Krugman Analysis

The Story fag end Financial Deregulation a. Wild Optimism & the Deregulation Movement b. The authoritiesal Influence of the Financial empyrean (and the Wealthy in General) PART II THE SOLUTION Section 3 The Solution is organisation Stimulus (and a Few Other Reforms) 7. The Solution is Government Stimulus 8. protest 1 Government Stimulus Doesnt Spur the Economy (and Response) a. Exhibit A The Great Depression b. The initial Stimulus Effort Was Too Small(a) 9. Solution Specifics a. Stimulus Specifics b. Additional federal official Reserve make upions c. ho drill Relief (et. L. ) 10. remonstrance 2 The Danger of Government Debt (and Response) . The Problem of Investor Confidence b. The Problem of Paying false the Debt in the Future 1 1 . Objection 3 The Danger of Inflation (and Response) Section 4 The Chances of Government Stimulus Being Implemented (and How to Improve Them) 12. Pragmatic Politics and the Coming Election a. An Obama sweep up b. An Obama Win, and a Divided P arliament c. A Ro maveny Victory 13. Conclusion Since the trapping and pecuniary crash of 2008, Americas parsimony has been stuck deep in the doldrums.Indeed, snap has remained headspring beneath pre-2008 levels, and employment levels pitch one across failed to recover. In an effort to bring to the stinting system, the Ameri green goddess governing essay graduation exercise to Jump-start it by means of stimulus spending, and has with let out delay replaced this approach with great austerity. Nothing appears to be working. For Nobel Prize winning economist capital of Minnesota Grumman, though, the answer is clear the problem is that the master stimulus effort was too small, and, since that sequence, the government is moving squarely in the maltreat direction.Indeed, Grumman argues that Americas modern shoes bares a striking resemblance to the stag republic of the Great Depression, and that history has taught us what to do in such situations the overspent must t ake an aggressive approach to wee the economy into reco rattling. This is the argument that Grumman makes in his new control End This Depression Now Now, Grumman is non a proponent of big government spending infra normal conditions. Indeed, even in a recession, Germans preferred approach is to drop rice beer grade in put up to spur consumer spending.The problem now is that interest rates are already at zero, and this has not been ample to protrude consumer spending off the ground, thus leaving the economy in what is called a fluidity trap. For Grumman, the liquidity trap is genuinely quite common in economic floorturns that al scummy fiscal crashes (as is the slipperiness with the current one, and as was the contingency with the Great Depression), and is why such rejects tend to be deep and prolonged. harmonise to Grumman, the best and surest way to save the economy from a liquidity trap is for the government to step in and undertake the spending that consumers won t.That is, the government must stimulate the economy go on up into action, until consumers can meet back on their feet enough to take over for themselves. For Grumman, this is precisely what happened in America during WI, when the governments military spending served to stimulate the economy and save it from the rips of the Great Depression. Now, Germans opponents entrust dapple out that the American government has already tried the stimulus approach during this downturn, and that this strategy did not work, thus showing that it cannot be relied upon.Whats more, these same opponents argue that the governments debt is already enormous, and indeed dangerously high, and that further government spending at this point may well kip down the debt completely unmanageable, if not force the government into insolvency (which is indeed a threat that is currently being face up by several countries in the European Union). Finally, Germans detractors maintain that pumping more money into th e economy at this time provided threatens to drive up inflation to dangerous levels, perhaps even triggering a hyperinflation spiral.Grumman, though, claims that he has answers to all of these objections. In the first place, as noted above, the motive maintains that the adversity of the governments first stimulus effort did not prove that this approach is in hard-hitting, plainly that it simply wasnt large enough to do the trick. Second, Grumman argues that though government debt does plant a concern, Americas debt is actually not that dangerous by historical tankards. Whats more, since America has its own currency (unlike the countries of the European Union), it is able to print money to turn over its debt, thus preventing the possibility of bankruptcy.Finally, with regards to inflation, Grumman contends that inflation simply cannot get off the ground in a dispirited economy (as the current situation would attest to), and that when it is triggered in an upturn the government can always reverse its policy, thus keeping it firmly in check. Here is Paul Grumman speaking or so his new book (Part II of the interview is available on Youth) http//www. Tube. Com/watch? What follows is a full executive summary of End This Depression NOW By Paul Grumman.PART l THE fuss Grumman begins by way of establishing the gravity of the problems that Americas economy is currently facing. This can be seen in the poem. To begin with, determine Americas Gross Domestic Product (GAP). As Grumman notes, GAP channelises the total value of goods and services that are produced in an economy, adjusted for inflation In a given period of time (loc. 274). As such, GAP provides a global picture of how some(prenominal) an economy is producing, and how quickly it is developing.Between the Great Depression and the beginning of the current recession, Americas GAP grew at an average rate of amidst 2% to 2. 5% per year (loc. 277). The biggest downturn during this time occurred between 1979 and 1982, when Americas economy experienced a double dip recession-?which Grumman characterizes as basically two recessions in close taking over that are best viewed as basically a single slump with a stutter in the middle (loc. 283). At the low point of this recession, in 1982, Americas authoritative GAP was 2 pct below its previous peak (loc. 83), meaning it basically went flat. However, the author continues, the economy rebounded very quickly in the nimble aftermath, growing at a 7 percent rate for the next two years-?morning in America-?and then(prenominal) returned to its normal growth track (loc. 283). When we look at the latest recession, we find that the low point occurred between 2007 and 2009. When compared with the recession of the late sasss and early sasss, we find that the latest plunge As steeper and sharper, with real GAP falling 5 percent over the course of eighteen months (loc. 287). Whats more, the American economy has not seen a strong recovery this tim e most, as growth since the official end of the recession has actually been degrade than normal (loc. 287). All in all, the author claims, the U. S. Economy is currently operating about 7 percent below its potential (loc. 295), and has mixed-up $3 trillion in value since the slump began (loc. 299).Most operative of all, though, is that the economy shows no signs of a major come back any time soon thus guide Grumman to conclude that at this point well be very lucky if we get away with a cumulative output passing game of only $5 trillion (loc. 299). . Unemployment Is Way Up While the GAP numbers are certainly telling, the more significant numbers, according to Grumman, are those concerning unemployment. As the author reminds us, unemployment statistics cover only those who are looking for work but who cant find it, and in December 2011 that amounted to more than 13 one thousand thousand Americans, up from 6. 8 million in 2007 (loc. 94). This is already a staggering number, but when you take into narration all of those sight who have stopped looking for work out of frustration, or who have taken part-time work out of desperation, this number balloons even Geiger by this broader measure there are about 24 million unemployed Americans -?about 15 percent of the workforce-?roughly double the number to begin with the crisis (loc. 202). And since the current slump has dragged on so long, the number of people who have been out of work long (meaning 6 months to 1 year, or longer loc. 224) has risen to levels not seen since the Great Depression.Indeed, Grumman writes that not since the sasss have so many Americans engraft themselves trapped in a permanent stats of Joblessness (loc. 228). The unemployment numbers are particularly important, the author argues, since hey bring home the human element of the story. Indeed, while GAP statistics re stage the abstract loss of an stallion economy, unemployment numbers reflect the loss of income of real people. Whats more, unemployment not only regards income, but self-esteem as well people who want to work but cant find work suffer greatly, not Just from the loss of income but from a diminished sense of self-worth.And thats a major reason why mass unemployment-?which has now been going on for years-?is such a tragedy (loc. 173). Adding to the tragedy here is the fact that those who are shut out of the Job market or long stretches end up being stigmatize, which can hurt their prospects of arrive work in the future Does being unemployed for a long time really fret work skills, and make you a poor lease? Does the fact that you were one of the long-term unemployed indicate that you were a loser in the first place? Maybe not, but many employers think it does, and for the doer that may be all that matters.Lose a Job in this economy, and its very hard to find other stay unemployed long enough, and you will be considered unemployable (loc. 241). While all of these factors have very such affected people who were already in the Job market, it has been even worse for young people who had not yet established themselves before the recession peach. Indeed, unemployment levels among the young tend to be higher than the general population in the best of times, but in the worst of times they tend to get hit even harder. As Grumman notes, truly , this is a terrible time to be youngRoughly one in four recent graduates is either unemployed or working only part-time. There has withal been a notable drop in wages for those who do have full-time Jobs that dont make use of their education (loc. 249-58). 3. The Potential Long- margin Consequences When it comes to the plight of young people, as well as those who have found themselves shut out of the Job market for an ext finish period, these phenomena not only affect those instanter involved, but to a fault threaten to damage the economy in the long term. This proves to be the case because, as mentioned, present unemployment, or underempl oyment, can threaten future opportunities.As Grumman explains, if workers who have been Jobless for extended periods come to be seen as unemployable, thats a long-term reduction in the economys effective workforce, and hence in its productive capacity. The plight of college graduates squeeze to take Jobs that dont use their skills is nearlywhat similar as time goes by, they may find themselves demoted, at to the lowest degree in the eyes of potential employers, to the status of low- skilled workers, which will mean that their education goes to waste (loc. 324). And lost employment opportunities is not the only way that a prolonged slump can adversely affect future economic performance.As Grumman argues, an extended downturn tends to deter businesses from enthronisation in and expanding their operations, which can leave them in a position where they are unable to meet emend when the economy finally does turn round and demand picks up the problem is that if and when the economy finally does recover, it will bump up against capacity limits and intersection bottlenecks much sooner than it would have if the persistent slump hadnt given businesses every reason to stop investing in the future (loc. 328).Germans claim that an extended economic downturn does in fact have significant long time repercussions is bolstered by an MIFF study that looked at previous recessions. As the author explains, the multinational Monetary Fund has tidied the aftermath of past fiscal crises in a number of countries, and its findings are deep disturbing not only do such crises inflict severe short-run damage they seem to take a huge long-term toll as well, with growth and employment shifted more or less permanently onto a lower track (loc. 41). Even more important, for Grumman, is that there is also leaven that a concerted effort to pull an economy up out of a slump can mitigate the future damage (loc. 341). For the author, then, the message is clear America is in the midst of a very serious and damaging slump the longer the country remains in the slump, the worse things ill be in the long run. As such, we must take swift and direct action to extricate the nation from the current situation.Before we take a look at what form Grumman thinks this action should take, it well help to regard the authors assessment of the current situation, and what he thinks landed the country here to begin with. According to Grumman, while Americas current situation is really quite dire, the reason why the country finds itself in this situation is really rather simple. It all has to do with demand why is unemployment so high, and economic output so low? Because we-?where by We I mean consumers, businesses, and governments combined-?arent spending enough E are suffering from a severe boilers suit lack of demand (loc. 453-62). Actually, this whole scenario is unfolding as somewhat of a domino effect, as is the case with all downturns. To be specific, consumers have stopped spe nding, which means that businesses do not feel the need to hire more employees and/or ramp up achievement and since production is down, governments are earning less revenue through taxes, and are themselves more reluctant to spend (loc. 459). So, how does a country get itself out of this kind of slump?Under normal circumstances Americas Central Bank (the Federal Reserve), would pump more money into the economy, thereby lowering the interest rate (by the law of supply and demand) (loc. 554-59, 590). This has the effect of making credit cheaper, which spurs individuals to lower their savings and consumer more, thus pulling the economy out of the slump. As Grumman reports, this strategy has proven to be very effective over the years it worked spectacularly after the severe recession of 1981-82, which the Fed was able to turn within a few months into a rapid economic recovery -?morning in America.It worked, albeit more tardily and more hesitantly, after the 1990-91 and 2001 recession s (loc. 559). The problem this time around is that when the recession hit in 2008 interest rates were already at the rock bottom rate of zero percent, meaning the Fed could not lower them any further (loc. 594). Since that time the interest rate has remained at zero, but, through it all, even this has not been enough to spur consumer spending to the point where it has been able to rescue the economy from its slump.When interest rates are at zero, and people still arent spending, you have what is called a liquidity trap. As Grumman explains, its what happens when zero isnt low enough, when the Fed has sodding(a) the economy with liquidity to such an extent that theres no cost to holding more cash, yet boilers suit demand remains IoW (loc. 596). And for the author, this is the crux of the issue. According to Grumman, a major part of the problem this time around is that when the latest recession hit, a large number of Americans were already deep in debt due to the housing crash, as w ell as other personal debt.What this meant is that even at zero percent interest a vast number of Americans could not afford to resume pending, for they had to get out of their debilitating debt first (loc. 755, 774, 2240). Nor is that the worst of it. Indeed, one of the most straightforward ways to get out of debt is to sell off your assets. scarce when a large number of people try to sell off their assets (including their houses) all at once, this drives down the price of the assets, thus reducing the amount of money that people can raise in order to pay off their debt, thus exacerbating the problem (loc. 63). yet theres more As the prices of assets fall, the purchasing office of money correspondingly emergences (called fellatio), and this increases the relative burden of debt (for the money that you are paying back your debt with is ever change magnitude in value), thus complicating the matter even further (loc. 767). 5. The Root of the Problem The Deregulation of the Financ ial Sector Now, a lot has been made of the issue of how Americans came to be so indebted in the first place, for this was a major part of why the current problem is so perverting.Commentators on the right tend to institutionalize borrowers who took out loans that they were not in a position to pay back, as well as government supported agencies who provided cheap loans to under-funded home-owners (loc. 059). Commentators on the left, on the other hand, tend to put the blame on deregulation in the financial industry, which allowed banking and investiture companies to take on undue risk, as well as the banking and investment companies themselves who took advantage of the situation by way of providing loans to overly-risky borrowers. Grumman himself is primarily in the latter camp.To begin with, Grumman claims that the vast majority of bad mortgage loans were made by private firms, not the much maligned government-sponsored Fannies Mae and Freddie Mac (loc. 1072) who, the author con tends, got into the bad mortgage name only very late (loc. 1072), and not nearly to the extent that private companies did (loc. 1072). But the root of the problem, according to Grumman, is the steady deregulation of the financial industry that began under Reagan in the sasss, and that culminated with the Grammar-Leach-Bailey Act of 1999, which repealed a readying of the Glass-Steal Act.Glass-Steal was a bill passed in 1933 to deal with the ongoing Great Depression (loc. 977). The major provision in the bill was that commercial banking deposits would be insured up to a certain point by the federal government (loc. 977). This was meant o restore confidence in banks, many of whom had fallen to bank runs in the previous years (loc. 977). The issue with insuring bank deposits, though, is that this creates a virtuous hazard for the banks. For the banks know that they will finally be bailed out by the government (meaning taxpayers) if they fall into insolvency (loc. 86) and, as such, th ey are tempted to make overly-risky investments. As Grumman explains, it could have created a situation in which bankers could raise lots of money, no questions asked-?hey, its all government insured-?then put that money into high-risk, high stakes investments, curing that it was heads they win, tails taxpayers lose (loc. 986). In order to protect against this moral hazard, the legislators arse Glass-Steal also included a provision that stipulated that commercial banks could not act as investment banks. This was meant to keep commercial bank deposits unspoilt from overly-risky investments.As Grumman notes, any bank accepting deposits was restricted to the business of making loans you couldnt use depositors funds to speculate in stock markets or commodities, and in fact you couldnt house such speculative activities under the same institutional roof (loc. 990). In 1999, though, this provision of the Glass-Steal Act was repealed by the Grammar-Leach-Bailey Act (loc. 1017). According to Grumman, this move was the height of irresponsibility, and was a major contributor to the extreme risk-taking environment that led directly to the financial crash of 2008 (loc. 007-1017). For the author, though, the repealing of Glass-Steal was not the only article of deregulation that prompted the crash. Indeed, he identifies several pieces of anti-regulatory legislation that also had a hand to play in triggering the whole mess, from President Carters Monetary Control Act of 1980 (which ended isolations that had prevented banks from paying interest on many kinds of deposits loc. 1003) to President Reggaes Garn-SST. German Act of 1982 (which relaxed restrictions on the kinds of loans banks could make loc. 003) to the failure of legislators to keep up with new innovations in the financial industry, such as shadow banks (loc. 1029-42). Now, unlike some left-wing commentators, Grumman is not prepared to let consumers off the hook entirely for the debt problems that complicated the c rash. Indeed, the author (following the economic thinker Hyman Minsk) argues that a big actor behind the growth of consumer debt in the recent past was a general natural tendency for people to forget about the dangers of debt during good times (loc. 733, 798-815).As Grumman explains, an economy with low debt tends to be an economy in which debt looks safe, an economy in which the memory of the bad things debt can do fades into the mists of history. all over time, the perception that debt is safe leads to more relaxed lending standards businesses and families alike develop the habit of borrowing and the overall level of leverage in the economy rises (loc. 810). As the quote makes clear, the optimism in question touched all Americans, not Just the lenders, and so all involved deserve some share of the responsibility (loc. 33, 806). 6. The Story Behind Financial Deregulation According to Grumman, though, it was ultimately the lack of regulations that allowed this selective memory and wild optimism to become dangerous, for the regulations were essentially keeping these sentiments in check (loc. 838). Now, it may rightly be said that the same emotions that led to growing debt also influenced the legislation that allowed it to become dangerous in the end (loc. 40). But for Grumman, there were other reasons behind financial deregulation that are also important to consider.For one, even before regulations were removed from the financial field, the government had already begun to deregulate other industries (such as air travel, trucking, and oil and gas) (loc. 999-1003). These reforms had led to significant gains in efficiency in these industries (loc. 999), and thus many were optimistic that the same approach would work in the financial sector. The problem, as Grumman points out, is that banking is not like trucking, and the effect of deregulation was not so such to encourage efficiency as to encourage risk taking (loc. 007). B. The Political Influence of the Finan cial Sector (and the Wealthy in General) all over and above the factors mentioned above, though, Grumman argues that there is a still more sinister explanation behind the deregulation of the financial sector. And this has to do with the political influence of those who benefited most from it the bankers themselves. Take the Grammar-Leach-Bailey Act of 1999, for instance (which, you will recall, revoked a authoritative regulatory provision of the Glass-Steal Act).As Grumman points out, the gassing of the Act was largely influenced by the lobbying of Citron and Travelers Group, who in 1998 had wanted to combine to become Citreous, but who had encountered obstacles due to Glass- Steal (loc. 1043, 1357-65). And even before this, the political elite stood in excuse of increasing deregulation, despite initial indications that the measures were problematic (loc. 1414, 1130). Indeed, as Grumman is wont to stress, the problems posed by deregulation did not begin with the financial crash of 2008.Instead, they began to surface even in the sasss when the banking sector was first deregulated. For instance, in 1989 the Federal government was forced to shut down the thrift banking industry due to a collapse induce by bad debt (loc. 1099-1120). A desperate move that put taxpayers on the hook for $130 zillion (loc. 1120). Then, in the sasss, further difficulties arose when several large commercial banks over-extended themselves in lending to commercial real-estate developers (loc. 1119).Finally, in 1998, with much of the emerging world in financial crisis, the failure of a single hedge fund, Long Term Capital Management, froze financial markets in much the same way that the failure f Lehman Brothers would freeze markets a decade later (loc. 1123). For Grumman, all of these events should have acted as clear model signs that there was something seriously wrong with financial deregulation (loc. 1 125-30). So why did the political elite fail to heed the warning signs? For Gr umman, this become a good deal more understandable when we appreciate how profitable deregulation was for the financial sector (loc. 142), and how much influence this sector has on government. Indeed, as the author points out, while deregulation did virtually nothing to increase the incomes of middle class families (loc. 137, 1190), the move was a great boon to the wealthy (loc. 1142, 1201), and specially the bankers themselves (loc. 1300, 1418). In addition, its no secret that the wealthy, and the financial sector in particular, has a major influence on government (loc. 1351). This influence exists not only in the form of significant monetary contributions (loc. 346), but in the two-way cross-over between the financial sector and political office (loc. 1380, 1392). Whats more, the influence of the wealthy has been increasing as the rich have gotten richer since the time when deregulation first took off (loc. 1388). Section 3 The Solution is Government Stimulus (and a Few Other Ref orms) 7. The Solution is Government Stimulus Grumman certainly maintains that reforms in financial sector regulations are needed if the country is to avoid falling into future debacles such as it finds itself in presently.For him, though, the more important question has to do with how to get the country out of its current situation. As you will recall, Grumman contends that Americas problem now is that it is in the midst of a liquidity trap. That is, interest rates are already at zero, and yet this still isnt enough to reignite consumer pending. Whats more, since consumers arent spending, businesses have no reason to hire workers and/or expand their operations, and so they arent spending either (loc. 461). Any yet, for Grumman, this lack of spending is very much the internality of the problem.So what can be done? According to Grumman, the answer is simple the government must step in and take over the role of spending (loc. 879). As the author puts it, the essential point is that wh at we need to get out of this current depression is another burst of government spending. Is it really that simple? Would it really be that easy? Basically, yes (loc. 688). Germans argument is that government spending will put money into the hands of the people, who will then be able to recover enough to resume spending themselves.As consumer spending increases, businesses will increase production and hire more workers, thus fully pulling the economy out of its current slump (loc. 679). 8. Objection 1 Government Stimulus Doesnt Spur the Economy (and Response) Now, some argue that government spending doesnt actually increase demand and spur the economy at all, since, they claim, all it really does is take resources from one sector of the economy and transfer them to another.The argument is well-rendered by Brian Riddle of the right wing thing tank the hereditary pattern Foundation, who Grumman quotes in his book the grand Keynesian myth is that you can spend money and thereby incre ase demand. And its a myth because Congress does not have a vault of money to distribute in the economy. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. Youre not creating new demand youre Just transferring it from one group of people to another (loc. 474).Now, for Grumman, this argument may hold true under normal circumstances, when banks are lending and companies are competing for resources (loc. 2369). But in a demoralize economy this is not the case. Rather, in such a situation banks are not lending because safe investments net very little profit, and risky investments are, well, too risky (loc. 2369). So in a depressed economy, resources go unused by the private sector (loc. 2079). This being the case, government spending does not mislay private spending rather, it does nothing but increase demand