Thinking About Stimulus in the US

A lot of US progressives, including Dean Baker, and Larry Mishel from the Economic Policy Institute, are weighing in on the need for a significant fiscal stimulus package, in the range of 1% of GDP.

Citing – entirely reasonably – the need for measures which will have a quick impact on a slowing economy, these packages tilt to income transfers to lower and middle income families, and to labour intensive infrastructure investments which can be rolled out quickly to boost new hiring, especially in the hard hit construction sector.

I agree – and yet it does seem somewhat perverse that the top of mind response to this particular crisis should be to support personal consumption. Ever since the recovery of the early 1990s, US growth has essentially been maintained by growth of household consumption well in excess of real household income growth, juiced up by low interest rates, asset bubbles (first dot com stocks and then housing) and by easy (not to say profligate) credit linked to these asset bubbles. The hugely indebted US household sector is now in full retreat – while the financial sector faces an imminent insovency crisis due to the massive amounts of bad debt which have been generated. It’s not just sub prime mortages which are turning bad, but also, increasingly, credit card debt and home equity lines of credit based on now woefully dated house price valuations. (The big US banks may also soon also face problems with the massive amounts of corporate debt incurred to fund private equity buyouts and their loans to hedge funds , but that’s another story.)

Those who argued the unsustainability thesis – that a US expansion fuelled by massive growth of household and public sector debt, and by the willingness of foreigners to fund US over-consumption relative to real income growth – have been proved correct. It seems unlikely that another big increase in US household debt is on the cards, and foreign lenders may yet balk at funding increased US government deficits, especially at currrent very low interest rates.
All of which is to say that the really important question is not so much how to get the US through this year with a mild recession using the usual macro levers – though that is indeed important – but whether we face a set of circumstances that can only result in a continuing crisis.

Some see only the need for a temporary monetary and fiscal stimulus to US growth, with the centre of global growth shifting to Asia, and the US current account deficit being slowly unwound by slower domestic consumption and higher net exports. But the idea that Asia and Europe can decouple seems increasingly a wishful dream. Both have been hit by the aftershocks of the US financial crisis, and the real economy impact flowing from reduced US imports seems likely to be large. At the same time, deep US interest rate cuts introduced to address the threat of financial system insolvency would seem to threaten any real prospect for continuing huge US borrowing abroad. Who is going to pile up US government bonds if the US dollar is going to fall still further? (The option of  massively selling off real US corporate assets to sovereign wealth funds flush with cash in a buyers market is in principle available, but unlikely to arouse great enthusiasm.)

Obviously we face very uncertain times. In this context, what we should be thinking about are establishing new driving forces for global growth which help lead the US out of a deep structural crisis with minimum damage to the rest of us (not least Canadians.)

To my mind, a big part of the answer has to lie in a shift from export led development to domestic demand led development in Asia, above all China, kicked off by a serious realignment of currencies and by trade management to produce much more balanced outcomes. That would at least give the US a chance to seriously addrress the balance of payments and trade imbalance on terms which benefit the global economy as a whole.   But this will require a major shift out of free trade orthodoxy, and re-regulation of global currency markets.
And we should also be thinking about a major expansion of public investment in the US, Canada, Europe and elsewhere to deal with the global warming crisis. If the US is to run big deficits moving forward to sustain domestic demand and jobs, far better to use them to rebuild the economy along environmentally sustainable grounds than to maintain unjustifiably high levels of personal consumption relative to domestic production.  Those deficits may in turn have to be financed by surplus countries as part of an explicit bargain, rather than relying on fickle international financial markets.

I hasten to add that steeply redistributive taxes and transfers plus real wage increases for ordinary working people can and should ensure that it is the super affluent in the US who bear the necessary burden of austerity. If the top 1% sustained anywhere near the share of the pain as they did the gain over the past decade and more, that would be justice indeed.


  • Andrew, I have been also thinking along these lines. There is a limit to the re-inflation of individual consumption sans any corresponding appreciating asset. Public investment and green investment would at least set the stage for more sustainable and improved growth in the future. It is in this light that the Cons tax cuts should be attacked.

    As for getting the top 1% to take their share of the pain: Good luck with that. At this point in history that would require a political and institutional ……

  • I would think it is better for housing stock depreciation to have tenants paying rent which in part pays landlords to keep homes renovated and heated.
    If there are too many upper income homes and too few lower income homes in the USA, and if the upper income housing stock functions better with tenants than boarded up, wouldn’t it be better to direct the stimulus towards some sort of “renting bonus”?

    I’m assuming there really is an uncosted infrastructure social good (lower occupied home depreciation rate) that could be capitalized by a stimulus package. Really, teaser mortgage rates must be accompanied by teaser skills retraining (like servicing/manufacturing wind-turbine components) and/or teaser increases in personal financial management.

    Unless Hillary or Barack raise income taxes and exit Iraq (leaving oil revenues to Iran or Al-Qaeda) fast the USA’s teaser debt payment schedule is gonna force Yunus to set up basket-weaving schools there.

  • I just skimmed this paper while trying to understand how OTC derivatives markets work, to see if SRI derivative baskets are marketable:

    Anyway, on page 35 the “CFTC Hybrid Instrument Rule” is discussed in 1999. IDK if it is in the context of regulating ABCP, but the argument given is that if an asset bundle is 50% risky (leveraged losses possible) derivatives and 50% safe assets, the risk is only twice that of 100% safe asset instruments.
    In reality, blowing 10x your initial capital (in defaulted mortgages, interest rates spreads, whatever) is almost as disasterous is blowing 5x your capital in the “safer instruments”. It is also funny to note in the paper how markets are perfectly efficient and actors like banks and insurance agencies are too smart to be aided by federal seals of approval on instrument baskets.

    Wind turbine manufacturing is 3 or 4x more employee intensive than oil infrastructure construction (refinieries, ships, etc). Electing a democrat and exhorting the new prez to gauge the coal/oil industry and bolster wind turbine manufacturing, would stimulate the US economy.

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