidence that consumers aren’t spending because of fear of failed policies. They’re not spending because they have no money! So no, i’m not making your point at all.
[quote=EconProf]
The very “stimulus” programs that have indeed pumped money into the economy–in great part to failed programs and wasteful bailouts–have cast a dark cloud over investors and consumers. [/quote]

Failed? I don’t think so. Less successful than hoped for? absolutely. Badly conceived and poorly executed? Yep. But not failed.

[quote=EconProf]
The Keynesian multiplier that arguably worked somewhat during the Depression is now nearly nonexistent. But the negative incentive and confidence effects of this “stimulus” are very real and offset any multiplier benefits.
BTW, Republicans can be just as guilty of an over-reliance on Keynesian economics as Democrats.[/quote]

If Republicans were even considering Keynes, they would have raised taxes in 2004. Keynesian theory has never had any influence among Republicans in at least 30 years. I’m not sure that there’s been much on the Democratic side either. There’s talk. But no action.

[quote=EconProf]
The regulatory burden of Sarbanes-Oxley was passed, I believe, during the Bush presidency, and we know much of the stimulus was begun in his last months in office before being continued and greatly increased under Obama. [/quote]

Perfect example of what I said earlier. Business complains about burdens presented by SOX compliance. And they deal with it. Hasn’t put companies out of business. In fact a whole new industry has grown up around it.

And no, we ddon’t know that any stimulus was passed during the Bush presidency. TARP was passed in his last few months in office. That wasn’t a stimulus. It was a crisis averting injection of capital into the system.

[quote=EconProf]
As to the “mistake” of FDR that led to a second phase of the Great Depression, perhaps you are referring to his attempt to “pack” the Supreme Court by boosting its membership so as to make it more compliant with his more extreme proposals, which by then were getting quite alarming to the general public. In fact, his business bashing did a lot to sap employment throughout the 1930s, and even Keynes advised FDR and his Treasury Secretary to ease up on the rhetoric if the US wanted to see a recovery. As Keynes put it, you need to preserve “animal spirits” in order to keep capitalism going.[/quote]

No, his packing of the supreme court, while ballsy, wasn’t the mistake I was referring to. It was his (non-Keynesian) reduction in government spending which lead to a halt of the advances of the previous 7 years. A recession within the depresssion. As soon as government spending resumed, so did economic growth. An identical similar concern exists now.

[CA renter]

[quote=EconProf]I second your comment about increased government debt in the 2000 – 2010 era being an especially large burden when the future interest burden is factored in. And given that today’s 10-year bond interest rate is 1.99% and likely to rise some day, we could really get walloped when that happens. Our “short-termism”, whether practiced by HELOC’d consumers or governments at all levels is coming back to haunt us.
The word “investing” is much abused by politicians. It sounds good to invest in infrastructure, until we find out it is something like that bridge to nowhere in Alaska, or, equally foolish, high speed rail for California. (The latter, by the way, is doomed according to every outside analysis of the subject.) As for me, I am planning on investing in a steak dinner tomorrow.
We part ways when you suggest raising marginal tax rates on the highest earners. I am all for cutting certain loopholes and privileges, though some like the benefits to homeowners will elicit howls. But the top rates already exceed 60% when you factor in federal (about 39%) Ca (about 11%), FICA, and a bunch of miscellaneous taxes. It may feel good to sock it to the rich, but they include the creaters, inventors, and hirers. Right now 47% of Americans pay NO income taxes, and a good share of them actually get money back through the earned-income tax credit. That big part of the electorate is certainly not going to vote for a leaner government[/quote]

The increased debt — public AND private — is definitely what’s coming back to haunt us. Agreed, the fact that interest rates are so low today is a warning sign, not a sign of hope for the future. At some point, the artificially low rate environment of this past decade is going to catch up with us…big time. They can only fake this “growth” (with extra printing and “stimulus”) for so long. Eventually, we will have to pay for the credit bubble, which is why I keep saying that our problems are not even close to be solved. The crisis is before us, not behind us, IMHO.

As for top marginal rates, there is absolutely no evidence that higher top rates keep people/companies from hiring…none. As a matter of fact, the most successful decades in this country saw some of the highest top rates in history (70-91%, IIRC), while the past decade (of slow/no/declining growth outside of the bubble) has seen some of the lowest top rates. The last time we saw rates this low (and wealth/income disparity this great, and debt loads so high) was just before the Great Depression. This is not a coincidence, IMHO.

The job creators will create new jobs when there is demand to justify it. I’ve never heard a single person say they would turn down good money and not expand production because of tax rates when there was ample demand for their goods/services. Why? Because somebody else will do it, instead. It is demand that spurs economic growth, and we cannot have demand when the bottom 50%+ of the population barely has enough money to feed and house their families (which is why they CAN’T pay taxes).

[SK in CV]

[quote=EconProf] But the top rates already exceed 60% when you factor in federal (about 39%) Ca (about 11%), FICA, and a bunch of miscellaneous taxes. [/quote]

Please find me exactly where that bracket exists. I can’t find a greater than 60% marginal rate anywhere. Enlighten me please.

[briansd1]

[quote=Allan from Fallbrook]
For much of the world, we are still that “shining city on a hill”.[/quote]

I agree. Temeculaguy ticked-off some metrics as to why we still are the city on the hill.

You alluded the rise of an angry radical right in Europe. Don’t you think that phenomenon is occuring in America as well?

[Veritas]

I do not think it is just the right that is angry. There are a lot of disenfranchised people out there because of high unemployment and no hope. These people will be exploited under certain circumstances such as the London riots and then we will have problems in some of our major cities. It will not take much to set them off either. I do not see the angry right as becoming a mob, Brian. It is the people that have nothing to lose that you should fear. Not the ones with jobs.

[briansd1]

Well, Veritas, people with no jobs are more likely to becoming a mob, I agree.

But there a policially angry right that feels like “their America” is slipping away from them. They don’t feel that America is the shining city on the hill anymore. They feel like only they “love America” enough and can restore our greatness.

In Europe that is manifesting itself in nationalistic xenophobia. Allan likes to point to Marine Le Pen of the National Front in France.

Do you thing that, in America, we are immune from such right-wing politics? It’s more subtle here, but I’m feeling some strong winds.

[Allan from Fallbrook]

[quote=SK in CV]
No, his packing of the supreme court, while ballsy, wasn’t the mistake I was referring to. It was his (non-Keynesian) reduction in government spending which lead to a halt of the advances of the previous 7 years. A recession within the depresssion. As soon as government spending resumed, so did economic growth. An identical similar concern exists now.[/quote]

SK: Although, there is some doubt here as well. I’d second EconProf’s recommendation of Amity Shlae’s “The Forgotten Man”: http://www.amazon.com/dp/0060936428/?tag=googhydr-20&hvadid=3387136635&ref=pd_sl_47xgpxln7i_b

Following is from Henry Morgenthau, FDR’s Treasury Secretary in 1939:

[U.S. Treasury Secretary Henry Morgenthau, Jr.]: “No, gentlemen, we have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong, as far as I am concerned, somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…
But why not let’s come to grips? And as I say, all I am interested in is to really see this country prosperous and this form of Government continue, because after eight years if we can’t make a success somebody else is going to claim the right to make it and he’s got the right to make the trial. I say after eight years of this Administration we have just as much unemployment as when we started.

Mr. Doughton: And an enormous debt to boot!

HMJr.: And an enormous debt to boot! We are just sitting here and fiddling and I am just wearing myself out and getting sick. Because why? I can’t see any daylight. I want it for my people, for my children, and your children. I want to see some daylight and I don’t see it…”

—Transcript of private meeting at the Treasury Department, May 9, 1939, F.D. Roosevelt Presidential Library

As Shlaes’ writes convincingly in her book, WWII had a far greater effect as far as lifting the US out of the Great Depression then did the economic policies of FDR.

[SK in CV]

I won’t (and can’t reasonably) dispute that it was WWII that ended the depression.

But neither can it be disputed that government spending was cut sharply in ’37, most as a result of those concerned with mounting government debt. Followed by a > 30% increase in unemployment. Followed by a return to large scale government spending (I think it was close to $5 billion in stimulus). Followed by the end of the recession. Beginning to end was less than 2 years.

That said, employment didn’t return to pre-recession levels until a few years later when the US entered WWII. Would it have happened without the war? Probably not with the speed and endurance that it did.

But I have to add here. Top marginal income tax rates for those making over $20,000 a year (I’m guessing pretty decent money at that time) almost doubled to 55% after US engagement. For the very wealthy, it rose to 89%, and then to over 90% where it stayed for the duration of that war and the next. And the economy exploded (in a good way) with those high tax rates. JM would have approved.

[Author]

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