The debate with Bradford De Long

2 commenti (espandi tutti)

michele i thought your performance was not as bad as you think. I am relieved to see that there are economists willing to fight this semi-socialist stream.

If I may, I'd like to suggest three things that got overlooked but i think are extremely important; to be said every time one discusses the generational theft act.

1. it always comes down to "but shouldn't we build hospital and bridges, that have some social value, now that it is very cheap to do it?". well the answer is yes BUT THAT'S NOT WHAT THE SPENDULUS BILL IS DOING! only 5% (if i remember correctly) is infrastructure. the rest is money for nothing (as the dire straits would say). also said infrastructure expenditure is taking place too quickly to be really useful.

1.a also, as you pointed out, current crisis seems determined by a bubble in the construction sector. do we really want to keep people in that sector of the economy by financing bridges and useless school in milwakee or do we want to actually facilitate the transition of these people to other sectors of the economy?

2. the "tax cuts" of the spendulus. economists like cuts to marginal tax rates. they are good for efficiency and stuff. obama is de facto increasing marginal tax rates by sending people money checks (tax credits) that will be lost if they make more money, i.e. disincentivizing labor supply, specially for poor/lower middle class people. obama's tax cuts, seems to me, are the worst kind of tax cuts possible.

3. delong said something like 1/3 of the bill is "tax cuts", 1/3 is money to states, and only 1/3 is spending. which means that 2/3 of it is spending (some of it will take place at state level but so what?). but the way delong puts it is much nicer for his point.

current crisis seems determined by a bubble in the construction sector

This statement is, at least partially, misleading. What lies behind the current crisis is overlending. Existing buildings have been financed as new ones, and even more. Collateral lending has been used for other businesses as well (private equity leveraged buy outs, leveraged hedge funds, etc.). It's not necessarily associated to expected cash flows to refund the loans, that is the paramount issue. Collateral lending has pushed up the price of certain assets up to a bubble level. When the new lending flows have dried the price of assets has started to decline, the collateral has vanished and the loans have turned into toxic assets. Collateral lending in relevant size has the power to inflate asset prices. Collateral apparently looks safe but it is only temporarily. At the first stages it is the additional lending which support asset prices and collateral value. At the end it looks like a Ponzi scheme where the new loans backed the old ones. The difference is that the value of collateral cannot go to zero. Actually it can go down enough to spread painful bankruptcies and to block lending to the overall economy, as it is now.