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February 4, 2013

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 15 Dec 2012 12:06 AM PST
Posted: 14 Dec 2012 01:53 PM PST
Laura Tyson echoes the message at the end of the post below this one (here too):
The Trade-Off Between Economic Growth and Deficit Reduction, by Laura D'Andrea Tyson, Commentary, NY Times: ...After three years of recovery, the economy is still operating far below its potential and long-term interest rates are hovering near historic lows. Under these circumstances, the case for expansionary fiscal measures, even if they increase the deficit temporarily, is compelling.
A recent study by the International Monetary Fund finds large positive multiplier effects of expansionary fiscal policy on output and employment under such circumstances. ... The rationale for expansionary fiscal policy is particularly compelling for federal investment spending in areas like education and infrastructure...
The economy does not need an outsize dose of fiscal austerity now; it does need a credible deficit-reduction plan to stabilize the debt-to-G.D.P. ratio gradually as the economy recovers. As I contended in an earlier Economix post, the plan should have an unemployment-rate target or trigger that would postpone deficit-reduction measures until the target is achieved. ...
The goal of deficit reduction is to ensure the economy's long-term growth and stability. It would be the height of fiscal folly to kill the economy's painful recovery from the Great Recession in pursuit of this goal.
Posted: 14 Dec 2012 10:10 AM PST
John Makin of the American Enterprise Institute says that "trillion-dollar deficits are sustainable for now, unfortunately." I don't agree with everything he says -- the "unfortunately" in the title for one, his fear of inflation and the increase in debt servicing costs that come with it for another (though he is not saying inflation is just around the corner like some others have claimed) -- but I appreciate that he is trying to play it straight rather than support the nonsense other Republicans have tried to foist upon the public:
Trillion-dollar deficits are sustainable for now, unfortunately, by John H. Makin: Congress is attempting, unsuccessfully, to reduce "unsustainable" deficits and debt accumulation by engineering "crises" that are meant to force politically challenging action on spending cuts (entitlements) and tax increases (loophole closing, higher tax rates on the "rich"). The mid-2011 debt-ceiling crisis fiasco and the upcoming year-end "fiscal cliff" are striking examples of this dangerous tactic. ...
The tactic of threatening to go over the fiscal cliff will fail ... because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little "sky is falling" approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised... Two percent inflation means that the real inflation-adjusted cost of deficit finance averages –1.5 percent...
The debt-to-GDP ratio is not a reliable guide for gauging the sustainability of deficits, notwithstanding the Reinhart and Rogoff warning...
The United States Is NOT Greece ... The hyperbolic claim that the United States is becoming Greece because of the absence of dramatic progress on deficit and debt reduction is unfortunately ridiculous. ...
The real danger facing American policymakers is, contrary to the cries of imminent "crisis" and "unsustainable" deficits and debt accumulation, the sustainability of trillion-dollar deficits. Eventually, probably much later than most pundits claim if the experience of Japan is any guide, the Federal Reserve's monetary accommodation of US government debt accumulation, largely aimed at sustaining the growth of outlays on entitlements that do not support economic growth, will cause inflation to rise. ...
Once inflation rises and the Fed is forced to tighten, borrowing costs for both the government and private sectors will rise. Growth measured in real, constant-dollar terms will fall relative to real, inflation-adjusted interest rates along with tax revenues, and the US debt-to-GDP ratio will rise rapidly. ...
We certainly disagree on how to solve the problem, i.e. whether to rely upon tax increases or cuts to important social programs, and on the pace of deficit reduction (though he calls for more gradual reduction than most), but I appreciate his willingness to acknowledge, as Krugman noted today, that "We are not having a debt crisis."
(I should also note, yet again, that with a "real inflation-adjusted cost of deficit finance [that] averages –1.5 percent," we ought to be investing heavily in critical infrastructure to stimulate output and employment, and to increase our future growth prospects.)
Posted: 14 Dec 2012 09:34 AM PST
Tim Duy:
Solid Bounce in Industrial Production, by Tim Duy: Industrial production posted a solid gain in November, more than offsetting the Sandy-impacted October decline:
Ip1
This means that what had been the best clear top in a recession indicator is a lot less clear. A solid blow to ECRI Co-Founder Lakshman Achuthan's claim that the US slipped into recession in the middle of the year.
I noticed this quote from Bloomberg:
"There is this continued tug of war for manufacturing," said Aneta Markowska, chief U.S. economist at Societe Generale in New York, who forecast a 1.2 percent gain in manufacturing output. "Consumer spending is still looking pretty good so that's helping support production. On the other hand, business demand for things like capital equipment, machinery is pausing."
That vexing consumer spending question again - pretty good, on shaky grounds, or a pillar of strength? I would say the middle ground holds, as least on the basis of core retail spending in November:
Retail
Of course, on a year-over-year basis, the deceleration from the earlier this year remains evident:
Retail2
It is worth remembering that at least one consumer sector that is an important element of manufacturing activity remains solid:
Autos
I have trouble imagining IP rolling over and heading downward in any meaningful fashion when auto sales are still on the upswing. Moreover, improving residential construction activity will provide support to suppliers of related manufactured goods:
House
Not to say the economy is growing gangbusters, but I think that Markoswka is broadly correct. The external sector and domestic business spending are a drag on some sectors of manufacturing, but other sectors are still growing. The upshot is that the decline in core manufacturing orders has yet to manifest itself in a broad decline in industrial production:
Ip2
Bottom Line: Weaker than we would like to see, but news of the economy's demise remains premature.

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