Karl Smith (correctly) suggests that we could make drastic tax cuts to fund stimulus, and borrow the money cheaply. I think he misses the point of the entire political debate going on in the country today (people don’t trust the government at all, and with the south re-engaging the republican party, both parties are increasingly becoming polarized). But his overall position that we can borrow very cheaply so we’re able to create a stimulus cheaply as long as it produces any reasonable return that doesn’t jeopardize our future. (I know. Thats a lot to ask. But remember that most Keyneisan and New Keynesian economists use a very narrow window of postwar data – a period of exception – on which to base their judgements.) Karl writes:
If we had enacted $5 Trillion in tax cuts and every bit of it was saved then the total liability that US households face would not have changed.
They would owe more in future taxes but they would be able to pay down their mortgages and other debts. And, that is a net plus because the rate at which the government borrows is much lower than subprime mortgage rates and indeed currently negative in real terms.
Having the government basically arbitrage the public-private spread is a net win for US households.
On top of that I think it likely that some households who didn’t have crushing debt burdens would have taken advantage of the flood of foreclosed homes, cut rates on hotel rooms and dealer mark downs on new cars to get some really great deals.
That would have been good for those well positioned households and good for the US economy which was facing a flood of foreclosed homes, empty hotel rooms and autos piling up on dealer lots.
It would have been good for those less well positioned households because they could have paid down their debt.
The price would be higher future taxes later but with the government paying such low interest rates the real costs of those future taxes would have been smaller than the taxes that were cut.
Moreover, the United States could have potentially avoided the devastating effects of a long term balance sheet recession.
That’s why Galbraith, before he died, me, and a few others recommended paying down mortgages directly with the trillions of available cheap debt.
The “demand story” that you keep referencing in your postings regarding the differences in the size of the boom and recession, is quite simple: that appreciation of home values affects such a vast number of households, that they all spend, even though the actual homebuilding sector is relatively small. Homeowners didn’t feel irrationally wealthy because of prices or credit — but because they believed that they had more income or savings to spend. That’s why the boom and bust has been asymmetrical. Now, after the bust, they think they are poorer than they expected to be. And it affected their retirement plans and calculations. So yes, the shrinkage of the economy has been vast. More so than any suggested stimulus so far will accomplish. And paying down mortgages would have the side benefit that it would not have expanded any of the negative sectors of the state and it’s extra-market allies. Which your recommended stimulus methods DO. Which is why the public won’t tolerate them. The public would have had a frenzy repricing if we had paid down mortgages. Pay down mortgages and refinance them at today’s prices.
Of course, I recommended all this when it started. Because, as Austrians we use analysis of individual actions. We recognize that patterns of sustainable specialization and trade must eventually reflect some global reality, while at the same time we also realize that digging holes is actually pretty wasteful of all the potential human capital that would be created by people actually working on internationally competitive sectors, while also aware that digging holes is wasteful of possible returns on fixed capital investment. (THe pyramids were a great investment.) And because, I do recognize, as do the NK’s, that it is hard to get people ‘swarm’ irrationally, but when they do swarm irrationally to certain things (becoming property owners) the externalities that are caused are ‘good’. Whereas the externalities caused by expansion of the state are ‘bads’.
And we were right to recommend this ‘stimulus’. Absolutely right. For the reasons you’re stating now – in retrospect.
It’s not that we cant still do it. People would become emotionally excited and therefore ACTION ORIENTED at the opportunities created. It would foster the impression of wealth far beyond any institutional stimulus – and it would not expand government – something that the people do not want to pay for.
If we combined direct mortgage pay-downs (maybe 2 Trillion?) with some form of credit towards home ownership for anyone who has lost a home, (using stricter lending requirements), with investments in energy production (nuclear plants), a new power grid, and roads, we would alter the economy rapidly in just months – because we would be funding multiple time scales, we would be empowering consumers, and the political resistance to expanding the state would disappear.
The American people would prefer to live in hardship rather than expand the state that they do not trust. The question remains whether you agree with them or not.
Curt