Monday, April 6, 2009

Thinking about aggregate demand

The blogosphere is chockerblot with detail.  Here, I am going to try to get the Big Picture in as few words as possible:

  1. The reason the banks are not lending is weak credit demand, not toxic assets on their balance sheets.  C&I lending declined after the last two recessions and will do so again this time.
  2. The reason to put the bad banks into receivership and for for the bad banks’ creditors to take a big hit is that the U.S. has too much debt.  And the more bad real estate-related private debt is made a public obligation of the federal government, the faster the U.S. becomes a failed and bankrupt state.  Housing prices are not coming back… time to boot the oligarchs.
  3. The best way to partially replace lost consumption demand is through direct transfers of a poverty-level dole to the unemployed combined with the provision of health care services to avoid greater health costs in the future.  This will partially sustain the derived investment demands generated by consumer spending, which collapsed last fall (cars piling up at ports, etc.).
  4. There is no need for a tax cut for Americans of high enough status or lucky enough not to lose their jobs.
  5. The Bush II tax cuts on the highly compensated should be rolled back immediately.  And the “hedge fund exemption” should be wiped out.
  6. Other government spending increases should be restricted to projects that can be considered “investment spending” or capital formation, including human capital, such as public sector infrastructure or education.  The military budget should be pared back by several hundred billion dollars over time and the spending redirected to productive domestic investment.
  7. The 10-year budget should be brought into balance.  Here I agree with the Europeans, who are content to take care of their people and not to worry about economists’ figment of an “output gap,” and who have, in the case of the Germans, a visceral memory of hyperinflation.  The ever-bellicose United States, with its bloated military budget, seems to be daring the world to sell off the dollar, bankrupt us, and “provoke” us into occupying the Middle East and simply taking the oil that we are so addicted to.

Monetary policy meanwhile should remain as accommodative as possible while keeping inflation to 5% or less.

The world is in the middle of a transition to “the end of the growth era,” and the sooner we get that, the better off we all will be.  It’s a major adjustment—the largest in human history.

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