"No nation ever borrowed and spent its way to prosperity"

[Kurt_and_Hunter]

"No nation ever borrowed and spent its way to prosperity"

Except for all the ones that did.

In actuality the real rarity is a nation scrimping and saving its way to prosperity. (One underlying cause of Japan's inability to avoid their "lost decade" was that the Japanese people "do the right thing" with money. Their ingrained fiscal responsibility was an anchor around the neck of the Japanese economy while the government tried to get people to be more like wasteful, indebted Americans.)

Here's a chart of how the US got out of the Great Depression. Notice that post-war our public debt was greater than GDP. We will never know what would have happened if something the scale of that massive Pearl Harbor borrowing & spending spike happening in 1931 instead of 1941.

What these wing-nuts cannot grasp is this: If in 1933 FDR had decided to hold WWII without the killing the economic effects would probably have been similar. If we had drafted three million men to play croquet instead of kill people it would have had the same effect because flying men to Europe to get shot at is no more economically productive than croquet. And building airplanes and tanks and driving them into the Grand Canyon would have been no less productive than having them shot down or blown up. (We got some post-war productivity from war-time research and advances in engineering and manufacturing efficiency and a better-trained workforce but those gains would, in theory, have been much the same if we had developed the same technologies without actually using them.)




http://krugman.blogs.nytimes.com/2009/02/15/debt-in-wartime/

[anonymous171]

1. Suddenly the GOP dislikes "borrowing and spending." I wonder why? nt

[ejpoeta]

17. how do they think we paid for the illegal war in iraq?

[earthside]

2. Name One

Name a debtor nation -- public and private debt -- without a manufacturing base that ever borrowed and spent its way into prosperity.

It is impossible.

Democrats have traditionally been against "borrow and spend" ... favoring "tax and spend " as more economically responsible.

This is not 1933 and this is not the Great Depression. Loading more debt on top of debt in the long run is going to bring a deeper and more severe economic collapse. Obama needs to be proposing some real cuts in military spending and corporate welfare to make a down payment on all these bailouts and the stimulus package.

[Kurt_and_Hunter]

3. Sorry, that's just mistaken

"Loading more debt on top of debt in the long run is going to bring a deeper and more severe economic collapse."

If you believe that national debt plays any substantial role in today's woes you're misinformed.

The massive deficits of the last 8 years are no only not a cause of our current problems, they have prevented us from collapsing faster.

If George Bush had balanced the budget in 2004 we would be in a full-on depression right now.

The collapse of the internet bubble in 2000 doomed us to economic catastrophe. That's a given. No bubble collapse has ever failed to wreck the host economy.

The fact that we have stretched out and somewhat softened the process through massive deficit spending has created a false sense of causation in folks who view economic trends through an inappropriately narrow time-frame.

What down-side of debt do you believe is restraining our economy right now? Inflation? We are fighting DEflation. A weak dollar? No, the dollar is stronger than it has been in years. High interest rates? The Fed funds rate is essentially zero and mortgage rates are at generational lows.

[grantcart]

6. You have to broaden your understanding of 'economy' and 'manufacturing'

(BTW I was once a CEO of a firm that manufactured furniture and love manufacturing)



The United States still has a massive manufacturing base and derives massive foreign trade dollars from it.


The top three 'manufacturing industries' for the US?


1) Movies

2) Computer games (almost as big as movies)

3) Software


Would you rather manufacture a TV (that somebody buys every 10 years) or would you rather manufacture the programming that goes on it every night?


The other factor that you are overlooking is 'repatriated profits'. American branding allows for American firms to manufacture overseas and deliver overseas but the profits from those activities are repatriated back to the US. Think McDonalds, KFC and Dove Soap. This is why the Japanese take such strong objection to our models showing huge trade imbalance. They have another model that takes into effect intellectual 'manufacturing' and repatriated profits and their model shows the US doing very well.


There are only two ways to retire the debt 1) grow the economy and use part of the growth for retiring debt (the Clinton model) or 2) inflation.


Your reference to 1933 is particularly ironic in that our exports at that time were relatively miniscule and declined significantly.

[jobendorfer]

4. Snort! Show me a country that outsourced itself into prosperity

I can think of a few examples of countries that massively outsourced themselves.
Hint: it's the terminal stage of empire.

J.

[avaistheone1]

7. I don't understand why people don't get that.

I don't think the outsourcing issue has been addressed by this stimulus at all - or did I miss something?


:shrug:

[grantcart]

5. "No nation ever paid off 10 trillion in debt without growing the economy"

Anyone who is worried about debt should understand that there are only two ways to get out of the situation that the Republicans have put is into: 1) Use the government to prime the pump and grow the economy, or 2) inflation. There is no economic model that allows for us to retire the debt as is unless we take out an entire sector like health care or defense.

[Kurt_and_Hunter]

8. And that's what makes the deficit hawks so comical. The thing most stimulated is government revenues

I would guess that dollar for dollar the stimulus bill's effect on future government revenues is probably greater than its effect on employment or even GDP.

The government is pretty good at taxing activity. In retrospect we inflated our way to the late 1990s surplus. Federal revenues were up a lot, largely on stock profits. So the money that closed the gap was a tax on imaginary wealth, payable in imaginary wealth.

I imagine that a lot of (the bulk of?) the damage bubbles do is by disguising inflation as growth. Is that correct?

[grantcart]

9. I think that it would be an interesting study for a PHD candidate.

I see two completely different types of bubbles; 1) Technological and 2) Speculation


The country used to have regular speculative bubbles and your point about inflation and growth being camoflauged in a speculative bubble is correct I think. FDR's changing of the government role allowed the government to significantly reduce the speculative bubbles since 1933, until now.


The 1990s bubble was based on three things; 1) the incredible increase of productivity of American workers by increased use of computerization 2) the growth of an additional layer of commerce in the internet and 3) allowing Americans to sell their homes without capital gains tax, allowing for families to change homes more frequently, if their economic circumstances changed, without having to worry about paying capital gains on the increase of their home (an example of how some tax changes can be stimulative).

If you look at the bubble that occurred when airplane manufacturing started and there developed a commercial use of planes for postal delivery (again a positive government/private cooperation) and then passenger travel you will see the same structure of the internet bubble;


Phase one "home built companies" the internet companies are still fresh in our mind but we forget that airplanes were literally built by family companies that built bicycles.

Phase two - dramatic proliferation of companies

Phase three - dramatic flight of capital

Phase four - inflated stock prices

phase five - phase 2,3 and 4 repeating themselves

phase six - overproduction of companies, production and market of new technology

phase seven - market correction and consolidation of survivors. The healthy companies would buy out good competitors and marginal ones were swept away. Same thing that happened to the internet companies happened to the airlines. "United" airlines was the conscious effort to combine several of the better candidates so that they could survive together what they could not survive individually.

[Kurt_and_Hunter]

10. I'm not sure I see a bright line distinction

A speculative bubble needs a narrative to explain why traditional methods of valuation are no longer valid. That comes from shiny objects that offer a plausible but unquantifiable productivity argument for why it's "different this time."

I would suggest that most bubbles start with sensible increases that get the fire going. There was an early '60s "tronic" bubble similar to the .com bubble, but smaller. Airplanes, as you say, as well as railroads (Big), steam ships, the telegraph... and 1929 was spurred to some degree by radio--I think RCA was the highest flier of them all. Almost anything big and new can be a bubble attractor.

The exploration of the south seas certainly justified some revision of the prospects of global trade, and there was a South Sea bubble in France that was about as large as the British version, but the new prospects (real) were not sufficient to warrant the South Sea bubble. The discovery of America kicked off some speculative bubbles comparable to the South Sea, though not as well remembered. Again, half-way right... the discovery of America was probably the most important economic event in European history and did upend the whole power structure, but that didn't mean investing in a particular America-related stock solicitation was wise. (Much like the bozos who would come on CNBC in the 1990s and explain how big a deal the internet was as a means of peddling a given stock. Arguing it's a big deal, which is was, does not argue that a specific "see how your dog would look with different haircuts" business on the internet is worth 25 billion dollars.)

I guess what I'm saying is that throughout the age of progress the technological bubble seems kind of the norm. (Counting the discovery of new lands in the same category, as legitimately calling valuation models into question. And without the grip of conservative tradition the bubble might be the natural behavior of markets... tapping into the innate ponzi scheme potential of a stock market.

I'm just rambling, but I think what I started out trying to say is that dramatic productivity increases in the last 150 years have been so continual that it's hard to isolate the technological component.

I am, however, treating our recent low-tech housing bubble as merely a phase of the internet bubble. Bubbles don't come every five years... the usual bubble model requires a new generation that doesn't remember the last bubble very well. I'm not an economist so I cannot hope to elucidate it well, but it seems to me that a lot of money based on no real value escaped from the stock market over the life of the thing and that "undeserved" money has been seeking refuge ever since. Housing being the traditional conservative investment, it was a great parking place for a lot of hot money. And wherever the leftover internet money fled became over-valued because it was being bought with a form of counterfeit money. The stair-step flight to safety from 2000-2007 is too orderly for me to see it any other way. Bogus stocks > land > gold & oil > cash. (And stocks were over-valued by the traditional measures within a couple of years of when the bubble supposedly burst, suggesting that the burst was not a decisive event. Nikei charts of the 1980s-1990s are scary because stocks struggled back to decent levels a few years after the bust and then collapsed for real. No bubble event is likely to produce a V-shaped bottom and if it does it's just a bear-market rally.)

I don't know if other bubbles have ground through seemingly "safe" sectors on the way down. (Did the Japanese stock market boom precede the land boom? I don't recall if they were simultaneous or tiered.)

Are there recent speculative bubbles without a technological predicate argument? (A question of the non-rhetorical variety)

(The fact that tulip-mania is taught as typical of the beast might distort thinking on bubbles. Though even that was sparked by a big boom in trade-related wealth in Holland but for some reason they piled the new money into bulbs rather than over-priced shares in shipping stocks.)

[Kurt_and_Hunter]

11. PS

"FDR's changing of the government role allowed the government to significantly reduce the speculative bubbles since 1933, until now."

In number, yes. In magnitude, however, maybe not so much. The late 1990s stock bubble was so massive (even in relative terms) that it more than made up for lost time. And the little run-up to the crash of 1987 was kind of text-book.

I would certainly agree that a cycle of speculative bubbles was broken in the 1930s but how much of that is attributable to policy? Genrationaly, you would expect to go 30-40 years from the crash of '29 and Great Depression to get a population of investors with short enough memories to think stocks always go up. So there were meta-factors that probably made policy look somewhat more decisive (in isolation) than it was.

So let's say FDR-Carter with Reagan-BushII being a separate era... the age of wing-nut deregulation.

Question: If bubble asset valuation were counted as inflation (not that I am proposing a definition of a bubble... just hypothetically) would the monetary policy suggested by that rate of "inflation" be the right policy to burst the bubble. Say the Fed said in 1998, "If you add shares of companies that won't exist in five years to our consumer basket, which they almost are given steady IRA/401K contributions, then our inflation rate is about 11%" would the interest rate hikes that suggested be in the ballpark of best bubble-busting practice?

[grantcart]

12. I would defer to somebody that has real authority on the subject but

From 1873 to 1893 the country experienced what was called at the time the Great Depression and after 1933 became the long depression.


During the 60 year period between 1869 and 1933 there were 5 great economic collapses;


Black Friday (1969) related to gold speculation 1869 http://en.wikipedia.org/wiki/Black_Friday_(1869)

Panic of 1873 causes were many and started in Germany but it was severe and unemployment reached 14% http://en.wikipedia.org/wiki/Panic_of_1873

Panic of 1893 was a result of railroad over expansion and has been compared to the tech bubble of 1990s unemployment reached 19% and there were massive bank failures.

Panic of 1907 stock market lost 50% of its value and was cause by monopolies trying to control the market, especially copper
http://en.wikipedia.org/wiki/Panic_of_1907 The NY stock exchange was thought to collapse completely if JP Morgan hadn't stepped in and convinced others to do likewise.




The main meta factor to effect capitalization after 1945 was the tremendous growth of pension savings that were put into the stock market.

Your question is interesting but I am guessing that most economists, including Krugman, would not want to see the Federal Reserve move into an area of policy making that your question would suggest.

The problem is that our economic situation changes and new bubbles occur and we take regulatory steps to fix that bubble but there is no way to forsee the next bubble. In a similar way there was no way to predict that after the breakup of the Soviet Union the next enemy of the United States would be militant Islamic splinter groups. We have moved through the following problem areas gold, national currency, monopolies, railroad, airplane and high tech bubbles and now the mortgage bubble.

BTW did you see 60 minutes? If not you should see it. They had a whistle blower on who said that criminal violations by mortgage companies were clear, widely known and the government was not responsive. Mortgages have been the most under regulated niche of American business. Look at the licensing you need for securities or insurance. In most states mortgage brokers don't have a unique test to take, just using the real estate license, and they can double as real estate agents with an obvious conflict of interest. Also appraisers are too vulnerable to being black balled for not giving the bank the appraisal they want.

It seems that with a modest amount of regulation this particular bubble could be eliminated.

[Kurt_and_Hunter]

16. I'm not proposing policy in that observation, of course

Not suggesting formal growth caps as real policy.

That said, the two great global economic calamities of the last century involve very similar short-term stock market behavior and I don't think that behavior has never occurred in a non-pathological way.

Here's the question: Imagine a rule that the economy be throttled down if a stock market gains more than 30% in a year. How many times would that rule have been triggered in the last 100 years in settings that were not subsequently revealed to be damaging bubbles? Whatever benign growth might have been lost would have been nothing compared to the damage done.

Offered as a devil's advocate thing, not something for the suggestion box.

Markets are so ingenious that it's possible that no regulation of behavior can anticipate all the wrinkles and that regulation of the symptom, rather than specific behaviors, might be the only sound fire-wall. And the web of regulation of specifics necessary to anticipate even most problems may be more restrictive than a flatter, more simplistic approach.

In practice the effect would be prophylactic. It's unlikely such caps would ever be triggered because knowing that there's a rough upper bound on next years market action would disincentivize a host of highly speculative actions today.

Yes, that would somewhat reduce growth in all years, good and bad, but regulation already does that so that's not in itself shocking.

(And if, as economists maintain, it is impossible to call a bubble at the time then timely reactive, targeted regulation is impossible.)

[Diclotican]

13. grantcart

grantcart

I guess that no other country, in the history of man ave 10 billion US dollar in debt, and belived they could just go as they allways have been going, becouse the currency they are using is the same as the rest of the world are using as their base currency. Every single other currency, is modeled or at least depended of the US dollar... And if US dollar was to go into the crapper - I am afraid that the economy as we know it, wil go the same way too... right down the crapper...

Diclotican

[Diclotican]

14. grantcart

grantcart

I guess that no other country, in the history of man ave 10 billion US dollar in debt, and belived they could just go as they allways have been going, becouse the currency they are using is the same as the rest of the world are using as their base currency. Every single other currency, is modeled or at least depended of the US dollar... And if US dollar was to go into the crapper - I am afraid that the economy as we know it, wil go the same way too... right down the crapper...

Diclotican

[TexasObserver]

15. Except this one!! Nice chart.

They just can't admit that massive government programs via war effort ended the Depression.

[Odin2005]

18. I think it was Krugman who said that WW2 inflation inflated away the income disparities of...

...the pre-Depression years.

[Cha]

19. Did any country have a fucktard, mad spendthrift

like bush busting the bank and the blood before hand?