The do nothing method of finance, would it work?

[The Dagda]

http://uk.news.yahoo.com/11/20090114/tpl-brown-brands-conservatives-the-do-no-0a1c1a1_1.html"

Brown brands Conservatives the 'do nothing' party

Gordon Brown has accused the Conservatives of being a "do nothing" party in their response to the economic downturn. The prime minister criticised the Opposition as being "out of touch with the rest of the world" with their policy of cutting public spending. He told MPs at prime minister's question time that Conservative leader David Cameron was "completely isolated" on the global stage. Brown also praised the government's package of support for businesses, which he said was "targeted", "focused" and "funded". "This is real help for business now," the prime minister stated. But Cameron accused the prime minister of creating a "pale" version of the Conservative loans guarantee scheme. He asked Brown to "be straight" on the economy and admit that he had been wrong with "boom and bust". "On boom and bust, doesn't the PM understand that if he cannot be frank about the past no one will believe him in the future," he said. Cameron claimed that this was one of the reasons why there was a lack of confidence in the economy. But Brown replied that it was a global financial crisis. He said that no other country was copying the Conservative Party economic policy. "No one except him is proposing to cut public spending," the prime minister said of Cameron. "You cannot fund support for business without the public expenditure to make it possible."But Cameron said that the prime minister was "achieving nothing". He claimed that the Labour 2.5 per cent VAT cut has been "ridiculed" and "condemned". The cut has added £12.5bn to the government debt and has become "an expensive failure", Cameron claimed. Brown retorted: "He [Cameron] may think that VAT is unimportant but a typical family has £5 extra in their pocket."He claimed: "The Conservatives are out of touch with the rest of the world."The prime minister told the Opposition benches that consumer spending helps business. "He [Cameron] may think it is irrelevant but people in my constituency think it is important," Brown said. "He is totally on the wrong side of the argument. "If he wants to be outside of the consensus for what needs to be done, let it be."Cameron accused the prime minister of "running round like a headless chicken announcing one bogus thing after another". He criticised the government for building up debt for Britain's children "in a vain attempt to save his own skin". Liberal Democrat leader Nick Clegg also accused the government of copying the Conservatives on the loans guarantee scheme. He queried why, under Lord Mandelson's initiative, banks should be asked again to do "what they should have done in the first place". "The prime minister is playing copycat with the Conservatives instead of hard ball with the banks," Clegg told the House. "He should stop telling banks to hoard and lend at the same time." Clegg suggested that the prime minister should use one state bank to lend to businesses. But Brown argued that the government was "doing things practically". Since November, 20,000 firms have benefited from government actions, the prime minister said. "I believe that the measures we are taking today will make a difference," he added.

So what should be done and do the libertarians/conservatives have it right in returning to a capitalist ideal not a socialist plan? If not what other options are there?

 

[Werg22]

No. Theoretically, when private demand is low, increased federal spendings is an economy's best interests. In practice, there have been superb examples of this; see Roosevelt's New Deal, or Hitler's/Schacht's pre-War economic recovery.

 

[Vanadium 50]

But the New Deal didn't end the Depression.

 

[Werg22]

Taken from the Wikipedia article, here's a plot of GDP measured in constant currency in function of the years spanning 1920 - 1940.

To be sure, only the years preceding 1939 are interesting. Clearly, from 1933, the time of the New Deal's inception, to 1939 there is a disturbed but sharp rise in GDP.

The New Deal didn't go so far as to end the Depression, but it alleviated it.

 

[The Dagda]

But who's tried a do nothing plan? And how can we be sure that won't work?

If you ask me that graph may be indicative of nothing more than the usual boom and bust cycle we see with capitalism in general.

 

[Vanadium 50]

GDP is only part of the story - the great depression was characterized by high employment: and it didn't drop below 10% until 1942 (and it didn't drop below 1929 levels until the following year).

 

[LowlyPion]

But who's tried a do nothing plan? And how can we be sure that won't work?

Looks to me like we just had 8 years of that, except for the last frantic months when the scab was ripped off the boil and Bush sent a panicked Paulsen scrambling to congress.

 

[The Dagda]

Looks to me like we just had 8 years of that, except for the last frantic months when the scab was ripped off the boil and Bush sent a panicked Paulsen scrambling to congress.

Yes but we were in a relative period of economic stability at least in the UK, in fact we had never been more well off as a whole. Would the do nothing plan work in a crisis, and can we say to libertarians that their idea is crazy? At least the right wing ones. I'm not just talking about the US, but every system in the West, could it work?

I saw a program a couple of days ago that said the stock market reminded a prominent economist of a pack of dogs, first they run one way, then another. That there is a certain pack mentality and a heard mentality in general, they highlighted this by showing bison crossing a river, first a few go then some of the more adventurous follow, then when they've overcome their natural fear of the water and or crocodiles they all go. This made me laugh but economists are revising their theories to take account of the inherent unreliability of social models and finance. Shouldn't we be thinking outside the envelope too?

 

[russ_watters]

I don't know how you define a "do nothing plan", but what do you guys think of Reaganomics? It's probably the most lazzes faire we've been since before the new deal.

 

[The Dagda]

I don't know how you define a "do nothing plan", but what do you guys think of Reaganomics? It's probably the most lazzes faire we've been since before the new deal.

That's a point maybe I should define it as let the banks and by extension everyone fend for themselves, with no input from government, kill or be killed, capitalism with no input from government in this case. Doing nothing when you're in the Reagan boom years, is just letting the freight train run, it's not particularly revolutionary.

 

[Gokul43201]

GDP is only part of the story - the great depression was characterized by high employment: and it didn't drop below 10% until 1942 (and it didn't drop below 1929 levels until the following year).

But it clearly turned around in 33.

Total employment numbers: http://en.wikipedia.org/wiki/New_Deal

Unemployment in 1932 was over 20% and rising fast over the last 3 years (at about 5% per year). That it then began dropping at a rate of 2% a year from 1933 is to be considered a failure of the New Deal?

 

[Gokul43201]

I don't know how you define a "do nothing plan", but what do you guys think of Reaganomics? It's probably the most lazzes faire we've been since before the new deal.

I think that the tax cuts spurred GDP growth over the short term, but being financed entirely by deficit spending, they may have been more detrimental than beneficial over the long term.

 

[The Dagda]

Ok I'm going to assume that no one has a problem with the do nothing strategy because to be frank they have no idea what would happen in the middle of a recession.

Let me ask another question then, in the UK we have bought shares in some banks in return for a bail out, so they are effectively part nationalised, the bank still has the control but we can influence its actions. In the US even the most left wing of Americans do not want to nationalise banks, so in essence they are throwing vast sums of money at them for nothing, with no provision in case it all goes pear shaped? Does anyone think there's something wrong with that?

As to the poll and given your answers I'm going to vote yes, although I think maybe, but I forgot that poll option.

 

[ThomasT]

Ok I'm going to assume that no one has a problem with the do nothing strategy because to be frank they have no idea what would happen in the middle of a recession.

Let me ask another question then, in the UK we have bought shares in some banks in return for a bail out, so they are effectively part nationalised, the bank still has the control but we can influence its actions. In the US even the most left wing of Americans do not want to nationalise banks, so in essence they are throwing vast sums of money at them for nothing, with no provision in case it all goes pear shaped? Does anyone think there's something wrong with that?

As to the poll and given your answers I'm going to vote yes, although I think maybe, but I forgot that poll option.

I might have a problem with a do nothing strategy, but I don't think I know enough yet to choose one course of action over another even though I've been looking at all sorts of economic statistics since a bit before this thread was started.

If there are problems with the current situation, then exactly what are they?

The strategy one chooses would depend on one's goals. Do we want more freedom (greater buying power) for the majority of consumers, or do we want more freedom for owners, investors and corporations? Do we want stability or do we want to maximize GDP growth? Are these goals at odds with each other? (And, etc., etc.}

You can stimulate mass consumption either directly (cash payments, raising minimum wage, price controls, etc.) or indirectly (tax cuts and various credits for investors and entrepreneurs, and government spending on large infrastructure projects, etc.). My guess is that some mix of free market- laissez faire and socialist approaches would produce a situation that everybody can be happy with, more or less. Of course, that's sort of what we have already -- maybe it just needs a bit of tweaking.

 

[Astronuc]

I believe the Dust Bowl period had an impact on (exacerbated) the Depression.
http://en.wikipedia.org/wiki/Dust_Bowl

 

[WheelsRCool]

The New Deal failed because it was a conglomeration of policies involving high taxes, price controls, rationing, and a high degree of government regulation over business. It unfortunately lengthened and deepened the Depression. FDR actually tried to give himself power over the U.S. economy equivalent to what Hitler and Mussolini had had over the German and Italian economies through his National Industrial Recovery Act, but this was declared unconstitutional by the Supreme Court.

FDR had his cause and effect reversed; he believed that the Depression occurred because of falling prices due to excessive business competition, rather than the reverse which was prices having fallen because of the Depression. The "solution" was then to raise prices, which was to be done by creating artificial shortages, hence requiring cutting back on production by government fiat, and limiting competition between firms and competition between workers to stabilize prices; basically make each sector of the economy more monopolized and have each sector cut production so they can then raise their wages and prices, and supposedly the economy recovers.

With a huge amount of unemployed workers wanting a limited supply of jobs, wages should have fallen naturally from competition among workers, yet wages instead increased (due to New Deal policies). Meanwhile, production was cut back, meaning fewer jobs. Not a good thing.

Things like violation of the Sherman Antitrust Act were also permitted, along with a whole host of oddball policies.

After all, if the economy is in recession or depression, you fix it by getting job creation going again. You can have government programs to alleviate the pain, but actual business growth is needed to create jobs to stimulate and grow the economy.

The notion that one could recover the economy by limiting production and competition was incredibly wrongheaded.

Then what happens is when the infrastructure programs run out, there are no new jobs to go to. The infrastructure is done, but the economy wasn't able to create any new jobs because of limiting production and competition and creating more monopoly. Thus the U.S. economy didn't really recover until the U.S. entry into WWII.

Here is an interesting paper on the subject:

http://www.economics.hawaii.edu/research/seminars/02-03/02-21.pdf

Some good things did come out of the New Deal however, such as the FDIC and the SEC, for example.

 

[mheslep]

But it clearly turned around in 33.

Total employment numbers: http://en.wikipedia.org/wiki/New_Deal

Unemployment in 1932 was over 20% and rising fast over the last 3 years (at about 5% per year). That it then began dropping at a rate of 2% a year from 1933 is to be considered a failure of the New Deal?

The primary cause of the great depression was the contraction of the money supply as a direct result of the actions of the federal reserve. There was a power struggle between NY and Washington Feds in '28/29; Washington won with the death of Fed banker Benjamin Strong. The Washington Fed then thought they needed to restrict money; to hold funds until there was a 'real emergency'. By '33 this policy had cut the US money supply by 1/3. There's wide agreement on the cause side of the argument now thanks to the work of Friedman and Schwartz, recently re-recognized by http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm" .
The causes of the recovery from '33 on are still in heated debate: New Deal, WWII, restoration of confidence, _your theory here_. The timing of the New Deal programs roughly tract the recovering employment figures. However, the money supply was allowed to grow again in '33, and some of the Smoot Hawley tariffs began to be reversed.
http://www.nowandfutures.com/images/m3_plus_credit_and_debt1920-40.png
So New Deal fiscal programs or other causes? Given statements like the one from Roosevelt's T. http://www.businessandmedia.org/articles/2008/20081104085447.aspx" :

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong ... somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises ... I say after eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"*

My money goes the reversal of the crazed Fed contraction policies starting in '33.

 

[mheslep]

Cole and Ohanian, authors of a 2003 published article critical of some New Deal policies had an Op Ed today that briefly summarizes their arguments on the New Deal:
Good: Deposit Insurance, SEC, unemployment benefits.
Bad: Suppression of competition, setting artificially high prices and wages via the National Industrial Recovery Act (NIRA).
In sum they argue that by 1933 productivity was high and increasing, the gold standard was dropped allowing money to flow, and that the economy should have been able to return to full (normal) employment. It did not do so because of the federal policies via NIRA. A normal business cycle should have seen falling wages which eventually leads to increases in employment. The New Deal caused the opposite to occur, driving wages up through government mandates with the consequence that the depression was extended by several years. Critics of Cole and Ohanian point to the overturn of NIRA by the Supreme Court in '35, saying that it could not have matter, but C&O counter that the Roosevelt administration took no action until years later to stop the cartel behaviour it had set up.

Government spending as stimulus in the Depression is still an open question; seems to be hard to get a handle on it as Roosevelt wasn't consistent on spending - running high deficits in '32-'36 and then cutting back in '37 to balance the budget.

I plotted all the tabulated employment and wage data from Cole to illustrate the rising wages concurrent with low employment, especially manufacturing employment where NIRA operated.
http://www.economics.hawaii.edu/research/seminars/02-03/02-21.pdf"
http://online.wsj.com/article/SB123353276749137485.html"
http://www.minneapolisfed.org/research/QR/QR2311.pdfhttps://www.physicsforums.com/attachments/17393

 

[Gokul43201]

The primary cause of the great depression was the contraction of the money supply as a direct result of the actions of the federal reserve.
...
My money goes the reversal of the crazed Fed contraction policies starting in '33.

Note: I did not say that the New Deal spending was what reversed the employment numbers. I merely said that it looked pretty hard to find support in the unemployment trends, for an assertion that New Deal spending did not help the economy out of the GD.

 

[mheslep]

Note: I did not say that the New Deal spending was what reversed the employment numbers. I merely said that it looked pretty hard to find support in the unemployment trends, for an assertion that New Deal spending did not help the economy out of the GD.

I'd call it ambiguous, hence the debate. The wiki chart includes population growth so it's esp. hard to tell there. UNemployment peaked at ~25% in '33, dropped to 14.3% in '37, but was still at 17% in '39.
http://www.bls.gov/opub/cwc/cm20030124ar03p1.htm

 

[D H]

The Prime Minister's Questions is a rather amusing British invention. "When did you stop beating your wife?" "I know you are, but what am I?" CSPAN airs the Prime Minister's Questions. (CSPAN isn't always mindnumingly mindnumbing.)

The "do nothing" epithet was thrown around quite a bit during the last session in a heated discussion between David Cameron and Gordon Brown (I thought they were going to come to blows). Transcript: http://www.theyworkforyou.com/debates/?id=2009-01-28a.288.3#g288.8

To the OP: Are the Conservatives truly advocating doing nothing, or was this just a sweet bit of invective that Brown used to avoid answering the questions?

 

[Gokul43201]

I'd call it ambiguous, hence the debate. The wiki chart includes population growth so it's esp. hard to tell there. UNemployment peaked at ~25% in '33, dropped to 14.3% in '37, but was still at 17% in '39.
http://www.bls.gov/opub/cwc/cm20030124ar03p1.htm

Here's the plot:

http://william-king.www.drexel.edu/top/prin/txt/probs/unemdpr.GIF

From: http://william-king.www.drexel.edu/top/prin/txt/probs/probOH.html

 

[Gokul43201]

I don't know how you define a "do nothing plan", but what do you guys think of Reaganomics? It's probably the most lazzes faire we've been since before the new deal.

There's one more point I wanted to make about Reaganomics in the context of today that I forgot to the last time round. When your tax rate is near 80% (top bracket), you can make a lot more convincing argument that you are on the right side of the Laffer curve than when it is near 40%. And unless you can make that argument, you have no rationale for a rate cut based on GDP growth.

 

[mheslep]

I don't know how you define a "do nothing plan", but what do you guys think of Reaganomics? It's probably the most lazzes faire we've been since before the new deal.

Tax cuts are going to be part of this recession bill, heck the President even campaigned on tax cuts for the middle class. There's little debate that -in general- tax cuts stimulate GDP (how much is the question). Reaganomics, as I understand it, went beyond generic tax cuts to say that cutting tax rates for the wealthiest would trickle down to the rest of the economy. That's the twist that creates the political firestorm.

There's one more point I wanted to make about Reaganomics in the context of today that I forgot to the last time round. When your tax rate is near 80% (top bracket), you can make a lot more convincing argument that you are on the right side of the Laffer curve than when it is near 40%. And unless you can make that argument, you have no rationale for a rate cut based on GDP growth.

Not exactly. Laffer is about net government revenues, and in that sense you're right up until the last sentence about GDP. There's little question though that long term tax cuts (even at lower rates) stimulate GDP. Whether they do so enough to pay for themselves is another question (Laffer).

The debate at the moment is whether govt. deficit spending or tax cuts does more to stimulate, i.e., create / save jobs.

 

[Gokul43201]

Not exactly. Laffer is about net government revenues, and in that sense you're right up until the last sentence about GDP.

Yikes, that's embarrassing! Yes, that ought to be revenues, not GDP, that my argument should have been made about.

 

[drankin]

I just have to say that if the government does not interfere, the market will adjust as needed. It always has and always will provided we continue to have a "free" market. Let fall what needs to fall and let businesses readjust. All bailing out does is prop up a system that began to fail rather than letting it fail/adjust to our changing economic environment. It doesn't take an economist to see this. The best thing the government can do is take this opportunity to look at it's own current processes and make them more efficient. At the same time cut our taxes, giving consumers and businesses more cash to use. Until I'm convinced otherwise, this seems the best course of government action.

 

[Gokul43201]

I just have to say that if the government does not interfere, the market will adjust as needed.

What exactly is "needed"?

It always has and always will provided we continue to have a "free" market.

How could it always have, when we've never had a free market in the first place?

And even if we did, why should "it always has" imply it "always will"? Seems there's a gap in the logic.

Let fall what needs to fall and let businesses readjust.

Under any circumstance? What if that which needs to fall turns out to be everything there is? Would you be okay with taking the chance that letting things fall may put the economy back in the stone age?

All bailing out does is prop up a system that began to fail rather than letting it fail/adjust to our changing economic environment. It doesn't take an economist to see this.

Yet, many economists do not share your view. Perhaps we should let all other important government tasks also be decided by non-experts resorting to "common sense". Let's have that level-headed florist down the street run the DoD.

The best thing the government can do is take this opportunity to look at it's own current processes and make them more efficient. At the same time cut our taxes, giving consumers and businesses more cash to use. Until I'm convinced otherwise, this seems the best course of government action.

Who is going to convince you otherwise? Not an economist!

Personally, I don't really much like the shape of the stimulus bill that went through the House, but based on what the most economists I've read are saying, I can't argue that it is still worse than doing nothing. And until now, I haven't come across a single serious proposal that said the government should have done nothing last September (besides cutting taxes), when all hell was breaking loose in the markets. If I recall correctly, even the more staunch free-market proponents here (eg: Russ, mheslep) were in support of some form of government intervention. But there's still a big part of me that wishes the folks on Wall Street hadn't gotten a bail out.

 

[drankin]

I'm not going to parse your every sentence but in response I would simply say that US gov't cannot spend our money better than we can in an effort to "stimulate" the economy. We have/are in the process of giving banks almost a trillion dollars and what has this changed for the economy? Now we are going blow close to another trilliion and we have no evidence historical or otherwise that this is going to change anything. Congress needs to quit spending our freaking money on BS! It's BS to even call it a "stimulus" package. It's just a cover to get buy-in towards more gov't spending. I'm surprised at the lack of outrage. But hey, it's easy to spend money you don't even have.

 

[Gokul43201]

I'm not going to parse your every sentence but in response I would simply say that US gov't cannot spend our money better than we can in an effort to "stimulate" the economy.

How do you know this?

All the historical evidence suggest that people do not like to spend money in a deflationary recession.

But even if you are right, and all the economists calling for spending a la Keynes are all completely wrong, would it be wise for your government to put all its eggs in your basket and completely disregard the counsel of such a strong community of experts? Wouldn't it be a safer bet to try a little bit of both strategies, and dilute the risk a little bit?

 

[drankin]

How do you know this?

All the historical evidence suggest that people do not like to spend money in a deflationary recession.

But even if you are right, and all the economists calling for spending a la Keynes are all completely wrong, would it be wise for your government to put all its eggs in your basket and completely disregard the counsel of such a strong community of experts? Wouldn't it be a safer bet to try a little bit of both strategies, and dilute the risk a little bit?

Is saving money a bad thing to do right now? Save now and we can spend later when the conditions are better. Basically, it sounds like you are saying that the feds should spend our money because the public is too dumb to spend it themselves?

 

[Gokul43201]

Is saving money a bad thing to do right now?

Why does saving money jeopardize the recovery?
https://www.physicsforums.com/showthread.php?t=289267

Basically, it sounds like you are saying that the feds should spend our money because the public is too dumb to spend it themselves?

I said no such thing.

 

[drankin]

Why does saving money jeopardize the recovery?
https://www.physicsforums.com/showthread.php?t=289267


I said no such thing.

No, you didn't, and I don't mean to put words in your mouth. But is this the attitude of Congress and the current administration? If the voting public had their say, there wouldn't be a stimulus package that looked anything like what is being pushed through right now. Let's just stick with cutting taxes and let the market figure itself out.

 

[Gokul43201]

Let's just stick with cutting taxes and let the market figure itself out.

That was mostly what the Bush policy was. And we've had possibly the poorest 8-year span of economic activity under Bush than any time since WW2.

And don't forget, we tried the tax rebate business last year. Fat lot of good that did!

Here's a link to all the analysis from Mark Zandi, McCain's economic adviser: http://www.economy.com/mark-zandi/default.asp?src=economy_homepage

An excerpt from the Jan 21 report:

The top priority should be the implementation of a large fiscal stimulus package. The House Democratic plan proposed in mid-January includes both increases in government spending and tax cuts. The plan costs approximately $825 billion, equal to 5.5% of the nation's gross domestic product. This is not as costly as the public works projects of the 1930s, but it is costlier than the 3% of GDP spent to stimulate the economy during the tough downturn in the early 1980s. The cost of the current package would thus be consistent with expectations regarding the severity of this downturn. At 5.5% of GDP, the stimulus would also be about enough to ensure the economy stops contracting by the end of 2009 and that GDP returns to its prerecession peak by the end of 2010—reasonable goals.

The mix of tax cuts and spending increases in the stimulus package is designed to provide both quick relief and a substantial boost to the struggling economy. The tax cuts will not pack a big economic punch, as some of the money will be saved and some used to repay debt, but they can be implemented quickly. Aid to state and local governments will not lift the economy, but it will forestall cuts in programs and payrolls that many governments would be forced to make to meet their states' constitutional obligations to balance their budgets. Infrastructure spending will not help the economy quickly, as it will take time to get even "shovel-ready" projects going, but it will provide a significant economic boost. Because the economy's problems are not expected to abate soon, this spending will be especially helpful this time next year.

But hey, what do economists know?

 

[mheslep]

That was mostly what the Bush policy was. And we've had possibly the poorest 8-year span of economic activity under Bush than any time since WW2...

Upon what do you base that statement? The looming (at the time) credit instability? Wage disparity? Surely not the macroeconomic conditions:

US GDP 2000-2008.

http://www.indexmundi.com/g/g.aspx?c=us&v=66
For comparison, US historic GDP average "www.ers.usda.gov/Data/macroeconomics/Data/HistoricalRealGDPValues.xls"[/URL]

GDP growth back to '47 by quarters:
[ATTACH=full]200533[/ATTACH]

US Unemployment 2000 to 2008
[ATTACH=full]196656[/ATTACH]
[url]http://www.indexmundi.com/g/g.aspx?v=74&c=us&l=en[/url]

 

[The Dagda]

But hey, what do economists know?

They know enough to get by, and probably more than those on Wall street, but not enough to predict the future. I saw an interesting program on the credit crunch and why it happened, and the bull bear models of economics and herd mentality lead to it. It seems to me the people most able to predict the stock market, predict that it is fundamentally unpredictable, but there are certain indicators that give hints.