by Vernon L. Smith Info
Vernon L. Smith, the George L. Argyros Professor in Finance and Economics at Chapman University, is a 2002 Nobel Laureate in Economics.
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Getty Images Deficit "stimulus" is not the road to economic recovery. It's the problem, not the solution, writes Nobel laureate economist Vernon L. Smith, who grew up in Depression-era Kansas. Plus, read the original manifesto to reboot America produced by top economists.
Last October a Rasmussen poll was already showing that only one-third of likely voters believed that the stimulus package was helping the economy. You, your fellow citizens and Congress are now concerned that the main effect of the federal stimulus has been to increase the burden of a swollen government living beyond its means. You were told that the stimulus was justified because it would jump-start the economy, setting in motion a recovery that would increase output by more than its increased deficit cost. But you are skeptical that there has been any recovery, and think that you have been misled by the president and the economic experts.
Your doubts have received bipartisan reinforcement. The $860 billion stimulus under the Obama administration was preceded by a $170 billion Bush stimulus that was said to be ineffectual because it was too small. Out of fear, people tended to use the Bush stimulus checks to pay down debt and to increase saving. Unemployment was rising, and large numbers of home owners were already living in homes worth less than what they owed the bank. It is now worse. In the five most severely affected states, here is the percentage of homeowners who owe more than their home is worth: Nevada (70%); Arizona (51%); Florida (48%); Michigan (38%); California (35%). Our current crisis was brought on by government and private programs designed to make it easier for people to buy homes. The result was an unsustainable housing bubble, and ensuing crash that put banks, businesses and households all in debt-reduction mode.
“Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies.”
The case for government deficit spending was that idle unemployed labor and capital would be put to work to increase the output of goods and services. Hence, a dollar of government spending would produce more than a dollar of new output because of the “multiplier effect.” Robert Barro of Harvard has studied wartime and defense spending, and found a multiplier of only 0.8. But those were better times, when businesses, banks, and consumers were not primarily concerned to use new income to pay down debt or save to protect against income loss. Even in better times there wasn’t much bang for the buck.
So what has been the government’s response in the current crisis? Besides spending stimulus, it was tax incentives for new home buyers and cash for clunkers if you bought a new car. All three are programs for borrowing output, homes and cars from future production and sales. Using subsidies to pump up home sales beyond what people could afford was the problem that led to the crisis. Now the problem is touted as the solution.
We are in times not seen since the Depression, when at its depth in 1934 my parents lost their Kansas farm to the bank. Such memories and the intensity of the current crisis led me and my colleague, Steven Gjerstad, to examine the last 14 recessions including the Depression. We have been surprised and dismayed to learn that in 11 of these 14 recessions the percentage decline in new house expenditure preceded and exceeded percentage declines in every other major component of GDP. Hence the sources of the current debacle are hardly new! Moreover, past recoveries in the housing market have been closely associated with recovery from recession. The latest data continue to tell us that the turnaround in housing, consumer durables, and business investment are all anemic.
Our past housing and government spending mistakes leave us with no good choices. But please no more government spending! The deficit must now be faced. Avoid any new taxes; they are unlikely to reduce the deficit without discouraging recovery.
Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies. Don’t subsidize them; just reduce their taxes even as they become larger; also reduce any unnecessary impediments to their formation. This is strongly indicated by the business dynamics program of the Bureau of Census and the Kauffman Foundation which has tracked new startup firms in the period 1980-2005. The entry of new firms net of departing firms in this period account for a remarkable two-thirds more employment growth (3 percent per year) than the average of all firms in the US (1.8 percent per year). The invigorating turmoil created by new technologies, with accompanying growth in output, productivity, and employment lead to new business formation as old firms inevitably fail. Reducing barriers to that growth encourage a recovery path which does not mortgage future output.
Vernon L. Smith, the George L. Argyros Professor in Finance and Economics at Chapman University, is a 2002 Nobel Laureate in Economics.
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I have a radical proposal, Instead of just trying to collect mortgages that are uncollectable, just write them off totally and give people their houses outright--wipe out all the debts or stick them in a bad bank somewhere, but don't expect the "small people" to be paying anything in a depression. In any case, we need a national housing bank that will basically give people their own housing, at least below a certain income. I also think the Federal Reserve should set up a national investment bank to provide grants and long term, zero-interest loans to a wide variety of industries, small business, infrastructure projects, research, the space program, state and local governments, etc. Put as much money into that for as long as it takes. No more tax cuts. About 40% of the so-called stimulus was tax cuts and it did nothing for us at all. Too much money has already been poured into the upper levels of teh economy, and not enough to the lower and middle levels.
People bought a home they couldn't afford, and your solution is to just write off the debt in its entirety, and give them the keys to their home? I would be interested to hear what your suggestion would be for the next time they get themselves in such dire straights. How many "strikes" do these owners get. And, what other durable and non-durable goods would you apply this "theory" too, autos, appliances, clothing? Our public school systems have educated America into financial illiteracy. Nothing could more plainly exemplify that illiteracy than your "idea'.
Yep, that's my solution. Write off all the debts and dump them in a bad bank somehwere--just wipe the slate clean and start over, with a national investment bank. The Fed could loan money at zero interest rates if necessary and cut out all the greedy middlemen.
Right-of-center, you're just hopelessly old fashioned and behind the times, still holding us back with 19th Century economics. You probably believe in 19th Century physics and psychology, too, even the the world has moved into the space age. People on your side are just dull and backward.
The New 21st Century Economics---Everything is Free !!! Yippee !!! All Hail the Messiah and mcmchugh99 !!!
mcmchugh Why should people be given free houses? Why should those who have contributed the least get a free pass when everyone else has to work hard to pay their mortgages? That's never going to fly in this country. Ever. No matter what party is in office. Take your free stuff fantasy to Cuba, though I doubt it will fly there either.
Why not give everyone a free home? I don't expect Republicans to understand this. No imagination. Never any new ideas or thinking outside the box. Just an automatic "No, no, no".
@mcmchugh99, If everybody got a free home they would all be worthless and then everybody would be fighting over which home they got. Thank God for Party and Power of No!!!
If the repoed homes in my community would be given away, my house would be worthless if I wanted to sell and move. The houses wouldn't be free. Every stockholder, pensioner, bank depositer, and homeowner would be paying.
So let's give people more stuff for not working. Your an idiot. Nothing is free, despite what your wellfare checks are telling you.
Yawn. I have gone far beyond those 19th Century economic ideas. You people are just so stuck in the past that you never try to look ahead.
lies...damn lies...and statistics....or....my economist knows better than your economist.... No wonder we are so lost. How sad for everyone that we spent a trillion dollars and got nothing. We have gotten no wind farms or solar arrays, no medical breakthroughs,no new highways, no new dams, no nation wide high speed internet service. All we have done is carve up pork into tiny chunks and throw it around. People would support more stimulus spending if it was going to achieve something great, but that opportunity has been lost. They say never waste a crisis....well we have.
You have the patience of a flea. So typical of too many Americans today.
It had to be cut into chunks to pay off all the Democratic constituencies. You didn't think the purpose was to rebuild the nation did you? What have Obama, Reid, or Pelosi ever done to make you think they actually cared about the welfare of the nation.
How utterly progressive of you! I'm sorry now that I didn't take up the offer to buy a 500K house. They approved me for a mortgage that big, which is ridiculous considering my income. If I had taken it and your plan went into effect, I would get a free 500K house. Instead, I kept my very modest house that I could afford. How stupid of me when libbies were in office!
Bad idea, it punishes those who used sound judgment and have honored their obligations. Hell if you idea was proposed everybody would stop paying. Stick to history mcmchugh99 and have you read the complete works of Thomas Sowell yet?
Well, so what if they stopped paying? Then everyone would have a free place to live.
mcmchugh99, We tried your approach with housing projects. When people receive something for free they don't value it. They became drug and crime infested ghettos within 20 years. Hell most of them had to be torn down because the people who got them for "free" didn't give a crap.
dalelama -- You beat me to the punch. Two words-- public housing-- are a sufficient answer to mcmc's proposal. The other two are "public restroom."
There was a suggestion advanced by some economists late last year that was about 180 degrees opposite your suggestion. Their view was the only way the housing market would recover in the foreseable future was to reduce housing inventory. Their suggestion was for the Feds to buy up vacant housing stock and tear it down. Recycle/resell what the could and return the property to vacant land thereby increasing the value of the owner occupied component of the housing industry. Interesting idea.
That's right, just tear down a bunch of housing when we have many people homeless in this country, just to artificially inflate "values" (so-called) and keep the banks happy. Much better just to give it all away.
Actually this would work, as you decrease the housing stock with demand constant home prices would rise.
why can't we walk and chew gum at the same time. it's not all black and white. we've attempted some keyennesian ploys. let's try some capital gains tax reductions as well. give this fascination with who gets the most money a break until we get the economy moving again. it's in all of our best interests. after we are solvent you can go back to your rich man poor man pitched battles. now is not a good time for them.
Oh really? And what happens to the depositors at the banks who extended the loans when the bank goes under? The FDIC doesn't enough money to insure everyone if banks start defaulting left and right because they weren't able to sell off the houses for at least part of the balance owed. Would you like your bank to go under taking all your money with it because they actually acted on your stupid suggestion?
Ummm, How about we just start manufacturing more products here in the US, while lower business tax may be an incentive to start up a company, it's no guarantee that company will prosper, especially in tough economic times. I don't think people aren't starting up businesses because of the taxes, which are always inevitable anyway, I think it's because consumers don't have the money to spend on too many non-essential items, so the timing isn't right. A company can't just create a demand for their product, put more money in the consumers pockets and they will come.
FarleftFist Put more money in consumers' pockets? And where is this money going to come from? By the way Greece tried that approach and look what happened over there.
Why doesn't the administration have people with common sense like this? They all appear to be incompetent, and Obama cannot tell the difference.
You think no one ever heard these ideas before? They're standard Republican rhetoric.
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