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It’s Official: Recession
Posted by: Dale Franks on Monday, December 01, 2008

The National Bureau of Economic Research has weighed in with it expected dismal news.
The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession.
So, we've been in a recession for about a year now, and presumably are heading for the trough.

So, what to do?

Well, if you ask Paul Krugman, he thinks he has the answer:
Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall.
In other words, a government spending spree. He suggests this because he's a bad Keynesian.

I, on the other hand, am a good Keynesian, which means that I do not believe that the government can spend us out of a recession through fiscal expansion.

Keynes suggested that in bad economic times, a fiscal policy that resulted in a budget deficit, was, on the whole, a good thing. He suggested that spending and taxation played a part in economic recovery. Although, he concentrated on the spending side, a natural result of the general fascist tone of the times.

By the 1980's, Keynes original writings from the 30s had to go through some serious revision in the light of 50 years of subsequent experience. During that time, massive spending was tried at various times, with so-so results.

What we know now is that the essence of Keynesianism is that in bad economic times, the government needs to get more cash into the economy. The classical Keynesian view is that government spending should be the primary component of that cash infusion.

But now, we know that tax policy is an extraordinarily effective tool. And one which few in government, especially in the incoming Obama Administration, wants to diddle with too much. But it is tax policy that needs to be diddled.

Consider: our goal is to increase aggregate demand by supplying cash to consumers.

The spending model suggests that we create many new jobs by embarking on some sort of massive public works programs or the like. But, what the spending model doesn't deal with well is that, the government doesn't create wealth. It merely transfers it.

The goal is to get money in to the hands of the businesses and individuals who do create wealth. If so, then...why take it from them in the first place?

Robert Mundell, the Nobel laureate economist, has a far simpler suggestion that creating some massive new spending programs, or re-creating the Depression Era National Recovery Administration.

Just cut taxes.

First, have a year-long tax holiday for business and corporate taxes. Then, after one year, when taxes are re-imposed, impose them at 15%.

This obviates the (essentially correct) objection to tax cutting offered by Robert Reich:
Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They're wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend.
He's right, although not for the reason he thinks. If personal income taxes were equitably spread out among the citizenry, personal income tax cuts might be a lot more effective. In a situation where a third of the citizenry already pays no income taxes, and the lion's share of taxes are paid by the top 10% of taxpayers, income tax cuts are fairly ineffective.

But business and corporate taxes are another matter. Those tax cuts would provide immediate cash reserves to businesses of all sizes. They would go towards capital improvements, investments, etc., far more directly.

For the government, the end result is the same, i.e., much larger deficits arising from the revenue decreases from tax cuts.

But by keeping the money in the hands of productive enterprises, the goal of increasing the cash available to businesses and, indirectly, consumers, and thereby increasing aggregate demand, is met much more efficiently.

Of course, doing so would eliminate the ability of politicians and bureaucrats to direct funds to their favored clients and causes. Instead, millions of individual actors in the free market would determine their own spending needs and priorities.

Which is why it will never happen, of course.
 
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Obama will likely maintain the middle class tax cut — he may even *gasp* follow through with his campaign plan. I expect they want a balancing act — a massive infusion of stimulus money designed to invest in things that will have an economic impact, followed by serious cuts of programs and spending that is inefficient or unnecessary. Obama will be able to cut things most Democrats wouldn’t touch because he’ll have a mix of a crisis on his hands and his popularity to get things through quickly.

I’m still very, very worried about a dollar collapse and inflation alongside a slowing economy. Just as Keynesian economics in practice produced negative results by the 1970s, supply side economics in practice produced imbalances that we are now working through. Perhaps we need a balance.
 
Written By: Scott Erb
URL: http://scotterb.wordpress.com
You are not going to see a tax cut that is not a laugh anytime soon. Because the people who will be running the show as of next month are either A) Socialists who hate cutting anyone’s taxes but their own and those of the poor (who pay no taxes), or B) Leftists who believe that tax cuts are "for the wealthy."

I sound like a broken record, but when The Clown™ spends us into the hemisphere next year with a trillion dollars in new spending, and the economy is still in the tank, the media will continue to blame George W. Bush for all of the nation’s ills. They have started already: the MSM claimed that last week’s stock market rise was due to "confidence in Obama," yet are preparing Tuesday to say that the 680 point drop on Monday was due to "Bush’s recession."

Oh, this should be a fun two years as the economy continues to spin out of control. (See Bernanke’s comments that we won’t see any sort of recovery until 2010 at the earliest.)
 
Written By: James Marsden
URL: http://
And lets not forget the simple fact that we don’t actually fit the definition of "recession". A smaller growth in GDP isn’t the same damn thing...

And way to kill the 500 point gain the markets had, NBER. Very well done.
followed by serious cuts of programs and spending that is inefficient or unnecessary.
Oh thank christ. FINALLY some cuts at the Department of Education...
 
Written By: Scott Jacobs
URL: http://
Those tax cuts would provide immediate cash reserves to businesses of all sizes. They would go towards capital improvements, investments, etc., far more directly.
Would they? Wouldn’t a business owner, seeing that it is currently harder to sell his product, and often making less of a profit when he does because he’s lowered prices to stimulate demand for his product, be just as inclined to save that money, and hold off making the capital improvements, etc. until "things improve"?
Oh thank christ. FINALLY some cuts at the Department of Education
You should know by now. If Erb predicts it, it’s almost certain not to happen.
 
Written By: kishnevi
URL: http://kishnevi.wordpress.com/
kishnevi,

I think that’s a possibility. Though the companies that are paying taxes are by necessity making a profit, so they can’t be that bad off. Maybe they aren’t as scared.

I think its the companies without any profits that are in trouble. (and that is a helluva lot of companies.) I’m in the furniture business and we felt this recession earlier than most - its been very, very, very grim.

I would suggest a moratorium on the payroll tax instead.

Taiwan is handing out vouchers that you have to spend - can’t save them or pay off debts.
 
Written By: harun
URL: http://
Wouldn’t a business owner, seeing that it is currently harder to sell his product, and often making less of a profit when he does because he’s lowered prices to stimulate demand for his product, be just as inclined to save that money, and hold off making the capital improvements, etc. until "things improve"?
Not really. Businesses aren’t like households. having wads of cash lying around simply Isn’t productive. At the very least, the business will invest, even if it’s just in CD’s. Those deposits then become the basis of of more ability to lend by the bank that holds them.

It’s not as if businesses stuff the money in mattresses. This is especially true of publicly-held businesses that have some fiduciary responsibility to the stockholders. Stockholders are either going to want some of that money back in dividends, or see it put to productive use. Large piles of cash serve no purpose for most corporations, if they are are flagrant excess of operating needs.

Moreover, by adding a significant tax rate cut to the tax holiday, the government changes the incentive structure of the tax system. Now, the lower rates in the future mean increased revenue for the business, effectively. In essence, the change to the tax structure, and the immediate tax holiday are an "improvement" in and of themselves.
 
Written By: Dale Franks
URL: http://www.qando.net
I would suggest a moratorium on the payroll tax instead.
Actually, since the payroll tax is so regressive, that’s a capital idea! That would get money into the hands of lower-income people far more effectively than an income tax cut.

I’m stealing your idea and adding it to mine.
 
Written By: Dale Franks
URL: http://www.qando.net
The Fed cuts in interest rates to near-zero this month have the American economy perilously close to the much-feared "liquidity trap," where no monetary policy is effective and fiscal stimulus merely pours gasoline on to the fire of future inflation.

Mr. Obama’s trillions will have to be obtained by deficit spending, which means Fed printing. If this sounds like ’stagflation’ rising again, it is. In ’82, at the bottom of the last large recession, the Dow hit the levels of 1929 (on an infltion-adjusted basis) as AAA government-guaranteed securities earned 18%. The only ’cure’ was to accept massive unemployment.

The current American generation as never experienced hard times. They are about to get a tough education.
 
Written By: a Duoist
URL: http://www.duoism.org
Income tax/Payroll tax/business tax cut - might still get saved not spent. Look at German consumers - they don’t frickin’ spend anything they are so worried about future taxes. That’s been for decades. That’s why I do like the change to 15% corporate taxes in your plan. I’d make that a flat tax, too - no loopholes. (sop to the left, and better economically speaking as well.)

I agree that spending our way out of this via new projects will be impossible. I mean, we could build a bunch of nuclear power plants, which would be dandy because we might actually need them but by the time they get rolling, the recession will be long gone.

Maybe allowing more oil drilling? - recessions dampen demand for oil, but I think the oil folks know that demand will pick right up again as Asia starts buying cars again. Again, by the time the environemental reports are filled in...recession is gone.

Oh, and possibly increase unemployment benefits - those will be spent as well.
 
Written By: harun
URL: http://
But now, we know that tax policy is an extraordinarily effective tool.
Do we, really?

When I look at the data before and after tax cuts and before and after tax increases, it looks pretty much the same, sometimes the GDP goes up and sometimes it doesn’t go up so much, and every once in a while it goes down.

I know that some folks consider it as obvious as water being wet that lowering taxes CAUSES growth, but I really don’t think the case is that well made.

I am not arguing that now is a good time to raise taxes, its not, but here’s the thing, in a bad economy, it doesn’t matter how much cash you put into the pockets of the captains of industry, that extra cash will go the same place the rest of their cash is going, a safe harbor to ride out this economic storm, with the occasional investor excited about the blood in the streets.

As I understood it, the reason Keynes thought recession was a good time for the government to SPEND money was because NO ONE ELSE WILL.

 
Written By: CaptinSarcastic
URL: http://
Of course, doing so would eliminate the ability of politicians and bureaucrats to direct funds to their favored clients and causes. Instead, millions of individual actors in the free market would determine their own spending needs and priorities.
Dale, you hit the nail on the head. Isn’t that the cornerstone of all liberal public policy?
 
Written By: jt007
URL: http://
Actually, since the payroll tax is so regressive, that’s a capital idea! That would get money into the hands of lower-income people far more effectively than an income tax cut.

I’m stealing your idea and adding it to mine.
Interesting idea, this is money that would absolutely go right back into the economy as spending, however, that would put the SS payments as debt right on top of the general fund, and although the SS surplus that is routinely spent is a paltry $200 billions, those SS checks add up to another $600 billion, for a total cost of a one year moratorium on payroll taxes of $800 billion.

Still, I like it, when people spend it, the demand should create the jobs needed to produce the supply to meet that demand.

As a sneaky aside, it might get people riled up about social security before they allow it to come back, and maybe we could get some needed changes in the system. As I have said before, on SS, it’s a Nixon went to China thing, only a Democrat can fix Social Security.
 
Written By: CaptinSarcastic
URL: http://
Captain Sarcastic,

People might just save their extra cash they get from not paying payroll taxes, too. Or pay off their credit cards. We’re talking likelihoods here.

But the problem is the same for anyone who gets the money - fat cat or welfare queen, they may not choose to spend it.

The government can spend money and make sure its spent, but their problem is that it takes too long to get it into the system and that it tends to end up becoming permanent spending. That’s not good either. I think some of the fear in people’s minds is due to the large sums the government is throwing around.

Reading the Economist the last few weeks, they mentioned that Germany is very skeptical of such Keynes spending and has only very small stimulus plans because in their experience it doesn’t work either.

Perhaps another idea would be for states to have a tax holiday on sales taxes for one year, funded by the federal government. (yeah not every state has one) You have to BUY something then, but again since money is fungible, they could just take those savings to the bank.

This is why Taiwan is trying this voucher scheme - to force consumption.

Now, how about setting up automated Keynesian programs with earmarked funds in the good years to be spent only after an official recession is declared. Obviously this would be politically very hard. But wouldn’t it be sweet to know that once we get in a recession, your checks in the mail, or that nuclear power plant is green-lit from day one? Uhhh, best to stay with checks in the mail rather than spending programs, can you imagine the lobbying? This is what Dale is talking about - no matter how you come up with spending, its going to be pork.

Again, extend and increase unemployment benefits might be the easiest way if you must have the government spend rather than the taxpayers.
 
Written By: harun
URL: http://
If a recession happens in the forest and no one notices, is it a recession?

I don’t doubt we were affected by a downturn for a while, but the NBER date to declare Recession seems a little too far back to me. If you tried to tell someone a year ago we were in one, Democrat political hacks aside, you’d have trouble finding someone who noticed.
 
Written By: jpm100
URL: http://
If Obama is serious about solving the problem of "man-made global warming", the quickest and easiest thing he could do that would have the biggest impact on the environment is to allow a tax credit for making homes more energy efficient. There is no better solution that could be implemented today!

Our homes are significant creator of pollution. Primarily HVAC draws electricity from the electric plant that needs to burn more coal to meet the increased need and hence creates more CO2.

A tax credit on home energy efficiency improvements would not only stimulate the economy, but "save" the environment at the same time. Think of all the blue collar jobs that would be created on both the back end and front end if we were to take this step.

Windows, door, insulation, attic fans, lights, and energy star rated appliances and so on.
 
Written By: blue
URL: http://
If Obama is serious about solving the problem of "man-made global warming",
If we accidentally solve global warming as we seek alternative energies, that will be fine, but as much as McQ and Dale argue against economically damaging rules to address AGW in good times, it would be like throwing an anchor to a drowning man in bad times.

Given a choice between having a job to provide for their children, or being unemployed with a better environment possible for their children, most Americans, even the environmentally conscious ones, will say screw the environment.

This is a backburner issue in good times, lots of rhetoric, little action, in bad times, it will be even less rhetoric and no action. As it should be.

 
Written By: CaptinSarcastic
URL: http://
People might just save their extra cash they get from not paying payroll taxes, too. Or pay off their credit cards. We’re talking likelihoods here.

But the problem is the same for anyone who gets the money - fat cat or welfare queen, they may not choose to spend it.
I agree we are talking likelihoods, but seriously, is there any doubt at all that people who have been living on credit for the last 8 years are anything but FAR more likely to spend than people who already have lots of money in the bank and are choosing not to spend it?

And if we are going to have the government take on more debt, why not get something for it in the form of infrastructure spending. It’s not wasted, our infrastructure is a mess, and if we have a trillion dollar infrastructure program, there will be a lot of domestic only jobs, and lot of people would be working that otherwise would not, and isn’t it better to have more people working rather than less as we ask the government to pump cash into the economy. That’s really the choice, more money for people who have jobs, or more jobs, with the money entering the economy either way. If you add a few bucks to people who have jobs, they may chose to not to spend it, but if you add jobs, the vast majority of that money will be spent. And because it is infrastructure, as long as we require that the contractors are US based, and the employees are legally working and living in America, the end result of an improved infrastructure would be to make America that’s more competetive in the global marketplace.
 
Written By: CaptinSarcastic
URL: http://
"AGW in good times, it would be like throwing an anchor to a drowning man in bad times."

Are all tax breaks bad during bad times or just one’s that can help both the economy and the enviroment at the same time?

How would reducing home energy costs hurt the economy? Wouldn’t consumers save money over the long run?

Wouldn’t this force people who had money who cared about this topic to spend it in order to take advantage of it?
 
Written By: blue
URL: http://
"followed by serious cuts of programs and spending that is inefficient or unnecessary"

This from the guy who accuses others of not knowing how the world works. Amusing.


********************************

"why not get something for it in the form of infrastructure spending. It’s not wasted,..."

Two words; ’Big Dig’.

As someone else mentioned, by the time any significant spending is done by infrastructure projects the recession will be long gone. They might get all the environmental reports and permits done, but that is about it.

***********************

Like the common cold, there is no cure for a recession. You just have to tough it out. Government spending, like Nyquil, may make some people feel better but it doesn’t cure anything.
 
Written By: timactual
URL: http://
"why not get something for it in the form of infrastructure spending. It’s not wasted,..."

Two words; ’Big Dig’.
Three other words, "Interstate Highway System"

You can describe all infrastucture projects by the worst of them.

Some projects can begin almost immediately, like bridge repairs and widening some major interstate routes. These all need to be done, and will be done, so why not now when these kinds of projects can have the biggest impact.
 
Written By: CaptinSarcastic
URL: http://
Three other words, "Interstate Highway System"
Maybe not the best example:
Although construction on the Interstate Highway System actually continues, I-70 through Glenwood Canyon (completed in 1992) is often cited as the completion of the originally-planned system.[12][13] The initial cost estimate for the system was $25 billion over 12 years; it ended up costing $114 billion (adjusted for inflation, $425 billion in 2006 dollars[14]) and taking 35 years to complete.[15]
(This is from Wikipedia, feel free to cite other sources.)


Clearly, the amount of money spent was way over initial estimates, and the time it took was much longer. I think that serves to prove timactual’s point, rather than refute it.
 
Written By: Steverino
URL: http://

Here’s a link that’s a little bit less, uh, Wikopedic. It doesn’t really dispute the costs, but it does show that Congress added and added to the project, which would of course increase the cost, and the $114 billion is not inflation adjusted, and the final number is adjusted to 2006 dollars without showing what the original estimate was in 2006 dollars. The $25b is 1954 dollars, so you have consider some very, very inflationary years in the middle there. By 1958, with the added elements, the cost estimate was $41B and by the mid 1990’s, actual costs were around $350B in 1996 dollars, but only $58B in 1958 dollars.

As of 1996 it has returned more than $6 in economic productivity for each $1 it cost.

That’s what I called GOOD spending.

 
Written By: CaptinSarcastic
URL: http://
PublicPurpose isn’t exactly neutral, so if you’re going to attack Wikipedia, maybe you should have used a different site. Wiki’s sources were footnoted...

A different site says otherwise:
Actual Cost to build the Interstate Highway System was $114 Billion over 35 years ago, and $500 billion in 2008 dollars
We can argue over whether it’s money well spent. However, the project was over budget by 356% and late by 191%. Try running a project like that and see what your boss has to say.

Spending on infrastructure might be a good thing, but it’s undeniable that the actual cost to complete a project and the actual time it takes is MUCH greater than the estimate.
 
Written By: Steverino
URL: http://
"Three other words, "Interstate Highway System" "

Which they are still working on, by the way, a generation later. Not much good for a recession cure. And do we really need another interstate highway system?

" widening some major interstate routes."

Dream on. It takes a bit of time and effort just to acquire the land, even after Kelo. These are all fairly large engineering projects, much larger than, for example, a kitchen renovation. Have you ever had any household renovation done? It never starts on time, goes according to schedule, costs what is initially budgeted, or turns out according to plan. Do you actually expect us to believe that a government public works job, particularly one that is rushed, will be any better?

" These all need to be done, and will be done, so why not now when these kinds of projects can have the biggest imp "

They are already being done, and it is a little more complicated than just telling someone to start building X next Tuesday. Civil engineering is not just a bunch of guys with picks and shovels digging holes anymore.
 
Written By: timactual
URL: http://
Actual Cost to build the Interstate Highway System was $114 Billion over 35 years ago, and $500 billion in 2008 dollars
Here’s the thing, your numbers do not show the 2008 value of the original $41 billion proposal.

Go this bls adjusted dollar calculator, and enter $41 (assume the billion) and calculate 1958 dollars into 2008 dollars.

The answer is $307 billion.

You say that the cost was $114 billion as of 35 years ago (1973) so just calculating the $41 billion in from 1958 dollars to 1973 dollars equals $200 billion. I don’t know exactly how much was spent each year, and to be accurate, we would need to adjust those dollars, but the point is that it was the wild overruns that you think it was.

And in any case, a great investment.
They are already being done, and it is a little more complicated than just telling someone to start building X next Tuesday.
Yes, I know, but there are a lot of necessary projects out there that have been planned out and are just waiting for funding. Projects can also be fast tracked, to get more work done sooner rather than waiting for the federal dollars over several years.

It’s not that I disagree with you completely, but I disagree with the idea that nothing can be done soon, so we shouldn’t even look at these type of projects.
 
Written By: CaptinSarcastic
URL: http://
"but I disagree with the idea that nothing can be done soon"

I am sure something can be done soon, but not enough make a significant difference. Politicians, who get to look useful and responsive, are the biggest beneficiaries. As I mentioned before, taking Nyquil or some other medicine will relieve some of the symptoms of a cold, but you are still going to have a week or so of misery.
 
Written By: timactual
URL: http://
you are still going to have a week or so of misery.
Yup, it’s going to hurt. On that, I do not disagree at all.
 
Written By: CaptinSarcastic
URL: http://
Seriously, I think the whole United States’ recession thing has somehow affected everyone. It’s ridiculous to think that payday loans are responsible for the economic mess in America. Apparently, economists have marked December 2007 the “official” beginning of our current recession. The National Bureau of Economic Research (NBER) identifies top activity at this point, and the U.S economy has been deteriorating since then. The NBER describes recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.” It seems other organizations are in the same boat. Backed by the government, academics and the private sector, it’s as close to official as possible. These conclusions are based upon unemployment, incomes, industrial output and sales data. The highest point in employment and incomes was marked that December. In January, industrial output peaked and five months later, in the month of June, sales peaked. Democrats claimed this wasn’t a shock and called for an economic stimulus package. “The announcement simply makes official what we have long known: with rising costs of living, rising unemployment, record foreclosures and depleting savings, we must do more to help families make ends meet,” says Senate Majority Leader Harry Reid. So, this would mean that the proposal to ban payday loans is not a good plan. Reid highlighted that a recovery package must create more jobs, cut middle class taxes and instill confidence in the market and the people. Payday loans, and any other similar form of lending, have proven once again the magnitude of their importance in our economy. Click here for more information about Payday Loans.
 
Written By: Payday Loans
URL: http://
"...It’s ridiculous to think that payday loans are responsible for the economic mess in America..."
(???)

Uh, okay.



(Psst! Dale, don’t you guys charge a fee for advertising space?)
 
Written By: timactual
URL: http://

 
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