demandside

Plus Gregory Mankiw, Idiot of the Week

Today, Nouriel Roubini surfaces in Dubai, Joseph Stiglitz on leadership at the Fed, one forecasting firm says increased economic activity under the stimulus could pay 40 percent of the cost, and finally, Idiot of the Week with N. Gregory Mankiw.

Nouriel Roubini

A bloomberg report yesterday.

Nouriel Roubini rose for a moment in Dubai this week.  We suspect a lot of money is flowing toward the iconic NYU professor who made his reputation on the prediction of the collapse of housing and consequent damage to the financial sector.  His website is subscription only.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai yesterday. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

… President Barack Obama will have to use as much as $1 trillion of public funds to shore up the capitalization of the banking sector, following the $350 billion injection by the Bush administration, Roubini told Bloomberg News.

… “The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”

… “I see commodities falling overall another 15-20 percent,” Roubini said. “This outlook for commodity prices is beneficial for oil importers, it’s going to imply that economic recovery might occur faster, but from the point of view of oil exporters, this will be very negative.”

Joseph Stiglitz

The Rocky Road to Recovery

January 15 Project Syndicate

NEW YORK – A consensus now exists that America’s recession – already a year old – is likely to be long and deep, and that almost all countries will be affected.

…

Fortunately, America has, at last, a president with some understanding of the nature and severity of the problem, and who has committed himself to a strong stimulus program. This, together with concerted action by governments elsewhere, will mean that the downturn will be less severe than it otherwise would be.

The United States Federal Reserve is trying to make amends by flooding the economy with liquidity, a move that, at best, has merely prevented matters from being worse. It’s not surprising that those who helped create the problems and didn’t see the disaster coming have not done a masterly job in dealing with it. By now, the dynamics of the downturn are set, and things will get worse before they get better.

In some ways, the Fed resembles a drunk driver who, suddenly realizing that he is heading off the road starts careening from side to side. The response to the lack of liquidity is ever more liquidity. When the economy starts recovering, and banks start lending, will they be able to drain the liquidity smoothly out of the system? Will America face a bout of inflation? Or, more likely, in another moment of excess, will the Fed over-react, nipping the recovery in the bud? Given the unsteady hand exhibited so far, we cannot have much confidence in what awaits us.

WSJ

January 16

January 15, 2009, 3:44 pm Stimulus Could Pay for 40% of Itself

The type of economic stimulus package being considered by Congress and the incoming Obama administration could have a major effect on economic growth and employment, according to an analysis by the forecasting firm Macroeconomic Advisers.

And in a finding sure to please stimulus backers, the firm thinks a plan could pay for up to 40% of itself via higher tax revenue over the next five years.

Based on assumptions of a … $775 billion package that’s tilted a bit more toward tax cuts, the firm estimates that stimulus would add 3.2% to the level of U.S. gross domestic product by the end of 2010 and add 3.3 million jobs, cutting the unemployment rate by 1.7 percentage points by the end of next year.

“The economy would regain full employment two years earlier than in the absence of the stimulus package and, perhaps more important, reduce the risk of the economy slipping into a deflationary contraction more serious than the recession envisioned in our baseline,” Macroeconomic Advisers said.

Without stimulus, Macroeconomic Advisers thinks the unemployment rate, currently 7.2%, will peak at 9.1% early next year. With stimulus, the peak will be 8.3%.

As we’ve said here, the unemployment rate will hit ten percent in the current year, with or without a stimulus.  We suspect the snapback will be significant, and further stimulus in the form of infrastructure will come on line, generating big re-employment and a substantially lower rate by mid-2010.  This also assumes real and competent restructuring of the banking sector unfreezing the credit system.

We disagree on the outlook absent aggressive government action.  There is no stabilizing mechanism in the economy as currently constituted.  Consumers will not return.  Lending will not return absent the prospect of profit.  The outlook without government is a continuous and deepening stagnation.

This is not the supply side Laffer curve effect, which contended that increasing financial rewards to the top would generate more output by dint of better effort and innovation.  This is a straight increase in GDP from demand.

Now, Idiot of the Week

Greg Mankiw

Being chair of the President’s Council of Economic Advisers under George W. Bush is a short step from being featured on Demand Side’s Idiot of the Week.  Hardly surprising, I suppose, since economic policy in this administration has been primarily in service to the corporate political agenda.  The current chair Edward Lazear made a policy of rosiness during the first six months of the current economic collapse.  Now he is rarely heard from.  The immediate prior chairman was Ben Bernanke, now perhaps our favorite target in his position as head of the Fed..  Previous chairs under Bush have also included the nutso supply sider R. Glenn Hubbard and — in the briefest tenure of all CEA chairs — Harvey Rosen.  Also chair, from 2003-2005, was Gregory Mankiw of Harvard, today’s idiot of the week.  Mankiw’s self-proclaimed largest influence was on the 2003 tax cut of the Bush administration, rammed through even after the 2001 tax cut failed to produce, and now credited with blowing the budget deficit into the stratosphere.

Here, from an appearance on Fresh Air with Terry Gross, we have Mankiw’s analysis, which might be characterized as running around in a circle piddling on oneself.

MANKIW

Nobody knows what to do, therefore perhaps we should do nothing, is apparently this message.  This kind of slippery verbiage reminds me of what Harry Truman said after a meeting with the first chair of the Council of Economic Advisers, Edwin Nourse.  “Give me a one-handed economist.”  On the one hand, on the other hand.

In order, there is little debate on whether a stimulus is needed except from those so long wedded to the economic theories that are now proving fallacious.  When he says, “in my book,” I would like to point out, he is talking about a part of a paragraph near the end.  Better to get Krugman’s book, where the subject is treated with proper attention.

MANKIW

Is there really debate on whether roads, bridges, schools, green energy, current state and local services, and so on pass a cost-benefit test when the cost is not only the loss of the opportunity for these goods and services, but the continued decline of the economy?

Public goods have large benefit-cost ratios as a result of the intrinsic nature of public goods.  Mankiw does not know this because it is not in his interest to know it.

But what are the alternatives?

MANKIW

So the alternatives, or tools, are what we’ve tried that hasn’t worked.  TARP as a stimulus tool and not as triage for a broken banking sector is an interesting twist.  We know Mankiw likes tax cuts in all weather.  Too bad the tax cuts of the first stimulus fell so flat.  Please, this great emphasis on government spending?  We haven’t done it yet.  Here you see a man defending academic turf, not good policy.

MANKIW

I hate this.  The problem with the revenue shortfall is not the tremendous supply side tax cuts that were supposed to but did not pay for themselves, it is the 70-year-old entitlement program of Social Security.  Let’s not mention that the dedicated payroll taxes …  Well, let’s not go there today.  Simply said, the aging of the population is not something that we have suddenly discovered.  Measures were taken in the 1980s to put Social Security on sound footing, where it is today if the government bonds in the trust funds are good.  Mankiw’s uncertainty babble is a smokescreen for advocating cutting Social Security as a way to pay for his tax cuts in the long term.

N. Gregory Mankiw.  Idiot of the Week.

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