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Tuesday, December 2, 2008

THE ARGUMENTS FOR AND AGAINST FISCAL STIMULI: CONTINUED

Today's Buggy Topic

 To make sense of our continued efforts to apply lessons from two sectors of economics for policy guides in dealing with the current financial crisis and recession --- specifically, lessons from the Great Depression and from macroeconomic theory since then --- you should read the previous buggy post, left here yesterday . . . December 1, 2008.  It will give you a certain perspective on what follows.

A Reminder

There are only two kinds of counter-recessionary policies at the disposal of a central bank and a government . . . in the US, the Federal Reserve independent of the government, a fairly widespread phenomenon in the industrial countries (not all) in order to create more private market confidence in its non-political decision-making. 

  

First Policy Options:

Monetary policy--- traditionally limited until this extraordinary last two months to the Federal Reserve influencing the monetary base: increasing or restraining the total number of dollars held by the public as currency and bank reserves --- has aimed at either some interest-rate target or the quantity of money.  In a recession, it seeks to expand the monetary base, and through a multiplier effect (the money multiplier), it can usually have a powerful impact on aggregate demand.  In an inflationary period, it does the opposite: it seeks to reduce the monetary base and reign in price rises.  The topic is much more complex than that, but we won't say anything more here until we finish dealing with fiscal policy.

Just keep in mind that what we have witnessed on the part of both the Federal Reserve and the US Treasury since mid-September has been radically innovative --- tremendous sums of money (trillions of dollars now) being delved out to commercial banks, investment banks, brokerage houses, and insurance companies, plus now to semi-governmental agencies like Freddie Mac and Fannie Mae in the housing mortgage markets . . . all in return for guarantees of preferred stock or financial assets held by these private and semi-private institutions.  Not to forget an extraordinary expansion of regulatory powers over the entire financial system that --- had these and the money-commitments been made by a Democratic administration --- would have had Republicans screaming Socialism! Socialism!

Second Policy Options, Our Concerns So Far in This Ongoing Series:

Fiscal Policies --- the ability of governments to set tax policies and spending policies . . . including subsidies and bailouts to troubled firms or whole industries.  Witness the US car industry, certain to get some government loan-guarantees sooner or later.  Yes, the industry and its supply lines and dealerships and all the related services for autos far too important to let it enter into bankruptcy . . . even chapter 11 of the bankruptcy laws, which restructure a company in trouble to make it more viable financially again.  That would take way too long to complete, what with the financial urgency of our existing system.  Not to mention the impact on potential customers for Detroit-3 cars.

Two Posted Buggy Commentaries Left Elsewhere and Linked To

Both were left recently at Carpe Diem, the impressive libertarian economic blog run by Professor Mark Perry of the University of Michigan . . . a site unrivaled, whether or not you agree with the thrust of Prof Perry's views, for its data-driven links and commentaries. 

Click here first.  Then, more up-to-date, click here

Warning: Tomorrow's Buggy Commentary on Fiscal Policy Will Be Somewhat More Technical

It was left earlier this evening and deals with a more complicated topic aimed at economists (remember: prof bug has a Ph.D. in both economics and political science, but was a practicing political scientist for his 40 years at UC Santa Barbara).  The link will be to another econ web-site and focus on which multiplier-effects should fiscal expansionary policy aim at . . . tax cuts financed by deficit spending (temporary or permanent), various kinds of increased government deficit-spending,  and the need to take into account the spillovers onto private consumption, private investment, and exports and imports . . . all crucial components, along with government spending (- taxes) of aggregate demand and GDP.