Quantitative Easing: A Viable National Defense Tool?

Yes, along with a Harvard economist named Robert Barro. But their assumptions have been severely scrutinized and they are of the minority in terms of real policy makers that disagreed with the stimulus.

My take on their faults is that they are using multipliers from WWII where Govt spending was the biggest. And as Paul Krugman pointed out, even though I'm not a huge Krugman fan... is that you can't use multipliers from WWII because it was a time of rationing and fully employment. The entire theory that Govt spending causes a crowding out effect is completely false. Especially deficit spending since there is no one that has to give up their spending for deficit spending.

There is absolutely no validity to the assertion that a Govt that represents a monopoly on it's currency has to "borrow" the made up currency from people that can not create the made up currency.

I'll listen to Ronald Reagan's top economic adviser instead.

 

Well, that is not the reason why they were wrong. It is the fact that the means for crowding out to occur never did occur. The federal funds rate has remained at 0 percent-0.25 percent since the stimulus went into effect, thereby rendering their assumptions null and void. In other words, if we applied their scenario to reality, interests rates were not a determinant of the effectiveness of the stimulus. This is because if government spending increases, and interest rates remain the same, investment spending remains the same. So, some other factor besides interest rates has to have contributed to the failure of the stimulus. Although Taylor was correct that the stimulus would have a smaller multiplier effect. The problem from my perspective was that we allocating funds to policies that have small multiplier effect due to marginal propensities to save. More of the $787 billion in funding should have gone to direct government spending rather than transfers or taxes.

 

I heard Reagan mentioned. This guy is one of the few telling the truth. All of this offshoring will not benefit America in any way, it is all globalized garbage for the cheapeast labor. The Fed is currently bailing out Europe in their global banking scheme. Guess what, screw your global debt web of junk. It's all a hoax.

Oh yeah, and he says 9/11 explanation was BS, which it absolutely was.

 

It is definitely why they are wrong, because that is their empirical basis for what "multiplier" to use. That is the entire reasoning for their opposition of stimulus. So to say that is not why they are wrong is completely false. If that little assumption is changed their entire argument is completely different. It literally relies on their assumption of what they think the multiplier is.

And this is still based on our economy before 1971. We now no longer have a crowding out effect based on deficit spending because we don't have to fund deficits. You can make a case for taxes, but with our incredibly low taxation that argument is not going to get very far.

And I 100% agree our stimulus should have been direct Govt spending on infrastructure and jobs rather than state stimulus and tax rebates. Although I do think another stimulus to support the states should have happened also.

 

Yes, but that multiplier was formulated out of the assumption that the interest rate peg would increase over time due to increased government spending. That would have occurred as an automatic stabilizer, but the Federal Reserve was engaging in discretionary monetary policy when it decided to maintain the federal funds rate at 0-0.25 percent. So, neither you or I are wrong, if Taylor's multiplier originates from World War II. It is dependent on an automatic stabilizer.

 

Well, I think it was also the fact that the stimulus did not include greater tax cuts, which should have been included. Tax rebates have less of an effect upon the multiplier and real GDP than tax cuts simply because they are smaller in value. Of course such cuts would have had to been more than just an extension of the Bush Tax Cuts. This is also why the 2010 extension of such were a failure. The Bush Tax Cuts were a policy introduced and continued throughout an expansion, a bubble to be more specific. They did not encourage spending with the extra disposable income, but saving. So, we should have implemented greater tax cuts as part of the stimulus package as well.

 

Well I haven't read Taylor's piece, but I know Barro's basis is completely dependent on his study of WWII...

http://online.wsj.com/article/SB123258618204604599.html

But there are so many inconsistencies with this assumption. First the rationing affect that was going on, second the fact we had full employment provided by the Govt, and the fact we were fighting for our lives.

So to take this extreme war time stimulus spending to create your basis for a Govt multiplier effect is asinine.

 

Of course Barro's analysis is asinine. He never mentions how interest rates changed. Crowding out is dependent on two factors, government spending and interest rates. Government spending determines how interest rates react, which effects consumption and investment. This is what Taylor and Cogan's multiplier was based upon. Take a look:

http://www.volkerwieland.com/docs/CCTW Mar 2.pdf

This essentially was the rationale for Taylor's multiplier.

 

Explain to me in laymen terms how interest rates play a role in crowding out.

 

As government spending increases, interest rates rise as a result. Again, this is an automatic stabilizer, it is not a discretionary policy. When this occurs, demand on the supply-demand model for investment spending and demand on the supply-demand model for consumption shift leftward. In other words, investment and consumption decrease, referred to as crowding out.

Now, if government spending increases but interest rates are kept the same, there is a discretionary policy preventing crowding out from occurring. In this case, both consumption and investment spending do not change as a result. This is what actually happened in regards to the stimulus. This does not mean that consumption and investment spending does not change for different reasons.

 

Ok, I am not understanding what you are saying...

#1) What do interest rates have to do with Govt spending? They are controlled by the Fed regardless of how much the Govt spends.

#2) Why would investment and consumption decrease when people pay less in taxes and the Govt spends more in deficit spending?

#3) How do you determine what spending by the Govt would have been investment/consumption spending by the private sector? The whole point of Govt spending during recessions is that the private sector is not investing and is not consuming. So where is the crowding out?

 

Like I said, government spending effects interest rates from the perspective that they automatically stabilize if left to their own devices. Of course this is not true because the Federal Reserve is highly discretionary in its monetary policy. This is why Taylor's theory is discredited.

In regards to number two, crowding out focuses on four factors, government spending, interest rates, consumption, and investment spending. All other things are equal.

In regards to number three, crowding out will only occur in two scenarios. First, when there is a liquidity trap, or in the classical model, when the liquidity preference and money supply equilibrium curve, or LM curve is vertical.

 

isn't it great to have "enemies" ?

 

yes, and if they try to sell their oil in gold, we bomb the crap out of them.

 

You target the private sector currency, which is not pegged to gold, nor is the government currency. The Iranian rial for government usage is pegged to oil. Consequently, targeting the government with such a tactic is futile. However, the goal would be to target the citizens' currency to provoke rebellion. The country already suffers from a 9 percent inflation.

Preferrably, if we can decipher whether Iran is using its nuclear program for religious reasons, or for economic and political leverage, I would end all economic sanctions with Iran, and normalize relations. The problem is we hear both, so it is hard to determine which path Iran's government takes. Until we understand that path, the Ahmadinejad Regime will continue to keep the international community on its toes.

 

I suppose we will set up a "democracy" when complete ?

 

I would leave the decision up to the Iranian people, regardless of United States policy towards Iran in a different capacity.

In addition, like I said in the above post, my preferred policy path to dealing with Iran would be to end all economic sanctions and normalize relations if we can determine that Iran's motive for nuclear development is to gain political and economic leverage rather than religious in nature, in which case, I would not advocate using QE for such a purpose.