The Bureau of Labor Statistics released unemployment figures for October 2008 this morning; the results cannot be described as anything but dismal. The official unemployment rate rose to 6.5%.
Alas, things are much worse than these figures indicate. There were also increases in both the number of discouraged workers (who do not get counted in official unemployment figures) as well as the number of people working part-time but would like full-time employment (these people are counted as fully employed). With the large number of layoffs recently announced by many firms, things are going to get much worse over the coming months.
How bad things get now depends on Congress. The Federal Reserve has done its job of cutting interest rates again and again over the past year. It is time for Congress to pass a large fiscal stimulus bill. The focus needs to be spending programs rather than tax cuts. What it does is less important than the fact that it does something, does something very soon (this month, rather than early next year when the Congress and the new administation is in place), and it does something large (additional government spending well over $100 billion, in an attempt to create several million jobs).
My first strong preference is for infrastructure spending. Let's repair the roads and bridges in the US that are crumbling and need to be repaired soon, no matter what the state of the economy. Also, given our energy and environmental problems, let's work on developing a decent rail system in the US.
I live on the New Jersey shore around an hour or so drive to both New York and Philadelphia. There is a train line to New York that is too slow and requires a train switch because the entire line to New York has not yet been electrified. Getting to Philadelphia by train is an exercise in absurdity. It requires going north almost to New York and then getting another train heading south to Philadelphia. If everything works well (the trains are on time and the connection is good), I can do it in 3-4 hours. If not, the train to Philadelphia takes 4-5 hours. We can and we need to do much better than that.
My second preference is to have the federal government just give the money to state and local governments so that they do not have lay off employees or raise taxes to make up for severe budget shortfalls. This has the virtue of being quick and it is easy. And it will save important jobs that are related to public safety and the ability of government to function in difficult economic times.
Friday, November 7, 2008
Thursday, October 16, 2008
John Kenneth Galbraith and Our Great Crash
John Kenneth Galbraith died in April 2006. Had he lived, he would have been 100 on October 15th.
Galbraith taught economics at Harvard, and advised several Democratic Presidential candidates and Presidents.
President Kennedy appointed Galbraith Ambassador to India. From there he made several trips to Vietnam and wrote to the President that the US should get out of Southeast Asia. We now know that Galbraith was successful in his efforts, and Kennedy planned to withdraw from Vietnam following the 1964 election. Alas, Galbraith could not persuade President Johnson.
But economic policy rather than foreign policy was where Galbraith made his mark. He was fascinated by the recurring financial follies in history, and became well-known for his work on the 1929 stock market crash.
The Great Crash 1929 documents the factors leading to the market bubble, its crash, and its major consequence, the Great Depression.
According to Galbraith, four problems in the 1920s led to the crash and then turned it into a depression-- an unequal distribution of income, corporate fraud, a financial system lacking regulation and oversight, and poor economic policy. These exact problems plague us now.
Galbraith was clear that great inequality breeds financial speculation. When the wealthy have more money than they know what to do with, they willingly gamble with it. Those not so well off, and who aspired to great wealth, follow the leaders and see speculation as the way to climb the economic ladder.
Inequality also means that middle-class households, which spend most of their income, receive too little income. This greatly reduces the spending necessary for robust growth.
Inequality today is nearly as great as during the 1920s. However, things are worse in one respect. During the 1920s, the middle class had little access to credit. Today the middle class is deeply in debt and must repay their debt with interest; this money they cannot spend, contributing to recessionary pressures.
Galbraith blamed corporate fraud and failed government oversight for causing the bubble. In the 1920s, failure to regulate buying stocks on margin led to more and more speculation. In the 2000s, there was a failure to regulate home purchases with debt. Naive optimism led people to believe that home prices could only go up.
Lacking oversight, financial institutions made home loans in the 2000s that could not possibly be repaid. In the old days, this would hurt financial institutions, since they would incur the costs from bad loans. But in the modern era of finance, loans are immediately sold and origination fees earned. No matter how bad the loan, banks could make money.
In both the 1920s and 2000s, excessive debt created great bubbles that could not be sustained forever. And in both cases, the ensuing crash led to bank runs, the lack of credit, and serious economic problems on Main Street.
Finally, in the 1930s, belief in the wisdom of balanced budgets kept the government from doing what was necessary to reduce the severity of the downturn. FDR did develop a spending package to create jobs; but it was too little to really help. Not until World War II did the government spend enough to get the economy moving again.
If he were alive today, what would Galbraith say about our current economic policy?
He probably would have supported the Wall Street bailout plan enacted earlier this month. Galbraith never hesitated from doing what was necessary. He recognized that the government must rescue capitalism from its mistakes. Although not desirable, it was always preferable to the misery of a depression.
No doubt, he would have supported higher taxes on the incomes of the wealthy—believing this contributed to the greed leading to our current problems. With high taxes on those earning millions per year, there is less to be gained from fraudulent and highly speculative activities. Higher taxes on the wealthy also would generate money to fund programs that create jobs for the middle class and the poor.
But Galbraith would have been critical of the policies adopted over the past year in an attempt to stem our financial and economic crisis. Tax cuts are usually ineffective in a crisis because too much of the tax cut gets saved and because tax cuts (unlike government spending programs) don’t create jobs. And he would have been skeptical that interest rate cuts could increase spending by consumers or business firms in a time of crisis.
Galbraith always preferred the stimulus of public works programs—infrastructure, education, and developing alternative energy sources—which directly creates jobs and improves our lives in many ways.
In this time of crisis, we can only hope that Washington remembers the lessons that Galbraith taught during his long, productive life.
Galbraith taught economics at Harvard, and advised several Democratic Presidential candidates and Presidents.
President Kennedy appointed Galbraith Ambassador to India. From there he made several trips to Vietnam and wrote to the President that the US should get out of Southeast Asia. We now know that Galbraith was successful in his efforts, and Kennedy planned to withdraw from Vietnam following the 1964 election. Alas, Galbraith could not persuade President Johnson.
But economic policy rather than foreign policy was where Galbraith made his mark. He was fascinated by the recurring financial follies in history, and became well-known for his work on the 1929 stock market crash.
The Great Crash 1929 documents the factors leading to the market bubble, its crash, and its major consequence, the Great Depression.
According to Galbraith, four problems in the 1920s led to the crash and then turned it into a depression-- an unequal distribution of income, corporate fraud, a financial system lacking regulation and oversight, and poor economic policy. These exact problems plague us now.
Galbraith was clear that great inequality breeds financial speculation. When the wealthy have more money than they know what to do with, they willingly gamble with it. Those not so well off, and who aspired to great wealth, follow the leaders and see speculation as the way to climb the economic ladder.
Inequality also means that middle-class households, which spend most of their income, receive too little income. This greatly reduces the spending necessary for robust growth.
Inequality today is nearly as great as during the 1920s. However, things are worse in one respect. During the 1920s, the middle class had little access to credit. Today the middle class is deeply in debt and must repay their debt with interest; this money they cannot spend, contributing to recessionary pressures.
Galbraith blamed corporate fraud and failed government oversight for causing the bubble. In the 1920s, failure to regulate buying stocks on margin led to more and more speculation. In the 2000s, there was a failure to regulate home purchases with debt. Naive optimism led people to believe that home prices could only go up.
Lacking oversight, financial institutions made home loans in the 2000s that could not possibly be repaid. In the old days, this would hurt financial institutions, since they would incur the costs from bad loans. But in the modern era of finance, loans are immediately sold and origination fees earned. No matter how bad the loan, banks could make money.
In both the 1920s and 2000s, excessive debt created great bubbles that could not be sustained forever. And in both cases, the ensuing crash led to bank runs, the lack of credit, and serious economic problems on Main Street.
Finally, in the 1930s, belief in the wisdom of balanced budgets kept the government from doing what was necessary to reduce the severity of the downturn. FDR did develop a spending package to create jobs; but it was too little to really help. Not until World War II did the government spend enough to get the economy moving again.
If he were alive today, what would Galbraith say about our current economic policy?
He probably would have supported the Wall Street bailout plan enacted earlier this month. Galbraith never hesitated from doing what was necessary. He recognized that the government must rescue capitalism from its mistakes. Although not desirable, it was always preferable to the misery of a depression.
No doubt, he would have supported higher taxes on the incomes of the wealthy—believing this contributed to the greed leading to our current problems. With high taxes on those earning millions per year, there is less to be gained from fraudulent and highly speculative activities. Higher taxes on the wealthy also would generate money to fund programs that create jobs for the middle class and the poor.
But Galbraith would have been critical of the policies adopted over the past year in an attempt to stem our financial and economic crisis. Tax cuts are usually ineffective in a crisis because too much of the tax cut gets saved and because tax cuts (unlike government spending programs) don’t create jobs. And he would have been skeptical that interest rate cuts could increase spending by consumers or business firms in a time of crisis.
Galbraith always preferred the stimulus of public works programs—infrastructure, education, and developing alternative energy sources—which directly creates jobs and improves our lives in many ways.
In this time of crisis, we can only hope that Washington remembers the lessons that Galbraith taught during his long, productive life.
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