Why Don't Govs Save Taxes?

[Deity Dude]

Michigan had a "rainy day" fund in the 80's and mid 90's when a Republican was the governor - Engler.

[DinoDoc]

I thought most states had something like that. I know MS does. Is that not common among the states, DD?

[Arrian]

It won't work though. The only thing that will work is allowing interest rates to rise, followed by tax and spending cuts.

If by "work" you mean "doing nothing to soften the impact." Liquidate everything!

Fiscal stimulus does work (though it has costs, and those must be considered). It worked in the early-mid 30s. Trouble was that FDR decided they were out of trouble and tried to balance the budget in, what, 1937? They pulled up, HARD, and the resulting shock send the economy back into a recession. Many people like to say that WWII is what really pulled our economy out of the gutter, and that's true. The problem with that argument is that from an economics standpoint, WWII was a gigantic government spending program. There is one key difference, to be fair: at the end of WWII, the US was unscathed and its competition was largely shredded. That won't be the case today. Luckily, we're not staring down something quite as serious as the Great Depression and our stimulus can be spent on things that will provide value in the future (whereas WWII spending included a fair amount towards things sent into battle never to return). Given all of that, I think fiscal stimulus is the way to go.

Look, I'm not thrilled with the prospect of massive deficit spending. But I'm excited about 15% unemployment either.

-Arrian

[Naked Gents Rut]

Look, I'm not thrilled with the prospect of massive deficit spending. But I'm excited about 15% unemployment either.

A fiscal stimulus is unlikely to have much of an effect before the recession ends on its own. Is it worth dumping hundreds of billions of dollars of debt on future generations to in order to lower unemployment by a couple percentage points for a few months?

[Victor Galis]

Look, I'm not thrilled with the prospect of massive deficit spending. But I'm excited about 15% unemployment either.

A fiscal stimulus is unlikely to have much of an effect before the recession ends on its own. Is it worth dumping hundreds of billions of dollars of debt on future generations to in order to lower unemployment by a couple percentage points for a few months?

Short answer: If you assume this recession is short, then no. If you assume that this recession is long then yes. I'm thinking this one is long unless there is some stimulus.

[Ben Kenobi]

Yes, that would work, but we're trying to prevent a second Great Depression, not cause one.

Why would high interest rates cause a depression?

Interest rates were very low during the Great Depression, for the same reason they are now, in an effort to encourage borrowing. It didn't work then, it won't work now.

It's like gravity, the interest rates have to increase.

[Naked Gents Rut]

Short answer: If you assume this recession is short, then no. If you assume that this recession is long then yes. I'm thinking this one is long unless there is some stimulus.

Even if this recession equals the longest recession since the Great Depression (16 months), fiscal stimulus enacted in the next few weeks won't have time to have much of an effect. The only reason to embark on a massive fiscal stimulus plan at this point (12 months into the recession) is if you think that we're headed for a second Great Depression. That doesn't seem very likely to me.

[Victor Galis]

Why would high interest rates cause a depression?

Existing debtors with adjustable rate loans and/or those who have rolling short term debt would be crushed. New borrowers would be unable to borrow. Economic activity would slow down even further. Some companies would be driven into insolvency.

Interest rates were very low during the Great Depression, for the same reason they are now, in an effort to encourage borrowing. It didn't work then, it won't work now.

It's like gravity, the interest rates have to increase.

That last line is a non-sequitur. Just because low rates aren't enough to jump-start the economy doesn't mean that higher rates would work better.

[Victor Galis]

Short answer: If you assume this recession is short, then no. If you assume that this recession is long then yes. I'm thinking this one is long unless there is some stimulus.

Even if this recession equals the longest recession since the Great Depression (16 months), fiscal stimulus enacted in the next few weeks won't have time to have much of an effect. The only reason to embark on a massive fiscal stimulus plan at this point (12 months into the recession) is if you think that we're headed for a second Great Depression. That doesn't seem very likely to me.

Why not? Housing prices have room to fall, and much consumption was fuelled by borrowing and will not resume any time soon. Banks are in deep trouble still despite several bailouts; in fact, there's talk of nationalisation. I don't think the recession is anywhere near over.

[Ben Kenobi]

Existing debtors with adjustable rate loans and/or those who have rolling short term debt would be crushed.

Agreed. They would have to sell. Right now, that's what is happening anyways, just in slow motion.

New borrowers would be unable to borrow.

Sure they would be able to borrow. Just not as much as previous. Prices then come down in response as the demand drops severely. Houses are still overbought and overpriced. Housing prices need to keep dropping.

Economic activity would slow down even further. Some companies would be driven into insolvency.

No different then what is happening now.

The difference is that loans would still be available, and that the financial institutions would find the inducements they need to loan.

Right now banks aren't passing rate cuts onto the customers, so we have a higher effective interest rate, then the one listed.

It would make for a sharp, severe recession, but things would get better once everything is set right again.

[Naked Gents Rut]

I don't think the recession is anywhere near over.

Analysts don't agree with you.

http://www.latimes.com/business/investing/la-fi-econ20-2008nov20,0,7221728.story

http://www.voxeu.org/index.php?q=node/2785

http://news.prnewswire.com/ViewContent.aspx?ACCT=109&STORY=/www/story/01-05-2009/0004949279&EDATE=

[Naked Gents Rut]

The CBO is also on my side.

Less than half the money dedicated to highways, school construction and other infrastructure projects in a massive economic stimulus package unveiled by House Democrats is likely to be spent within the next two years, according to congressional budget analysts, meaning most of the spending would come too late to lift the nation out of recession.

A report by the Congressional Budget Office found that only about $136 billion of the $355 billion that House leaders want to allocate to infrastructure and other so-called discretionary programs would be spent by Oct. 1, 2010. The rest would come in future years, long after the CBO and other economists predict the recession will have ended.

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/20/AR2009012003980.html

[Victor Galis]

The difference is that loans would still be available, and that the financial institutions would find the inducements they need to loan.

You realise that the central banks can only set the rate at which banks borrow from them, right? What banks charge to lend on top of that is up to them. Actually I heard from NPR yesterday that companies with less than AAA ratings have trouble getting loans at below 10% right now.

Right now banks aren't passing rate cuts onto the customers, so we have a higher effective interest rate, then the one listed.

Maybe they are, maybe they aren't. They're in a panic mode where they've raised everyone's rate by way more than the govt. has cut their rate.

It would make for a sharp, severe recession, but things would get better once everything is set right again.

Depends on how many people lose their jobs. The problem is when that happens, they stop consuming at their current level, and a vicious cycle begins.

Analysts don't agree with you.

http://www.latimes.com/business/inve...,7221728.story

http://www.voxeu.org/index.php?q=node/2785

http://news.prnewswire.com/ViewConte...4949279&EDATE=

Were those analysts by any chance predicting that the country wasn't in recession a few months ago?

A report by the Congressional Budget Office found that only about $136 billion of the $355 billion that House leaders want to allocate to infrastructure and other so-called discretionary programs would be spent by Oct. 1, 2010. The rest would come in future years, long after the CBO and other economists predict the recession will have ended.

If Oct. 1, 2010 is the end date of the recession predicted by the CBO, that doesn't exactly disagree with me. That's an additional 22 months on top of 12 or so months already. Now if only 1/3 of the stimulus will have effects in the next 22 months, that means we need to be more careful.

[Naked Gents Rut]

If Oct. 1, 2010 is the end date of the recession predicted by the CBO, that doesn't exactly disagree with me.

It's not.

[Dauphin]

Dauphin:

Are you talking about arbitrarily long periods of time? Like, geological, age-of-the-universe type stuff?

Bonds are not future taxes if there is no way future tax revenue will ever be enough, unless you are talking about 'the next million years' or something.

'Future taxes' are not some unlimited resource that can be borrowed against forever. At some point you create a debt that no future population can ever hope to pay off under reasonable, non-theoretical conditions, or even do anything besides pay interest. This kind of thing leads to default.

Lots of countries take out massive loans and then default. Not a wise policy for industrialised nations, but par for the course for some countries. No reason to disregard it as theoretical.

Also, didn't mean to say it was future taxes, only collateralised against them. I may have been loose in my later post.