Paul Krugman is worried
about deflation and I am too.
But really the deflation is not just a worry that something bad might happen, it is a worry that something bad might happen soon that we cannot easily fix later. Once deflation really sets in, the fix is far more difficult, and expensive, than if we deal with deflation in an aggressive manner today. We need a huge stimulus package to avoid deflation sooner rather than later.
I went through all of the different possible stimulus on the table above in these posts at daily kos in early december. If we go down the list of potential stimulus with multipliers greater than one, only a payroll tax holiday is quick and large enough to matter. Only a payroll tax holiday is large enough in magnitude and quick enough in effect to avoid deflation.
Now I am not saying we should only have a payroll tax holiday, and avoid new infrastructure spending. I would prefer both. But the infrastructure spending, if passed in Jan, will begin to be spent in meaningful amounts April, jobs created in May-June, resulting in consumer spending in September. It will not be fast enough to avoid deflation.
We need stimulus quickly, and a payroll tax holiday is $20B a week in stimulus.
From Warren Mosler:
The only way to immediately avoid prolonged recession remains a US payroll tax holiday which will add over $20 billion per week to the incomes of workers and businesses, adding maybe 5% to US GDP and supportive of the USD incomes and exports of the rest of the world as well. Increasing govt. spending on needed projects and state revenue sharing for same would also work but would take much longer to kick in and be narrower in focus. These could be done as well and when they do kick in should the economy show signs of overheating methods to reduce demand might be appropriate. But most expansions do this ‘automatically’ as the last one did. The problem is getting the politicians to realize that falling budget deficits during an expansion are not a ‘good thing’ per se.
The payroll tax holiday could start Feb 1 if we work quickly.
posted by Unknown @ Sunday, January 11, 2009
3 Comments
3 Comments:
LATEST ENTRY ON MY BLOG, MOSLERECONOMICS.COM
In case you thought Krugman isn’t part of the problem.
From his recent column:
Ideas for Obama
By Paul Krugman
O.K., I’ll bite — although as I’ll explain shortly, the “jump-start” metaphor is part of the problem.
First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.
Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more.
If he understood non-convertible currency he wouldn’t make this statement.
First, it’s not a trade off.
Second, tax cuts not spent indicate the tax had no value in reducing demand in the first place.
Third, a tax cut that goes unspent is not ’squandered’. Government squandering would take the form of wasting real goods and services (which does happen too often but that’s another story), not the funds spent per se.
There is not a finite pot of funds that government can spend. The limits of government spending are inflation tolerance, not any specific quantity. Government can do both tax cuts and relief payments if the political will is there, and if the tax cuts are ‘ineffective’ all the better as other government spending can be higher than otherwise without any extra movement of the inflation needle.
And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?
Krugman is contributing to more real damage than the dynamite that funded his nobel prize.
If anyone reading this knows him, please forward, thanks!
Thanks Warren,
You are my first comment!
I get more response over at the daily kos. Look for user: mickslam. I am getting more and more each post, and have over 100 comments on one post.
100+ comments postings can be heady and adrenalin inducing as a sustained double bass drum roll at a 220 tempo for a solid 5 minutes, but keep in mind, the cacophony can be deafening as well.
Keep up the good work Mike. I enjoy the read.
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