March 2006
The latest data from the US treasury shows that the total of American debt has risen to close to 9 trillion dollars. Not unexpectedly that has brought forward cries of alarm from critics of the American deficit strategy and the tax cuts initiated by the Bush administration in their first budgets.But as usual, while it is reasonable to debate the nature of the tax cuts, for example they ought to have been disproportionately directed at lower income Americans as opposed to higher income ones; the suggestion that the deficits the United states has been running are catastrophic or horribly harmful is very misleading.
The current debt outstanding of close to 9 trillion dollars is roughly 75 % of the American GDP. Most state budgets(in 2006) on the other hand are either in balance or running surpluses.
A significant proportion of the bonds which finance the debt is held as assets by various US departments of Government including the Federal Reserve and various pension plans and state and local authorities. A large proportion of the debt is held internally by American enterprises and tax paying individuals. Recently issued debt has been purchased by
Asian governments and individual savers including Japan and China but their total holdings are much less than that held by Americans. (In 2006 Japan held $640 billion of U.S. debt while China held $321 b.About another 1 billion was held by a long list of countries. American taxpayers held 2785 billion while the U.S. government and its agencies held 3499 billion ).
The Chines and Japanese purchases of the debt helped recycle American dollars which they have earned from exports to the United States.
By the end of the Second World War in 1945 the debt was 154 % of the National income of the US.
It had risen to that level from its value of 66 % in 1939. In 1929 it had been as low as 18.6 %.Did the US suffer catastrophic collapse after the war.
Absolutely not.
Can anyone argue that the US was materially worse off in the post-war years than what it was in 1929 ? That would be very difficult to claim since the National income was considerably larger.
Some data to back up this argument is available from the US Treasury department and in particular their March 2006 Treasury bulletin.
As of December 2005 according to the latest data published in the bulletin there was a total of 8.194 trillion dollars of federal debt outstanding. Out of this total the public held 4.738 trillion dollars in the form of treasury bills, notes, bonds and treasury inflation protected securities. The average maturity date of these debt instruments which included 20 year plus bonds, T bills of 26 weeks, bonds of maturities varying from 2 years to 20 plus years was overall 4 years and nine months down from 6 years and 6 years and 1 month in 2001.
The total debt in 2001 was 5.834 trillion dollars.
Foreigners including foreign central banks and governments in Asia held 2.18 trillion dollars of the debt or roughly 25.4 % of the total debt. In other words 74.6 % of the debt was held by American individuals, corporations and the US government itself.
The federal reserve banks held 732 billion dollars of the debt or 8.93 % of the debt; the US Treasury held 234.4 billion or 2.9 % of the debt and significant proportions were held by various government agencies and pension funds.
The federal reserve and government accounts overall held 4.2 trillion dollars of the total public debt.(all data from the March 2006 bulletin of the US Treasury department)
Thus the actual picture is rather more complex and considerably less worrisome than the headlines would suggest.
Wednesday, September 29, 2010
On uncertainty and international exchange
On uncertainty and international exchange March 7, 2006 One of the great errors that was made by the neo-classical mainstream when they popularized Keynes and remade his work into the neo-classical Keynesian synthesis which was the dominant orthodoxy from the first days of Paul Samuleson's text Economics published in the late 1940s until the OPEC stagflation crisis of the 1970s was their failure to recognize the centrality of uncertainty to Keynes' theory. Keynes elaborated the notion of uncertainty in his Treatise on Probability, his General Theory of Employment , Interest and Money and his article in the Quarterly Journal of Economics, in Feb. 1937, "The General Theory of Employment". It is useful to recall what Keynes wrote on this subject. Keynes distinguished what was probable in the sense that one could assign a probability statistic to the outcome from what was uncertain or definitely not knowable. In his own words: " Actually, however, we have , as a rule only the vaguest idea of any but the most direct consequences of our acts. Sometimes we are not much concerned with their remoter consequences, even though time and and chance may make much of them But sometimes we are intensely concerned with them, more so, occasionally, than with the immediate consequences. Now of all human activities which are affected by this remoter preoccupation, it happens that one of the most important is economic in character, namely wealth. The whole object of the accumulation of wealth is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders wealth a peculiarly unsuitable subject for the methods of classical economic theory....By uncertain knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. ...The sense in which I am using the termis that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention , or the position of private wealth holders in the social system in 1970. About these matters there is no scientific basis on which to form any calcuable probability whatsoever. " But because in a real world of action and decision we are obliged to make intelligent decisions Keynes argues that we tends to overlook the awkward facts and act as if we "had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages each multiplied by its appropriate probability , waiting to be summed." (p.114, vol xiv CW) We tend to cope with uncertainty by assuming that what has happened in the past will happen in the future. Thus we tend to ignore the prospect of future changes about which we know nothing. We assume that "existing opinion" about future prices and output is correct; "knowing that our own individual judgement is worthless, we endeavour to fall back on the judgment of the rest of the world which is perhaps better informed." Keynes points out that a practical theory of the future based on the above because it is a flimsy foundation will be subject to violent fluctuations. "The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will without warning, take charge of human conduct... .All these pretty, polite techniques, made for a well-panelled boardroom and a nicely regulated market, are liable to collapse....I accuse the classical economic theory of being itself one of these pretty polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future." p.114-115 ibid.) Keynes goes on to relate this sense of uncertainty to decisions about the value of money and decisions about investment and future rates of return as well as decisions to hoard . Clearly what is true of investment, decisions to hoard and rastes of return applies in spades to rates of exchange and therefore to the international trading system as a whole. Hence the history of the search from the days of Thomas Mun, mercantilism and bullionism forward for a system of international trade which would benefit the merchant class and the nation state. In the twentieth century this led to the abandonment of the gold standard and the era of Bretton Woods. By the last third of the century it had led to the anarchic system of free floating rates of exchange and what has come to be relatively unstable speculation driven by the more than trillion US dollars, Yen, Euros and other significant currencies that circle the globe on a daily basis looking for the highest rates of return regardless of the consequences for global emplyment security and stable growth. (more to come)
Monday, September 27, 2010
Revisiting the Great Depression
February 20 , 2006
The Great Depression which began after the stock market crash in the fall of 1929 and lasted in its extreme form until 1934 and its aftermath form until 1939 was an event that marked the last century. Indeed such major collapses seem to be possible only once or perhaps twice a century in keeping with the long term business cycle theories of Kondratieff and Schumpeter.
The exact nature of the depression and its causes are still much debated. In exploring this debate one can learn a great deal about business cycles, central banking policies, exchange rate management, international flows of capital and trade and stock market speculation.
A number of influential authors have weighed in on the depression from both a Keynesian and monetarist perspective. These include Charles Kindleberger, Milton Friedman and Ana Schwartz, Gotfried Haberler,Peter Temin, Abe Safarian, Clarence Barber, Donald Moggridge, John Maynard Keynes, Friedrich von Hayek, Robert Lucas and many others. The reason for so much interest is not surprising.
First of all this was a very major event that presaged and in many ways contributed to the rise of fascism and the Second World War. In economic theory terms if one can explain the causes of the depression one can learn from this and develop policies to prevent another such occurence. Here of course the medical model is influential. One studies epidemics to discover how to prevent them in the future. Charles Kindleberger has written a very comprehensive and fascinating guide to the great depression.The World in Depression 1929 -1939 enlarged edition 1936 University of California Press, Berkely, Los Angeles& London.
Kindleberger starts off by explaining that as a young man in the late 1920s he worked in the stock exchange in New York as a runner for a New York brokerage house.Despite the collapse in share prices he and his family were not severely affected and he was able to continue his studies including European travels and graduate work at Columbia University beginning in the winter of 1933.
He became fascinated with international exchange depreciation and later worked on his dissertation and got a job in 1936 in the International Research Division under Harry White who later played a key role in establishing the World Bank and the IMF along with John Maynard Keynes at Bretton Woods.Kindleberger later went to work at the Federal Reserve Bank of New York and the International Bank of Settlements.
So in many ways Kindleberger was ideally placed to write a history of the Great Depression. His perspective is that of an insider to the events that he describes in such effective detail. Kindleberger eschews econometric techniques and instead relies upon narrative history and a profound understanding of economic theory and the events themselves. He is convinced that the international monetary mechanism played a very important role in the depression. In addition Kindleberger shows how countries like Japan anticipated much of the thrust of Keynesian deficit financing policy as early as 1932.
Keynes first broached the subject of public works in a letter to the Times on Aug 7, 1929 as well as in earlier writings in 1928. Similar proposals were made by the German progressive economist W.S. Woytinsky in the International Labour Review in January, 1932.(p.171-172)Woytinsky drafted along with two other labour economists a plan for domestic public works for the German Federation of trade unions in December 1931. Arthur Gayer wrote about the strategy of using public works to stabilize the cycle for a study published in New York in 1935 by the National Bureau of Economic Research , Public works in Prosperity and Depression.
The Swedish economists associated with the Stockholm School developed similar notions in 1932. See the work of Eric Lindhal,Offentligaarbeten i Depressionstider with commentaries by Bertil Ohlin, Gunnar Myrdal, G.Bagge and J. Akerman;( Nationelonomisaka Foreningen, Forhandlingar, 1932 Stockholm, 1933). As far back as 1857 public works such as street cleaning and stone quarrying had been urged by the Mayor of New York as a program to assist the unemployed during the then depression. In 1855 workers were sent to work on the Erie Canal when they applied for assistance.
What this analysis of Kindleberger shows is that along with our knowledge of Kalecki`s work in the early 1930s and the pathbreaking work of R.F. Kahn and several other lesser well know theorists Keynes was not alone in breaking with orthodoxy and developing the intellectual apparatus necessary to justify this new path. But on the whole the fiscal conservatives , the advocates of balanced budgets and deflation were more numerous and overall in charge of policy until well into the 1930s.The automatic deflationist bias of the gold standard and the stubborn insistance of so many countries in trying to cling to it was also to blame.
In addition from a game theoretic point of view Kindleberger points out the necessity of one major power acting as the responsible underwriter of the international econopmic system. It was the inability of the British to continue in that role from the late 1920s on and the ``reluctance of the United States to take it on until 1936 `` that caused so much damage. (p.11) (more to come)
U.S. slowdown looms Fed overshoots
Early Feb, 2006
I have been looking through the GDP release from the US office of Economic analysis to try to better understand what seems to be happening in the US economy. The release which was made available on January 27 shows that the output of goods and services produced by labor and capital located in the US increased at an annual rate of 1.1 % in the fourth quarter of 2005.This was a marked slowdown form 4.1 % in the 3rd quarter of 2005.
The last time there was such a sharp drop was in the last quarter of 1999 to the first quarter of 2000 when growth fell from about 7 % to just over half a per cent in the first quarter of 2000. This was followed by another sharp rise in the second quarter to over 6 % and then 3 non consecutive quarters of negative growth in the 3rd quarter of 2000 and the first quarter of 2001 and the 3rd quarter of 2001. They were separated by the last quarter of 2000 at 2 % and the 2n quarter of 2000 at about 1 %
.So there is some recent evidence that shows such a sharp drop in GDP growth fuelled by a slowdown in both consumption and private investment can lead to rising unemployment and a recession.In addition the leading diffusion index which is a composite of a number of business cycle indexes also may be turning negative.
In the past this was an accurate predictor of a recession in the coming 6 to 8 months. Finally of course the Fed has increased the Federal Funds rate from about 1 % in 2004 13 times over the past 2 years so that it now stands at 5 %.
Such a large increase also slows growth and may well have already overshot the mark in terms of the mythical soft landing for the economy. Typically in previous US recessions the Fed continues to raise rates well into the beginning of a recession typically because they misdiagnose the problem and overshoot on the anti-inflationary side. This is particularly likely when most , if not all, the inflationary impulse is coming from the oil cartel.
I have been looking through the GDP release from the US office of Economic analysis to try to better understand what seems to be happening in the US economy. The release which was made available on January 27 shows that the output of goods and services produced by labor and capital located in the US increased at an annual rate of 1.1 % in the fourth quarter of 2005.This was a marked slowdown form 4.1 % in the 3rd quarter of 2005.
The last time there was such a sharp drop was in the last quarter of 1999 to the first quarter of 2000 when growth fell from about 7 % to just over half a per cent in the first quarter of 2000. This was followed by another sharp rise in the second quarter to over 6 % and then 3 non consecutive quarters of negative growth in the 3rd quarter of 2000 and the first quarter of 2001 and the 3rd quarter of 2001. They were separated by the last quarter of 2000 at 2 % and the 2n quarter of 2000 at about 1 %
.So there is some recent evidence that shows such a sharp drop in GDP growth fuelled by a slowdown in both consumption and private investment can lead to rising unemployment and a recession.In addition the leading diffusion index which is a composite of a number of business cycle indexes also may be turning negative.
In the past this was an accurate predictor of a recession in the coming 6 to 8 months. Finally of course the Fed has increased the Federal Funds rate from about 1 % in 2004 13 times over the past 2 years so that it now stands at 5 %.
Such a large increase also slows growth and may well have already overshot the mark in terms of the mythical soft landing for the economy. Typically in previous US recessions the Fed continues to raise rates well into the beginning of a recession typically because they misdiagnose the problem and overshoot on the anti-inflationary side. This is particularly likely when most , if not all, the inflationary impulse is coming from the oil cartel.
The very old roots of sound finance.
Feb.14 2006 The doctrine of always balancing the budget and ignoring the difference between the capital budget and the current expenditure budget goes back a long way in history. One can trace the roots of this debate to the ancients. James Macdonald in a Free Nation Deep in Debt:the Financial Roots of Democracy, (New York: Farrar, Strauss and Giroux, 2003) traces some aspects of the doctrine to the Greeks and ancient Romans.for example, the first recorded public loan occurred in 404 BC at the end of the Peleponnesian War. The Spartan sponsored oligarchy that replaced the defeated Athenian democrats who fled Athens borrowed 100 talents from the Spartans to fund an anti democratic campaign. When the democrats returned to power a vote was held whether to honour the debt of their oligarchic predecessors by levying a tax. The citizens decided to do so. This first loan was followed in the next 150 years by a series of other loans essentially to finance wars. In 360 BC the Ionian city of Clazomenae sold devalued drachmas made from iron rather than silver forcibly to their wealthier citizens to finance the payoff of a loan of 20 talents at 20 % interest to their mercenaries. (p.37-38, Macdonald) A variety of other debt financing strategies including life annuities,foreign borrowings and interest free or low interest loans were already present in the classical world of the ancients. Much later in the fourteenth century the Italian city states engaged in deficit finance and sold low interest bonds called the monte comune to finance their expenditures.By the early 1400s 2/3 of Florentines held public bonds that financed the public debt. This was also true in Venice and Genoa. (p. 82 Macdonald) By the time of the English civil war the two doctrines sound finance versus deficit finance as techniques of economic management were relatively well established in the literature and in practice. St. Thomas Aquinas, the theologian 1225-1274 was an exponent of balanced budgets and strongly opposed to loans. The French philosopher and political writer Jean Bodin(16th century)believed that state revenues should be limited to the public domain,conquest,gifts, annual contributions of allies, customs duties and taxes.(Alvin Hansen, Fiscal Policy and Business Cycles, p.109) But the great English philosopher Thomas Hobbes believed that sometimes borrowing was justified and necessary to finance great ventures. Adam Smith disagreed arguing that overspending in good times caused ther shortfall in bad times and believed much like our contemporary fiscal conservatives that borrowing was the road to ruin. David Hume as well. This debate continued between Ricardo and Malthus. Ricardo argued that public investment was a net subtraction from private investment which contemporary economists call crowding out.The British called it the Treasury view which R.F.Kahn showed to be faulty in his famous article on the multiplier.Adrian Ham has written the best guide to the Treasury in which he as a former insider expresses his exasperation with how the Treasury insisted on trying to sabotage Keynesian policy. Malthus to his everlasting credit disagreed and called attention to the problem of inadequate aggregate demand. (He is buried incidentally in Bath Cathedral. The day I went the doorkeeper told me I was one of the only persons in close to 20 years who was a visitor and knew this).(See Samuel Hollander's excellent work Classical Economics as well as Keynes' General Theory. Keynes , of course famously wrote to George Bernard Shaw before the General Theory appeared that he was writing a work that would dethrone the Ricardian basis of classical economics ) But the reality was that the growth of the state and the increasing wealth and economic development of capitalist societies was fuelled by and faciltated by the growth of the financial industries which increasingly bankrolled the process. Alvin Hansen puts it clearly. ``The development of credit institutions made possible the financing of wars in a manner which added stimulus to the economy through the net additions of purchasing power injected into the community through the use of credit.`` (p.111)How much better it would have been if the rise of these credit institutions would have been used to finance peaceful expansion of civil society and not war. But it would take until the twentieth century until that principle was firmly established. However, even in the nineteenth century credit institutions like the Barings Bank financed the economic development of Canada and the development of the vast transportation infrastructure that was essential to building the country. The boom in government securities was paralleled and even supplanted by the boom in private securities issued by the great corporations during the latter half of the nineteenth and early twentieth century.
Sunday, September 26, 2010
Some policy advice for Ed Miliband
Congratulations to Ed Miliband on his victory and to all the other candidates for their contribution to the renewal of the party. One of the first things that Ed Miliband should do is to avoid being trapped by journalists or the coalition on the necessity of cuts to reduce the deficit.I have said this and written about it on a number of occasions but it bears repeating.
The ratio of the national debt to GDP for Britain was five times greater in 1946 than now some 240 % of the GDP versus a little over 50 % today.The latest data from the British Office for National statistics as of September 21, 2010 shows the net debt to GDP ratio as of Aug 2010 as 56.3 %. This figure excludes the temporary financial provisions that grew out of the crisis. If we include them the ratio rises to 64 %. Either way there is no cause for alarm.
Britain had a much smaller economy in 1946 measured in terms of the real GDP. The GDP per capita today is far greater so the much smaller sovereign debt burden is far less of a problem. It is simple deficit hysteria to claim as the coalition does that there is some sort of crisis that demands swingeing cuts. As the economy recovers and unemployment falls the deficit will shrink as long as the interest rates are kept below the growth rate in the GDP. the debt to the GDP ratio will also stabilize and then fall as the economy grows.
Britain had a much smaller economy in 1946 measured in terms of the real GDP. The GDP per capita today is far greater so the much smaller sovereign debt burden is far less of a problem. It is simple deficit hysteria to claim as the coalition does that there is some sort of crisis that demands swingeing cuts. As the economy recovers and unemployment falls the deficit will shrink as long as the interest rates are kept below the growth rate in the GDP. the debt to the GDP ratio will also stabilize and then fall as the economy grows.
So Ed Miliband and the Labour party leadership should avoid the Coalition trap of signing onto a debate that will harm Britain and the prospects of the party's renewal.
Making the public sector run more efficiently is always good policy. But making or agreeing to cuts in response to deficit hysteria is always bad policy.
Saturday, September 25, 2010
Ed Miliband defeats brother David to capture U.K. Labour party leadership
In somewhat of an upset 40 year old Ed Miliband has come from behind and captured the leadership of the British Labour party. David ,the former foreign minister and elder brother 45, supposedly closer to the Tony Blair wing of the party, had been the original favourite when the race got under way this summer but Ed Miliband quickly became the preferred person among the anti-Blair more traditional Labour party supporters and among the trade unions who still have a powerful voice in the Labour party. For an interesting explanation of why see Roy Hattersly's article on Ed Miliband's victory in today's The Guardian.
In fact, the Labour electoral college is split three ways among MPS and MEPs, the trade unions and rank and file members. There were five candidates and each voter cast a ballot that indicated their first and second preference. The bottom candidate was dropped out after each round and the second preference votes redistributed in the next round.(see the results below)
David Miliband led on all but the last round after Ed Balls the third place finisher who had campaigned on a more Keynesian orientation than the others was eliminated. His second preference voters pushed Ed over the top by a narrow margin 50.6 % to 49.4 % for David. Although David had won the majority of MP's and MEP's and ordinary party members' votes Ed Miliband won far more of the trade union sector votes . So much so that he narrowly defeated his brother on that basis.
The brothers embraced warmly at the end (as I know their late father Ralph who was one of my professors at the L.S.E. who was proud of his sons' achievements would have wanted) The other candidates were Andy Burnham and Dianne Abbott.
We will now to get to see how well Ed Miliband the first Jewish leader of the Labour party in its history
(the Conservatives have had two Michael Howard and Benjamin Disraeli) does against David Cameron and Nicholas Clegg in Parliament and in his mandate to reposition the Labour party as a party of the centre left. The hopes of millions of Britons are with him.
The results as reported in the New Statesman
In fact, the Labour electoral college is split three ways among MPS and MEPs, the trade unions and rank and file members. There were five candidates and each voter cast a ballot that indicated their first and second preference. The bottom candidate was dropped out after each round and the second preference votes redistributed in the next round.(see the results below)
David Miliband led on all but the last round after Ed Balls the third place finisher who had campaigned on a more Keynesian orientation than the others was eliminated. His second preference voters pushed Ed over the top by a narrow margin 50.6 % to 49.4 % for David. Although David had won the majority of MP's and MEP's and ordinary party members' votes Ed Miliband won far more of the trade union sector votes . So much so that he narrowly defeated his brother on that basis.
The brothers embraced warmly at the end (as I know their late father Ralph who was one of my professors at the L.S.E. who was proud of his sons' achievements would have wanted) The other candidates were Andy Burnham and Dianne Abbott.
We will now to get to see how well Ed Miliband the first Jewish leader of the Labour party in its history
(the Conservatives have had two Michael Howard and Benjamin Disraeli) does against David Cameron and Nicholas Clegg in Parliament and in his mandate to reposition the Labour party as a party of the centre left. The hopes of millions of Britons are with him.
The results as reported in the New Statesman
First Round
Diane Abbott: 7.4%,
Ed Balls: 11.8%.
Andy Burnham: 8.7%.
David Miliband: 37.8%.
Ed Miliband: 34.3%.
(Abbott eliminated)
Second Round
Ed Balls: 13.2%
Andy Burnham: 10.4%
David Miliband: 38.9%
Ed Miliband: 37.5%
(Burnham eliminated)
Third Round
Ed Balls: 16%
David Miliband: 42.7%
Ed Miliband: 41.3%
(Balls eliminated)
Fourth Round
David Miliband: 49.35%
Ed Miliband: 50.65%
(Ed Miliband elected)
Friday, September 24, 2010
Ben Bernanke and stimulus
January 16, 2008
According to the New York Times, Senator Charles Schumer of New York has said that Fed chairman Ben Bernanke has agreed that a Keynesian fiscal stimulus is necessary and he supports it so long as it is temporary even if it increases the American public sector deficit.
This is welcome news because it means that Bernanke who is normally a devotée of Milton Friedman's economics understands the current crisis and will not increase interest rates but cut them even if Congress increases the deficit as part of its fiscal stimulus plan.
Former Treasury Secretary Larry Summers is now calling for a 150 billion dollar stimulus plan.As I pointed out several days ago this is still only about 1.07 % of the GDP. But it is certainly closer to the necessary level of stimulation that is needed than the first proposal from Hillary Clinton of only $70 billion.
In my view a stimulus of 3 % of the GDP or about $400 billion would be a better bet to transmit the right impulses to the economy and the financial markets particularly if accompanied by a 100 basis point cut in interest rates.
Accompanying such a stimulus package ought to be environmental investments that improve public transportation,give incentives for the purchase of energy efficient cars and investments in infrastructure and help to retrofit homes in an environmentally sound way. As well as op ed columnist Harold Meyerson has proposed in the Washington Post,`("A different recession:the old remedies won't work this time") changes in labour laws that would promote unionization and protection of workers' rights in the lowest paid industries in the US that were not subject to easy outsourcing and the restoration of regulatory oversight of the banking and financial sectors would be very desirable add ons to any stimulation package.
Crises create both strains and opportunities.
If American policy makers act decisively there is much progress to be made. Jan 17,11:00 am Federal Reserve Chair Ben Bernanke has been testifying before the congressional committee and I have been watching it on C span. He has made it clear that he supports a stimulus package. He argued in response to a question that 100 billion would be effective and significant and not window dressing.
He later in response to questions stated that the range of 50 to 150 billion was a reasonable range and admitted that the more you spend the bigger the stimulus. He , of course, cautioned that the more you increase the deficit the more difficult it might be later to reduce it. He agrees that the deficit in the short term would have to go up to accomodate the stimulus but in the longer term "fiscal responsibility" would be necessary to ensure that America's "structural deficit" would not increase. These are traditional cautionary notes that befit the chairman of the Federal Reserve.
But the key point is that he supports a Keynesian deficit, that is fiscal policy to complement monetary policy and this is a very welcome statement on his part.
I still believe that 100 billion in a close to 14 trillion dollar economy may be too small given the turmoil in the housing sector and financial markets and the fact that there are as much as 400- $500 billion of potentially bad mortgages.So far 200 billion worth have been identified. But we shall see assuming that the Congress acts swiftly. In psychological terms it may have a greater impact although a larger stimulus would be more reliable. This is I believe another very significant turning point in the re-establishment of aspects of Keynesian doctrine as appropriate public policy in Washington.
As part of his testimony Bernanke accepted and articulated the Keynesian notions of the marginal propensity to consume being larger for low and moderate income people, the notion of the Keynesian multiplier and the economic wisdom of counter -cyclical deficit spending as a means of rescuing an economy from a slump. These are all very significant admissions on the part of a monetarist economist and they would have been ferociously resisted not long ago by almost all monetarists.
Bernanke's advantage is that he has made the study of the Great Depression part of his expertise.See his article in the American Economic Review 73 (June). Also see Ben Bernanke and Harold James, 1991 the gold standard, deflation and financial crisis in the Great Depression:An international comparison in Financial markets and Financial crises, ed.R.G.hubbard,33-68.Chicago:University of Chicago Press, pp.257-276 and B. Bernanke:1994, The macroeconomics of the Great Depression: A comparative approach. Journal of money, credit and banking 27 (1):1-28 Nonmonetary effects of the financial crisis in the propogation of the Great Depression.
See also his recent paper "Should central banks respond to movements in asset prices" and his co-authored book with Thomas Laumbach, Frederic Mishkin and Adam Posen, Inflation Targeting:Lessons from the international Experience, Princeton University Press. At Milton Friedman's 90 th birthday party he is said to have stated that he was going to make sure that the errors of the Fed in the thirties when according to Friedman and Anna Schwartz it had failed to supply sufficient liquidity to the markets would not be repeated on his watch.
Whether or not Friedman and Schwartz were totally correct about what they argued although many analysts think that they were,( a notable exception having been Nicholas Kaldor) is less important than the fact that Bernanke understands that deflationary forces can be very powerful. (See also Allan H. Meltzer, A history of the Federal Reserve vol.1 1913-1951. Chicago:University of Chicago Press, 2003.)
It is about time that the powers that be in the Department of Finance and at the Bank of Canada understand and appreciate both this and the relevance of Keynesian doctrine to solving crisis problems.It is about time that they escape from the destructive grip of the anti-Keynesian orthodoxy and dogma that has dominated Ottawa for the past 30 years. The testimony of Chairman Bernanke is reproduced below courtesy of the New York Times and the US House of Representatives.
Testimony Chairman Ben S. Bernanke The economic outlook Before the Committee on the Budget, U.S. House of Representatives January 17, 2008 Chairman Spratt, Representative Ryan, and other members of the Committee, I am pleased to be here to offer my views on the near-term economic outlook and related issues.
Developments in Financial Markets Since late last summer, financial markets in the United States and in a number of other industrialized countries have been under considerable strain. Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. Notably, as the rising rate of delinquencies of subprime mortgages threatened to impose losses on holders of even highly rated securities, investors were led to question the reliability of the credit ratings for a range of financial products, including structured credit products and various special-purpose vehicles. As investors lost confidence in their ability to value complex financial products, they became increasingly unwilling to hold such instruments.
As a result, flows of credit through these vehicles have contracted significantly. As these problems multiplied, money center banks and other large financial institutions, which in many cases had served as sponsors of these financial products, came under increasing pressure to take the assets of the off-balance-sheet vehicles onto their own balance sheets. Bank balance sheets were swelled further by holdings of nonconforming mortgages, leveraged loans, and other credits that the banks had extended but for which well-functioning secondary markets no longer existed. Even as their balance sheets expanded, banks began to report large losses, reflecting marked declines in the market prices of mortgages and other assets. Thus, banks too became subject to valuation uncertainty, as could be seen in the sharp movements in their share prices and in other market indicators such as quotes on credit default swaps.
The combination of larger balance sheets and unexpected losses prompted banks to become protective of their liquidity and balance sheet capacity and thus to become less willing to provide funding to other market participants, including other banks. Banks have also evidently become more restrictive in their lending to firms and households. More-expensive and less-available credit seems likely to impose a measure of restraint on economic growth. The Outlook for the Real Economy
To date, the largest effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so. The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes. New home sales and housing starts have both fallen by about half from their respective peaks. The number of homes in inventory has begun to edge down, but at the current sales pace the months' supply of new homes has continued to climb, and home prices are falling in many parts of the country. The slowing in residential construction, which subtracted about 1 percentage point from the growth rate of real gross domestic product in the third quarter of 2007, likely curtailed growth even more in the fourth quarter, and it may continue to be a drag on growth for a good part of this year as well.
Recently, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced. In particular, a number of factors, including continuing increases in energy prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008. Consumer spending also depends importantly on the state of the labor market, as wages and salaries are the primary source of income for most households. Labor market conditions in December were disappointing; the unemployment rate increased 0.3 percentage point, to 5.0 percent from 4.7 percent in November, and private payroll employment declined. Employment in residential construction posted another substantial reduction, and employment in manufacturing and retail trade also decreased significantly. Employment in services continued to grow, but at a slower pace in December than in earlier months. It would be a mistake to read too much into one month's data.
However, developments in the labor market will bear close attention. In the business sector, investment in equipment and software appears to have been sluggish in the fourth quarter, while nonresidential construction grew briskly. In light of the softening in economic activity and the adverse developments in credit markets, growth in both types of investment spending seems likely to slow in coming months. Outside the United States, however, economic activity in our major trading partners has continued to expand vigorously. U.S. exports will likely continue to grow at a healthy pace in coming quarters, providing some impetus to the domestic economy. Financial conditions continue to pose a downside risk to the outlook. Market participants still express considerable uncertainty about the appropriate valuation of complex financial assets and about the extent of additional losses that may be disclosed in the future.
On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news thus has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses. Even as the outlook for real activity has weakened, some important developments have occurred on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices. Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. The most recent reading on overall personal consumption expenditure inflation showed that prices in November were 3.6 percent higher than they were a year earlier. Core price inflation (which excludes prices of food and energy) has stepped up recently as well, with November prices up almost 2-1/4 percent from a year earlier. Part of this rise may reflect pass-through of energy costs to the prices of core consumer goods and services, as well as the effects of the depreciation of the dollar on import prices, although some other prices--such as those for some medical and financial services--have also accelerated lately.1 Thus far, the public's expectations of future inflation appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit. Further, futures markets suggest that food and energy prices will decelerate over the coming year.
Given these factors, overall and core inflation should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken. However, any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly inflation expectations. Monetary Policy Response The Federal Reserve has taken a number of steps to help markets return to more orderly functioning and to foster its economic objectives of maximum sustainable employment and price stability. Broadly, the Federal Reserve's response has followed two tracks: efforts to improve market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy.
To help address the significant strains in short-term money markets, the Federal Reserve has taken a range of steps. Notably, on August 17, the Federal Reserve Board cut the discount rate--the rate at which it lends directly to banks--by 50 basis points, or 1/2 percentage point, and it has since maintained the spread between the federal funds rate and the discount rate at 50 basis points, rather than the customary 100 basis points. In addition, the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms. In December, the Fed successfully auctioned $40 billion through this facility. And, as part of a coordinated operation, the European Central Bank and the Swiss National Bank lent an additional $24 billion to banks in their respective jurisdictions. This month, the Federal Reserve is auctioning $60 billion in twenty-eight-day credit through the TAF, to be spread across two auctions. TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives. Although the TAF and other liquidity-related actions appear to have had some positive effects, such measures alone cannot fully address fundamental concerns about credit quality and valuation, nor do these actions relax the balance sheet constraints on financial institutions.
Hence, they alone cannot eliminate the financial restraints affecting the broader economy. Monetary policy (that is, the management of the short-term interest rate) is the Fed's best tool for pursuing our macroeconomic objectives, namely to promote maximum sustainable employment and price stability. Monetary policy has responded proactively to evolving conditions. As you know, the Federal Open Market Committee (FOMC) cut its target for the federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the federal funds rate down by 1 percentage point from its level just before the financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The FOMC will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks. Financial and economic conditions can change quickly. Consequently, the FOMC must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.
A number of analysts have raised the possibility that fiscal policy actions might usefully complement monetary policy in supporting economic growth over the next year or so. I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone. But the design and implementation of the fiscal program are critically important. A fiscal initiative at this juncture could prove quite counterproductive, if (for example) it provided economic stimulus at the wrong time or compromised fiscal discipline in the longer term. To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving. Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed.
Any fiscal package should also be efficient, in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue. Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit. As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult. Thank you. I would be pleased to take your questions. -------------------------------------------------------------------------------- Footnotes 1. Prices for some financial services are implicit; for example, depositors may pay for "free" checking services only indirectly, by accepting a lower interest rate on their deposits. The Bureau of Labor Statistics uses estimates of such prices, as well as other nonmarket prices, in calculating the inflation rate. Return to text 2008 Testimony Last update: January 17, 2008
According to the New York Times, Senator Charles Schumer of New York has said that Fed chairman Ben Bernanke has agreed that a Keynesian fiscal stimulus is necessary and he supports it so long as it is temporary even if it increases the American public sector deficit.
This is welcome news because it means that Bernanke who is normally a devotée of Milton Friedman's economics understands the current crisis and will not increase interest rates but cut them even if Congress increases the deficit as part of its fiscal stimulus plan.
Former Treasury Secretary Larry Summers is now calling for a 150 billion dollar stimulus plan.As I pointed out several days ago this is still only about 1.07 % of the GDP. But it is certainly closer to the necessary level of stimulation that is needed than the first proposal from Hillary Clinton of only $70 billion.
In my view a stimulus of 3 % of the GDP or about $400 billion would be a better bet to transmit the right impulses to the economy and the financial markets particularly if accompanied by a 100 basis point cut in interest rates.
Accompanying such a stimulus package ought to be environmental investments that improve public transportation,give incentives for the purchase of energy efficient cars and investments in infrastructure and help to retrofit homes in an environmentally sound way. As well as op ed columnist Harold Meyerson has proposed in the Washington Post,`("A different recession:the old remedies won't work this time") changes in labour laws that would promote unionization and protection of workers' rights in the lowest paid industries in the US that were not subject to easy outsourcing and the restoration of regulatory oversight of the banking and financial sectors would be very desirable add ons to any stimulation package.
Crises create both strains and opportunities.
If American policy makers act decisively there is much progress to be made. Jan 17,11:00 am Federal Reserve Chair Ben Bernanke has been testifying before the congressional committee and I have been watching it on C span. He has made it clear that he supports a stimulus package. He argued in response to a question that 100 billion would be effective and significant and not window dressing.
He later in response to questions stated that the range of 50 to 150 billion was a reasonable range and admitted that the more you spend the bigger the stimulus. He , of course, cautioned that the more you increase the deficit the more difficult it might be later to reduce it. He agrees that the deficit in the short term would have to go up to accomodate the stimulus but in the longer term "fiscal responsibility" would be necessary to ensure that America's "structural deficit" would not increase. These are traditional cautionary notes that befit the chairman of the Federal Reserve.
But the key point is that he supports a Keynesian deficit, that is fiscal policy to complement monetary policy and this is a very welcome statement on his part.
I still believe that 100 billion in a close to 14 trillion dollar economy may be too small given the turmoil in the housing sector and financial markets and the fact that there are as much as 400- $500 billion of potentially bad mortgages.So far 200 billion worth have been identified. But we shall see assuming that the Congress acts swiftly. In psychological terms it may have a greater impact although a larger stimulus would be more reliable. This is I believe another very significant turning point in the re-establishment of aspects of Keynesian doctrine as appropriate public policy in Washington.
As part of his testimony Bernanke accepted and articulated the Keynesian notions of the marginal propensity to consume being larger for low and moderate income people, the notion of the Keynesian multiplier and the economic wisdom of counter -cyclical deficit spending as a means of rescuing an economy from a slump. These are all very significant admissions on the part of a monetarist economist and they would have been ferociously resisted not long ago by almost all monetarists.
Bernanke's advantage is that he has made the study of the Great Depression part of his expertise.See his article in the American Economic Review 73 (June). Also see Ben Bernanke and Harold James, 1991 the gold standard, deflation and financial crisis in the Great Depression:An international comparison in Financial markets and Financial crises, ed.R.G.hubbard,33-68.Chicago:University of Chicago Press, pp.257-276 and B. Bernanke:1994, The macroeconomics of the Great Depression: A comparative approach. Journal of money, credit and banking 27 (1):1-28 Nonmonetary effects of the financial crisis in the propogation of the Great Depression.
See also his recent paper "Should central banks respond to movements in asset prices" and his co-authored book with Thomas Laumbach, Frederic Mishkin and Adam Posen, Inflation Targeting:Lessons from the international Experience, Princeton University Press. At Milton Friedman's 90 th birthday party he is said to have stated that he was going to make sure that the errors of the Fed in the thirties when according to Friedman and Anna Schwartz it had failed to supply sufficient liquidity to the markets would not be repeated on his watch.
Whether or not Friedman and Schwartz were totally correct about what they argued although many analysts think that they were,( a notable exception having been Nicholas Kaldor) is less important than the fact that Bernanke understands that deflationary forces can be very powerful. (See also Allan H. Meltzer, A history of the Federal Reserve vol.1 1913-1951. Chicago:University of Chicago Press, 2003.)
It is about time that the powers that be in the Department of Finance and at the Bank of Canada understand and appreciate both this and the relevance of Keynesian doctrine to solving crisis problems.It is about time that they escape from the destructive grip of the anti-Keynesian orthodoxy and dogma that has dominated Ottawa for the past 30 years. The testimony of Chairman Bernanke is reproduced below courtesy of the New York Times and the US House of Representatives.
Testimony Chairman Ben S. Bernanke The economic outlook Before the Committee on the Budget, U.S. House of Representatives January 17, 2008 Chairman Spratt, Representative Ryan, and other members of the Committee, I am pleased to be here to offer my views on the near-term economic outlook and related issues.
Developments in Financial Markets Since late last summer, financial markets in the United States and in a number of other industrialized countries have been under considerable strain. Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. Notably, as the rising rate of delinquencies of subprime mortgages threatened to impose losses on holders of even highly rated securities, investors were led to question the reliability of the credit ratings for a range of financial products, including structured credit products and various special-purpose vehicles. As investors lost confidence in their ability to value complex financial products, they became increasingly unwilling to hold such instruments.
As a result, flows of credit through these vehicles have contracted significantly. As these problems multiplied, money center banks and other large financial institutions, which in many cases had served as sponsors of these financial products, came under increasing pressure to take the assets of the off-balance-sheet vehicles onto their own balance sheets. Bank balance sheets were swelled further by holdings of nonconforming mortgages, leveraged loans, and other credits that the banks had extended but for which well-functioning secondary markets no longer existed. Even as their balance sheets expanded, banks began to report large losses, reflecting marked declines in the market prices of mortgages and other assets. Thus, banks too became subject to valuation uncertainty, as could be seen in the sharp movements in their share prices and in other market indicators such as quotes on credit default swaps.
The combination of larger balance sheets and unexpected losses prompted banks to become protective of their liquidity and balance sheet capacity and thus to become less willing to provide funding to other market participants, including other banks. Banks have also evidently become more restrictive in their lending to firms and households. More-expensive and less-available credit seems likely to impose a measure of restraint on economic growth. The Outlook for the Real Economy
To date, the largest effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so. The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes. New home sales and housing starts have both fallen by about half from their respective peaks. The number of homes in inventory has begun to edge down, but at the current sales pace the months' supply of new homes has continued to climb, and home prices are falling in many parts of the country. The slowing in residential construction, which subtracted about 1 percentage point from the growth rate of real gross domestic product in the third quarter of 2007, likely curtailed growth even more in the fourth quarter, and it may continue to be a drag on growth for a good part of this year as well.
Recently, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced. In particular, a number of factors, including continuing increases in energy prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008. Consumer spending also depends importantly on the state of the labor market, as wages and salaries are the primary source of income for most households. Labor market conditions in December were disappointing; the unemployment rate increased 0.3 percentage point, to 5.0 percent from 4.7 percent in November, and private payroll employment declined. Employment in residential construction posted another substantial reduction, and employment in manufacturing and retail trade also decreased significantly. Employment in services continued to grow, but at a slower pace in December than in earlier months. It would be a mistake to read too much into one month's data.
However, developments in the labor market will bear close attention. In the business sector, investment in equipment and software appears to have been sluggish in the fourth quarter, while nonresidential construction grew briskly. In light of the softening in economic activity and the adverse developments in credit markets, growth in both types of investment spending seems likely to slow in coming months. Outside the United States, however, economic activity in our major trading partners has continued to expand vigorously. U.S. exports will likely continue to grow at a healthy pace in coming quarters, providing some impetus to the domestic economy. Financial conditions continue to pose a downside risk to the outlook. Market participants still express considerable uncertainty about the appropriate valuation of complex financial assets and about the extent of additional losses that may be disclosed in the future.
On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news thus has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses. Even as the outlook for real activity has weakened, some important developments have occurred on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices. Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. The most recent reading on overall personal consumption expenditure inflation showed that prices in November were 3.6 percent higher than they were a year earlier. Core price inflation (which excludes prices of food and energy) has stepped up recently as well, with November prices up almost 2-1/4 percent from a year earlier. Part of this rise may reflect pass-through of energy costs to the prices of core consumer goods and services, as well as the effects of the depreciation of the dollar on import prices, although some other prices--such as those for some medical and financial services--have also accelerated lately.1 Thus far, the public's expectations of future inflation appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit. Further, futures markets suggest that food and energy prices will decelerate over the coming year.
Given these factors, overall and core inflation should moderate this year and next, so long as the public's confidence in the Federal Reserve's commitment to price stability is unshaken. However, any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank's policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly inflation expectations. Monetary Policy Response The Federal Reserve has taken a number of steps to help markets return to more orderly functioning and to foster its economic objectives of maximum sustainable employment and price stability. Broadly, the Federal Reserve's response has followed two tracks: efforts to improve market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy.
To help address the significant strains in short-term money markets, the Federal Reserve has taken a range of steps. Notably, on August 17, the Federal Reserve Board cut the discount rate--the rate at which it lends directly to banks--by 50 basis points, or 1/2 percentage point, and it has since maintained the spread between the federal funds rate and the discount rate at 50 basis points, rather than the customary 100 basis points. In addition, the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms. In December, the Fed successfully auctioned $40 billion through this facility. And, as part of a coordinated operation, the European Central Bank and the Swiss National Bank lent an additional $24 billion to banks in their respective jurisdictions. This month, the Federal Reserve is auctioning $60 billion in twenty-eight-day credit through the TAF, to be spread across two auctions. TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives. Although the TAF and other liquidity-related actions appear to have had some positive effects, such measures alone cannot fully address fundamental concerns about credit quality and valuation, nor do these actions relax the balance sheet constraints on financial institutions.
Hence, they alone cannot eliminate the financial restraints affecting the broader economy. Monetary policy (that is, the management of the short-term interest rate) is the Fed's best tool for pursuing our macroeconomic objectives, namely to promote maximum sustainable employment and price stability. Monetary policy has responded proactively to evolving conditions. As you know, the Federal Open Market Committee (FOMC) cut its target for the federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the federal funds rate down by 1 percentage point from its level just before the financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The FOMC will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks. Financial and economic conditions can change quickly. Consequently, the FOMC must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.
A number of analysts have raised the possibility that fiscal policy actions might usefully complement monetary policy in supporting economic growth over the next year or so. I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone. But the design and implementation of the fiscal program are critically important. A fiscal initiative at this juncture could prove quite counterproductive, if (for example) it provided economic stimulus at the wrong time or compromised fiscal discipline in the longer term. To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving. Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed.
Any fiscal package should also be efficient, in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue. Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit. As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult. Thank you. I would be pleased to take your questions. -------------------------------------------------------------------------------- Footnotes 1. Prices for some financial services are implicit; for example, depositors may pay for "free" checking services only indirectly, by accepting a lower interest rate on their deposits. The Bureau of Labor Statistics uses estimates of such prices, as well as other nonmarket prices, in calculating the inflation rate. Return to text 2008 Testimony Last update: January 17, 2008
U.S. needs big stimulus (January 11, 2008)
Jan.11, 2008 5:30 pm Hillary Clinton has announced a proposed stimulus package of 70 billion dollars. Sounds like a lot, but in fact its way too small to make much difference as the slowing down of the US economy gathers steam. Remember the US economy has a 13.97 trillion dollar GDP.(2008)
140 billion dollars would be a 1 % stimulus, 280 billion a 2 % stimulus and 420 billion a 3 % stimulus. Its only at this level of magnitude and beyond that fiscal stimulus would have some positive impact. 70 billion is simply way too small.
Currently the American deficit as of 2007of 244 billion dollars is 1.7 % of the GDP ( source:Office of Management and budget) If one added say say 420 billion dollars to the current deficit (for a total of 664 billion) and targeted very carefully in terms of lower and middle class tax cuts or rebates,including rebates for purchasing more fuel efficient vehicles and retrofitting homes to save energy, and also included a capital works program of much needed infrastructure repair and got the Fed to lower interest rates rates substantially the impact would be very positive.
During the second World War the US ran deficits that were as follows: 1942 14.94 % of the GDP 1943 31.01 % of the GDP 1944 23.27 % of the GDP 1945 21.9 % of the GDP.
These deficits led to a debt that peaked at 119.75 % of the GDP in 1946. The current US gross debt is $9,196.5 billion. The gross debt to debt to GDP ratio is 65.7%.The defict to GDP is currently 1.7 %..(Source : US Treasury)
This means that the net debt to GDP ratio is somewhat smaller.
So there is plenty of room to safely temporarily increase the deficit to about 5 % of the GDP to lessen the impact of the recession and shorten its duration. Since oil prices are cartel driven they should not be a prime consideration in calculating whatever inflationary impact a deficit resisted recovery might produce.In the beginning of a recovery almost all of the vector forces will be on output rather than price.
As recovery proceeds the longer term strategy of detaching the US from the influence of the cartel through greater energy efficiency and increased North American supplies can proceed. As well the Fed can also tighten its stance but only once the downword momentum is clearly reversed.
140 billion dollars would be a 1 % stimulus, 280 billion a 2 % stimulus and 420 billion a 3 % stimulus. Its only at this level of magnitude and beyond that fiscal stimulus would have some positive impact. 70 billion is simply way too small.
Currently the American deficit as of 2007of 244 billion dollars is 1.7 % of the GDP ( source:Office of Management and budget) If one added say say 420 billion dollars to the current deficit (for a total of 664 billion) and targeted very carefully in terms of lower and middle class tax cuts or rebates,including rebates for purchasing more fuel efficient vehicles and retrofitting homes to save energy, and also included a capital works program of much needed infrastructure repair and got the Fed to lower interest rates rates substantially the impact would be very positive.
During the second World War the US ran deficits that were as follows: 1942 14.94 % of the GDP 1943 31.01 % of the GDP 1944 23.27 % of the GDP 1945 21.9 % of the GDP.
These deficits led to a debt that peaked at 119.75 % of the GDP in 1946. The current US gross debt is $9,196.5 billion. The gross debt to debt to GDP ratio is 65.7%.The defict to GDP is currently 1.7 %..(Source : US Treasury)
This means that the net debt to GDP ratio is somewhat smaller.
So there is plenty of room to safely temporarily increase the deficit to about 5 % of the GDP to lessen the impact of the recession and shorten its duration. Since oil prices are cartel driven they should not be a prime consideration in calculating whatever inflationary impact a deficit resisted recovery might produce.In the beginning of a recovery almost all of the vector forces will be on output rather than price.
As recovery proceeds the longer term strategy of detaching the US from the influence of the cartel through greater energy efficiency and increased North American supplies can proceed. As well the Fed can also tighten its stance but only once the downword momentum is clearly reversed.
Randall Wray and Monetary theory
One of the most interesting post-Keynesian theorists who specializes in monetary theory is L. Randall Wray who teaches in the Economics Department at the University of Missouri in Kansas City. Wray whom I have met and talked shop with is a former Ph.D. student of Hyman Minsky and much of his work shows the influence of Minsky. One of Wray's books Understanding Modern Money(Edward Elgar, 1998) I consider a classic because it largely successfully revives Abba Lerner's conception of the monetary system. It also introduces the very heuristic concept of fiat currency as "That which is necessary to pay taxes" or twintopt. As Wray puts it " If a state decided it would accept only beaver pelts in payment of taxes , the population would have to organize itself to ensure that it obtained the requisite number of beaver pelts; ...of course all modern states impose a monetary tax liability and generally accept only money in payment of taxes. Not coincidentally all modern states require that monetary tax payments be made in the form of the state's own currency. That currency, in turn, is nothing more than the government's liability. " (Wray,Understanding Modern Money, p.4) As Wray explains because citizens need the fiat currency with which to pay their taxes governments (and in reality employers and the private banking system to the extent that governments permit them)have the power through their central bank to dictate the terms upon which citizens acquire the currency. High powered money with which citizens can pay taxes is supplied through the banking system governed by the policies and overnight lending rate imposed by the central bank.If the central bank imposes too high an interest rate and also effectively restricts the availability of high powered money through tight money policies citizens will have a difficult time finding enough currency and bank deposits to pay their taxes with. Instead they will resort to credit . Wray's book is definitely worth reading as his recent article done for the Jerome Levy institute for economics at Bard college available on the internet.(simply google Randall Wray) I don't agree with some of the thrust of his most recent paper on the irrelevance of monetary policy but his work is both informative and provocative, particularly on the way in which overnight interest rate setting works and its impact upon liquidity in the banking system.
Keynes and the quantity theory of money
Feb. 2006 For a good part of his career as a policy economist and economic theorist John Maynard Keynes struggled to escape from the quantity theory of money. Although he was considered a quantity of money theorist until the late 1920s as early as 1911 Keynes rejected the classical doctrine of the natural rate of unemployment and therefore implicitly the quantity theory of money. In its classical formulation the quantity theory could be stated quite simply as MV = PO where M was the money stock, V the velocity or circulating turnover of the money stock in given time period , P the price level and O the level of output of goods and services.The classicals argued that because of Say's law output was always at the full employment level and velocity varied so slowly that it resembled a constant. If so then there was a direct relationship between money and prices. Keynes rejected the classical doctrine of Say's law that supply created its own demand.Unemployment was possible and it would not be cured by allowing the market and excess supply of labour to lower prices.In 1911 Keynes reviewed a book by the American economist Irving Fisher. In his review he rejected the classical doctrine that unemployment was impossible in the economic system unless people voluntarily rejected working at the prevailing wage. Instead Keynes accepted that involuntary unemployment could occur. He further developed that approach in his writings in the late 1920s and in the General theory of 1936. He argued "the celebrated optimism of traditional economic theory which has led economists to be looked upon as Candides who argued that all is for the best in the best of all possible worlds provided we let well enough alone is to be traced ...to their having neglected to take account the drag on prosperity which can be excercised by an insufficiency of aggregate demand.(GT p33-34) Keynes also dismissed the notion of the natural rate of unemployment arguing instead that output was not solely determined by current equipment and technique in the way that Ricardo and the classicals insisted. (See Michael Perleman, Keynes, Investment Theory and the Economic Slowdown: The role of investment and q ratios Macmillion 1989, p.100ff. Keynes believed that only under strict unrealistic assumptions could the Ricardian quantity theory of money hold sway and prices rise in direct proportion to MV. What is extraordinary is that these Ricardian and quantity theory simplifications have re-emerged in the late 1970s and held sway in economic policy for the past 30 years despite all the evidence that shows they are misguided.
Thursday, September 23, 2010
Unemployment Jan 2006
The latest unemployment rates and numbers have been released by the US Department of Labour and Statistics Canada. They show that unemployment has risen last December 2005 from 6.4 % in November to 6.5 % for Canada but dropped from 5.0% to 4.9 % over the same time period in the US. The rate in Québec has also risen to over 8 %. How come ? I believe part of the explanation lies in the overly tight monetary and fiscal policy being pursued in Canada as opposed to in the US. While both central banks have been tightening and raising rates The US continues to run a small but significant budget deficit which combined with low rates is stimulative. Canada has somewhat higher rates and a substantial budget surplus which is not stimulative. Over the past ten years 1995 to 2005 if one compares unemployment performance the results are quite striking. In the US unemployment has ranged from a low of 3.9 % in September through December 2000 to a high of 6.3 % in June and July of 2003. Canadian performance over the same period is much less impressive. I believe the explanation lies in the tighter monetary and fiscal policy that was pursued in Canada.
After the election dust settles in Canada it will be useful to pursue this analysis further. Despite all the conventional wisdom about the merits of supply side approaches I believe that importance of aggregate demand and the impact of monetary and fiscal policy upon aggregate demand is still widely misunderstood. More on this later.
After the election dust settles in Canada it will be useful to pursue this analysis further. Despite all the conventional wisdom about the merits of supply side approaches I believe that importance of aggregate demand and the impact of monetary and fiscal policy upon aggregate demand is still widely misunderstood. More on this later.
Oil prices
Dec.15, 2005 Rising oil prices have had a major impact upon western economies ever since the creation of OPEC during the 1970s. If we look at a time series of oil prices going back to 1946 and run the series to the present converting the price to 2005 US prices the price of a barrel of oil has fluctuated between $14.53 in 1998 to as high as $90.39 in 1980. From 1971 to 1975 the price of oil rose from $17.68 to $45.08. It rose again from 1975 to 1980 from 45.08 to $90.39 triggering the steep rise in inflation, followed by rising interest rates and the deep recession of the early 1980s.
The current price of oil on an annualized average basis is $50.15 for 2005.(as of September 2010 the price is over $74 a barrel) This is a major increase over 2004 when oil prices averaged $39.61.(In the last three years in 2008 oil prices peaked at over $137 a barrel, thereby helping to bring about the deep slump that followed) see charts below) In fact from 1998 to the present oil prices have averaged as follows. 1998 $14.53 1999 19.72 2000 31.61 2001 25.83 2002 25.19 2003 29.93 2004 39.61 2005 50.15 In Canada oil prices in current dollars ranged from $$3.20 a barrel for Alberta well head crude in 1947 to $2.62 a barrel in 1962.The exact range in this period was as follows. 1947 $3.20 a barrel at the wellhead 1948 2.68 1951 2.44 1953 2.65 1955 2.49 1957 2.67 1958 2.42 1962 2.62 Source: G.Cambell Watkins, Canadian Oil and Gas Pricing in E.Berndt et al, Oil in the Seventies, The Fraser Institute, 1977.table 1 Watkins relies on data from the Alberta Energy Conservation Board. If we were to adjust this time series for the rate of inflation since this period to 2005 prices we would have to multiply the price by a factor of between 5 and 6. Hence the current dollar price during this period never exceeded 20 dollars a barrel. What explains this enormous and clearly capricious increase. The defenders of the oil cartel claim it is simply supply and demand. But something else is at work - the cartel organized by OPEC and the willingness of speculators to take advantage of world events to drive up the price when hysteria grips the markets. Surely it is high time for our central banks to disconnect themselves from this hysteria and not make matters worse whenever the cartel drives up prices in this way. Increasing unemployment does nothing to weaken the power of the cartel. Instead we should be bringing on stream as much of our Canadian supplies as possible, increasing our supply of ecological alternatives to petroleum consumption and increasing public transportation as much as possible. This, rather than unemployment causing interest rate hikes, should be the basis of our anti-inflationary policy.
The current price of oil on an annualized average basis is $50.15 for 2005.(as of September 2010 the price is over $74 a barrel) This is a major increase over 2004 when oil prices averaged $39.61.(In the last three years in 2008 oil prices peaked at over $137 a barrel, thereby helping to bring about the deep slump that followed) see charts below) In fact from 1998 to the present oil prices have averaged as follows. 1998 $14.53 1999 19.72 2000 31.61 2001 25.83 2002 25.19 2003 29.93 2004 39.61 2005 50.15 In Canada oil prices in current dollars ranged from $$3.20 a barrel for Alberta well head crude in 1947 to $2.62 a barrel in 1962.The exact range in this period was as follows. 1947 $3.20 a barrel at the wellhead 1948 2.68 1951 2.44 1953 2.65 1955 2.49 1957 2.67 1958 2.42 1962 2.62 Source: G.Cambell Watkins, Canadian Oil and Gas Pricing in E.Berndt et al, Oil in the Seventies, The Fraser Institute, 1977.table 1 Watkins relies on data from the Alberta Energy Conservation Board. If we were to adjust this time series for the rate of inflation since this period to 2005 prices we would have to multiply the price by a factor of between 5 and 6. Hence the current dollar price during this period never exceeded 20 dollars a barrel. What explains this enormous and clearly capricious increase. The defenders of the oil cartel claim it is simply supply and demand. But something else is at work - the cartel organized by OPEC and the willingness of speculators to take advantage of world events to drive up the price when hysteria grips the markets. Surely it is high time for our central banks to disconnect themselves from this hysteria and not make matters worse whenever the cartel drives up prices in this way. Increasing unemployment does nothing to weaken the power of the cartel. Instead we should be bringing on stream as much of our Canadian supplies as possible, increasing our supply of ecological alternatives to petroleum consumption and increasing public transportation as much as possible. This, rather than unemployment causing interest rate hikes, should be the basis of our anti-inflationary policy.
World Crude Oil Prices |
Wednesday, September 22, 2010
John Kenneth Galbraith 1908-2006
April 30, 2006
The world has lost an enormously important voice for humanism and all that is good and just in economic thought with the passing at age 97 of the Canadian born economist who rose to political and economic stardom with his long career in the United States as Professor of economics at Harvard, advisor to American presidents from the Democratic party from Franklin Roosevelt forward,onetime Ambassador to India under President John F. Kennedy, leading liberal intellectual and prolific writer of popular and accessible works in economics, public policy and political economy.
Galbraith who was a product of a very different era received his intellectual inspiration from the work of theorists, thinkers and iconoclasts like Thorstein Veblen,John Commons, Richard Ely, Wesley Mitchell,Aldoph Berle and Gardiner Means, John Maynard Keynes and the school of evolutionary and institutional economics that was influential during the 1920s and 1930s in North American economic thought.
He also had a largely unrecognized(possibly even by himself) Canadian approach to economic analysis and thought that was rooted in the interdisciplinary tradition of political economy that people like Harold Innis developed at the University of Toronto during the period of the 1930s and forties.
Galbraith correctly saw that economics was about power and the disproportionate role that corporate power could deliver to the wealthy few who controlled the corporations unless there was a countervailing force to balance that power and ensure that social justice was promoted and the common good protected and nurtured.This was an idea he introduced in American Capitalism published in 1952 which also displayed his formidable grasp of Keynes' economics.In a number of respects Galbraith's countervailing power, his economics of oligopoly, the role of the technostructure outlined in the New Industrial State(1967) when combined yielded a more powerful model of capitalist behaviour than that of Keynes.
He got the idea of countervailing power from his extensive knowledge of both Veblen and Berle and Means( See Berle and Means, The Modern Corporation and Private Property; and Thorstein Veblen`s works; The Theory of Business Enterprise, The Theory of the Leisure Class where Veblen developed his idea of conspicuous consumption that Galbraith uses in the Affluent society and in his later work; and Veblen`s The Higher Learning in America,The Engineers and the Price system, and his collection of Essays for the Dial Press.) The search for that countervail to corporate power and wealth inevitably led to the state, a much maligned force in contemporary society, which Galbraith believed could play such a benificent role as a regulator and source of control, particularly if it were under the influence of liberal Keynesian educated intellectuals like himself.
In many ways Galbraith was an American disciple of Keynes, but one who, unlike Keynes` patrician but Bloomsbury altered orientation, drew upon the deep wellspring of American populism best represented by Thorstein Veblen.
Veblen, himself, of Minnesota Scandinavian heritage and therefore a social democrat of sorts had an enormous influence upon Galbraith. Veblen`s classic works The Theory of Business Enterprise and The Engineers and the Price System can be very easily and usefully linked to Galbraith`s classic The New Industrial State. We owe a great debt to Galbraith for keeping alive these progressive traditions in writing about economics and economies and integrating them with the thrust of Keynesian economics that wisely pushed the depression and fascist plagued world of the 1930s toward democracy and social justice and full employment in the post world of the 1940s and beyond.
A giant like Ken Galbraith occurs infrequently in the course of economics and intellectual history. The neoclassical mainstream may not appreciate him much. But that is of no matter.
His greatness lay in his successful role as a public intellectual. Their smallness lies in their inability to speak to the public except in arcane and often irrelevant mathematical technique. The fact that many of them, though not by any means all, considered him a sociologist or journalist rather than a bona fide economist is a sign of how far toward irrelevance most of them have fallen.
Our sympathy to his family and friends.
The world has lost an enormously important voice for humanism and all that is good and just in economic thought with the passing at age 97 of the Canadian born economist who rose to political and economic stardom with his long career in the United States as Professor of economics at Harvard, advisor to American presidents from the Democratic party from Franklin Roosevelt forward,onetime Ambassador to India under President John F. Kennedy, leading liberal intellectual and prolific writer of popular and accessible works in economics, public policy and political economy.
Galbraith who was a product of a very different era received his intellectual inspiration from the work of theorists, thinkers and iconoclasts like Thorstein Veblen,John Commons, Richard Ely, Wesley Mitchell,Aldoph Berle and Gardiner Means, John Maynard Keynes and the school of evolutionary and institutional economics that was influential during the 1920s and 1930s in North American economic thought.
He also had a largely unrecognized(possibly even by himself) Canadian approach to economic analysis and thought that was rooted in the interdisciplinary tradition of political economy that people like Harold Innis developed at the University of Toronto during the period of the 1930s and forties.
Galbraith correctly saw that economics was about power and the disproportionate role that corporate power could deliver to the wealthy few who controlled the corporations unless there was a countervailing force to balance that power and ensure that social justice was promoted and the common good protected and nurtured.This was an idea he introduced in American Capitalism published in 1952 which also displayed his formidable grasp of Keynes' economics.In a number of respects Galbraith's countervailing power, his economics of oligopoly, the role of the technostructure outlined in the New Industrial State(1967) when combined yielded a more powerful model of capitalist behaviour than that of Keynes.
He got the idea of countervailing power from his extensive knowledge of both Veblen and Berle and Means( See Berle and Means, The Modern Corporation and Private Property; and Thorstein Veblen`s works; The Theory of Business Enterprise, The Theory of the Leisure Class where Veblen developed his idea of conspicuous consumption that Galbraith uses in the Affluent society and in his later work; and Veblen`s The Higher Learning in America,The Engineers and the Price system, and his collection of Essays for the Dial Press.) The search for that countervail to corporate power and wealth inevitably led to the state, a much maligned force in contemporary society, which Galbraith believed could play such a benificent role as a regulator and source of control, particularly if it were under the influence of liberal Keynesian educated intellectuals like himself.
In many ways Galbraith was an American disciple of Keynes, but one who, unlike Keynes` patrician but Bloomsbury altered orientation, drew upon the deep wellspring of American populism best represented by Thorstein Veblen.
Veblen, himself, of Minnesota Scandinavian heritage and therefore a social democrat of sorts had an enormous influence upon Galbraith. Veblen`s classic works The Theory of Business Enterprise and The Engineers and the Price System can be very easily and usefully linked to Galbraith`s classic The New Industrial State. We owe a great debt to Galbraith for keeping alive these progressive traditions in writing about economics and economies and integrating them with the thrust of Keynesian economics that wisely pushed the depression and fascist plagued world of the 1930s toward democracy and social justice and full employment in the post world of the 1940s and beyond.
A giant like Ken Galbraith occurs infrequently in the course of economics and intellectual history. The neoclassical mainstream may not appreciate him much. But that is of no matter.
His greatness lay in his successful role as a public intellectual. Their smallness lies in their inability to speak to the public except in arcane and often irrelevant mathematical technique. The fact that many of them, though not by any means all, considered him a sociologist or journalist rather than a bona fide economist is a sign of how far toward irrelevance most of them have fallen.
Our sympathy to his family and friends.
Central Bank interest rate hikes and real estate bubble
January 2006
One of the reasons that the real estate market has been so hot is because interest rates have been so reasonably low for a long period . However now that the central bank has made it clear that it intends to keep raising the rates this rise in property values may be coming to an end. Since rising property values have fuelled through property based lines of credit house renovations and other consumption activity the end of the property bubble could cause a major slowdown in the economy if the central bank lets the air out of the bubble too quickly. Recent data in the US on new house construction and sales suggest that a slowdown is underway there. The same sort of thing may be happening in Canada in the months to come. While some people undoubtedly welcome the rise in the rates because of the higher interest they will earn on their savings many others probably a much larger number will be disappointed by the slowdown in economic activity that the rise in rates will promote. More reluctance to use lines of credit for further investment in ones property, less consumption secured by property and a general slowdown is probably unwelcome news to the majority. Time will tell us if the central bank has overshot the mark. My guess is that has done so.
One of the reasons that the real estate market has been so hot is because interest rates have been so reasonably low for a long period . However now that the central bank has made it clear that it intends to keep raising the rates this rise in property values may be coming to an end. Since rising property values have fuelled through property based lines of credit house renovations and other consumption activity the end of the property bubble could cause a major slowdown in the economy if the central bank lets the air out of the bubble too quickly. Recent data in the US on new house construction and sales suggest that a slowdown is underway there. The same sort of thing may be happening in Canada in the months to come. While some people undoubtedly welcome the rise in the rates because of the higher interest they will earn on their savings many others probably a much larger number will be disappointed by the slowdown in economic activity that the rise in rates will promote. More reluctance to use lines of credit for further investment in ones property, less consumption secured by property and a general slowdown is probably unwelcome news to the majority. Time will tell us if the central bank has overshot the mark. My guess is that has done so.
Deficit hysteria in Québec (2005)
November 26, 2005 There is more disturbing news about the grip of deficit and debt hysteria upon the minds of the young politically active. This past week the Metro paper distributed widely for free in Montreal's metro carried an article about the youth wings of the three leading political parties in Quebec supporting an all out campaign to eliminate deficits and reduce debt in Quebec.This deficit mania is very bad news for all of us who have witnessed and experienced the terrible consequences of cut backs in the Quebec education and health care system. In Quebec close to 650,000 people have no family doctor and are forced to rely on queueing up in health clinics often for waits of over 3 hours before they can see a general practitioner let alone a specialist.
The infrastructure in Montreal has been crumbling for years and hordes of homeless people are reduced to begging on Ste. Catherine St. despite the best efforts of many noble volunteer organizations trying to help them.
The foolishness of these neo-conservative and neo-liberal and ADQist young people in believing that salvation is possible for their generation through further slashes of public spending which can only worsen the situation is a sad spectacle.
Its time they studied a little history and the work of Keynesian economists like Abba Lerner, Gideon Rosenbluth, John Kenneth Galbraith, Robert Heilbroner, Joseph Stiglitz(a Nobel prize winner) William Vickery(another Nobel prize winner , John Hotson, Mike McCracken, Jim Stanford, and a long list of other economists who share the belief that deficit cutting is best achieved through lowering the unemployment rate through a combination of low interest rates and economic stimulation. Its not accomplished except in a very damaging way through destroying our public institutions through more cut backs.
Quebec's debt situation is far from a state of crisis. Increasing the suffering among the poor and unemployed through more cutbacks can only make matters worse. Young people will inherit the debt but they will also inherit a wealth of assets both public and private. But if they neglect to protect these assets currently their inheritance will be damaged.More about this later.
The infrastructure in Montreal has been crumbling for years and hordes of homeless people are reduced to begging on Ste. Catherine St. despite the best efforts of many noble volunteer organizations trying to help them.
The foolishness of these neo-conservative and neo-liberal and ADQist young people in believing that salvation is possible for their generation through further slashes of public spending which can only worsen the situation is a sad spectacle.
Its time they studied a little history and the work of Keynesian economists like Abba Lerner, Gideon Rosenbluth, John Kenneth Galbraith, Robert Heilbroner, Joseph Stiglitz(a Nobel prize winner) William Vickery(another Nobel prize winner , John Hotson, Mike McCracken, Jim Stanford, and a long list of other economists who share the belief that deficit cutting is best achieved through lowering the unemployment rate through a combination of low interest rates and economic stimulation. Its not accomplished except in a very damaging way through destroying our public institutions through more cut backs.
Quebec's debt situation is far from a state of crisis. Increasing the suffering among the poor and unemployed through more cutbacks can only make matters worse. Young people will inherit the debt but they will also inherit a wealth of assets both public and private. But if they neglect to protect these assets currently their inheritance will be damaged.More about this later.
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