About Our Current Failing Economy
One of those who comments here asked why I don't blog about the economic conditions. I am reluctant to do this and say "We can expect this to happen." I don't know what will happen. Also I don't want to use the arcane language and methodology of economists. There are some observations I can make from 50 years of reading about and teaching economics that might help readers themselves decide what to make of it all.
One is about the Federal Reserve and Trump's ridicule of it. Before the virus took hold he consistently berated the F.R. for not lowering interest rates.
The Federal Reserve conducts monetary policy which is the favorite economic tool of conservative Republicans. The F.R. can try to lower interest rates to stimulate the economy and raise them trying to cool it off and prevent inflation. This is a favorite of conservatives because it does not involve government stimulus and avoids the hint of "socialism" that is so often tossed around. In this case the interest rate was almost zero and the F.R. lowed it to virtually zero. I doubt this provides any stimulus at all. I've read that interest rates are the only economic policy that interests Trump. He has borrowed all of his business career and hates paying interest. Currently, the only option is fiscal policy, the policy Republicans most dislike because it involves government spending.
During the Great Depression the unemployment rate was over 20%. It has been under 4% recently. Where I live the office in charge of unemployment benefits said there are more applicants everyday now than their used to be each month. I read some officials guess unemployment will reach 20% again. That seems within reach.
Most readers know Roosevelt started government programs that hired people, the Public Works Administration (WPA) and Civilian Conservation Corp (CCC). They probably helped a little. World War II came along and hired everyone.
It does not seem practical for government to try something like the WPA again. This time it seems like the only solution is to pay unemployed people enough so they can have good housing, buy food and drive a car, quite a bit more than current rates. As things get better the amount paid can be slowly reduced. I don't understand talk of $1,000 for each person or bailing out airlines and other companies. Neither of the latter help the ordinary unemployed person, thus the economy, through the slump.
It will be fascinating to watch politics for the next couple of years. Even though Hoover tried valiantly to find solutions neither his administration nor the Congress had a deep bench. Elections swept Republicans out of office for a long time. With young people being the group most hurt by current problems one would think there will be political support for bigger government.
Having said all of this, I don't claim to know what will happen.
this is a welcome departure from the usual tenor of this blog. for my part I am not economically illiterate. have worked in finance and have taken my share of academic econ courses. so go ahead and use some technical terms, if you will. that said, low interest rates may help a lot of industries but they don't do well for retired old folks. and low rates encourage borrowing: is that a good thing just now? and what about the federal deficit? there are people around who talk about something called Modern Money policy who, at least as I understand them, think that trillion dollar deficits are no big deal. any comments?
ReplyDeleteUnknown "low interest rates encourage borrowing..is that a good thing now."
ReplyDeleteIt would be a good thing is firms actually borrowed. With so much of the economy shut down I can't see why firms would borrow. There is an old saying in economics, "You can't push a string." That means demand for goods and services persuades firms to borrow and invest--pulling a string. With low interest rates they will borrow to make investments with lower returns, expanding the economy, but there has to be at least some opportunity to make some investment work.
"Large Federal debt"
Large debt per se is usually manageable because our economy is so huge. The biggest problem with spending more than revenue is that it screws up thinking of both liberals and conservatives. Liberals want to spend too much on domestic things and conservative want to spend too much on defense. At the moment, there seems some agreement to borrow to offset economic activity and that seems good, at least to me.
an observation. cheap debt can certainly be a boon for business, small business especially. good for expansion/investment and for help over an economic rough spot.. but can't cheap money also be undesirable from an economic point. rather like to man who needs a loaf of bread but finds bread on sale and buys ten loaves instead. inefficient use of resources? opportunity costs and all that. and don't you think that a lot of this sort of thing was going on in our economy prior to COvid-19?
DeleteUnknown "can't cheap money get us over a rough spot."
DeleteIt can help. At least so it appears. In this case money was cheap before the virus so probably it will make no difference. You are right, it may be cheap money can aid inflation.
The thing is, the economy is so complex with so many moving parts it is hard to say for certain what changes cause other changes. There is this assumption in economics that is repeated every other sentence, "all other things remaining unchanged." Economists know all other things do not remain unchanged but it is necessary to state from the outset this assumption so we all know what variable is being discussed.
During the great depression banks argued they could not make loans to farmers because farmers were not depositing much money in banks. Along about that time the Federal Reserve was formed. One man noticed that when the F.R. bought treasury bonds, part of the national debt, banks suddenly had reserve and could make loans. This was the beginning of monetary policy. But, it only works if there is a backlog of people wanting loans.
ah yes, ceteris paribus. my father, as a farmer, lost big in a 1925 bank failure triggered by the agricultural recession of the mid 1920s. small rural banks, of course, were almost totally dependent on the local economy. and there was no FDIC. BTW the Fed came along in 1913-14. it was one to Wilsonian reforms. interestingly also the Hoover and FDR people were struggling to print money to be infused into the banking system in 1932. there was, as you may recall, a run on the banks. people were putting money in their mattresses, taking it out of circulation.
Delete"ah yes.." You are correct, the F.R. in 1913-14, had forgotten. I hope my memory is correct that the realization buying government debt made reserves available happened in the mid 1930's. The term "printing money" is, I'm sure you know, not a meaningful term. When more currency is printed people just deposit it in the bank. "Printing money" is actually "creating money" which what happens when the F.R. buys Treasury Bills. The money, which becomes bank reserves available for to be loaned out, does not exist before the F.R. pays for the T. Bill.
ReplyDeleteOK remember that from econ. in 1932 however was just to keep cash in the economy money supply was running low because folks, in effect, hoarding currency.
DeleteJon, are you at all familiar with the new approach Denmark is using? They are basically planning to freeze the economy, workers cannot be let go and the govt. will pay 75% of their wages. When everything is ready to ramp up again there work force is pretty much ready to work. Don't know the ins and outs of it.....if I can find it I'll send it to you.
ReplyDeleteThank you Jinx. I looked at Denmark--seems like the country has its $hit together.
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