I wrote: >>The news tells us that the US may soon institute $60-$75 billion in new >>anti-recession relief in the form of tax cuts and emergency spending in >>the near future. If the multiplier is 5, then the impact would be $300 to >>$375 billion. If, as more likely, the multiplier is 2, that's only about >>$130 billion in terms of raising GDP. But the actual GDP is about $10 >>_trillion_. So the $130 billion is only about 1.3% of GDP. That's not >>enough to prevent a rise in the unemployment rate is it?
Doug Henwood writes: >That's a big stimulus program - the biggest fiscal stimulus in at least 40 years, according to estimates I just saw from Wall Street guru Ed Hyman of ISI. A lot of it is targeted at the lower and middle income brackets, too. Bush is proposing a more aggressive stimulus program than the Dems or the AFL-CIO did.< the last doesn't surprise me, given the way the Dems and Dose became born-again fiscal conservatives. It may be "the biggest fiscal stimulus program in at least 40 years" compared to other fiscal stimulation, but how does it compare to the apparent fall in the economy, which seems to be one of the steepest falls in at least 40 years (and the perhaps most surprising to the "usual suspects" among forecasters)? When I sent the missive above, I was in a hurry and didn't get to finish my thought. If we can interpret the 1.3% stimulus/GDP ratio as implying a 1.3% increase in the rate of growth of real GDP (all else constant), then Okun's Law can be applied: a one percent growth rate of real GDP sustained over a year will lower the unemployment rate by about 0.4 percentage points. Optimistically assuming that the "Okun's Law constant" is instead 0.5, a 1.3% one-year stimulus would lower the unemployment rate by 0.65 percentage points, say, from 5 percent to 4.35 percent. Though the unemployment rate stayed constant this month, that mostly says that monthly statistics can be deceiving. The economy seems to be driving the unemployment rate up by more than 0.65 percentage points this year. Mat writes: >so much emphasis on 'consumer confidence' 'investor confidence' 'market psychology' etc that you get the feeling they think that there will be a 'psychological multiplier' or something....< Krugman has been very scornful toward those who invoke expectations or "business confidence" to justify their proposals -- and rightly so, since expectations can be used to justify almost anything -- but of course he does it too. Doug writes: >And as for investment, well as every Keynesian knows, confidence is extremely important to investment, and that's basically the motor of the system.< That's a crude form of Keynesianism. Optimistic expectations (about future profitability) -- and cheer-leading by our fearless leaders -- won't do much if the businesses face extreme unused capacity, the results of previous over-building, and high debt/revenue ratios. and: >There may well be a reduction in aggregate income, but over the last 4-5 months, the personal savings rate went from 0.9% to 4.1% - still a ways from the long-term average of over 8%. So it could definitely go higher in anxious times.< I don't see why the historical average is relevant. A sudden increase in the savings rate of the sort you report has clear recessionary impact. It's not just anxiety, as seen in the following: More Debt, Fewer Paychecks Spell Trouble for Economy [L.A. TIMES, October 5, 2001] Outlook: A prolonged consumer retrenchment could exacerbate a recession. By LESLIE EARNEST [!!], Times Staff Writer As layoffs mount and the nation teeters toward a recession, consumers' heavy debt load is looming as a serious risk for many American households and the economy. Consumers who have been spending freely--relying heavily on their credit cards--have been propping up the U.S. economy. But credit card delinquencies hit a 29-year high recently, before the Sept. 11 terrorist attacks further eroded consumer confidence and the job market. Jobless benefits claims reached a 10-year high last week, the government reported Thursday. And many economists are expecting today's labor report to show that businesses slashed about 70,000 jobs in September, a figure that does not include the tens of thousands of layoffs announced by airlines and hotels after the surveys. In the previous six months, about 264,000 jobs evaporated. More debt and fewer paychecks spell trouble because the combination makes consumers retrench. And consumer spending makes up two-thirds of the economy. "Delinquencies are going to rise, bankruptcies are going to rise, and they're going to cut back on their spending," said Mark Zandi, chief economist at RFA Dismal Sciences, a consulting firm in the Philadelphia area. A sharp increase in defaults and bankruptcies could make banks reluctant to generate loans. "If that happens," Zandi said, "the problems for the economy are going to grow very deep." for the rest, see: http://www.latimes.com/business/la-100501debt.story >>are they assuming that monetary policy will finally work? >> >>or that the mythical self-curative forces of the market will work? the last refers to the effects of falling prices, which are likely to spur a deeper recession (as debt loads get worse). Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
