Sunday, December 07, 2008

End Of Semester

This will be finals week at San Antonio College, so I will not post very much in the next month or so. Once the next semester start, I will go back to 3 posts a week.

Friday, December 05, 2008

Is An Electronic "Helicopter Drop" Feasible? (Part 2)

I first posted on this last January. Here is the link Is An Electronic "Helicopter Drop" Feasible?. Basically, people have debit cards with a zero balance. If the FED wants consumer spending to increase, then it puts money in everyone's accounts. I initially stated that there could be a time limit, so it gets spent quickly, tyring to avoid the policy lag problem. (some people have called Ben Bernanke "helicopter Ben"-this may not be fair, but "helicopter drop" is an old term that I recall from grad school in the 80s).

Here are some additional thoughts on this:

People could have two accounts. In one, they would have to spend the money by the end of the month. In the other the money could build up so you could buy a durable like an appliance. As before, you can't convert these accounts to cash. But the stores can.

We could prohibit them from being spent in grocery stores, so people just don't save money from their own paychecks and then use these accounts to buy necessities.

Some economists say that we need to create inflationary expectations to get AD increasing again (or at least reduce deflationary expectations so things don't get worse). Getting this kind of spending going so quickly might help.

Some articles that I am reading say the FED can basicially create as much money as it wants. It has added over $1 trillion to its balance sheet in the last year. So this would just be another way to do it.

This is consistent with the FED's interest in helping consumers which we see in its buying of credit card debt.

Bank's excess reserves are very high ($600 billion). But not enough is being loaned and spent. So we may need other ways to stimulate AD. Paul Krugman said the other day that it might take awhile to get the fiscal stimulus plans in place. Maybe something like this would work faster.

State sales tax collections might rise. States need money now, so this might help.

If businesses know that consumers will be spending, then they might be more willing to invest and not layoff workers.

The debit cards could be activated like other debit and credit cards. You call the FED and tell them your SS# and you can start spending.

We might have to give people more money each month than the fall in consumer spending to make sure they just don't save their own money and then use the debit cards to buy their normal goods.

The government gives out money anyway, like in unemployment insurance and welfare and food stamps.

It is possible that when economiy start to slide into recessions people might anticipate that the FED will put money in their accounts, so they will delay purchases. But knowing that consumer spending is going to rise might also affect expectations in positively, too. Also, some research suggest that unemployment insurance keeps people unemployed longer but no one calls for ending that program.

Maybe this could only be done if there are 3 straight months of falling consumer spending and it would have to be unanimous or close to it on the FOMC.

Tuesday, December 02, 2008

Why We Are In A Recession And Why Fiscal Policy (increasing government spending) Might Not Help

Normally I don't like to just put in links to other blogs since you can read that stuff by clicking on my links to those blogs. But since the economy is in the news so much and since alot of that is on what caused the crisis and what needs to be done, these two links are important in giving a different perspective.

The first one is What Really Happened? by Larry White of the University of Missouri. He blames the FED keeping interest rates too low for too long and there being too many "sub prime" loans, that is, loans with lower standards for incomes of the borrowers and downpayments. The government encouraged these home loans. Adjustable rate mortgages play a role, too.

Then there is Fiscal Policy Puzzles where Harvard professor Greg Mankiw disucsses the fact that fiscal policy might not work the way we want it to. That is, increasing government spending might not help very much (although he says " I am not sure what model I should use to explain" this). He also says "At the very least, these puzzles should give us reason to pause when using the Keynesian framework for policy analysis. There is still a lot about macroeconomics that remains deeply puzzling."

Another post by Mankiw is The Bils-Klenow Stimulus Plan. This suggests that cutting payroll taxes (social security taxes) is the best stimulus.