Thoughts on the economy

Devin has a great post on the economy. You should read the whole thing.

There is one area in which I strongly disagree with him. He says:

The stimulus was actually much too small. The stimulus size should reflect the size of the fall in the net paper wealth. A stimulus of $15 trillion would have jolted the economy back to life quite quickly. . . .

The optimal path to a quick recovery would be to pass a law that multiplies the face value of every FDIC backed account, every money market fund account, and every treasury bill, by 50%. So that you’re not just benefiting the wealthy, maybe also mail a check to every American for $15K.

I believe that the stimulus prolongs the economic pain. As Carlyle said, "Great is Bankruptcy: the great bottomless gulf into which all Falsehoods, public and private, do sink, disappearing; whither, from the first origin of them, they were all doomed." A huge stimulus prolongs the falsehoods by keeping the bankrupt in operation. This is precisely the opposite of what we need to occur if we are going to "recover" in any meaningful sense of the word.

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10 Responses to Thoughts on the economy

  1. I strongly disagree that the type of stimulus I proposed would prolong the crisis. I also disagree that businesses that were producing real value should suffer and go bankrupt because USG doesn’t know how to manage a currency. Many businesses are suffering and going bankrupt because of deflationary pressures, not because they are failing at producing goods people want. It’s the responsibility of a currency issuer to prevent deflation, and my stimulus was a plan for doing so in a fair manner. I debate this issue at length with a Rothbarian in this comment thread. I would encourage you to read the thread (I’m bokonist).

    • Foseti says:

      I’ll read that and report back. Surely you recognize that *some *bankruptcy is necessary and restorative though, right?

      • Yes, of course some bankruptcy is necessary.

        Let’s consider two scenarios.

        Scenario a): Counterfeiters had printed enormous money to buy McMansions. When the counterfeiting is discovered and stopped, construction companies who previously built McMansions will go bankrupt. They’ll have to find new work. Preventing them from going bankrupt would only prolong the realloction of productive forces.

        Scenario b) Imagine that a software glitch in the banking system wiped out 25% of everyone’s paper wealth. Naturally, people would spend less in order to restore their balance sheet. Spending less means less demand for goods, which means perfectly productive companies would lay people off. Perfectly good factories would fall idle. The natural response to scenario b) would be to renominate everyone’s bank accounts to restore the old paper wealth value. Demand would return and factories would hum with activity.

        In the real world, scenario a) and b) happened at the same time. The answer is to restore the balance sheet of ordinary Americans who do not have any special blame for the crisis. When balance sheets are restored, consumer spending can return to normal levels, but in non-distorted fashion. The industries that made money off the distortions of the last few years (housing, finance) should be allowed to contract and go bankrupt. But the industries that are producing real value will have enough consumer demand to flourish.

      • Foseti says:

        Interesting stuff. I agree that a) and b) happened at the same time. Your plan, however, only seems targeted to fix b), leaving a) potentially unsolved.

      • For a), I would allow the general bailout of main st (backstopping the money market funds, increasing the FDIC limits) but I would not bail out any Wall St. firm. No TARP, no AIG bailout. Banks would be allowed to fail, enter recievership, equity holders wiped out, and then re-privatized, under the structure I proposed in my banking reform blog post.

  2. red says:

    Devin,
    You make some excellent arguments but I wonder of our ability to make them happen. So lets say we give out money to a set group of people. This immediately creates a new distortion to the economy and rewards those who created the problems in the first place and re-enforcing their behavior. Remember, once a bubble is rewards everyone has an incentive to create a new bubble.

    On top of this we have a large group of people who will manipulate and influence the process to obtain a great deal of free money for themselves and thus benefit unfairly from the pay out. Corruption is always part of any political process and make no mistake, this will be a political and not a rule of law process. These type of manipulations will result in further incentives to create yet another bubble and cause the average Joe to view the entire country with disgust. Average people giving up on money is the fastest way to causes massive inflation.

    I don’t doubt your solutions would likely work if they could be perfectly implemented. Unfortunately we are far from perfect and we are incapable of making such a system work.

    What the Austrian system is arguing for is not a political resolution but rather a solution through the largely impartiality rule of law. We are best served when we use rules and laws that everyone can understand instead of perfect systems that humans are unable to run correctly.

    • Red-

      I am not a policy aide for the Obama administration. The point of my essays is not to influence current events. The point is to create a foil by which we can judge actual events.

      My solutions do not require perfection or angel leaders to work. If the government was half as well run as the company where I work, it could and would pull off my proposed policies without much trouble. But of course, our political system is not well run, and thus you can notice the enormous delta between what I propose in my essay and what is actually happening.

      The Austrians have some very good insights. But fractional reserve has been a part of our banking system for over three hundred years. No industrial society has ever run on a pure Austrian system. There has always been fractional reserve and government intervention in the banking sector. Maybe an Austrian system would work quite nicely. But if you think my solution is unrealistic, an Austrian solution is a 100X more unrealistic and difficult to pull off. To make an analogy – linux may be a better server than Windows. But if you have an enterprise running thousands of windows server, you’re probably a lot better just installing the latest Windows patch than rewriting the entire thing to use Linux.

      If you wish to entertain yourself with an intellectual exercise, try and figure out exactly how the U.S. could convert itself from its current banking system to an Austrian system without leaving the entire thing in smoking pile of rubble.

      • Foseti says:

        Devin, I agree that Austrian economics are untried, however, there isn’t exactly a long track record of fiat currencies that are not tied to gold and/or silver (and the existing track record isn’t pretty).

      • Timmy says:

        You are assuming that the smoking pile of rubble isn’t coming anyway. A system which requires/allows less “government intervention” and requires more discipline from the financial sector seems like a good replacement. The fact Austrian economics are untried makes them preferable to an approach that has been tried and failed.

        In suggesting that the bailouts could be made to work, if only the right people were in charge, you sound rather like the apologists for the Soviet Union (stimulus spending didn’t fail us, we failed stimulus spending).

      • Timmy-

        If you have the right people in charge my solution would work. If you don’t have the right people in charge, they sure as hell are not going to choose the Austrian solution. The degree of talent and benevolence required to pull off my solution, and get a reasonably functional banking system without an economic collapse, is much less than the degree of talent and benevolence required to transition to an Austrian system.

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