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Stimulus is on the way

I’m finding it interesting to read the debate on economics blogs about how effective the stimulus package that the government will pass early next year is likely to be in addressing the economic collapse that we all hope won’t linger for ten years.

For what it’s worth, I think Tyler Cowen is close to the truth when he writes this:

Note that under standard theory neither monetary nor fiscal policy will set right the basic problems from negative real shocks and indeed the U.S. economy is undergoing a series of massive sectoral shifts. That includes a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.)

That’s why we’re in for pain for what may be a very long time. I think we should all hope that the more optimistic economists are right on this issue, because some stimulus package is inevitable.

For the pro-stimulus argument, Brad DeLong and Paul Krugman are the essential stops.

For what it’s worth, non-economist Jim Henley wrote the best summary of the economics of the past 20 or 30 years that I’ve read:

During the period of Republican dominance, government policy contributed to stagnant real wages for most Americans, but to keep consumption up, fostered ever-more-creative ways for them to take on debt. The recent real-estate bubble (still deflating) was the final(?), decadent stage of the con. Now the jig is up: what falling asset prices reveal is that the country was a lot less wealthy, in real terms, than we imagined. In the absence of broadly shared prosperity, society can’t maintain a robust growth in genuine wealth.

You can leave out the stuff about Republicans if you like, increased ability to take on debt did replace wage growth as the means by which people improved their standard of living over the past 10 or 20 years. The difference between borrowing and having is that now the economy is going to suffer as people try to pay down the debt they’ve accumulated as rapidly as possible.

Intuitively, if the economy’s size was based in large part on borrowed money, government borrowing could make up some of the difference since businesses and consumers are borrowing less, but clearly that can only work for a short time as we try to find some more reliable means to rebuild the economy.

3 Comments

  1. I remember thinking in college that my generation (early Xers) would be the first generation not to improve their standard of living over their parents’. I look at my peers and my family, mostly the in-laws, and finally the illusion that allowed everyone to think otherwise has fallen apart.

  2. Given the performance of most retirement accounts, it looks like we may still be able to pull their standard of living down to ours, though.

  3. The difference between borrowing and having is that now the economy is going to suffer as people try to pay down the debt they’ve accumulated as rapidly as possible.

    Actually, that’s only part of the picture. Whenever I hear people talk about the need to get banks to start lending again, I think: it’ll never go back to the way it was, since that was unsustainable.

    So, the additional pain will be the adjustment to an economy without all that easy credit. So, even if we ease the current crisis, the new ‘good’ economy will not be nearly as large as it was before. In terms of jobs, etc., that’s gonna hurt.

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