The Market Wants More Stimulus

[ShackledNation]

You said "recovery occurs in a free market environment." That is historically wrong. It is mere ideological pap.

GDP doubled from 1939 to 1944 driven by war spending, not by a "free market environment."

I said recovery, not GDP. Think before you write

Unemployment at 1% and doubling of GDP in four years, and that's not a recovery?!?!

rofl

That's a pretty amazing pretzel you've twisted yourself into to confirm your biases.

Are you really ignorant of the widely known fact that those GDP numbers are completely meaningless for that time period? People were off dying in war and food was rationed. All resources went into machines of war. You call that economic growth? It is a complete myth that war spending saved the economy. War spending only hurt the economy. It was not until the spending ended and a more free market environment was restored that the Depression ended.

 

[ShackledNation]

You said "recovery occurs in a free market environment." That is historically wrong. It is mere ideological pap.

GDP doubled from 1939 to 1944 driven by war spending, not by a "free market environment." If what you were saying wasn't ideological drivel, we would have seen the economy collapse after the war. Of course, that didn't happen.

Yet the war years were a time of shortages, rationing, insane inflation, defacto travel restrictions, almost nonexistent economic mobility, internment camps, the annihilation of the European economies, cities laid waste, millions upon millions of people on all sides butchered....

Some recovery.

If you are attempting to defend the market economy, you probably should stop and think really hard about what you just wrote.

GDP measures include government spending, even if money is spent building a useless ditch. Government spending during WWII created shortages, rationing, high inflation, travel restrictions, terrible economic conditions for the average worker, internment camps, destruction of Europe, cities laid in waste, and millions dead.

Think this over: Government spends 1 trillion dollars to kill every man woman and child in the united states, demolish every business, and burn down all the forests and annihilate all the wildlife. GDP would increase by 1 trillion, suggesting massive economic growth. But obviously that is not the case. The entire country was just completely destroyed.

If you are too blind to see the difference between productive and destructive spending, then I suggest you stop and think really hard about what you just wrote before lecturing anyone else.

 

[EdwardBaiamonte]

Unemployment at 1% and doubling of GDP in four years, and that's not a recovery?!?!

rofl

actually 1% unemployment because of 20 million hired for $100/month make work liberal jobs, and $3 trillion of GDP dumped into the ocean each year rather than consumed is by no means a recovery. You're way out of your league.

 

[Toro]

GDP measures include government spending, even if money is spent building a useless ditch. Government spending during WWII created shortages, rationing, high inflation, travel restrictions, terrible economic conditions for the average worker, internment camps, destruction of Europe, cities laid in waste, and millions dead.

Think this over: Government spends 1 trillion dollars to kill every man woman and child in the united states, demolish every business, and burn down all the forests and annihilate all the wildlife. GDP would increase by 1 trillion, suggesting massive economic growth. But obviously that is not the case. The entire country was just completely destroyed.

If you are too blind to see the difference between productive and destructive spending, then I suggest you stop and think really hard about what you just wrote before lecturing anyone else.

The problem with your argument is a simple one.

If what you wrote is true, if we had all this useless government spending that added nothing to the long-term economy, then the economy should have collapsed right after WWII to at least its trend line in 1939. It did not. The economy doubled in four years during the war then declined by 10% before rising again. All you have to do is look at the data. War spending gunned the US economy.

The contradiction in Oddball's argument is that he was arguing that a command economy produces significant economic growth. We had the government take over wide swaths of the economy, as he pointed out, and the economy doubled then recalibrated after the war before resuming an upward trajectory. This is an extreme example of Keynes's argument writ large. Keynes argued that in times of oversupply or lack of demand, government should spend massively, even if that meant blowing up bridges and rebuilding them again. War is a massive government spending program (though the population will act differently during war than peace, thus government spending during war may have different affects than during peacetime).

The obvious problem in your analogy is that the government did not kill every American nor destroy every American business. There was no war here. The war was over there. Destruction never affected the US economy. Destruction affected European economies but not ours. But that doesn't not obviate the historical fact that government spending ramped up during WWII, the economy soared, unemployment effectively fell to zero and the economy went on a tear in the 1960s.

 

[Toro]

Are you really ignorant of the widely known fact that those GDP numbers are completely meaningless for that time period? People were off dying in war and food was rationed. All resources went into machines of war. You call that economic growth? It is a complete myth that war spending saved the economy. War spending only hurt the economy. It was not until the spending ended and a more free market environment was restored that the Depression ended.

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

And why would they be? GDP measures total income. Total income rose substantially during that time.

 

[EdwardBaiamonte]

Keynes argued that in times of oversupply or lack of demand, government should spend massively, even if that meant blowing up bridges and rebuilding them again.

Of course, now we know that's idiotic. Liberal spending is merely mal investment. It merely creates a bubble that bursts and causes a recession like the current housing recession. A recession is the time it takes for the Republican free market to reallocate resources to their proper sustainable places.

For example, a carpenter must waste time money and resources to retrain as say a computer programmer after being duped by the liberal's Keynesian bubble into carpentry.

Not so hard is it?

 

[Oddball]

You said "recovery occurs in a free market environment." That is historically wrong. It is mere ideological pap.

GDP doubled from 1939 to 1944 driven by war spending, not by a "free market environment." If what you were saying wasn't ideological drivel, we would have seen the economy collapse after the war. Of course, that didn't happen.

Yet the war years were a time of shortages, rationing, insane inflation, defacto travel restrictions, almost nonexistent economic mobility, internment camps, the annihilation of the European economies, cities laid waste, millions upon millions of people on all sides butchered....

Some recovery.

If you are attempting to defend the market economy, you probably should stop and think really hard about what you just wrote.

The war economy had extremely little to do with a normal market economy...Hayek went to great lengths in that little novella he wrote at the time, pointing out those numerous differences.

Try again.

 

[EdwardBaiamonte]

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

And why would they be? GDP measures total income. Total income rose substantially during that time.

actually you should ask for your money back. GDP measures what is produced, not income. GDP rose because of weapons production but this did not increase income since the weapons were not, like cars for example, made for domentic consumption or as paid for exports. Is that really over your head?

Simpleton libs still imagine we can make weapons, dump them into the sea, and get rich! Its absurd beyond words

 

[ShackledNation]

GDP measures include government spending, even if money is spent building a useless ditch. Government spending during WWII created shortages, rationing, high inflation, travel restrictions, terrible economic conditions for the average worker, internment camps, destruction of Europe, cities laid in waste, and millions dead.

Think this over: Government spends 1 trillion dollars to kill every man woman and child in the united states, demolish every business, and burn down all the forests and annihilate all the wildlife. GDP would increase by 1 trillion, suggesting massive economic growth. But obviously that is not the case. The entire country was just completely destroyed.

If you are too blind to see the difference between productive and destructive spending, then I suggest you stop and think really hard about what you just wrote before lecturing anyone else.

The problem with your argument is a simple one.

If what you wrote is true, if we had all this useless government spending that added nothing to the long-term economy, then the economy should have collapsed right after WWII to at least its trend line in 1939. It did not. The economy doubled in four years during the war then declined by 10% before rising again. All you have to do is look at the data. War spending gunned the US economy

GDP does not measure government production, it measures government spending! Government did spend a ton of money during WWII on useless things that did collapse the economy. Rationing and employment of the majority of workers producing things to kill people is not economic growth and prosperity.

The problem with your argument is that you are equating GDP with economic growth. GDP by definition is investment plus consumer spending plus government spending (C + I + G). Government spending increased during WWII, but that spending was not productive.

I will go into more detail of the hypothetical I offered to illustrate the point. You have an economy with a GDP of 1 trillion. Say half of that is government spending and half of it consumer spending + investment. The government then spends 2 trillion dollars killing all people in the country and destroying all property and wildlife. According to GDP by nature of the way it is calculated, the GDP of that country would be at least 2 trillion dollars (assuming there was zero private spending and investment due to everyone being dead), and thus if you assume GDP automatically means economic growth you would conclude the economy doubled in size. But it didn't. It was completely destroyed, and all participants in it killed.

To put it simply, if you equate GDP with economic growth, government spending an additional 1 trillion dollars killing people will result in economic growth because GDP will increase by 1 trillion. Not only did the economy not grow, it actually shrank, despite GDP increasing two-fold.

The obvious problem in your analogy is that the government did not kill every American nor destroy every American business. There was no war here. The war was over there. Destruction never affected the US economy. Destruction affected European economies but not ours. But that doesn't not obviate the historical fact that government spending ramped up during WWII, the economy soared, unemployment effectively fell to zero and the economy went on a tear in the 1960s.

It wasn't an analogy, it was a hypothetical. It was a thought experiment to prove the point that GDP and economic growth are not the same thing, which apparently went over your head. What evidence do you have that the economy soared? How can you say an economy is booming when the workforce is out getting killed in war, and the remainder is at home producing weapons and war machines that ultimately end up at the bottom of the ocean instead of food and amenities? How is rationing a booming economy?

Again, your flaw in your argument is the assumption that GDP is always an accurate measure of economic growth. It is clearly not, as my hypothetical examples illustrate. The economy during WWII was one of the worst in US history. The Great Depression raged on during that time, as bad as ever.

Saying the WWII economy was productive because GDP was high is a circular argument. It is equivalent to saying "Government spending grew the economy because government spending increased."

 

[DSGE]

Are you really ignorant of the widely known fact that those GDP numbers are completely meaningless for that time period? People were off dying in war and food was rationed. All resources went into machines of war. You call that economic growth? It is a complete myth that war spending saved the economy. War spending only hurt the economy. It was not until the spending ended and a more free market environment was restored that the Depression ended.

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

They're not meaningless, but they cease to be a good proxy for prosperity when government purchases dominate GDP. Usually we think of more GDP as being better since it's normally dominated by private consumption and investment, things which actually create value. Take a trivial example where government forces everybody to dig ditches. Unemployment would be zero. GDP would be Y = zF(L, K), where z is TFP, L is the labour supply and K is the capital stock. This isn't a prosperous economy. Nobody wants dirt and everybody hates digging. The parts of GDP we care about are real private consumption and real private investment; both of which fell below trend during WWII.

I'm not sure why we're hearing about Keynes and fiscal policy on this thread either. We've had 75 years worth of new economic theory since Keynes, in this case the relevant one is monetary theory. We don't need fiscal stimulus because monetary policy can do it for us.

 

[DSGE]

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

And why would they be? GDP measures total income. Total income rose substantially during that time.

actually you should ask for your money back. GDP measures what is produced, not income.

They're the same. Total production = Total income = Total expenditure. If I buy something from you valued at $X then my expenditure is $X and your income is $X. GDP measures total expenditure. GDP underestimates it though because it's extremely difficult to measure production that you haven't sold (like mowing your own lawn, cleaning your own house, building your own furniture). Except for that, they're identical.

 

[Toro]

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

And why would they be? GDP measures total income. Total income rose substantially during that time.

actually you should ask for your money back. GDP measures what is produced, not income.

They're the same. Total production = Total income = Total expenditure. If I buy something from you valued at $X then my expenditure is $X and your income is $X. GDP measures total expenditure. GDP underestimates it though because it's extremely difficult to measure production that you haven't sold (like mowing your own lawn, cleaning your own house, building your own furniture). Except for that, they're identical.

There's a whole lot of fail in this thread if posters don't know that GDP is a measurement of income.

 

[DSGE]

actually you should ask for your money back. GDP measures what is produced, not income.

They're the same. Total production = Total income = Total expenditure. If I buy something from you valued at $X then my expenditure is $X and your income is $X. GDP measures total expenditure. GDP underestimates it though because it's extremely difficult to measure production that you haven't sold (like mowing your own lawn, cleaning your own house, building your own furniture). Except for that, they're identical.

There's a whole lot of fail in this thread if posters don't know that GDP is a measurement of income.

Tell me about it. Still, I find economically illiterate people less annoying than people whose only exposure is to Austrian Business Cycle theory.

 

[Toro]

Are you really ignorant of the widely known fact that those GDP numbers are completely meaningless for that time period? People were off dying in war and food was rationed. All resources went into machines of war. You call that economic growth? It is a complete myth that war spending saved the economy. War spending only hurt the economy. It was not until the spending ended and a more free market environment was restored that the Depression ended.

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

They're not meaningless, but they cease to be a good proxy for prosperity when government purchases dominate GDP. Usually we think of more GDP as being better since it's normally dominated by private consumption and investment, things which actually create value. Take a trivial example where government forces everybody to dig ditches. Unemployment would be zero. GDP would be Y = zF(L, K), where z is TFP, L is the labour supply and K is the capital stock. This isn't a prosperous economy. Nobody wants dirt and everybody hates digging. The parts of GDP we care about are real private consumption and real private investment; both of which fell below trend during WWII.

I'm not sure why we're hearing about Keynes and fiscal policy on this thread either. We've had 75 years worth of new economic theory since Keynes, in this case the relevant one is monetary theory. We don't need fiscal stimulus because monetary policy can do it for us.

A few things.

First Bernanke was telling us the other day that monetary policy can't get us out of this mess though, so I don't think it's that cut and dried.

Second, the context is that WWII finally got us out of the Depression and we stayed out. It doesn't matter if the spending was not efficient. What matters is what happened after the spending stopped. If this were the equivalent of borrowing a trillion dollars to do nothing but dig ditches with TFP=0, then the economy should have collapsed afterwards. But that did not happen.

Finally, private fixed investment may have fallen below trend during the war, but at the end of 1945, it was 3x that of 1939, and 10x that of 1933. Similarly, private consumption in 1945 was double that of 1939.

 

[DSGE]

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

They're not meaningless, but they cease to be a good proxy for prosperity when government purchases dominate GDP. Usually we think of more GDP as being better since it's normally dominated by private consumption and investment, things which actually create value. Take a trivial example where government forces everybody to dig ditches. Unemployment would be zero. GDP would be Y = zF(L, K), where z is TFP, L is the labour supply and K is the capital stock. This isn't a prosperous economy. Nobody wants dirt and everybody hates digging. The parts of GDP we care about are real private consumption and real private investment; both of which fell below trend during WWII.

I'm not sure why we're hearing about Keynes and fiscal policy on this thread either. We've had 75 years worth of new economic theory since Keynes, in this case the relevant one is monetary theory. We don't need fiscal stimulus because monetary policy can do it for us.

A few things.

First Bernanke was telling us the other day that monetary policy can't get us out of this mess though, so I don't think it's that cut and dried.

Did he say can't or won't? Both Bernanke in his 1999 paper on Japan and Krugman in his 1998 paper on the liquidity trap both agree that monetary policy can be used to escape the liquidity trap.

Second, the context is that WWII finally got us out of the Depression and we stayed out. It doesn't matter if the spending was not efficient. What matters is what happened after the spending stopped. If this were the equivalent of borrowing a trillion dollars to do nothing but dig ditches with TFP=0, then the economy should have collapsed afterwards. But that did not happen.

Finally, private fixed investment may have fallen below trend during the war, but at the end of 1945, it was 3x that of 1939, and 10x that of 1933. Similarly, private consumption in 1945 was double that of 1939.

It didn't happen because aggregate demand had been permanently increased. If you think government spending did it, you've gotta believe a model with multiple equilibria where a "push" from the government can permanently change monetary velocity. Or you can say that NGDP was increased by the fact that the war debt was monetized. I personally think the latter makes more sense.

 

[EdwardBaiamonte]

A "widely known fact?" By whom exactly? I wrote my thesis for my economics degree on the post-WWII economy, and I never once ever came across anyone in my research who said that the GDP numbers were meaningless.

And why would they be? GDP measures total income. Total income rose substantially during that time.

actually you should ask for your money back. GDP measures what is produced, not income.

They're the same. Total production = Total income = Total expenditure. If I buy something from you valued at $X then my expenditure is $X and your income is $X. GDP measures total expenditure. GDP underestimates it though because it's extremely difficult to measure production that you haven't sold (like mowing your own lawn, cleaning your own house, building your own furniture). Except for that, they're identical.

they are not the same in war because then GDP measures weapons output, for example, that does not contribute to ones standard of living.

 

[EdwardBaiamonte]

What matters is what happened after the spending stopped [after WW2)

what happened is: 15 years of pent up demand was released, the economy returned to capitalism, we had the only economy in the world left standing.

what happend is the liberal Depression and the liberal war that resulted, ended!

 

[Toro]

Did he say can't or won't? Both Bernanke in his 1999 paper on Japan and Krugman in his 1998 paper on the liquidity trap both agree that monetary policy can be used to escape the liquidity trap.

Indeed they did write that. And Bernanke now says that the Fed can't/won't do much more, and Krugman now bangs the table for more spending.

It's easy to say when applying the standards to others, i.e. Japan. However, when one is in the morass, ideas can change.

Second, the context is that WWII finally got us out of the Depression and we stayed out. It doesn't matter if the spending was not efficient. What matters is what happened after the spending stopped. If this were the equivalent of borrowing a trillion dollars to do nothing but dig ditches with TFP=0, then the economy should have collapsed afterwards. But that did not happen.

It didn't happen because aggregate demand had been permanently increased. If you think government spending did it, you've gotta believe a model with multiple equilibria where a "push" from the government can permanently change monetary velocity. Or you can say that NGDP was increased by the fact that the war debt was monetized. I personally think the latter makes more sense.

First, given your knowledge of the topic at hand, I'm assuming your handle isn't a coincidence.

However, though its been 15 years since I sat down in front of econometric software and hence my mathematical skills have disappeared down black hole, after spending my career in the capital markets, I've come to the conclusion that the assumptions in economic modeling in a Gaussian framework do not accurately reflect human behavior, at least all of the time. I think such a framework can be a useful approximation under normal conditions, but in times of stress and unusual circumstances, I believe the models can fly out the window. Thus, in times of duress or war, human behavior changes, and the models break down.

But even if we accept such a framework, its not that monetary velocity has to rise to a permanently higher plateau. Instead, it has to be brought up to where it was before if it has collapsed, as it did during the Depression. Money in circulation to deposits soared during the Depression, as irrational bank runs caused people to hoard money and take it out of the financial system. You can see it here.

As to your last sentence, I agree to some extent. The government pegging long-term rates at 2.5%, which monetized the debt, was significant. (Hello future!) The answer is, of course, complex, and not dependent upon any one thing. After a generation of depression and war, for example, there was tremendous pent up consumer demand that was unleashed in the 1950s and 1960s. Also, the conceptualization and development of suburbs influenced the patterns of economic growth. Government programs such as the GI bill - which were passed in an attempt to avoid a collapse like after WWI - also had an affect. But I also think government war spending was very significant.

Since I assume you are well versed - and certainly much better versed than I - on the DSGE framework, you'll understand the concept of agent-based modeling. I'm not sure if it can be modeled properly when the tails get fat, but I look at the world in terms of agents, with government being an agent through which economic activity flows. The arguments of guys like Lucas, Cochrane, Roll, etc., are that the government is an inefficient allocator of capital and income. In general, I would agree. Generally, the government is an inefficient allocator of capital. However, to assume that it is always an inefficient allocator of capital assumes that individuals are hyper-rationalists, constantly maximizing infinite utility curves under all circumstances. I do not believe this is correct. Peoples' motivations are not always driven by the maximization of individual utilities (unless one assumes that utility also includes the desire to maximize the utilities of others, which may be a fair point). At times, individuals will sacrifice their own well-being for the good of the whole, which should be patently obvious in a discussion about war, given that people are willing to sacrifice their lives for the country. If people are willing to die for their country, why is it unreasonable to assume that people will also subsume their own desires and work as hard for the nation as they do for themselves? If this is true, then in war time, people may be as productive working for the collective, i.e. the nation, as they are for themselves, which may not be true during peacetime. And if this is true, then the assumptions behind traditional econometric modeling break down. Ergo, government war spending in a time of duress can have an independent positive affect on the economy that can be sustained when the economy reverts back to a more normal framework, even when the government spending is withdrawn, especially when excess capacity is expunged from the economy.

 

[EdwardBaiamonte]

government war spending in a time of duress can have an independent positive affect on the economy that can be sustained when the economy reverts back to a more normal framework,

Generally the mal-investment of war spending or liberal pump priming of any kind will cause a recession as the free market moves people and resources back to their sustainable free market places.

 

[EdwardBaiamonte]

It didn't happen because aggregate demand had been permanently increased.

how do you permanently increase demand when war demand was mostly for weapons that had no permanent use? You have described a bubble without realizing it.