Krugman - Life Without Bubbles
nytimes.com
nytimes.com
* Going into debt to buy foreign goods is bad.
* Going into debt to buy domestic goods is bad.
* Not going into debt to buy foreign goods is fine.
* Not going into debt to buy domestic goods is fine. Hence
* The "trade deficit" is entirely beside the point. Moreover,
* Consumer spending is not the cause of prosperity.
* The collapse in consumer demand reflects people realizing they were spending beyond their means.
* Having the government "stimulate" the economy with demand only postpones the inevitable, because
* There are too many companies making too many consumer goods, and
* This has to change.
Rest assured, then, that the government stimulus will mainly benefit producers of steel beams and concrete rather than iPods and Laptops.
Since we're basically borrowing money from the future to attempt to smooth out a difficult transition in the present, I think a stimulus can make the problems less bad for some people.
That the money will be used inefficiently is probably the case, but the money is more valuable in the present, in a sense, than it is in the future -- because without the money now, a desirable future may not exist.
At the worst, the stimulus won't matter much.
At the best, it'll help a few million people.
The truth will probably lie somewhere in between those two extremes.
The stimulus package is about infrastructure. If the resulting payoff is greater than the debt, then absolutely it makes sense to go into debt. That's basic economics, and it has been for as long as the concept of debt has existed.
The reason why we're spending is to cushion ourselves from the economic collapse, yes. The reason why we're spending on infrastructure is because this is the only way to do it that isn't ultimately a waste, and we would have needed to do it at some point regardless of the state of the economy. No better time than an economic collapse to do so.
(This assumes that the infrastructure plans themselves are wise, of course. So far, they appear to be.)
Saying that investment in the US is traditionally "repaid from increased borrowing" has nothing to do with the rationality of spending on infrastructure (which eventually pays for itself by increasing GDP). A lack of responsible accounting and accountability causes US debt to be repaid with increased borrowing, not what the borrowed funds are spent on.
If the resulting payoff is greater than the debt, then absolutely it makes sense to go into debt.
I agree: if. But government lacks the proper incentives to ensure that the benefits justify the costs.
This has already begun. We've effectively seen a run on the shadow banking system of investment banks, prime brokers, hedge funds, etc., as initial losses in subprime have forced firesales of other assets to meet margin calls. To be sure, the credit bubble extended far beyond subprime, and the deteriorating economic fundamentals support continuing write-downs and losses on Alt-As, option ARMs, prime mortgages, auto loans, credit card debt, student loans, etc. But the credit market's subsequent freezing has put everyone at risk, so that the recession could potentially far overshoot the "disease" of over-indebtedness and overconsumption. Absent the government stepping in and trying to make use of the wasted capacity in the economy, making up for lost private and business investment, this process could spiral on well beyond what the economic fundamentals justify, and past anyone's ability to predict as well.
Yes, this recession is the result of previous bad choices, but that doesn't mean we shouldn't try to ameliorate the worst consequences and prevent a negative feedback loop. Telling people that this is the "cure" without trying to end the cycle of loss smacks of neo-Hooverism.
Those bubbles have burst, and prices are returning to their normal level. Over the short term, that looks like deflation (just as the bubble looked like inflation), but it's really very different from actual Japan-style deflation.
By the way, "shadow banking system" is just a scary term invented by Paul Krugman to describe non-S&L investors.
Those bubbles have burst, and prices are returning to their normal level. Over the short term, that looks like deflation (just as the bubble looked like inflation), but it's really very different from actual Japan-style deflation.
By the way, "shadow banking system" is just a scary term invented by Paul Krugman to describe non-S&L investors.
And once deflationary expectations set in, it's very difficult to rid the economy of them. For example, if you expect housing prices to fall even more, it makes sense to wait a few months for them to do so. If enough people act this way, deflationary expectations become self-justifying, and prices could keep falling even beyond the fundamentals. And while individuals benefit from their dollars having increasing buying power, this is more than offset by the fact that in the face of falling demand, companies will have to slash payrolls, either through benefit reduction or layoffs. This is in turn lowers demand, deteriorating the business environment even more. And this is to say nothing of the fact that people's debts become larger in real terms during deflation, likely causing more defaults of all sorts.
The shadow banking system refers to financial institutions that act like banks - ie borrow short, and lend long, oftentimes in illiquid assets - but don't have the protections that banks do, most importantly depositor insurance. Consequently, institutions like investment banks or hedge funds can still experience the equivalent of bank runs. Bear Stearns was a perfect example of this.