Hello,
I am trying to contribute to two separate issues in one email; forgive me if
this is not allowed.
TAX CUTS and expansion / recession
Thanks to Tom Walker remarks (and epilogue below). I broadly agree.
We know one thing: business as usual ain't going to cut it. The probable is
no longer possible. Whatever happens next is bound to be "improbable".
IMHO, the probable thing, and at the same time unprecedented in its depth
(would this merit the qualification of "improbable"?), would be a recession
scenario, of drastic and painful consequences (and not equally distributed,
neither domestically nor across the borders).
Such an outcome does not imply to say that a fiscal relaxation would not
have *any* Keynesian effect at all. In a demand-driven setting an increase
of disposable income would have a multiplier effect. Such does not
contradict the fact that it could be very little, or too little, and thus
not sufficient to overcome a recession. Further, a tax relaxation may have
a different impact depending on how this is distributed across household
income levels. I agree with this (thanks, Max for your remarks), but
unfortunately, in the model we used for the "Implosion..." we did not go as
far as to specifying different types of households with different
propensities.
WEALTH EFFECTS.
The WSJ article is consistent with our analysis. Moreover, our 'private
expenditure function' is influenced, among others, by the evolution of
prices in the stock market *and* in the housing/ real state market.
However, any form of credit, refinancing, or whatever *based on a
debt/wealth* indicator is misleading; or, as Jim put it, "it continues the
development of a bubble economy". Looking solely at the house market, what
is going on now in the US seems a reminiscence of the Japanese bubble a
decade ago (from the very little I know of it).
Yet, I am not sure whether I understand Michael remarks:
the wealth makes debt seem somewhat rational since it is tied to an
underlying "value".
What I think is (and I am sorry to insist again and again on the same) that
the meaningful indicator, for the private sector as a whole, is the ratio
*Debt/income*, because debts cannot be paid, on the aggregate, with wealth.
Wealth needs to be either cashed; or more credit (which would lead to more
debt to be serviced) needs to be granted. And there is a limit to both.
The above does not mean that the debt/income ratio needs to be guiding the
behaviour of consumers (or private expenditure in the aggregate). I
personally think that it is not the case, that the 'fear of bankruptcy" is
somehow less significant than the 'frenzied rush of the tide'. In a
(classic, IMO) article of C. Diaz-Alejandro (1985) "Good-bye financial
repression, hello financial crisis" he expresses quite well the sentiment of
consumers:
"when everybody is bankrupt, nobody is!".
Our point, in the "Implosion..." paper was not that debt/ income ratio is
guiding consumers, but that such indicator ought to inform economists and
policy-makers of the risk of letting things going this pace.
Alex
