"The Paradox Of Thrift"

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Toons
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"The Paradox Of Thrift"

Post by Toons »

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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JMacDonald
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Post by JMacDonald »

Hi,
I guess emergency funds and living below your means is just a foreign concept to many people.
Best Wishes, | Joe
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Post by White Coat Investor »

I'm impressed with the families in the article. It doesn't sound like they did anything stupid to me. When things weren't looking good, they dramatically cut their spending, reduced fixed expenses (like debt payments), and increased emergency funds. Sure, they weren't great savers before, but I'd much rather have someone living just within their means than far beyond them.
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Post by bluemonday »

All well and good, but the point of the article is, that enough families doing this dramatic cutback in spending, will make things worse in the general economy, at least in the near term. Any stimulus package may be gobbled up in a wave of thrift. If everyone expects someone else to do the "heavy lifting" of spending, then it won't happen, and things will get worse. Not saying they are doing the wrong thing individually( they are not ), simply that in the aggregate, this will only make things worse. But I guess that's the price we will/must pay for our previous spendthrift ways, pain.
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Post by Valuethinker »

bluemonday wrote:All well and good, but the point of the article is, that enough families doing this dramatic cutback in spending, will make things worse in the general economy, at least in the near term. Any stimulus package may be gobbled up in a wave of thrift. If everyone expects someone else to do the "heavy lifting" of spending, then it won't happen, and things will get worse. Not saying they are doing the wrong thing individually( they are not ), simply that in the aggregate, this will only make things worse. But I guess that's the price we will/must pay for our previous spendthrift ways, pain.
Paul Krugman's reissue of his book 'The Return of Depression Era Economics' (2008 edition) is a very good, succinct and non-technical summary of precisely this problem.

John Maynard Keynes is almost impenetrable, but I believe he was the first person to introduce the concept.
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Post by yehudimenuhin »

Even though I took macro-economics at MIT, I never got a good feel for macro-theory. I might just be too simple, but then again, I didn't sit in Krugman's class.

So, my question is this: Don't most people discussing "paradox of thrift" come at things from the wrong angle?

The discussion usually goes along these lines: "Sure, things were terribly unbalanced, and that has given us this awful recession. And those folks who have ceased spending money they don't have on things they don't need are just making it worse. If we can encourage them to blow their non-existant savings, we can get this thing running again."

Isn't it a lot like a junkie hitting a score so the urge goes away?

How does stimulus improve things in the long run? Doesn't it just prolong the problem?
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Post by richard »

yehudimenuhin wrote:How does stimulus improve things in the long run? Doesn't it just prolong the problem?
By stopping short term bleeding in order to facilitate long term recovery. No

Here's a 1998 article by Krugman that's worth reading: http://www.slate.com/id/9593
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Post by tetractys »

bluemonday wrote:All well and good, but the point of the article is, that enough families doing this dramatic cutback in spending, will make things worse in the general economy, at least in the near term. Any stimulus package may be gobbled up in a wave of thrift.
A reasonable viewpoint. But what about veering toward a economy based more on need based products or consumer staples, and less on superfluous throwaway goods. In the long run that would be better I think, and a stronger base for a solid economic future.

A big key, IMO, is bringing production home, locally need based production like agriculture, textiles, transportation, and green energy--bioregional macroeconomic strong boxes.

Long distance trade has it's place too, especially for unique goods and shortages; but the historic failure and destruction caused by past efforts, and recently repeated by the WTO thus far, have shown that there are limits, and that large doses of discretion are needed for everyone's benefit.

Best regards, Tet
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Post by craigr »

yehudimenuhin wrote:Doesn't it just prolong the problem?
Yes it does. Government is not nearly as good spending money as the people they took it from through taxes and inflation. The paradox of thrift and the need for government to take citizen's money in order to spend it for them is just a silly idea.

The only reason this idea has any traction is because it incorporates two things politicians love:

1) Spending money that isn't theirs.
2) Plausible deniability for the theft by acting like it's sound economic principle.
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Post by craigr »

Valuethinker wrote:John Maynard Keynes is almost impenetrable, but I believe he was the first person to introduce the concept.
Henry Hazlitt is what people want to read to get an introduction to economics. Avoid Krugman and Keynes. A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
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Post by shizzyfinn »

craigr wrote:Henry Hazlitt is what people want to read to get an introduction to economics. Avoid Krugman and Keynes. A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
Hey craigr, turns out the seven-year-old had to close his lemonade stand when demand dried up because his customers were all worried about losing their jobs. When I saw him in the soup line, he seemed upset that the government didn't do more to help. But no worries - I explained that, per Hazlitt, any assistance would actually have hurt him in the long run. Then I asked him if he'd like a copy of Hazlitt's Economics in One Lesson. He eagerly accepted, saying "Sure, the leather cover looks delicious."
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Post by craigr »

shizzyfinn wrote:
craigr wrote:Henry Hazlitt is what people want to read to get an introduction to economics. Avoid Krugman and Keynes. A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
Hey craigr, turns out the seven-year-old had to close his lemonade stand when demand dried up because his customers were all worried about losing their jobs. When I saw him in the soup line, he seemed upset that the government didn't do more to help. But no worries - I explained that, per Hazlitt, any assistance would actually have hurt him in the long run. Then I asked him if he'd like a copy of Hazlitt's Economics in One Lesson. He eagerly accepted, saying "Sure, the leather cover looks delicious."
Naturally. The polices worked so well in the 1930's that the Depression lasted almost 15 years until finally ending in a gigantic world war and nuking of two cities.

Re: Soup lines

My wife's 92 year old grandmother lived in rural farming area during the Depression and remembers it well. Her uncle, a farmer, was prohibited by the government from growing too much food, from growing the "wrong" kind of food and from charging too little for it. He was threatened with jail time and fines if he violated the govt. imposed controls. He had to secretly give the food to his relatives who would then sell it or barter it in secret to their neighbors. Seems the New Dealers thought that they had to "create demand" by propping up prices. It didn't work and people starved because they couldn't afford to eat with the artificial scarcity these policies created.

I don't recommend anyone spend time reading what Keynes has to say other than to be able to refute his nonsense. Deep understanding of Keynes is as useful to sound economics as studying phrenology is to a neurology student.
Last edited by craigr on Tue Jan 06, 2009 6:21 pm, edited 1 time in total.
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Post by DRiP Guy »

Sorry, I could not resist turning the graph in the article upside down so that the positive vertical is savings rate and the below zero is consumption.

I happen to think it is a good thing, but then, I am not an an economist.


Image

:lol:
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Post by Met Income »

craigr wrote:
Valuethinker wrote:John Maynard Keynes is almost impenetrable, but I believe he was the first person to introduce the concept.
Henry Hazlitt is what people want to read to get an introduction to economics. Avoid Krugman and Keynes. A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
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Post by shizzyfinn »

craigr wrote: Naturally. The polices worked so well in the 1930's that the Depression lasted almost 15 years until finally ending in a gigantic world war and nuking of two cities.
Krugman would respond that the reason the Depression lasted so long was that FDR's intervention was stymied in several ways, and by FDR himself. In fact, here's a tasty Krugman excerpt from a November 10th column on the subject:

F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”

...The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level...

After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.


Krugman goes on to make the same point you did, craigr, about World War II finishing off the stimulatin' that FDR walked away from too soon. So you and Krugman can agree on something! :)
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read some herbert marcuse...

Post by greenspam »

from wikipedia (sorry, too tired to find a better reference):

Herbert Marcuse...

Consumerism as a form of social control

Herbert Marcuse strongly criticizes consumerism, arguing consumerism is a form of social control in his book "One-Dimensional Man". He suggests that the system we live in may claim to be democratic, but it is actually authoritarian in that the few individuals are dictating our perceptions of freedom by only allowing us choices to buy for happiness.[2] It is in this state of “unfreedom”[3] in which consumers act irrationally by working more than they are required to fulfill actual basic needs, ignoring the psychologically destructive effects, ignoring the waste and environmental damage it causes, and also by searching for social connection through material items. [4]

It is even more irrational in the sense that the creation of new products, calling for the disposal of old products, fuels the economy and encourages the increased need to work more to buy more. An individual loses his or her humanity and becomes a tool to the industrial machine and a cog in the consumer machine. Additionally advertising sustains consumerism, which disintegrates societal demeanor, delivered in bulk and informing the masses that happiness can be bought, an idea that is psychologically damaging.

There are other alternatives to counter the consumer lifestyle. Anti-consumerism: a lifestyle that demotes any unnecessary consumption, and with that, demotes unnecessary extra work, extra waste, etc. But even this alternative is complicated with the extreme penetration of advertising and commodification because everything is a commodity even the things that are actual needs.
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Post by Die Hard »

When she saw a great deal on eggs recently she bought 10 dozen, which she cracked into ice-cube trays, froze and transferred to bags for cold storage. "Not many people know eggs freeze," she said.
Regarding the article, I would like to see the ice-cube trays that Mrs. Muir broke the eggs into..............not trying to be funny, but one egg could easily take up the space of 4 cubes. I can't imagine how many trays were used for 10 dozen eggs???

Have I missed something????
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Post by dtrainer »

I have found one of the best resources for learning about economics is the 'EconTalk' website: http://www.econtalk.org. The podcasts are a joy to listen to and very educational. Coincidentally, this week's podcast was on the Austrian school's view of business cycles and monetary policy. The website also has a number of primary sources and basic lessons in economics.
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Met Income
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Re: read some herbert marcuse...

Post by Met Income »

greenspam wrote:from wikipedia (sorry, too tired to find a better reference):

Herbert Marcuse...

Consumerism as a form of social control

Herbert Marcuse strongly criticizes consumerism, arguing consumerism is a form of social control in his book "One-Dimensional Man". He suggests that the system we live in may claim to be democratic, but it is actually authoritarian in that the few individuals are dictating our perceptions of freedom by only allowing us choices to buy for happiness.[2] It is in this state of “unfreedom”[3] in which consumers act irrationally by working more than they are required to fulfill actual basic needs, ignoring the psychologically destructive effects, ignoring the waste and environmental damage it causes, and also by searching for social connection through material items. [4]

It is even more irrational in the sense that the creation of new products, calling for the disposal of old products, fuels the economy and encourages the increased need to work more to buy more. An individual loses his or her humanity and becomes a tool to the industrial machine and a cog in the consumer machine. Additionally advertising sustains consumerism, which disintegrates societal demeanor, delivered in bulk and informing the masses that happiness can be bought, an idea that is psychologically damaging.

There are other alternatives to counter the consumer lifestyle. Anti-consumerism: a lifestyle that demotes any unnecessary consumption, and with that, demotes unnecessary extra work, extra waste, etc. But even this alternative is complicated with the extreme penetration of advertising and commodification because everything is a commodity even the things that are actual needs.
Consumerism probably isn't beneficial, but it's still a choice. I figured out long ago that stuff doesn't make me happy and I won't make many trade-offs in order to acquire more things. If people want to do that, more power to 'em.
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Post by Met Income »

dtrainer wrote:I have found one of the best resources for learning about economics is the 'EconTalk' website: http://www.econtalk.org. The podcasts are a joy to listen to and very educational. Coincidentally, this week's podcast was on the Austrian school's view of business cycles and monetary policy. The website also has a number of primary sources and basic lessons in economics.
Russ Roberts is a tremendous thinker. He blows a lot of conventional thinking out of the water.
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Post by Met Income »

Met Income wrote:
dtrainer wrote:I have found one of the best resources for learning about economics is the 'EconTalk' website: http://www.econtalk.org. The podcasts are a joy to listen to and very educational. Coincidentally, this week's podcast was on the Austrian school's view of business cycles and monetary policy. The website also has a number of primary sources and basic lessons in economics.

Russ Roberts is a tremendous mind. He blows a lot of conventional thinking out of the water.
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Post by Die Hard »

I have found one of the best resources for learning about economics is the 'EconTalk' website: www.econtalk.org. The podcasts are a joy to listen to and very educational. Coincidentally, this week's podcast was on the Austrian school's view of business cycles and monetary policy. The website also has a number of primary sources and basic lessons in economics.
dtrainer,
Thanks for recommending. I've never heard of this website. I've listened.....which will be a relief compared to reading so much. Sometimes, my eyes get really tired and listening is a welcome change.

Thanks for sharing!
The best way to teach your children about money is to not have any.............
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Post by rokid »

craigr wrote:A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
Macro or micro?----Jim :wink:
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Post by dtrainer »

Met Income wrote:

Russ Roberts is a tremendous mind. He blows a lot of conventional thinking out of the water.
I would agree. The thing I respect most about him is that he exhibits true intellectual curiosity and is not afraid to admit he doesn't know something. Such humility is rare for a tenured economics professor and not a characteristic I see in Paul Krugman's work.
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not well read on this, but...

Post by AerialP »

the posts about consumerism remind me of the magazine I used to read and who I know has a web presence. Adbusters - Journal of the Mental Environment

adbusters.org I think?

I'll have to dip my toe into econtalk, too.

Thanks all!
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Post by craigr »

rokid wrote:
craigr wrote:A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
Macro or micro?----Jim :wink:
I think I'm going to write an essay on this. I'm convinced I can make my case. I'm serious.
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Post by craigr »

shizzyfinn wrote:Krugman goes on to make the same point you did, craigr, about World War II finishing off the stimulatin' that FDR walked away from too soon. So you and Krugman can agree on something! :)
I don't agree that wars stimulate the economy productively. The only reason why WWII helped the economy (and it really didn't help it during the war years - the depression was just overshadowed by the fighting) is because it killed so many people unemployment was less of a problem here. Secondly, we were the only country with an intact industrial base left with which to help everyone else rebuild after it was all over.

Other than that, wars are horrible for economies. They don't provide any real growth or prosperity. They just destroy lives and resources that could be put to better use.
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Post by AlohaJoe »

craigr wrote:A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
Most quasi-rational intelligent people realize that making ridiculous (non-humorous) exaggerations has the tendency to cause their audience to discount them as extremists not worth listening to rather than someone who may have thoughts worth hearing.
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Post by craigr »

AlohaJoe wrote:
craigr wrote:A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
Most quasi-rational intelligent people realize that making ridiculous (non-humorous) exaggerations has the tendency to cause their audience to discount them as extremists not worth listening to rather than someone who may have thoughts worth hearing.
I'm in a combative mood over what is being done in the economy in the name of saving everyone from themselves. The pretense of academic rigor is sometimes best attacked by making ridiculous examples.

The idea of a Paradox of Thrift when consumers are up to their eyeballs in debt is far more ridiculous of an idea than what I presented. Consumers have no money to spend because they are doing the responsible thing and getting out of unmanageable debt. Instead of encouraging this behavior it is being scorned. The idea that this could even happen, and that it's wrapped up in academic language to legitimize it, is the part that's really ridiculous. IMO.

In any event I know I came off as antagonistic towards the other posters. I apologize if I offended anyone. It wasn't directed at them.
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Post by Met Income »

craigr wrote:
AlohaJoe wrote:
craigr wrote:A seven year old child who runs a lemonade stand for a week understands more about economics, finance and business than Krugman and Keynes put together.
Most quasi-rational intelligent people realize that making ridiculous (non-humorous) exaggerations has the tendency to cause their audience to discount them as extremists not worth listening to rather than someone who may have thoughts worth hearing.
I'm in a combative mood over what is being done in the economy in the name of saving everyone from themselves. The pretense of academic rigor is sometimes best attacked by making ridiculous examples.

The idea of a Paradox of Thrift when consumers are up to their eyeballs in debt is far more ridiculous of an idea than what I presented. Consumers have no money to spend because they are doing the responsible thing and getting out of unmanageable debt. Instead of encouraging this behavior it is being scorned. The idea that this could even happen, and that it's wrapped up in academic language to legitimize it, is the part that's really ridiculous. IMO.

In any event I know I came off as antagonistic towards the other posters. I apologize if I offended anyone. It wasn't directed at them.
Don't you get it? Just like a surging tech stock without earnings can never go down, just like a real estate market that can never falter, the American consumer can spend above their means forever!

(But only if the almighty government helps us.)
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Freezing Eggs

Post by yehudimenuhin »

DieHard,

RE: your question on freezing eggs. I haven't tried it, but I imagine grandma could just beat the eggs before pouring them into trays.

They sell frozen egg whites in the market, but I think yolks don't handle freezing well.

I'd like to buy a laying hen or two....just to see my neighbors' reactions.
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Post by Quidnam »

Die Hard wrote:Regarding the article, I would like to see the ice-cube trays that Mrs. Muir broke the eggs into..............not trying to be funny, but one egg could easily take up the space of 4 cubes. I can't imagine how many trays were used for 10 dozen eggs???
I'm guessing she beat them together so as to make the mixture homogeneous.

The "broke into ice-cube trays" construction may have been chosen by the reporter or editor for verbal economy, resulting in a description lacking the sort of specificity that you might find in an EggFreez (TM) instruction manual.
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Post by yehudimenuhin »

On the New Deal and the Depression

As I understand it, the current thinking (Krugman aside) is that the New Deal did not and could not end the depression. Rather that money supply is far more siginifcant a contributor to the recovery (as well as with other recessions).

Here's a paper on it: http://www.nber.org/papers/w4765

The author is Christina Romer, new chair of Obama's Council of Economic Advisors. So, there may be some hope.

Krugman's the go-to guy for trade/tariff economics, but on domestic stuff, he's simply another political ax-grinder.

And anyway, if putting this money in the hands of folks is good for industry, etc..., why not permanantly lower taxes?
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Post by dtrainer »

I think the problem of thrift reducing aggregate demand could be due to Americans starting to save coupled with high savings rates in many asian countries. Countries like China, with a savings rate of 40%, need to consume a little more if Americans are going to save more. If everyone worldwide increases their savings we will be in trouble. My amateur opinion is that savings and consumption rates need to equalize between countries for long term economic health.
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Post by shizzyfinn »

craigr wrote:Consumers have no money to spend because they are doing the responsible thing and getting out of unmanageable debt. Instead of encouraging this behavior it is being scorned.
Krugman and other supporters of big stimulus are not scorning consumers, and are not scorning consumers' new thriftiness. Krugman and Friends are just noting that the thriftiness has emerged, and that aggregate demand will drop as a result. They also note that, if the government steps in to spend, demand will not drop quite as far as if the government does not step in. And they believe that limiting the drop in demand is a good thing, because of all its nasty downward spiralish tendencies.

Come to think of it, the consumers' new thriftiness is perhaps more accurately called "consumers' new net worth, approx 30% smaller than its old net worth." It's not like we all started reading Ben Franklin all of a sudden. Everybody just lost a ton of loot, and it hurts, baby, it hurts!
yehudimenuhin wrote:And anyway, if putting this money in the hands of folks is good for industry, etc..., why not permanantly lower taxes?
Aha, this is how criticism of goverment stimulus reveals itself to be the newest sheepskin over the wolf of trickle-down economics. The "don't tax the rich" argument (always dutifully embraced by many who are not rich) has morphed into "don't spend on the rest of us" (now dutifully embraced by many who are the rest of us).

yehudimenuhin, I think this is the time for the Arthur Laffer crowd to make its big push: Zero Taxes 2009. It's the elephant in the room of all Laffer Curve discussions that, weirdly, no one ever points out: that if you journey along the curve, so the tax rate keeps going down and government revenues keep going up, you reach a point of absolutely no taxes and absolutely infinite revenue. Voila, this whole Depression '09 thingy would be a distant memory, like the slim Oprah.
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Post by Valuethinker »

craigr wrote:
shizzyfinn wrote:Krugman goes on to make the same point you did, craigr, about World War II finishing off the stimulatin' that FDR walked away from too soon. So you and Krugman can agree on something! :)
I don't agree that wars stimulate the economy productively. The only reason why WWII helped the economy (and it really didn't help it during the war years - the depression was just overshadowed by the fighting) is because it killed so many people unemployment was less of a problem here.
You've actually said something so wrong about casualties it is offensive.

http://en.wikipedia.org/wiki/World_War_II_casualties.

US casualties were 416,000, 0.32% of population. Almost the lowest of any major combatant. No big impact on the civilian labour force.

WWII stimulated the economy: US unemployment went to zero percent. effectively. The US was the 'arsenal of the Allies' and its war production was decisive, even indirectly in the Russian war effort. The US managed to produce more armaments than Japan-Germany-Italy combined, without counting the production of the other allied countries + Russia.
Secondly, we were the only country with an intact industrial base left with which to help everyone else rebuild after it was all over.

Other than that, wars are horrible for economies. They don't provide any real growth or prosperity. They just destroy lives and resources that could be put to better use.
Wars can be stimulative. As was World War II. The cost of a war (in economic terms) besides death and destruction is the opportunity cost of using those factors for some other purpose. Before WWII, much of the world was still in Depression, so those factors were unused. the death and destruction cost was largely not born by the USA-- Continental USA was shelled only once I believe (and no one noticed at the time, it was from a Japanese submarine off California). Damage to coastal shipping was significant and severe off the East Coast (but limited in time span).

It's also the case in the US that the war led to huge business investment eg in aircraft and car manufacture, in energy supply, in oil. R&D transformed: part of the wave of science and technology that hit the world in the 50s was the product of the vast expansion of that activity in the 40s-- radar, engine technology, rocketry (of course), chemistry etc.

In an ideal world, we wouldn't have wars for other reasons. Or we might note that the bad effects outweigh the good ones.

But it's nonsense to argue that WWII was not stimulative for the US (and the world economy).
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Post by Valuethinker »

yehudimenuhin wrote:On the New Deal and the Depression

As I understand it, the current thinking (Krugman aside) is that the New Deal did not and could not end the depression. Rather that money supply is far more siginifcant a contributor to the recovery (as well as with other recessions).

Here's a paper on it: http://www.nber.org/papers/w4765

The author is Christina Romer, new chair of Obama's Council of Economic Advisors. So, there may be some hope.
As has been pointed out, the rubber meets the road, now. The Friedmanist argument is that money supply caused the Great Depression, but if monetary policy cannot solve this slump, that calls that into question as well.

The monetary policy mistakes of the 1929-1935 period have not been made, this time.
Krugman's the go-to guy for trade/tariff economics, but on domestic stuff, he's simply another political ax-grinder.
Incorrect. He's a very good macroeconomist. What he is is open about his political biases.

He made the point in 1998 that the Asian Crisis had relevance for the West, and that our conventional monetary policy tools could be ineffective under some circumstances. That book came out in 1998. Fast forward to 2008, and what he feared, has indeed occurred. Suddenly the US government is running around as if it was Japan, Malaysia or Thailand or Korea (or Sweden) and for very similar reasons.
And anyway, if putting this money in the hands of folks is good for industry, etc..., why not permanantly lower taxes?
Feldstein, former advisor to President Reagan, advocate of SS privatisation etc. has the answer to that one.

He estimates 80% of the last tax cut was saved. No stimulus.

Tax cuts don't have economically multiplicative effects. Particularly not when sentiment is bad. Also tax cuts do not create new Public Goods: like education, research & development, or infrastructure.

There may be a get-out, in that there is some hypothesis and evidence that cuts in payroll taxes get spent, because they fall on people who don't have a lot of spare cash flow anyways (and hence discretion about how they spend) and because human nature means a small increase in monthly pay doesn't have the same tendency to be saved as a 'windfall' tax rebate.
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craigr
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Post by craigr »

Valuethinker wrote:You've actually said something so wrong about casualties it is offensive.

http://en.wikipedia.org/wiki/World_War_II_casualties.

US casualties were 416,000, 0.32% of population. Almost the lowest of any major combatant. No big impact on the civilian labour force.
In the 1940's it was largely men who went into combat. It is also the case that largely men worked in the household. Woman stayed at home by and large. Further, the population of the country also included those who were retired and children. So the actual percentage of men who were killed in combat and were working age and had a job in the US was higher than 0.32% of the workforce.

But even the above is a sterilization of the main point. The US Economy was essentially nationalized for war production and able bodied men were armed and put in danger. Unemployment may have been low, but the cost to families was tremendous.

The merits of the war are a separate issue. The main point is war only stimulates the economy for people who happen to think that blowing things up and getting people killed is good economics. Other than that, it's a negative.
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Post by grayfox »

DRiP Guy wrote:Sorry, I could not resist turning the graph in the article upside down so that the positive vertical is savings rate and the below zero is consumption.

I happen to think it is a good thing, but then, I am not an an economist.


Image

:lol:
Good insight. Agree 100%.
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craigr
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Post by craigr »

Paradox of Thrift in Handy Cartoon Format

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Post by SpaceMonkey »

craigr wrote: The merits of the war are a separate issue. The main point is war only stimulates the economy for people who happen to think that blowing things up and getting people killed is good economics. Other than that, it's a negative.
I agree that if you start with a healthy economy, and then go to a total war footing for 5 years, the net effect will probably be negative. However, if you are in a situation where there is not enough capital in the system because everyone is repairing their balance sheets rather than producing goods or loaning money (everyone's individual choices are rational but the net effect harms the economy), massive government spending during war can act as a jump-starter.
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Post by yehudimenuhin »

Shizzyfin,

I don't want to seem like an apologist for Laffer. I'm not, but your comment about zero taxation demands a response.

Laffer doesn't say that revenues increase indefinitely as taxes decrease.

There is an inflection point where revenue is maximized...somewhere between 100% taxation and 0% taxation. It looks like an upside lower-case N.

The controverisal part is where we are on the curve, but not whether revenues begin to decline after a certain low rate.

more here:

http://en.wikipedia.org/wiki/Laffer_curve

and

http://www.youtube.com/watch?v=5UR594f25pQ
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Post by yehudimenuhin »

Spacemonkey,

Continuing that thought into the modern era.

Do we, in this age, wage war in a way that would have that same effect?

Those "total resource" kind of wars (with boots on the ground, tanks, jeeps, tens of thousands of air and naval craft, et...) seem to have been replaced by jets, missiles, and a few other niche technologies (for the most part). Doesn't seem like the current two wars are making a productivity difference.
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Government has no resources of its own

Post by tms »

The important thing to remember is that the government does not have any of its own resources. It cannot spend without taking the resources from someone else, either through taxation, borrowing (and thus crowding out private investment), or inflation.

For any positive "multiplier effect", there is an equal and opposite negative multiplier effect.

Not to mention the fact that even if it did work, the timing of government stimulus is always off, and includes all sorts of waste, fraud and abuse.
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Post by tms »

richard wrote:
yehudimenuhin wrote:How does stimulus improve things in the long run? Doesn't it just prolong the problem?
By stopping short term bleeding in order to facilitate long term recovery. No

Here's a 1998 article by Krugman that's worth reading: http://www.slate.com/id/9593
Response to Krugman, who mischaracterizes the Austrian school.

http://mises.org/story/630
Last edited by tms on Thu Jan 08, 2009 10:12 am, edited 1 time in total.
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Met Income
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Re: Government has no resources of its own

Post by Met Income »

toddschanel wrote:The important thing to remember is that the government does not have any of its own resources. It cannot spend without taking the resources from someone else, either through taxation, borrowing (and thus crowding out private investment), or inflation.

For any positive "multiplier effect", there is an equal and opposite negative multiplier effect.

Not to mention the fact that even if it did work, the timing of government stimulus is always off, and includes all sorts of waste, fraud and abuse.
And boom goes the dynamite.
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Post by dmcmahon »

bluemonday wrote:All well and good, but the point of the article is, that enough families doing this dramatic cutback in spending, will make things worse in the general economy, at least in the near term. Any stimulus package may be gobbled up in a wave of thrift. If everyone expects someone else to do the "heavy lifting" of spending, then it won't happen, and things will get worse. Not saying they are doing the wrong thing individually( they are not ), simply that in the aggregate, this will only make things worse. But I guess that's the price we will/must pay for our previous spendthrift ways, pain.
I don't buy it. Unless the savings are stuffed under the mattress, the money's going to go somewhere. By foregoing the purchase of consumer items people are voting with their dollars for less consumption and more investment. This doesn't have to reduce economic activity overall. Frankly we could use less short-life-span consumer goods and more long-life-span nuclear or solar power plants. The savings, in a bank or in equities, are available to fund investments in our collective future.
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Post by grumel »

The money vanishes when gdp falls due to lower working hours. Not automatic bad.
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Post by richard »

dmcmahon wrote:I don't buy it. Unless the savings are stuffed under the mattress, the money's going to go somewhere. By foregoing the purchase of consumer items people are voting with their dollars for less consumption and more investment. This doesn't have to reduce economic activity overall. Frankly we could use less short-life-span consumer goods and more long-life-span nuclear or solar power plants. The savings, in a bank or in equities, are available to fund investments in our collective future.
Businesses see lower demand and therefore don't invest as much in productive capacity. This lowers economic activity.

Savings are in effect, claims on future economic activity. If there is less activity, the savings have lower value.
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dmcmahon
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Post by dmcmahon »

richard wrote:
dmcmahon wrote:I don't buy it. Unless the savings are stuffed under the mattress, the money's going to go somewhere. By foregoing the purchase of consumer items people are voting with their dollars for less consumption and more investment. This doesn't have to reduce economic activity overall. Frankly we could use less short-life-span consumer goods and more long-life-span nuclear or solar power plants. The savings, in a bank or in equities, are available to fund investments in our collective future.
Businesses see lower demand and therefore don't invest as much in productive capacity. This lowers economic activity.

Savings are in effect, claims on future economic activity. If there is less activity, the savings have lower value.
I don't think that's a correct view of what's going on. Imagine an isolated village where everyone works producing consumables like food, clothing, etc. The villagers are efficient enough that some of the items are a bit above the bare necessities of life. One day the village elders get together to talk about the water supply, which is drawn from a river each day by villagers who carry buckets on their backs. One of the elders suggests that it would save a lot of time if a trench was dug and lined with rocks to carry water directly to the village. It will take many months of effort by many villagers to construct. The elders agree that in the long run the village will be better off, and some villagers are put to work on the project, instead of producing some luxury goods. The village as a whole is deferring some consumption now for more consumption later, but there is still just as much economic activity. Now run the same scenario again, but super-impose money as a method of keeping score and allocating the benefits. Perhaps the villagers who volunteer to dig the trench will be entitled to more luxury goods in the future, goods that will be produced in the future because everyone will have more time to produce them since they're going to be spending less time carrying buckets down to the river. Anyway I hope you get the idea. Saving and investing have driven progress throughout history - live-for-today consumption hasn't.
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