Why this recession might last a while

by on August 24, 2008 at 7:31 am in Economics | Permalink

The column is entitled: "Finding the Mess Behind the Mess."  The key line is:

The fundamental [macroeconomic] problem in the American economy is that, for years,
people treated rising asset prices as a substitute for personal
savings.

After discussing some adjustment problems, here are comments on policy:

One path that is likely to prove
counterproductive is further fiscal stimulus in the form of tax
rebates. Such stimulus can raise consumer spending and bolster the
economy in the short run, but it works – if it works at all – only by
pushing consumers to spend rather than to save. It merely postpones
needed adjustments by providing a grab bag of goodies at exactly the
wrong time.

Here is the conclusion:

Have you ever tried to undo a bunch of tangled wires or cords? If
you don’t pull on the right wires in the right order, the mess becomes
worse. If you pull too hard, the whole thing can break. But if your
first pulls are good ones, the untangling becomes easier with each
move.

That’s like our economy’s situation today. If we expect
too much too quickly, we’ll make matters worse. But there is a way out
of the mess, and it lies in our hands.

Be careful, and start pulling.

I’ve become increasingly interested in how an economy can be "tangled up," a notion I first learned from Axel Leijonhufvud.  The literature on self-organizing critical systems considers this idea, but I don’t think it has been expressed in simple, intuitive form and in a manner that can be integrated with other macroeconomic ideas.

1 odograph August 24, 2008 at 8:16 am

In his google talk, Michael Heller suggests breaking some gridlock in the anti-commons might help this recovery.

That actually makes sense to me. It’s a new kind of “deregulation.”

2 chsw August 24, 2008 at 11:23 am

In a long run scenario and with positive, variable inflation, choosing hard assets (especially real estate) over financial assets may make sense, even with higher price variability of hard assets due to leverage, because of the inflation factor. Basic CAPM combined with an inflation factor.

chsw

3 brainwarped August 24, 2008 at 11:58 am

Can you recommend some papers on your “tangled up” notion? Both by Axel Leijonhufvud and others.

Thanks.

4 David Jinkins August 24, 2008 at 1:06 pm

Isn’t the knot idea just a restatement of the traditional bottleneck argument about barriers to growth. “Pulling the string” is what a government does when it tries to find the constraining barrier. Investment in the wrong type of infrastructure will not help and waste money, possibly making the “knot” worse.

5 odograph August 24, 2008 at 2:16 pm

James, there are a number of reasons companies keep ads open. Some might be willing to hire the perfect person, and leave the welcome mat out for that day. Some like to interview competitor’s staff and ask what they’ve been doing lately. Gross stats on numbers of jobs offered would be good, but if you could get a line on employees placed that would be even better.

The ADP numbers are a pretty good proxy for that: http://www.adpemploymentreport.com

6 blink August 24, 2008 at 3:13 pm

The metaphor is tantalizing but also disconcerting. I wonder: Is the present economy really so delicate that it can be broken by pulling on the wrong wires? If so, it seems the recommendation would be “Don’t touch!† rather than (carefully) “Start pulling!† Moreover, the metaphor seems to assume an agent outside the economy to do the pulling. Who, or what, will be the agent? Why should it be trusted? I am skeptical that this imagery will do anything other than encourage evermore ill-fated tinkering – just let *me* get my hands on that knot!

7 JordanT August 24, 2008 at 3:50 pm

choosing hard assets (especially real estate)

Without the corresponding wage inflation, real estate will fall in a high inflation environment. Higher interest rates on loans, means you can’t afford as much house. Spending more money on other necessities also does the same.

8 brainwarped August 24, 2008 at 4:54 pm

Don’t get hung up on the economic definition of a recession… If anything, you should be hung on why its OK to compare the Japanese economy to the US economy.

An NBER search resulted in a Paul Krugman article!!! Someone put me on the right path here, please. I don’t know if I can believe this is what Tyler is referring to.

9 Dirk August 24, 2008 at 7:37 pm

But Alex Tabarrok said there was no real estate bubble!!

10 Anonymous August 24, 2008 at 8:36 pm

Soon enough the government will find itself not pulling, but pushing on a string.

11 Tom T. August 25, 2008 at 12:05 am

people treated rising asset prices as a substitute for personal savings

This remark is somewhat baffling. My retirement fund is heavily invested in mutual funds and common stocks. Is this not “savings”?

Does Tyler really have all of his money in a sock in his bottom drawer?

12 heh indeed August 25, 2008 at 2:16 am

…who occasionally makes typos.

13 John Dewey August 25, 2008 at 4:42 am

gadfly: “Here are some more knots that many Americans would like to untangle: The national debt, health care costs, foreign trade imbalance, and lower wages adjusted for inflation.”

Why do you see our current account deficit and capital account surplus to be a “knot”? If Americans want to send dollars overseas for less expensive goods – and foreigners want to use those dollars earned to buy and create U.S. assets – what is the problem? It’s not as if foreigners are “buying up the USA”. As long as the net worth of U.S. households continues to rise (in the long run), it should not make any difference that foreigners are also taking advantage of the U.S. economic engine.

14 spencer August 25, 2008 at 10:02 am

Tom T. — No, your holding assets in a mutual fund is not savings. It is wealth and they are two very different things.

15 J Thomas August 25, 2008 at 10:42 am

If Americans want to send dollars overseas for less expensive goods – and foreigners want to use those dollars earned to buy and create U.S. assets – what is the problem?

Similarly, if your daughter wants to spend her allowance on heroin, and somebody else wants to sell it to her, what’s the problem?

When you argue that the sum of a lot of individual decisions can’t be a bad thing because each of them was freely chosen, you are arguing against paternalism. It’s basicly a libertarian position, which for rational people is now discredited as much as communism.

16 J Thomas August 25, 2008 at 2:11 pm

John Dewey, we are agreed on parental responsibility.

Are we agreed that *someone* needs to look at the bigger picture, and take action about “tragedy of the commons” problems etc? I say that we need to evolve government abilities for this because no one else is responsible for the big picture, or responsible to the citizens. If anyone else looks at the bigger system and sees how to warp it for their own interests which are opposed to your interests, they’re just being smart and playing the game well.

Currently, money is a government monopoly. We tried banknotes, where individual companies competed to print money, and it didn’t work.

We have a system of international money exchanges that do not work very well, that are regulated by governments. How those exchanges behave strongly affects the relative price of american versus foreign automobiles, and if there were still any US TVs it would affect their relative price too. (Maybe there are US TVs now, I read somebody was going to start msking some in 2006.)

It doesn’t make sense to say one government should keep its hands off the economy regardless what the others do, any more than it does to say that one government should shut down its military.

So we must attempt to get our government to make economic policies that actually help protect us against other governments’ blunders and attacks, rather than policies that hurt us. I agree with you that forcing americans to buy american is hardly ever a good strategy.

17 indiana jim August 25, 2008 at 5:16 pm

Tom Hanna has it right, again:

“Which recession? Where? The one in the US with the new defintion – back to back quarters of positive GDP growth and a media hostile to the White House?”

There is so much uncertainty out there about the Pres. election, is it any surprise that the stock market is like a yo yo in the hands of someone walking downhill. We are battling terrorists who like to blow up innocent civilians in the name of their god and the Russians are mooning us in Georgia, and we have, given current polls, better than a 50% chance of having as president someone who a few months ago was open to unconditional talks with a leader who thinks the Holocaust was hokum (and that it would be great if it “really” happened today).

Oy ve!

18 John Dewey August 25, 2008 at 7:02 pm

J Thomas: “Similarly, if your daughter wants to spend her allowance on heroin, and somebody else wants to sell it to her, what’s the problem?”

J Thomas: “Similarly, if a foreign nation sends its army to invade your country it doesn’t make sense to send your soldiers out to get shot at.”

Sorry, but I think your analogies are irrelevant and demagogic. We’re not talking about daughters being addicted to heroin or armies invading our soil. Trying to evoke emotional reactions using such analogies just doesn’t lead to rational discussion. When Walmart buys televsions assembled in Taiwan or T-shirts sewn in China, neither the company nor the nations are engaging in warfare.

J Thomas: “There are nations that follow neomercantilist policies, and we need some kind of response to that. At the least, responses that reduce the harm they do to us.”

They only harm their own citizens. We do not need to respond at all. If they goods they offer provide more value than any other source, we should buy those goods.

You still have offerred no specifics, only:

J Thomas: “we must attempt to get our government to make economic policies that actually help protect us against other governments’ blunders and attacks”

What “economic policies” do you propose for our government? Can you be more specific than “no choice but to play the foreign exchange markets”?

19 J Thomas August 25, 2008 at 10:52 pm

Sorry, but I think your analogies are irrelevant and demagogic.

Sorry about that. When we try to say things quickly in a blog comment we’re reduced to soundbites and metaphors. I thought those were quite good metaphors myself.

J Thomas: “There are nations that follow neomercantilist policies, and we need some kind of response to that. At the least, responses that reduce the harm they do to us.”

They only harm their own citizens. We do not need to respond at all. If they goods they offer provide more value than any other source, we should buy those goods.

No, each string has two ends. Each transaction has a buyer and a seller. When a prospective monopolist sells below cost to drive out competitors, you can argue that he hurts only himself — his customers get a good deal and as soon as he tries to raise prices to make back his losses the competitors will immediately rush back. It’s pleasant to believe this but often it has not turned out that way.

When chinese sell cheap, they benefit US consumers and hurt US producers. And the foreign exchange they build up gives them a lot of control over US trade. I can understand how you would feel that they only hurt themselves, as if every trojan horse is a gift that benefits the receiver exactly as much as it costs the giver.

But just imagine that china were to go to war with us. Imagine them building aircraft carriers and cruise missiles etc. Imagine how much it would cost them to come over here and destroy much of our industry. And compare that to how much it cost them to do it with sheer economics, because we let them manipulate currencies to make their products cheap and ours expensive.

What “economic policies” do you propose for our government? Can you be more specific than “no choice but to play the foreign exchange markets”?

It’s hard to go into a lot of detail in a short blog comment. In general we are better off when our trade is balanced. We have a market mechanism that’s supposed to accomplish that, and it fails to do so when other nations peg their currency to the dollar. There’s no single simple solution any more than there’s a single simple military strategy that always works.

Faced with other governments that may attempt strategies which may hurt us more than them, or may hurt us a great deal even if they are hurt more, we must make effective responses and those responses will have to vary by circumstance.

20 J Thomas August 26, 2008 at 9:02 am

$5.5 trillion U.S. Treasury securities are held by the private citizens and foreign governments. Of that amount, China holds $500 billion. Please explain how China holding 9% of U.S. Treasury securities held by the public enables that nation to control U.S. trade.

You don’t see that? Then how can you argue the topic?

OK, briefly, there is a market in US dollars in other currencies, and a market in US treasury securities. China can serve as a market-maker in both. The US government would prefer to be the sole market-maker, but that is not the situation.

Now, if the chinese goal was only to maximise the value of their US assets, then they would be constrained in their choices. They would have to do things that didn’t hurt us. But that might not be their only goal. We don’t get to decide their goals for them.

Sometimes you hear of a company that buys a rival company for more than it’s worth and shuts it down. At first sight you might say they have made a mistake. Pay more than it’s worth. And then shut it down, getting even less for the scraps they can sell than they’d get by running it. But it happens, and it isn’t usually considered a mistake.

If the chinese were to damage our economy, the value of their investment in us would go down. That would be self-defeating on their part, if what they want is for their investment in us to keep its value and increase. But if they think of us as a competitor they want to shut down, why not spend money to do so? If it costs them a trillion dollars to turn the USA into a third-world nation, well — how much would it cost them to do that with a war?

J Thomas: “It’s hard to go into a lot of detail in a short blog comment. …There’s no single simple solution … we must make effective responses and those responses will have to vary by circumstance.”

In other words, you don’t have anything specific to offer? You know that the U.S. government must do something to end its imbalance in trade of goods with China. You’ve ruled out forcing Americans to buy American-made goods. But you really don’t know what should be done, do you?

Try out this reasoning. If the chinese government is successfully waging economic warfare against us — which fits the available data, but is not the only explanation that fits — then the USA would require a careful strategy to bring that war to an acceptable conclusion.

If you had asked me in January 1942 what specific plan the US government should follow to win the war, I couldn’t have given you all the details. The enemy gets to make some of the choices, and some of our choices must be responses to theirs. We want to gain the initiative, but we don’t have it yet.

Beyond protection from other governments, our government should do things to encourage productivity which quickly and flexibly meets demand, and should discourage uneconomic corporate behaviors. I have a variety of suggestions along those lines, all of which would be strongly opposed by entrenched interests.

But here’s one — make it impossible for US citizens (or players on US stock exchanges) to make a profit by buying and selling a stock in less than 2 years. When you buy a stock you should be confident it will do well in the future, not that you can sell high soon. The effort that americans put into gambling on the stock exchanges is a waste for the economy. You can get liquidity, you can sell any time — but not make a profit early. It’s hard for corporations or investors to look ahead more than a quarter, but that’s worth encouraging.

There are various ponzi schemes outside the stock market that the government should discourage. The general pattern is that the perp spreads money around and gets people interested, and then he takes their money. Kind of like fishing — you spend bait and get fish. In the short run the fish think there’s nothing wrong with you giving away bait, you only hurt yourself and help them…. In general the government should encourage people to make money by satisfying demand and not by fraud.

21 john dewey August 26, 2008 at 12:03 pm

Closing out italics.

22 J Thomas August 26, 2008 at 1:58 pm

Well, don’t be shy Mr Thomas. Share your wisdom with the rest of us.

J Thomas: “make it impossible for US citizens (or players on US stock exchanges) to make a profit by buying and selling a stock in less than 2 years”

Mr. Thomas, no one is going to listen to recommendations such as that. What experience do you have in financial markets or corporate governance – or training in economics – that qualifies you to make such an off the wall suggestion?

See the problem? No one listens to reasonable suggestions, not even you. Without even considering the merits of the idea you demand credentials, as if the marketeers who have created the current situation or the economists who’ve justified it somehow gain credibility from their experience.

How plausible is it that we can get any meaningful reform?

23 環保袋 December 9, 2008 at 2:37 am

New homeowners are most concerned about leaks, someone to 抓漏grasp Henmomianzai leakage, a good new home, can not find a good 清潔公司cleaning company to clean up clean. That day I had bought a 機票ticket in Paris, a house was found leaking in the morning, quickly hit a 租車taxi to find out who repair, really bad

Comments on this entry are closed.

Previous post:

Next post: