Only because the toolset is artificially restricted for ideological reasons.
Fiscal responses (having the government spend actual money, either on things like infrastructure it by just handing it out to the population, which will then largely spend that money as they see fit) rather than monetary policy responses (reduce rates and hope that people will borrow more) are known to work well in most cases.
The Corona virus situation is slightly different than the financial mess of 2008 because it involves actual potential supply constraints. This means that a higher rate of inflation may have to be accepted temporarily. But inflation has arguably been far too low for far too long anyway...
Keynes famously said you could hire people to dig ditches and it would stimulate the economy.
However, if we were to take aggressive action on Climate Change, there’s a lot of potential jobs there. A massive potential stimulus. Also, you know, public funding of basic research which could explore, I don’t know, pandemic response, new therapeutics, etc.
Like you said, ideological barriers are what’s keeping us stuck. But before we went all in on finance we had a pretty epic run last century of productivity fueled by public investment (think 1940-1970).
The problem is most governments are already highly in debt. It is not that a fiscal stimulus is a bad idea per se, but it has to start during the expansion cycle by reducing the debt, otherwise at some point so much debt becomes unmanageable.
Climate Change is doing just fine with us doing no work, notice the recent news about the satellite-detectable pollution levels in China being at lows not seen in a long while. Of course, that means us not being as product- and services-rich as we are right now (farewell to cheap airplane rides, disposable clothes and easily replaceable electronics) but at the end of the day something will have to give.
Saving doesn't grow the economy, pretty much by definition as was already pointed out.
(Real) investment, in the sense of building up new productive capacity, is an important part of growing the economy. However, investment at least by the private sector cannot thrive in a vacuum. It needs a context of either existing or plausible demand. If the demand is missing, you'd be a fool to spend money on increasing productive capacity, i.e. you'd be a fool to invest.
Note the important emphasis on what kind of investment we're talking about. Unfortunately, the act of buying existing productive capacity (e.g. by buying stocks) is also called investing, and you have to be careful not to confuse the different meanings of the word.
Indeed, real investment requires market interest, something the government is pretty bad at discerning
Saving goes hand in hand with investment since by putting money in the bank it can be borrowed by entrepreneurs and they can hopefully do something productive with it. Merely spending it doesn't have that effect.
I feel like you are not replying to the core of the argument:
Spending is crucial because that's what signals where investment is needed / desirable. Furthermore, spending is what gives companies profits that can then be reinvested for sustained development. If there is no spending, then investment is simply pointless.
If investment happens in a vacuum, without regard for where the demand (which is nearly a synonym for spending) is, the investment will likely go to inefficient or useless projects.
Furthermore, the stated causality from saving to investment doesn't exist in our modern financial system. Banks create money out of nothing whenever they find a suitable borrower. Of course, a borrower is more likely to be suitable if they can demonstrate demand for their product - again, the importance of spending.
Sidenote: There is an equality of savings and investment in the national accounts (if you ignore the external sector), but that's just an after-the-fact accounting identity without any causal content. There's good reason to believe that, if anything, the causality goes from investment to savings. Either way, it's not an interesting causality. The real economic decisions, certainly the ones that lead to good allocation of capital, follow where the demand is.
Sidenote #2: Your stab at the government misses the point as well. Nobody is asking for the government to start investing in productive capacity for things that the private sector usually provides.
However, government could ensure that people have more disposable income. This leads to more spending, which encourages (and finances, via reinvested profits!) investment in order to satisfy the added demand. At the same time, it improves the quality of the demand signal, which helps achieve a better overall allocation of capital.
There are other useful things that governments could do, but this is an important and useful thing. The economy generally works well when people can just vote with their wallets. But one precondition is that there is money in those wallets.
The government would be creating a market distortion by not allowing companies to spend their money how they see fit and instead redistributing to another sector (the general public).
There would be no growth because the money the people would be spending is the same the government took from the companies in the first place. It's like taking the fat out of a man and feeding it back to him.
I'd point out that nobody (except for you) said anything about preventing companies from spending their money as they see fit. I don't understand where you even get that from.
How does the government acquire the money for that stimulus? By taking it from the companies through taxation. Government spending is always less efficient than by private entities.
I mean half of the economy is digging ditches basically. A few small portions of the economy produce the necessities of life while nearly everyone else just circulates money around through entertainment, advertisement, etc.
> inflation has arguably been far too low for far too long anyway...
Do you not need a roof over your head, health insurance, a car, college education, etc? Inflation has been rampant, it's just not apparent in manufactured goods because the actual cost of production dropped rapidly with offshoring and technological progress. Without significant inflation, we would have seen a steady march down of consumer prices, as happened in computing.
Yes the not-so-hidden inflation has been rampant, but universal health care, basic income, and direct infrastructure investment would help, not hurt those.
Let's go over Housing, healthcare, and education in turn:
- Housing, overpriced because the jobs are concentrated, stupid zoning, etc. We deserve dense cities but UBI means no job, no stave, which in the short term takes away the demand to move. Let's not rest on that and continue to stupid-suburb, but do take some refuge in that short term benefit of decreasing the necessity of people moving.
- Education, overpriced because of a shortage of work and a credentialist rat race. I'm all for people being educated---say a liberal arts that includes engineering not because it pays well but because one has to understand the machines that surround us to understand the modern human and social condition. But it's stupid to expect people to stuggle to acquire credentials that won't get them hired and won't actually help with the stupid jobs that get if they are hired.
UBI helps eliminate unproductive by removing the desperation that forces people to take them. The decreased demand for employment hopefully will end the credentialism rat race, lowering the cost of education. And the decreased drudgery of the education that remains should make the education better, and push employers to shoulder more of the remaining cost.
- Healthcare. Unlike the others this probably is less overvalued; avoiding being sick or getting well when sick is incredibly valuable to the individual, and thus I view the price gouging as inevitable. I don't think there is a market based solution to this one, but that's OK. Just do the universal thing and remove this from the market, and now its not subject to inflation in the same way. [The power of the state commands the supply to exist.]
Housing is overpriced because anyone can go to a bank and get as much cash as the house is appraised for, which is circular. So the actual constraint is just the inverse of interest rates. The same goes for education. There are underlying supply problems with each of these that need to be directly addressed, but they're exacerbated by the current economic policy of giving out as much rope needed to hang one's self.
I think much of healthcare could be solved if providers had to publish uniform prices and couldn't post-facto bill, you know, like every other business. Imagine going to the grocery store, paying at the register, and then two months later receiving a bill in the mail for the cashier's time!
Still, I am not opposed to single payer as a way forward - assuming it doesn't get transmuted into mandatory patronage of the same corrupt system. It's not like Medicare currently solves the underlying issues, it just absorbs the cost disease.
Basic income is a natural extension of quantitative easing. It will help people in rural areas, but do nothing for in-demand areas (being swallowed up by housing). I do agree it's much better than just giving the money to the banks though!
Direct infrastructure improvement - party on! Government "public works" is currently focused on the military, producing a surplus of chaos and misery abroad, while our infrastructure crumbles. I don't know that subsidizing suburban infrastructure fully makes sense, but I do know it's better than squandering the resources elsewhere.
> Housing is overpriced because anyone can go to a bank and get as much cash as the house is appraised for, which is circular.
The appraised value is just a signal how much collateral a bank can rely on for the loan, which is why most loans with good interest rates have a maximum loan to value ratio. Banks don't want to own houses, they want to own a piece of the borrower's future productivity, manifested as interest payments.
The limited housing/transit supply (due to zoning restrictions) coupled with concentrated job growth are what drives up housing costs.
I did go on to acknowledge the "underlying supply problem". But this thread is about financials, and without the endless supply of money, asset valuations would be much lower.
The inflation has been offshored. China's rural population has been lifted out of poverty. What happens to the world economy when china runs out of cheap labor?
There are still many other countries with cheap labor (Bangladesh, Pakistan, lots of Africa etc). It will still take a few more decades for the majority of the whole world to get out of poverty (assuming we don’t go off the rails).
If housing prices are too high, it's because there are too many dollars chasing too few houses. Fix one or the other. The easiest and most humane option is to just let people build more housing and stop with the stasis-producing process you see in places like San Francisco
Housing prices are not too high. They are too high in some places.
So what you're really seeing is that physical infrastructure cannot keep up with the massive change in the US from a manufacturing and agricultural economy to a service and information economy.
> We're basically running out of tools to combat an actual financial crisis
Not really. This was extensively explored following the Great Depression, in part by Ben Bernanke, which is how we got QE. In summary, the Fed can buy more than just short-dated government bonds.
Moreover, "liquidity trap" doesn't refer to the central bank running out of tools per se. It refers to investors calling a central bank's bluff.
A classic example is a stagflation-facing central bank cutting rates. The cut spurs inflation. Investors figure that will force the central bank's hand into a rate hike shortly. As a result, they hold.
The cut thus fails to have an impact because the bank is perceived to be constrained. That doesn't apply here.
Who could have known that using debt to purchase back stock for the purposes of artificially increasing company value without building value would cause a crisis?
The entire world is about to have a supply chain disruption that you can't stoke into recovery using central bank policy. The Fed rarely lowers interest rates without notice. They're spooked.
That is a possible scenario, but not what market participant behavior is predicting. So, you either believe governments, or you believe the flow of trillions of dollars through the capital markets. The truth likely lies somewhere in the middle, waiting to be discovered.
It can go negative, or Fed can do another round of QE, there are plenty of tools. The real question is whether the deficit can grow indefinitely without consequences, and if this is a moral hazard (e.g. no risk priced in borrowing).
When we design policy around increasing the value of the stock market, we effectively give stock-holders power. Good policy should create efficient markets, not "high value" ones.
Deficit is funded through debt (treasury notes). Fed buys treasury notes (through QE) and sets the interest rate on these debt. Lower interest rate in short-term reduces deficit (smaller coupon payment), but in longer-term encourages borrowing.
If a company temporarily can't manufacture something due to supply chain disruption, they could lose a lot of money and might need to borrow some. Getting by until things recover just got cheaper.
I'd guess there are probably similar issues for restaurants, the tourist industry, maybe construction?
But that assumes they're credit-worthy. It wouldn't help a company that can't borrow.
We could always just end the practice of paying interest on excess reserves which the Fed started when they thought banks were collapsing but there wasn't any economic downturn back in 2008, so they needed to get the banks not to lend out the money they were pumping into them somehow. The Fed's inflation models have been predicting higher inflation than we've seen ever since. Currently the interest on required reserves (IORR) and interested on excess reserves (IOER) are both 1.6%, well above the Fed lending rate of 1.25%.
I find it ironic that the people who say "the government should just spend tons of money because the debt doesn't matter" and don't care about punting the problem to the next generation are the same ones who say how irresponsible the Baby Boomers are for punting the environment problem to the next generation.
The "passing the problem to the next generation" thing doesn't make any sense.
There are two possibilities: If in 25 years there wil be enough real resources (machines, infrastructure, knowledge..) for covering all the needs of the people, the accumulate debt is not going to be a problem. If in 25 years there will not be enough real resources, the government finances are going to be irrelevant.
So, what is the best way to make sure there are going to be enough resources? investing in infrastructure and education or "saving" money?
> If in 25 years there wil be enough real resources (machines, infrastructure, knowledge..) for covering all the needs of the people, the accumulate debt is not going to be a problem.
Unless, you know, there are enough goods to support a lifestyle similar to that of the current generation but our kids can't buy them because all their productivity is going to pay the interest on our generation's (foreign-owned) debt. Or there would have been enough goods but we took that money we borrowed and used it to shift production toward things we want now, compromising the capital investment and maintenance which were needed to stay productive so that everyone's needs could be covered in the future.
Profitable investment is good, and it isn't necessarily wrong to go in debt to fund a good investment, but there is such a thing as malinvestment—investing in the wrong things, resulting in a net loss—and the more debt you take on the more your productivity is continually drained away and unavailable for either investment or consumption. Profitable investments will take place without subsidies, and if it isn't clear which kinds of investment will end up being profitable then it's better to save the funds until the situation becomes clearer rather than waste scarce goods and labor on a bad investment.
You don't have a point, you have an opinion. You don't provide any facts or resources that prove the money spent in a fiscal stimulus returns a greater rate than the interest on it. You don't address the fact that the debt has gone up 300% over the last 20 years while the GDP is up only an average of 2.5% a year.
Printing your way out of debt is not a solution, ask Argentina. Eventually your investors will lose faith in the value of the money they're getting back in return and the currency will collapse.
> You don't provide any facts or resources that prove the money spent in a fiscal stimulus returns a greater rate than the interest on it.
1. I never said fiscal stimulus was guaranteed to return more than the interest to service the debt needed to pay for it. I said if it does that. My point is deficit spending == bad is not always true.
2. You didn't provide any facts or resources to prove that there exists no possible fiscal stimulus that could generate a greater return than the interest on the debt needed to pay for it.
If you want resources, Google it. You'll find plenty of information backing up the claim that it is possible for deficit spending to pay for fiscal stimulus to be a net benefit.
>You don't address the fact that the debt has gone up 300% over the last 20 years while the GDP is up only an average of 2.5% a year.
Why are you quoting a 20 year value for the debt, but a yearly value for GDP?
>Printing your way out of debt is not a solution, ask Argentina.
Instead of looking at Argentina, why don't you look to the US? We've been effectively printing money since 2008 and inflation hasn't come close to going out of control.
The US isn't Argentina, and saying look to Argentina is no better than people saying look to Somalia for an example of why small hands off government doesn't work.
Inflation is not as bad in the US as it is in Argentina because the demand of US dollars is still high. When that changes you can say good bye to a nice, stable inflation rate.
No, learc83 has a point, in the abstract. If you borrow to spend the money, and the rate of return on what you spend it on is higher than the interest rate, then it's a good idea to go ahead and do it. That's true... in the abstract.
In the real world, though, Congress decides where to spend the money - not based on any kind of return on investment calculation, but based on political calculations. So in reality, a positive return, if it happens at all, will only happen by coincidence.
Us GDP to debt ratio is not dramatically worse compared to where it was 30-50 years ago if you just look at how other countries were during this period
Boomers are the ones who tell you to be scared of the debt. Same boomers tell me that gold is the best investment
It's done ok, it's at about 45x its 1970 price in nominal terms, something like 5x in real. More importantly, as an uncorrelated asset to help buffer against crises in a portfolio strategy, it's actually done very well. I'm certainly not advocating that anyone go 100% gold, but it gets hated on more than it deserves.
Because they've already been expended to keep the "growth" party going indefinitely, rather than ever letting things cool off. This includes 2008 - a short hiccup and then full speed ahead, culminating in VC's filling sidewalks and gullies with a glut of consumer goods, hoping for some kind of eventual profit. Eventually the bubble has to pop - when it's not allowed to do so relatively casually, it will do so catastrophically. When it's not allowed to do so at it's own time, it will do so at the worst time.
