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Tilting at Windmills

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January 17, 2008
By: Kevin Drum

ECONOMIC UPDATE....In a story about the fast growing consensus that Congress ought to enact some kind of economic stimulus package, Maura Reynolds and Richard Simon of the LA Times lay out the latest economic indicators:

A stream of unwelcome economic data has added to politicians' sense of urgency. The Labor Department announced Wednesday that consumer prices rose 4.1% last year — the fastest in 17 years — led by soaring gasoline costs and higher prices at the supermarket. Average wages, meantime, recorded a slight drop when adjusted for inflation. Earlier this month, the department reported unemployment had hit 5%, the highest rate in two years.

Now see? That wasn't so hard. When you report wage or spending data, you should correct for inflation. And corrected for inflation, wages were down a bit last year. Other reporters please take note.

In related news, Fed chairman Ben Bernanke said today he supported a temporary stimulus package because "fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone." But is that true? With nominal interest rates still above 4%, would a fiscal stimulus package have any effect?

Beats me. But conventional wisdom suggests that fiscal stimulus doesn't have much effect until the Fed has used up all the arrows in its monetary quiver, so Bernanke's comment might suggest that the Fed is planning something fairly spectacular in the near future. The rumor, apparently, is that instead of waiting for its regular meeting and cutting interest rates by 25 or 50 bp, Bernanke will instead call an emergency meeting before the end of the month and announce a whopping rate cut of 75 bp. This, combined with some kind of dramatic congressional action, might keep things from getting worse.

Maybe. Stay tuned.

Kevin Drum 12:05 PM Permalink | Trackbacks | Comments (33)

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Comments

This is just another ruse to place more middle-class money into the hands of the Wall Streeters.

Posted by: Jenna's Bush on January 17, 2008 at 12:09 PM | PERMALINK

I don't know what the big deal is here. If we'd finally get rid of the death tax, everything would be fine.

Posted by: junebug on January 17, 2008 at 12:09 PM | PERMALINK

So the Fed is giving up on controlling inflation?

Hey, I lived through stagflation. Stagflation SUCKS!

Posted by: Tripp on January 17, 2008 at 12:15 PM | PERMALINK

Be careful what you wish for, Kevin. Soon the economics writers will be saying, "Adjusted for inflation, consumer prices were unchanged."

Posted by: Barry on January 17, 2008 at 12:17 PM | PERMALINK

We've been saying the economy could use a tax cut for some time....

Posted by: CFG in IL on January 17, 2008 at 12:24 PM | PERMALINK

But is that true? With nominal interest rates still above 4%, would a fiscal stimulus package have any effect?

I'm not an economist, but if the Fed chief says so I will accept his word. There are various tax cut package which could serve as a fiscal stimulus. First a capital gains cut would be good idea because cutting capital gains always helps the economy. Making the Bush tax cut permanant would also be a good idea, and keep the economy roaring. Eliminating the death tax would also be a good idea because then people don't stall the economy by worrying about estate planning. These fiscial stimuluses would do a good job of preventing a recession.

Posted by: Al on January 17, 2008 at 12:24 PM | PERMALINK

Big shitpile has already been thrown out the window. They are trying to put a parachute on it so it doesn't hit the pavement until it can splatter all over the next Democratic president.

Let it fall.

Posted by: Trypticon on January 17, 2008 at 12:25 PM | PERMALINK

Kevin

i don't think you've got the conventional wisdom quite right - fiscal policy works just fine even if the Fed hasn't reduced rates a lot.

Fiscal stimulus can be undone through rate increases, and, fiscal stimulus is particularly welcome *if* the Fed has gone to zero and there's been no effect (the 'liquidity trap'), but, it doesn't require the Fed cutting rates to the bone to begin having an effect.

Posted by: josh bivens on January 17, 2008 at 12:25 PM | PERMALINK

I agreed with you last time, but this time I agree with Barry. If you post prices and wages so close together, you invite people to compare them, so making one number look like 4% and the other like 0% when they were really close to equal is bad context.

Posted by: Noumenon on January 17, 2008 at 12:29 PM | PERMALINK

Like Josh said, fiscal policy is mostly indifferent to the current interest rate target. However, fiscal policy, in general, is seen as inferior to monetary policy for economic stimulus: it is much less controllable (politicians vs. technocrats), it's effects are diffuse and very delayed, it's difficult to reverse, and the rational expectations crowd believes that fiscal policy can be too easily predicted, and thereby counteracted.

Posted by: luci on January 17, 2008 at 12:41 PM | PERMALINK

"Bernanke will instead call an emergency meeting before the end of the month and announce a whopping rate cut of 75 bp."

Oh, and I gotta say, there's no way this can happen. The article is probably just referring to a "non-zero" probability of a 75 bp cut implied in the forward rates. The rates will eventually be cut that far, and further, as the housing market continues to tank and financial firms need bailing out, but the Fed won't do it all at once.

Posted by: luci on January 17, 2008 at 12:47 PM | PERMALINK

We have been heading towards this cliff for years.

Nobody has had the balls to admit that the obscene tax-cuts to the wealthy, coupled with globalization sending jobs overseas, has steered us to this precipice. The high cost of energy has simply speeded up this economic disaster.

Now we are over the cliff,falling. There will be no soft landing (by padding everyone'smattress with extra bucks), nor will any parachute be of much help (since only a select few will be given one).

We have needed real jobs for years. Why wasn't Detroit investing in super hybrids and solar cars?

Why have we not built 100s of solar photovoltaic plants?

Where are the jobs?

"Hello, this is Rishi can I help you."

And don't forget the Iraqistan debacle that has bled us even before we fell off of the economical cliff.

The weakening dollar says it all.

Posted by: Tom Nicholson on January 17, 2008 at 12:59 PM | PERMALINK

Bernanke will instead call an emergency meeting before the end of the month and announce a whopping rate cut of 75 bp. This, combined with some kind of dramatic congressional action, might keep things from getting worse.


I guess I'll "stay tuned" (to something or other) but can state with 100% certainty that neither one of these things is going to happen.

Posted by: gordonminor on January 17, 2008 at 1:25 PM | PERMALINK

Let us assume the Congress comes up with some temporary stimulus package. Let us assume it includes some sort of tax credit and/or payroll tax credit for the middle and lower classes. Where are the nicely targeted folks likely to spend their tax credit checks. I don't know about you, but I would bet a lot of folks are going to throw the money at their credit cards. What a way to bail out Citigroup.

Posted by: corpus juris on January 17, 2008 at 1:48 PM | PERMALINK

For what the Repiglicans want to do and how they see the rest of us, and to see a typical pearl-necklaced plutocratic lady RepubliRep with that wildish expression, catch:
http://thinkprogress.org/2008/01/16/bachmann-jobs/

Posted by: Neil B. on January 17, 2008 at 1:50 PM | PERMALINK

Maybe if we cut our $700 billion defense budget in half and use the extra for domestic infrastructure, health, energy, education and environmental improvements we'd have the stimulus we need.

Posted by: AJ on January 17, 2008 at 2:01 PM | PERMALINK

Making the Bush tax cut permanant would also be a good idea, and keep the economy roaring

He really is a fucking idiot isn't he? How would extending something that ends three years from now have any effect on today? "Roaring"? Have you been asleep for the last six months?

Posted by: Jenna's Bush on January 17, 2008 at 2:26 PM | PERMALINK
With nominal interest rates still above 4%, would a fiscal stimulus package have any effect?
It better, because if the fed lowers interest rates further it will lower the value of the dollar (further) and increase the pressures causing inflation.

Then the lenders will start building an anticipated inflation into their interest rates, increasing interest rates.

Right now, between declining economic growth (monetary solution - lower interest rates) and the threat of inflation (monetary solution - raise interest rates), monetary policy is in a real quandary. Fiscal policy is all that's left.

If fiscal policy fails, it means stagflation, much as the Nixonian mismanagement of the economy left for the next decade until Paul Volker (appointed by Carter) wiped out inflationary expectations with a two year long bad recession. (Ford's WIN buttons had failed. WIN was "Whip Inflation Now" and wearing the button was supposed to convince managers not to raise prices when costs went up. Remember?)

Posted by: Rick B on January 17, 2008 at 2:27 PM | PERMALINK

Bush and Bernanke push corporate socialism
The financial types made, packaged and sold huge numbers of poor mortgages. As they traded these shoddy assets back and forth amongst themselves they, (Wall Street) paid themselves $25 billion in bonuses for 2006 and $32 billion for 2007.
Now Bernacke and Bush recommend a stimulus to replace the missing equity capital in the financial system. How can this not be called socialism? Or is socialistic tinkering with the system to protect the rich called a stimulus package while providing health care is oh so unAmerican.
The nation's debt has skyrocketed from six to nine trillion dollars under Bushco and as a legacy for his last year he will oversee spending a couple hundred billion dollars we don't have to bail out his cronies.
Meanwhile a useful scorecard to watch is that the Pound and the Euro continue to soar against the dollar even while Europe provides a social net for the health and retirement of their workers.
We get to inject billions into the economy in an act of corporate socialism; Wall Street takes out $57billion and yet helping the poor with medical bills and heating costs remains a danger to the American psyche.
As the accountants say: "Go figure."

Posted by: cognitorex on January 17, 2008 at 2:30 PM | PERMALINK

Sounds like malaise. We need another Reagan to teach us that you don't have to pay taxes at the Big Rock Candy mountain.

Posted by: Luther on January 17, 2008 at 2:31 PM | PERMALINK
Nobody has had the balls to admit that the obscene tax-cuts to the wealthy, coupled with globalization sending jobs overseas, has steered us to this precipice.
Hasn't anyone noticed that the corporations have been swimming in cash for the last five years or so and couldn't find good ways to invest it?

So how were the tax cuts supposed to stimulate the economy? All the really good returns on investment have been outside the U.S.! The additional investment funds weren't needed in the U.S. (and still aren't) so how does a tax cut for the wealthy stimulate the economy?

Those tax cuts for the wealthy had to send additional investment money where the new jobs were - overseas. And the wealthy do not significantly change their consumption just because they get more money. Those founds just go to build more wealth to be invested.

Posted by: Rick B on January 17, 2008 at 2:38 PM | PERMALINK

The Rich really really hate John Edwards for telling them to take their medicine. But, when they see the onset of this sickness they still don't want the medicine. They just ask for more candy. Lunatics!

Posted by: MarkH on January 17, 2008 at 3:56 PM | PERMALINK

The Standard and Poor’s 500-stock index, a broad measure of the financial markets, tumbled below its low for last year, set in March. At the close, it was down 2.9 percent after giving up early morning gains, bringing its decline since Jan. 1 to 9.2 percent.

The Dow Jones industrial average ended down 306.95 points, or 2.5 percent, at 12,159.21, and the technology-heavy Nasdaq composite index was off 2 percent.

Posted by: Michael M. Grynbaum on January 17, 2008 at 5:07 PM | PERMALINK

But conventional wisdom suggests that fiscal stimulus doesn't have much effect until the Fed has used up all the arrows in its monetary quiver...

The hell? Maybe you should call a real (macro) economist and run that by them.

Of course spending increases or tax cuts stimulate the economy. The problem is that stimulus during boom times leads to inflation, as production bottlenecks appear. Alternatively, what the Congress giveth, the Federal Reserve can taketh away by raising rates or cutting rates slower than they would have.

Posted by: Measure for Measure on January 17, 2008 at 5:10 PM | PERMALINK

Rick B has largely made the points i wanted to make, and indeed, have been making for several years now: that the logical outgrowth of bush league economics was stagflation lite.

in many respects, that's already been true, in that real median household income has been flat, job creation mediocre, headline (and core) inflation creeping up, investment so-so: the gains have been highly concentrated. and now that the gains are going away (the core problem people are facing up to is that there is less capital in the world than people thought), the stagflation lite shoals are being exposed....

Posted by: howard on January 17, 2008 at 5:34 PM | PERMALINK

>"Roaring" economy?

Well, I think an economy going down in flames could make a nice roaring sound...

The problem is at this point there is no quick fix available.

The consumer is tapped out and there is no help available from them.

The dollar is collapsing already so if you dump interest rates it will auger in to an abyss somewhere.

Since the US is a debtor nation and completely dependent on borrowing... that action kicks off hyperinflation... $10/Gal gas anyone?

Folks, the Regan hatched chickens are coming home to roost no matter what the Fed does. It's 1930 all over again.

Posted by: Buford on January 17, 2008 at 5:48 PM | PERMALINK

Strangely, in the sunny state of California, getting unemployment has become like pulling teeth. Of the dozen friends who qualified for it last quarter... Zero have actually gotten any assistance in the form of unemployment checks.

A couple have found new work, but sheesh. You'd think a biased sample would have some success, right?

Posted by: Crissa on January 17, 2008 at 7:13 PM | PERMALINK

Strangely, in the sunny state of California, getting unemployment has become like pulling teeth. Of the dozen friends who qualified for it last quarter... Zero have actually gotten any assistance in the form of unemployment checks.

A couple have found new work, but sheesh. You'd think a biased sample would have some success, right?

Too many comments have been submitted from you in a short period of time. Please try again in a short while.

Dude, I've been off the internet for like eight hours (modem failure). I haven't been on this website in twenty. What gives?

Posted by: Crissa on January 17, 2008 at 7:14 PM | PERMALINK

Howard 5:34 PM,

and now that the gains are going away
Thanks for confirming that you also see what seems so obvious to me. I keep wondering why no one else sees what has happened and what is currently happening.

The reason the gains are going away is because they were fake. Greenspan (after raising the interest rate before the 2000 Presidential election to get a Republican into office) then pumped up the economy by lowering the interest rates and pumping both the housing bubble and new financial methods for homeowners to get at the increase equity to keep consuming. The dead giveaway is that when Bush was sworn in the second time in January 2005, Greenspan started steadily increasing the interest rate in February. He knew how much damage he was risking, and tried to ease out of it to bring it to a soft landing. Didn't work, of course.

In reality, the overall economy never recovered from the recession that followed Greenspan's dot com bubble. All the apparent gains during the Bush administration were being bought by stealing consumption from the future.

After over a year of interest rate increases, the housing bubble started to break, but housing is an extremely slow market. The trouble had to have been obvious to the professionals in the mortgage industry by late 2006, but Countrywide finally had to face the music in public last Spring, and it has all been steadily, inexorably, downhill since then.

This new market now is not going to begin to recover until all the fake gains that Greenspan created and built into the current economy with his interest rate jiggery-pokery and the housing bubble since 2001 are stripped back out of the economy, and then it will probably drop even more because of the new oil shortages worldwide.

I have wondered if it is true that Bush by himself has been worse than his only other real competitor for the bottom rank as American President, Andrew Johnson. I think the issue could still be debated, since A. Johnson probably extended the problems of Southern Racism for an extra 75 or more years after the Civil War. But I'll guarantee that no American President has ever done the damage to America that Bush, Cheney, and Greenspan together have done, and neither has any other similarly small group.

That triad is gong to be seen to have done as much damage to America as World War I did to the UK, France and Germany. We're just watching the beginning of the beginning of the end of the American Empire.

Posted by: Rick B on January 17, 2008 at 9:23 PM | PERMALINK

Rick B >"...We're just watching the beginning of the beginning of the end of the American Empire."

About 35 years or so too late frankly but I doubt it will actually happen. Too many "rich" people got their hands stuck in that hedge fund cookie jar for some magic rabbit not to pop out of some random hat.

All that really needs to be finished is the terms of the retreat & surrender by TPTB currently so the new PTB can wrap their sweaty hands around that oh so beautiful shiny Chrome Dildo of Global Power.

Time to start thinking seriously about what sort of lubrication you will choose.

"No place is so strongly fortified that money could not capture it." - Marcus Tullius Cicero

Posted by: daCascadian on January 18, 2008 at 1:57 AM | PERMALINK

Rick B and several others here have it right, imo. Rooting for a big drop by the Fed, Kevin? You need to start reading ...

http://cunningrealist.com

... more often.

It ain't gonna be pretty.

Posted by: Fel on January 18, 2008 at 4:08 AM | PERMALINK

Agree totally with Tom Nicholson.

Cutting rates will not help.

After all, cutting them before just created the housing bubble.

Let's not go that route again.

The war is bleeding us dry..... that is the underlying problem. We have to stop paying a half million @$ per DAY and get out of there.

Posted by: Clem on January 18, 2008 at 6:47 PM | PERMALINK

Come on! Get serious! 75 basis points!

If the market sees the Fed panicking, what will the market do?

Bernanke has no idea. None. Everything he does comes behind the curve.

Between him and the preznit (who chose him) we'll get what we asked for. Total, Ignorant Maladministration.

Who could guess?

Posted by: notthere on January 19, 2008 at 12:19 AM | PERMALINK




 

 

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