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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for August, 2009


Posted by WARREN MOSLER on 31st August 2009

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Levy Recap


Posted in Uncategorized | No Comments »

Chicago Purchasing Managers’ Index Increased to 50 in August

Posted by WARREN MOSLER on 31st August 2009

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Just enough to keep additional fiscal measures off the table while unemployment remains around 10%.

Chicago Purchasing Managers’ Index Increased to 50 in August

By Courtney Schlisserman

Aug. 31 (Bloomberg) — A measure of U.S. business activity rose more than forecast in August, adding to signs that the economy may be entering a recovery.

The Institute for Supply Management-Chicago Inc. said today its businessbarometer increased to 50, the highest level since September, from 43.4 in July. Readings below 50 signal a contraction.


Posted in Economic Releases | 2 Comments »

India’s Growth Accelerates for First Time Since 2007

Posted by WARREN MOSLER on 31st August 2009

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India the next engine of growth where deficit spending remained high and the recession was largely averted?

All they need to do is let themselves become a large net importer.

India’s Growth Accelerates for First Time Since 2007

By Cherian Thomas

Aug. 31 (Bloomberg) — India’s economic growth accelerated
for the first time since 2007, indicating the global recession’s
impact on Asia’s third-largest economy is waning.

Gross domestic product expanded 6.1 percent last quarter
from a year earlier after a 5.8 percent rise in the previous
quarter, the Central Statistical Organisation said in New Delhi
today. Economists forecast a 6.2 percent gain.

India joins China, Japan and Indonesia in rebounding as
Asian economies benefits from more than $950 billion of stimulus
spending and lower borrowing costs. India’s recovery may stall
as drought threatens to reduce harvests and spur food inflation,
making it harder for the central bank to judge when to raise
interest rates.

“The weak monsoon has complicated the situation for the
central bank,” said Saugata Bhattacharya, an economist at Axis
Bank Ltd. in Mumbai. “Poor rains will hurt growth and stoke
inflationary pressures as well.”

India’s benchmark Sensitive stock index maintained its
declines today, dropping 1 percent to 15755.33 in Mumbai at
11:12 a.m. local time. The yield on the key 7-year government
bond held at a nine-month high of 7.43 percent, while the rupee
was little changed at 48.86 per dollar.

Before the rains turned scanty, the Reserve Bank of India
on July 28 forecast the economy would grow 6 percent “with an
upward bias” in the year to March 31, the weakest pace since
2003. It also raised its inflation forecast to 5 percent from 4
percent by the end of the financial year. The key wholesale
price inflation index fell 0.95 percent in the week to Aug. 15.

‘Recovery Impulses’

The central bank’s Aug. 27 annual report said withdrawing
the cheap money available in the economy would heighten the risk
of weakening “recovery impulses,” while sustaining inexpensive
credit for too long “can only increase inflation in the

As the global recession hit India, the central bank
injected about 5.6 trillion rupees ($115 billion) into the
economy, which together with government fiscal stimulus amounts
to more than 12 percent of GDP.

China’s economic growth accelerated to 7.9 percent last
quarter from 6.1 percent in the previous three months, aided by
a 4 trillion yuan ($585 billion) stimulus package and lower
borrowing costs. China and India are the world’s two fastest
growing major economies.

Interest Rates

The Reserve Bank of India kept its benchmark reverse
repurchase rate unchanged at 3.25 percent in its last monetary
policy statement on July 28 and signaled an end to its deepest
round of interest-rate cuts on concern that inflation will
“creep up” from October. The next policy meeting is scheduled
for Oct. 27.

Manufacturing in India rebounded to 3.4 percent growth in
the quarter ended June 30 after shrinking 1.4 percent in the
previous three months. Mining rose 7.9 percent compared with 1.6
percent while electricity growth almost doubled to 6.2 percent
during the period, today’s statement said.

India’s move to a higher growth trajectory is on course,
Ashok Chawla, the top bureaucrat in the finance ministry, told
reporters in Mumbai.

Drought or drought-like conditions has been declared in 278
districts in India, or 44 percent of the nation’s total, as
rainfall has been 25 percent below average so far in the four-
month monsoon season that started June 1, the farm ministry said
Aug. 27.


Posted in BRIC, Emerging Markets, GDP, Government Spending, Interest Rates | 1 Comment »

In case you thought business economists understand the monetary system

Posted by WARREN MOSLER on 31st August 2009

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Not to mention these CNBC headlines today:

No Need for 2nd US Fiscal Stimulus Package: Survey

August 31 (CNBC) — The U.S. economy does not need a second fiscal stimulus package, instead the government should cut spending over the next two years, according to a survey of business economists released on Monday.

Fed’s Profit from Crisis Loans is $14 Bn

Economists Are Split on Inflation

By Sara Murray

August 31 (WSJ) — Business economists are split on whether the Federal Reserve’s massive infusion of credit into the economy will lead to inflation in the next couple of years.

Half of 266 members of the National Association for Business Economics surveyed in August said the Fed’s decisions to increase the money supply won’t lead to inflation in the next few years, the NABE said Monday. Some 41% disagreed, though, citing “lagged effects of policies now in effect,” “monetization of the debt” and “ineffective exit strategy” as their primary concerns.

Recent debate over the Fed’s strategy for reducing its large holdings of government bonds and mortgage-backed securities has centered on timing. If the Fed waits too long to bring the programs to a close, the economy runs the risk of inflation. But if it attempts to wind them down too soon, while the economy is still weak, it could hinder the recovery.

As for U.S. fiscal policy, 35% said it was “about right,” the highest percentage to say so since March 2008. But 50% of the economists surveyed said fiscal policy was too stimulative.


Posted in Fed, Inflation | No Comments »

NYC 2006 acquisition of Stuyvesant Town

Posted by WARREN MOSLER on 31st August 2009

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Thanks, looks like we could use a full payroll tax holiday and a lot of per capita revenue sharing ASAP.

Pretty much as expected, GDP muddling through around flat or modestly positive, supported by the automatic stabilizers and a bit of proactive fiscal support dribbling in, but not enough to keep unemployment from rising as GDP gains lag productivity gains.

This can be ok for financial markets and equities, which are now well off the bottom, but depressing for most of the voters.

NYC is dynamic and seems to adjust relatively quickly. Finances are getting reorganized, and prices are adjusting to current market conditions, as life there moves on and doesn’t look back.

Tishman Speyer’s 2006 acquisition of Stuyvesant Town for $5.4 billion apparently is about to turn terminally sour. The “biggest deal for a single American property in modern times” which never managed to be profitable from day one, is on the verge of completely exhausting reserve accounts tied to $3 billion of securitized accounts.The premise – take the 11,227 rent-stabilized u,nits apartment complex and convert them to market-rate. Alas, the timing could not have been worse due to an implosion in the NY rent market, coupled with legal difficulties – to date only 4,350 of the units have been converted to market rate, while the remaining rent-controlled units will likely increase in number due to a recent court ruling.

According to RealPoint the original reserve fund which had a balance of $650 million in 2007 when Stuy Town’s debt was first securitized is down to a meager $49.7 million. The origianal reserve fund set consisted of a $190 million general reserve as well as a $60 million replacement reserve, both of which have been depleted, as well as a $400 debt-shortfall service fund, which has now declined to just over 10% of its initial balance.

The reserve fund was drawn down by $7 million month to date, versus $13.3 million in July and $19.6 million in June, with an average decline in the reserve fund of $11.3 million per month. At this rate Stuy Town’s reserves will be completely wiped out in four months, sometime in December.

To demonstrate what a colossal failure Tishman and Blackrock’s assumptions have been from the very beginning, the property has a $23.8 million monthly debt service, while on the revenue side, according to first quarter data, the property generates $136.5 million in annual cash flow, or $11.4 million monthly, a $12.4 million monthly shortfall (a cap rate of about + infinity).

And to demonstrate just how bad (and getting progressively worse) real estate in New York is, midtown’s Dream Hotel, owners Hampshire Group have notified special servicer LNR Group, that it wold not make any more payments on the $100 million loan against the property. According to CREDirect, in 2008 the property’s cash flow dropped 11 percent to $7.8 million as occupancy fell 3% to 84%, with a DSCR drop from 1.41x in 2007 to 1.26x. Things have since deteriorated, not just for the now defaulted Dream, but for a vast majority of all other New York hotels who have been struggling with declining bookings and room rates.


Posted in Deficit, GDP, Government Spending | No Comments »


Posted by WARREN MOSLER on 31st August 2009

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Nothing hopeful here:

The DPJ won power for the first time yesterday on a pledge to support households battered by two decades of economic stagnation. Hatoyama has also committed to avoid increasing government bond issuance, leaving his main initiative as a redistribution of the former Liberal Democratic Party government’s stimulus efforts, which focused on public works.


Posted in Government Spending, Japan, Political | No Comments »

St. Louis Fed Pres Bullard

Posted by WARREN MOSLER on 28th August 2009

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Bullard is indicating rates should be left low until the Fed’s balance sheet is reduced.

This would mean longer rates would likely go higher before the Fed allows short rates to rise.

(It also shows he’s very confused on monetary operations but that’s a different issue.)

Fed officials say must not ignore exit policy

By Alister Bull

St. Louis Federal Reserve Bank President James Bullard said the central bank would need to think about scaling back its economic support in the months ahead, while Richmond Fed chief Jeffrey Lacker said it should weigh whether to carry through with all of its current stimulus plans.

“As we head to 2010, the Fed will shift its focus to implementing an exit strategy in order to avoid any potential inflation threats to the economy,” Bullard said in prepared remarks.

“Monetary policy is still very accommodative and the (Fed) intends to keep the fed funds target near zero for an extended period,” he said, according to a summary of his presentation on the economic outlook at the College of Business at the University of Arkansas-Little Rock.

Bullard emphasized that the exit ought to mean allowing the Fed balance sheet to shrink, perhaps by selling assets that it purchased this year to counter the worst recession since the Great Depression, rather than speedy rate hikes.


Posted in CBs, Fed | 4 Comments »


Posted by WARREN MOSLER on 27th August 2009

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Waiting to see if Brown gets any credit for his fiscal policies which in fact are responsible for stopping the slide.

As in the US, monetary policy has been contractionary with lower rates hurting demand from savers and borrowers gaining
little or nothing, and lenders replenishing lost reserves.

And QE per se does nothing apart from altering the term structure of rates and modestly reducing bank earnings.

  • British house prices rise again in August
  • City regulator seeks to deflate financial sector with global tax
  • U.K. Retail Sales Index Falls, Outlook Improves, CBI Says
  • U.K. Business Investment Fell Most Since 1985 in Second Quarter
  • U.K. Two-Year Notes Rise as Chinese Curbs Boost Safety Demand
  • U.K. Population Hits 61.4 Mln; Immigration Eases


Posted in UK | 5 Comments »


Posted by WARREN MOSLER on 27th August 2009

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The FDIC gets the funds from the treasury as needed and then tries to tax the banks to pay it back.

All that does is raise the marginal cost of credit via a transfer to the govt.

Which reduces aggregate demand. Just one more example of a confused govt policy.

FDIC’s Coffers Are Depleted, It May Need Help

August 27 (AP) — The coffers of the Federal Deposit Insurance Corp. have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.

That has happened only once before — during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest.

Small and midsize banks across the country have been hurt by rising loan defaults in the recession. When they fail, the FDIC is responsible for making sure depositors don’t lose a cent. It has two options to replenish its insurance fund in the short run: It can charge banks higher fees or it can take the more radical step of borrowing from the U.S. Treasury.

None of this means bank customers have anything to worry about.

The FDIC is fully backed by the government, which means depositors’ accounts are guaranteed up to $250,000 per account.
And it still has billions in loss reserves apart from the insurance fund.


Posted in Banking, Government Spending | No Comments »


Posted by WARREN MOSLER on 26th August 2009

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This doesn’t look good:

This does not look good

  • US RevPAR declined 16.7% last week versus a year ago, the largest decline since early July
  • Occupancy fell 7.2% to 60.4% and average room rates fell 10.2% to $95.70
  • Higher quality and urban segments continue to lead the decline


Posted in Housing | 3 Comments »

FDIC Sets Standards for Private-Equity Firms to Buy Shut Banks

Posted by WARREN MOSLER on 26th August 2009

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So why should capital ratios be a fuction of who the shareholders are?

FDIC Sets Standards for Private-Equity Firms to Buy Shut Banks

By Alison Vekshin

August 26 (Bloomberg) — The Federal Deposit Insurance Corp. approved guidelines for private-equity firms to buy failed banks, opening a growing pool of failing lenders to new buyers and limiting costs to the agency and the industry.

The FDIC board approved the rules today at a meeting in Washington, agreeing to lower to 10 percent from the proposed 15 percent the Tier 1 capital ratio private-equity investors must maintain after buying a bank.


Posted in Banking | 4 Comments »

Money as a Public Monopoly

Posted by WARREN MOSLER on 26th August 2009

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Money as a Public Monopoly by L. Randall Wray


Posted in Banking, Currencies, Deficit, Government Spending | No Comments »

Levy Policy Brief

Posted by WARREN MOSLER on 26th August 2009

The Levy Economics Institute of Bard College
Public Policy Brief
No. 103, 2009

James K. Galbraith

Beginning page 9:

Warren Mosler picked up on the theme of human resource
utilization and full employment in a particularly useful way.
Mosler suggested that stabilization of employment and prices is
akin to a buffer stock—something to which surpluses can be
added when demand is low, and drawn down when it is high.
Normally, a buffer stock works on a price signal: the authorities
agree to buy when market prices are below the buffer and to sell
when they are above. In this way, prices stabilize at the buffer
price. The Strategic Petroleum Reserve is potentially a good
example, though political decisions have prevented it from being
used as it should be.

The problem with most commodity buffers is elasticity of
supply: create a buffer stock in wool, and suddenly it pays to raise
sheep. But this problem is cured if the buffer stock is human
labor, which cannot be reproduced quickly. A program that provides
a public job at a fixed wage for all takers functions exactly
like a buffer stock, stabilizing both total employment and the
bottom tier of the wage structure. People can move in and out of
the buffer as private demand for their services varies. Meanwhile,
the work done in the buffer—the fact that people are working
rather than receiving unemployment insurance—helps keep the
buffer “fresh.” Private employers like hiring those who already
work, and will prefer hiring from the federal jobs program rather
than from among those who remain unemployed.

The point is: the problem of unemployment is easily cured,
without threat of inflation. It is merely sufficient to provide jobs,
at a fixed wage, to whoever wants them, and to organize work
that needs to be done. Such work should be socially useful and
environmentally low impact: from child care to teaching and
research, to elder care to conservation to arts and culture. Where
possible, it should contribute to global public and knowledge
goods. It should compete as little as possible with work normally
done in the private sector; for instance, by serving those who
cannot afford private sector provision of teaching and care. The
point is not to socialize the economy but to expand the range of
useful activity, so that what needs doing in society actually gets
done. The barrier to all this is simply a matter of politics and
organization, not of money.

The effect, nevertheless, would be to raise all private sector
wages to the buffer-stock minimum (say, $8/hour in the United
States), while eliminating the reserve of unemployed used to
depress wages in low-skilled private sector industries. There will
be no pressure to raise wages above the buffer threshold, since private
employers providing higher wages can draw on an indefinitely
large workforce willing, for the most part, to move from the
buffer to the private sector in return for those wages. Hence, the
program is not inflationary. There is therefore no excuse for waiting
a year or two years on the assumption that unemployment
will cure itself, and every reason to believe that at the end of such
a policy of “hopeful waiting,” the discovery will be made that the
problem has not been cured.

Posted in Comodities, Employment, Oil | 4 Comments »

US Debt Clock

Posted by WARREN MOSLER on 26th August 2009

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The name needs to be changed to the ‘non govt savings clock’ asap!


Posted in Deficit, Government Spending | No Comments »

Number of new homes in inventory

Posted by WARREN MOSLER on 26th August 2009

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(Sent ahead of the 10am number)

The actual homes in inventory, as per the attached graph, is exceptionally low, particularly on any kind of population adjusted number.

And with actual inventories this low, much of what’s left may be undesirable for any number of reasons.

While orders for new homes can pick up, it’s unlikely sales out of inventory can show
substantial gains as there doesn’t seem to be much inventory to buy.

But even a modest increase in sales is likely to drop the ‘number of months’ inventory data.


Posted in Housing | 3 Comments »

Bean Says Impact of BOE Bond Purchases ‘Moderately Encouraging’

Posted by WARREN MOSLER on 26th August 2009

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Bean does see the interest rate channel but misses the savings/income channel, and has it all wrong regarding the fact that causation runs from loans to deposits and reserves, not from reserves to loans. And he’s reading what happened in Japan incorrectly as well.

Also, the second article misses the point as well. The rising domestic savings/debt pay downs is being ‘funded’ by govt. deficit spending. The deficit spending, if sufficient, allows the consumer to both increase savings and spending. So the fact that savings went up says nothing about what consumption might have done.

Bean Says Impact of BOE Bond Purchases ‘Moderately Encouraging’

August 25 (Bloomberg) — “The initial responses in the United Kingdom to these measures (purchases of government and corporate debt) have been moderately encouraging,” BOE Deputy Governor Charles Bean said in a speech. Gilt yields “appear to be some 50 to 75 basis points lower than they would otherwise be. And there are also signs of beneficial effects on conditions in the relevant corporate credit markets.” “It is very early to draw conclusions on the efficacy of these measures, as the transmission lags through to nominal spending are likely to be quite long,” Bean said. “When banks are trying to de-leverage, ,such additional reserves are more likely to be hoarded” Bean said. “That appears to be what happened during the Japanese experiment with quantitative easing in the early part of this decade and a similar response is to be expected from banks at the current juncture.”

U.K. Home Lending Drops as Consumers Cut

August 25 (Bloomberg) — U.K. net mortgage lending slumped to the lowest in almost nine years as consumers used gains from lower interest rates to pay down debt rather than boost spending.

“It could be that people on low interest rates are keeping their mortgage payments the same to reduce their borrowing,”

Vicky Redwood, an economist at Capital Economics Ltd. said.

“It’s good news if you think consumers have taken on too much debt, but it’s bad news for the economy in the short term, as it means that money is not feeding back into the economy in increased spending.”

Net mortgage lending at the end of July declined 74 % to 1.64 billion pounds ($2.69 billion) from 6.23 billion pounds in August 2007, the peak of Britain’s decade-long real estate boom, the British Bankers’ Association said yesterday. Mortgage approvals in July rose to the highest since February 2008. The data show new home lending is being outweighed by repayments, according to the BBA.

U.K. consumers’ debt reached a record 1.5 trillion pounds in January, according to the Bank of England. Consumer spending accounts for about 65 % of gross domestic product, while about 20 % of incomes are spent on mortgages, according to Simon Willis, an analyst at NCB Stockbrokers Ltd. in London.

“The household sector is far too highly leveraged,” said Ross Walker, economist at Royal Bank of Scotland Group Plc.

“There’s been a concerted effort to pay back credit cards and mortgages.”

U.K. Rate of Workless Households Increases to Highest in Decade

August 26 (Bloomberg) — The proportion of workless households rose to the highest in a decade in the second quarter as Britain experienced its worst recession in a generation.

The rate increased 1.1 %age points from a year earlier to 16.9 %, the most since 1999 and the biggest increase since records began in 1997, the Office for National Statistics said today. The number of people living in households where no adults work rose by 500,000 to 4.8 million.

Mounting job cuts threaten to hinder Prime Minister Gordon Brown’s prospects less than a year before he has to hold the next general election. Unemployment rose to the highest level in 14 years in the quarter through June, and joblessness is forecast to increase further as the economic slump forces companies to fire workers.

“We expect to see unemployment continuing to rise into the middle of next year and the number of jobless households with it,” said David Page, an economist at Investec Securities in London. “We’re going to have to get used to high levels of unemployment for quite a long time. It’s unlikely the labor market will provide Brown with anything to electioneer on.”

The workless household rate was highest in the northeast of England, at 23 %, with the lowest rate in the east of England at 12.2 %, today’s figures showed.


Posted in CBs, Government Spending, Housing, UK | No Comments »

Bernanke reappointed…

Posted by WARREN MOSLER on 25th August 2009

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Karim writes:

Should help the ‘low for long’ camp…

Yes, he’s an output gap guy.

Unfortunately if I’m right low interest rates without a larger deficit are deflationary and contractionary, and bernanke thinks the opposite.


Posted in CBs, Fed | No Comments »

Roubini again

Posted by WARREN MOSLER on 24th August 2009

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Just in case you thought he knew how the monetary system works.

The nonsense about the penalty for deficit spending being anything but possible inflation makes him part of the problem:

“There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote. “Policy makers are damned if they do and damned if they don’t.”

Government and central bank officials may undermine the recovery and tip their economies back into “stagdeflation” if they raise taxes, cut spending

Yes, that would reduce demand and is a deflationary bias.

and mop up excess liquidity in their systems to reduce fiscal deficits,


Roubini says. He defines “stagdeflation” as recession and deflation.

Market Vigilantes

Those who maintain large budget deficits will be punished by bond market vigilantes, as inflationary expectations and yields on long-term government bonds rise and borrowing costs climb sharply, he wrote. That will in turn lead to stagflation, Roubini said.

Mainstream economics is a disgrace


Posted in Defecit, GDP, Government Spending | 26 Comments »

Valance Gasoline Demand Chart

Posted by WARREN MOSLER on 24th August 2009

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This chart shows demand for gasoline is still down year over year, even with substantially lower prices.

It is also another indication of the ‘soft spot’ in demand that may have hit a couple of months ago.


Posted in Comodities, Energy, Oil | No Comments »

WSJ–economists on stimulus

Posted by WARREN MOSLER on 24th August 2009

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Mainstream economics is largely a disgrace

Economists Give Fiscal Stimulus Mixed Grades

Jon Hilsenrath

August 22 (WSJ) — Economists at the Federal Reserve’s Jackson Hole Symposium in Wyoming gave the Obama administration’s fiscal-stimulus program a mixed review, saying it wasn’t as well targeted as it could have been and pointing to the challenges of balancing stimulus against long-term deficit worries.

In a paper being presented Saturday at the conference, Alan Auerbach of the University of California at Berkeley and William Gale of the Brookings Institution noted problems the U.S. had in the 1930s and Japan had in its 1990s “Lost Decade” making fiscal policy work.

“The remarkable fact is that sustained fiscal policy expansion was not attempted in either episode,” the economists wrote, in part because policy makers were focused on balancing budgets even as they tried to pump money into the economy.

The U.S. government, for instance, raised taxes in 1932, as did state governments, and a round of fiscal restraint hit in 1936 and 1937. “By the end of the decade, even with output well below potential and the unemployment rate at 17%, the contribution of fiscal policy to aggregate demand in 1939 was 0.6 percentage points larger than in 1929,” they note. In Japan, spending was often offset by tax increases, in part due to concerns about the fiscal outlook.

They spend less time detailing their specific criticisms of the 2009 stimulus plan, but offer up several critiques: tax cuts will stimulate demand but could have been designed better, they say. Research has shown that lower-income, liquidity-constrained households have a higher tendency to consume after getting tax cuts than higher income households, but the authors don’t detail how the program could have been pointed more in their direction. Moreover, the authors write, spending wasn’t well-targeted. “Government investments were part of a longer-term Obama agenda and are probably not best characterized solely as stimulus,” they say.


Posted in Deficit, Government Spending | No Comments »