Friday, January 11, 2008

The Bernanke Paradox And How To Overcome It

Following on the heels of the Greenspan Conundrum, we may get a Bernanke Paradox. Rapid cuts of US interest rates may not revive the debt-ridden and asset-dependent US economy, but instead drive it closer to what Mr. Bernanke fears most: the hole of a liquidity trap. Given the nature of the developing recession (deflationary asset and credit contraction), the odds of this happening are increasing.

Central to this line of thought is the observation that the current slowdown is not the common variety, caused by excess inventory accumulation. Rather, it is most similar to the popping of the Japanese bubble: a stubborn contraction preceded and caused by excessive credit expansion and unsustainable asset appreciation.

The term "excessive credit expansion" is best explained by the following chart, showing the annual growth in household debt (red line) and hourly earnings (blue line). Borrowing rose much faster than earned income for too long (1998-2006) and is now imploding because households cannot properly service their existing debt out of current income. It follows that Americans won't jump into more debt and won't rush out to buy new assets until their balance sheets are lighter and debt service can be more comfortably met by earned income - a process that will take many years (The Slow Recession).

Annual Growth Rates for Household Debt and Hourly Earnings

The characteristics of this potential liquidity trap is different from the classical definition (lenders unwilling to lend). This trap may be aggravated by borrowers unwilling or unable to borrow, even if benchmark interest rates near 0%. Thus, the Bernanke Paradox.

I am aware that American consumers (72% of GDP) have historically pulled the economy out of previous slumps and that betting against their propensity to "shop till they drop" has been a losing proposition. But, in my opinion, right now they are "dropped, so they can't shop". It's not for lack of want, but lack of means that the mighty US consumer is pulling back.

Under such a scenario, cutting interest rates in a panicky mode can only exacerbate matters. It officially signals that the Fed and the government expect worse to come for the economy and causes consumers to respond by shutting down spending even faster. Let's not forget that the "wealth effect" caused by the prior real estate run-up is now rapidly becoming a "poverty effect", further depressing their propensity to consume.

In the last few days several economists are finally saying that monetary policy alone won't do the job, a position that I have long held and expressed in this blog. They want fiscal policy to help out but I fear they are looking in the wrong direction, since they focus exclusively on tax cuts. It is quite obvious that Bush's favorites (permanent tax cuts for the rich) won't do a thing, but even cuts and one-time rebates targeted to the poor and middle classes won't achieve more than a temporary boost. And this, assuming most of the money isn't saved instead, a possibility that can't be ignored.

To be effective, economic policy must rapidly raise real earned incomes for the "bottom" 95% of Americans that have not substantially benefited from the 2003-07 expansion and who are feeling unsure of their future. In other words, what we need is a targeted jobs program. This is a difficult proposition that does not lend itself to quick fixes, announced as TV sound-bites by politicians ("$1,000 for every family"). Instead, serious problems demand serious fixes, not one-liners.

My proposal may smack of "state planning" - and you know what? That's exactly what it is. The US needs official policies that will create high value-added jobs in energy and environmental mitigation, to name my two favorite fields that are also the most pressing problems facing our world. Hoping that the invisible hand of the free market will cause solutions to miraculously materialize is tantamount to believing in the tooth fairy.

We need government-sponsored action on a scale several times bigger than the Manhattan or Apollo projects. Expecting private enterprise to undertake them is unrealistic: such projects are simply not profitable enough in the short time horizon that business operates in. Every infrastructure development that radically altered the American economy was undertaken and financed by the government: going as far back as the Erie Canal (1817-1825), the Panama Canal, TVA, the great dams, the interstate highways, ports and airports.. even the Internet was originally a government scheme.

This is the kind and scale of economic - fiscal policy we urgently need. If anyone has a better idea, please let me know because I, for one, do not believe in tooth fairies.


  1. Good analysis of the problem, poor solution.

    A government led and funded jobs program for "energy and environmental mitigation" is simply a disastrous proposition. Nothing I have seen from the government over the last several decades indicates to me that such a program would be anything other than a massive boondoggle and huge waste of taxpayer money.

    By the way, how is this going to be funded? Are you recommending raising taxes? Or simply adding to the current debt burden with more unfunded government spending?

    What "blue ribbon panel" will determine which energy technologies to pursue and what environmental problems to address?

    Furthermore, for the people who will be most affected in the upcoming recession, like factory workers, such programs will provide few if any opportunities. What you are recommending will only provide immediate benefit to a select group of intelligent scientific researchers, engineers and skilled workers who are already in high demand. Are you really going to trust the govt to determine how best to utilize their skill sets?

    In large part, it is govt. intervention that has got us into the current mess we are in by bailing out the financial markets and creating moral hazards throughout the banking system. We would not have our current set of problems were it not for the FED, FDIC, GSEs and a whole host of other govt. and quasi-govt. institutions intervening in the economy in the first place to try and fix things.

    The solution is to cut back on deficit spending, reduce the tax burden and allow market efficiencies to actually start taking effect. What is it that makes people think that a group of "enlightened" central planners can determine what people need and fix their problems for them.

    If alternative energies are needed, then let these promising technologies raise capital in the VC community. Keep in mind that the internet was nothing until it got out of the public sector and into the hands of privately funded companies.

    The first thing I recommend is that we cut off subsidies for oil companies and the crazy corn ethanol program. There is plenty of money available already if an energy technology is promising. $100 a barrel oil will certainly create the necessary incentives.

    Nevertheless, if I could get an immediate 50% reduction in military spending and a withdrawal from Iraq in exchange for the boondoggle you recommend I would gladly take it.

  2. I totally agree with your diagnosis
    The myth that central banks can inject unlimited amount of money into system props up emerging markets and commodities bubbles for the time being but not for too long.

    I am alredy reading anectodes of cash shortage in US banking system. I think cash especially swiss franca and japanese yen will be king soon.


  3. The US needs official policies that will create high value-added jobs in energy and environmental mitigation,...

    I agree, especially after the disappearance of so many manufacturing and professional (e.g. IT) jobs over the last few years.

    But I do not see how this could ameliorate asset deflation in the short- or mid-term. And it seems to me that it is this wealth destruction that will hamper consumption and crimp risk-taking.

  4. We could just drop money from helicopters. That will fix it, won't it?
    Of course not. Actually Germany tried something similar during WWII. They got all convicted money forgers out of prison and told them to figure out how to copy British bank notes. Eventually they were printing the stuff wholesale, put it on planes (didn't have helicopters back in those days) and dropped it over England. The plan was that people would pick it up and spend it with the hope that it would destroy the British economy.
    What I can't figure out is, why would you want to do this to your OWN country?
    Yes, I agree with you. Instead of spending a trillion in Iraq the money would be better spend getting ready for an uncertain energy future.

  5. Anon said: "...such a program would be anything other than a massive boondoggle and huge waste of taxpayer money."

    Were the Panama Canal, highways, Apollo and countless other govt. sponsored projects boondoggles? A quarter century of constant government bashing by movement Republicans has left most Americans thinking that only the "private sector" can be a force for good. That's so self-evidently wrong, I won't even try to refute it.

    Blue ribbon panels are perfectly fine: give honest people pride and recognition and they will do wonders.

    Funding has to come from several places:

    a) From the inflow side, carbon taxes, perhaps a VAT, and yes higher income taxes for the top 10%, including taxing dividends and capital gains.

    b) From the outflow side, cutting defence spending that is specifically targeted to safeguarding access to oil (at least 25% of the defence budget).

    As for the Fed, FDIC and GSEs producing the current problems, I strongly disagree. It is the lax way these institutions have been managed and overseen in the last years that has created problems, not the institutions themselves.

    $100 oil won't solve anything by itself and I totally agree that corn ethanol is currently nothing but bad science.


  6. Hellasious,

    I must admit, that I broadly agree that the incomes of the lower a middle classes must be boosted.I suppose I differ from you with regard to the mechanism, but an updated version of the New Deal is not likely to cut the mustard.

    As you have correctly pointed out, the consumer of last resort is out spent. In fact he was probably outspent a couple of years ago, however the the democratic nature of the recently ended asset price boom let him go just a bit longer.

    The fact that the consumer has reached/exceeded his debt service limit means that the economy now starts shrinking, stimulus or not. However nearly everyone on these blogs ignores the elephant in the drawing room: demographics. The baby boomers are about to retire en masse. Retiree's are net consumers of resources and considering their political power will ensure that their needs will be met. Heroic savings by young adults will be required to offset the drain on savings by retirees. The economy remains in hole.

    I am afraid we're in for a long, slow drawn out depression. There will be economic bright spots here and there, but for the next fifteen years or so, it will be a time history will want to forget.


  7. Dude - generally your previous articles have been good. The solution you propose is drivel. Another WPA? Are you kidding? More govt borrowing for foreigners to fund?

    A better solution(slow painful but better) -
    1. treasury controls currency backed by silver/abolish Fed. USD lossed stop immedidately. Business can now plan on selling in a non inflationary environment. Price of oil stabilizes.
    2. Stop govt spending. Stop all income taxes.
    3. Govt gives 1 billion USD to whomever can produce a working design for a 75mpg car. Oil co executives sent to jail for life if they interfere. This one step would bring price of oil to $15/barell and slow inflation/stop radical islam and put the middle east back in a box/eliminate the 'need' for US global military power.

    Another WPA is stupid. Weve had generations of bad spending and savings habits - pain is required to get people to change their behavior.

  8. H. I have formed the opinion from your comments that you regard the economic situation in the US as being quite serious, and since this situation has taken some time to develop, radical solutions need to be implemented in order to resolve it. More significantly, these solutions will be necessarily complex and time consuming. Regretably you are correct in this.

    So. How did the US end up in this situation? Would it be possible for the Administration, together with Congress, to 'reverse engineer' some of their dopier policies that got the US into this situation?

    Private industry would only become involved in major infrastructural and renewable energy projects if they were assured of an appropriate return on their investment. What if the Administration and Congress 'legislated' the relevant industries to become involved on the basis of 'costs for materials, labour and financial charges only', no profits?

    If the unfortunate 'average' US citizen is going to have to endure many years of privation to correct the US economic situation, then private industry, both manufacturing and financial, should be expected to share an appropriate level of the burden.

    Brian P

  9. "Dude" Anon.,

    I am a very open-minded individual who has successfully created a large enough ego so that personal attacks do not bother me. However, in the interest of keeping the exchange of ideas in the comment section at a civilized level, kindly contain your use of derogatory epithets.

    "Drivel" and "stupid" would not have been your choices, had you thought about them a second time, perhaps?

    As to the content of your comment, I refer you to my first comment, plus the fact that $15 oil will keep polluting just as much at $100 oil.

  10. Dear Brian,

    One main reason for the current situation is a dogmatic belief in privatizations and "free" markets in the absence of adequate regulation, coupled with crony capitalism. Enron was just the most visible example - there are many more.

    There is no need to provide private industry with "adequate" returns - or any returns at all. They can and should be hired as sub-contractors, but that doesn't mean they have to be owners/operators, too - at least not initially. If the state takes the risk, the state (i.e. all of us) should also reap the rewards.

    It is very amusing to see all those investment bankers who breathed fire against state enterprises go hat in hand to state-owned SWF's. They should be eating their hats, instead..


  11. Hellasious,

    the main problem with the fiscal/infrastructure/innovation solution is: how to fund it?

    Even more debt sold to Asia? Will they buy it?

    A tax bomb to the upper class? Won't they move away and pay their taxes abroad?

    I really don't see how the US can get the funding for a massive gov't job creation plan.

  12. So eviscerating rates and killing savers is the answer?...Wrong.

  13. "As for the Fed, FDIC and GSEs producing the current problems, I strongly disagree. It is the lax way these institutions have been managed and overseen in the last years that has created problems, not the institutions themselves."

    It is the nature of institutions themselves and how they are incentivized that results in them being managed and overseen in a lax manner. That is the problem with govt. programs. What makes you think that the politicians and bureaucrats are going to suddenly change and implement future govt programs any differently?

    By the way, what you are proposing is an absolute wet dream for crony capitalists because they never have to establish the economic viability of such a project.

    All of the specific public works examples you cite are more than 40 years old. Also, right now, is probably not a great time to cite the space program as a model. While the Apollo project has some nostalgic value, it is more relevant to today's discussion to talk about the status of the space shuttle program.

    NASA is currently a notorious example of the breakdown in standards including huge cost overruns, dubious scientific and economic priorities, and a total lack of accountability that is endemic to govt agencies.

    As far as highways and similar infrastructure programs are concerned, I would be all in favor of such programs if we redeploy spending away from military towards such endeavors.

    "There is no need to provide private industry with "adequate" returns - or any returns at all. They can and should be hired as sub-contractors, but that doesn't mean they have to be owners/operators, too - at least not initially. If the state takes the risk, the state (i.e. all of us) should also reap the rewards."

    Great in theory but how does this work out in the real world. When you are talking about choosing between investments in competing technologies as opposed to simply redistributing wealth,
    private industry is far more efficient and effective than govt bureaucrats. Why? The most intelligent, entrepreneurial and motivated individuals do not want to work within a governmental bureaucracy. Government bureaucracies, by their nature, stifle creativity, spontaneity, innovation and ingenuity. They do not attract the best and the brightest.

  14. "2. Stop govt spending. Stop all income taxes.
    3. Govt gives 1 billion USD to whomever can produce a working design for a 75mpg car. "

    Interesting. How should the government "give the 1 billion USD" if it doesn't collect revenues? Gold or silver that it doesn't have? Bushels of corn? IOUs?

  15. U.S. Federal Lands....

  16. "A tax bomb to the upper class? Won't they move away and pay their taxes abroad?"

    They can move away but their wealth can't. Laws were changed in the 80's to prevent this from happening.

  17. No you are talking about the 1995 Health & Portability Act...And no that ain't going to do jack squat from stopping wealthy folks from rearranging their affairs that provides them with the max benefit....

  18. "3. Govt gives 1 billion USD to whomever can produce a working design for a 75mpg car."

    Such cars exist already. A small car with a modern turbo-diesel engine easily is a 75mpg car.

    What about 500 mpg car, which would be close to current rail transit and hybrid busses of near future?

  19. Hel,

    I'm in agreement with you that we have too much personal consumption and not enough investment in activities that can produce income streams in the future. I'm also in agreement that those who benefited most, i.e., those in the highest wealth brackets , should bear a much larger share of taxes.

    Much of the western U.S. was populated because of heavy water development investments in FDR's time (refer to "Cadillac Desert")

    But the nature of large government spending bills has changed a lot over 50 years. Ag subsidies, Eximbank subsidies, indirect subsidies to health care industry via prevention of the government from negotiating prices, scores of subsidies to companies who hire lobbyists, .. and so on, leave the ordinary citizen with little input.

    And a shockingly small number of congressmen have science or engineering degrees. We have more preachers in Congress than scientists and engineers.

    I'm not even sure that non-partisan scientific institutions such as the NSF have the capabilities to judge what will have payoffs and what won't. Much of the benefits from basic scientific R&D are luck (all the more reason why we should fund many small projects rather than a few large ones).

    Finally, I don't think there is a silver bullet. We haven't even come to grips with just how much personal consumption could fall if the nominal or inflation-adjusted benefits from social security payments fall.

    Comparing the US to countries where there are no safety nets leads me to think that there is a long way for personal consumption to fall, e.g., 72% in the US to a level more like the mid 50s. And economists worry about tiny drops of 1 or 2% in PC.

  20. Hello Hellasious -

    I am the Anon of the past who asked all the questions about M3 yet expressed confidence that the Fed, despite devaluing the currency, still knew what they were doing ("..?!?..").

    Though I read your posts regularly and very much benefit by your knowledge and foresight I have detected, at various times, "Leftisms" which, as a Free Markets Republican, irk me out. Though my experience and knowledge of this stuff is scant compared to yours I do offer the following for your critique.

    Incidentally, you are are the better for not responding to trite name-calling. Anyone who has spent time on your blog should recognize that you do not write things you don't mean and that you only believe things that you can evidence either by your experience or by research. One might disagree with your political philosophy but, apart from others, what you believe is more from experience than theory. Though I disagree STRONGLY with FDR-type Liberal Economic Theory placed in today's context I also recognize that the theory of Free Markets and the Invisible Hand might not work always work too well in practice though sound great in theory - all the same I think it is better to error with the Invisible Hand and avoid the gov't as much as possible.

    This being said, as you know, our economy and educational opportunities are MUCH differeent than what they were in the 1930's, 1960's, and before and after. People can go to trade schools and community colleges as well as higher almost as soon as they decide to commit themselves to this path. Our economy is no longer based on Farm or City - it is diverse and the training-opportunities are diverse (and available) enough to anyone consciously making the decision and committment to learn. I think your perspective might go more in the direction of more funding for people who make these decisions (which I might go along with) but personal responsibility (and personal means) is not totally dead with regard to us getting out of the situation we are in - this should be encouraged before the gov't spending HUGE amounts of money we don't have and when we are already DEEP in SUDDEN DEBT to begin with (I learn a more lot of this fact from your blog).

    On a similar note, I just read about Hillary's $70 billion spending package proposal - and then if THAT doesn't work cutting taxes by $40 billion (geez - that doesn't even cover the new $70 billion spending!). Even being a Free Market Republican I can see the value of extending some $ help to people who are having trouble with their mortgage because the banks are hoarding all the dough the Fed gives them - but isn't this consumer-bailout idea just what we DON'T need to fix these things for the longterm? Besides, aren't the banks bending over backwards to keep people in their homes so they can continue getting at least a portion of the mortgage payments they were originally getting? I have read on this blog before the problem with bailing-out irresponsible behavior be it banks or individuals - wouldn't more gov't spending prop-up artifically high prices that need to come down for us to be healthy again?

    Thanks Hellasious.

  21. Dear All,

    Please note I am against personal and institutional bailouts. A targeted jobs program is most certainly NOT a bailout but an investment in the infrastructure of the country, moving us away from an (imported) carbon economy towards a sustainable, greener future.

    Just because we have a corporatist crony-political economy now doesn't mean we will necessarily have one in the future. It is amazing how little economic scandal the FDR era produced, given the size of the government intervention in the economy. For this we need really good, dedicated leaders who believe in the common good.

    Am I a leftist? Heck, no. But I should also quickly point out that FDR was vilified as a Communist for years... so I guess I'm in good company - not that I dare compare myself with FDR, of course.

    We have lost the Dwight Eisenhower type of conservative/Republican. When he was President he thought those who wanted to undo the FDR insitutions were stark raving lunatics.

    We need to get that type of conservative back..


  22. ... the solution sounds good.
    But I can't see where the money is going to come from.
    All western goverments are already into deficit spending.
    Maybe this can be funded by private companies via a detax-incentives schema?

  23. Evident, over many decades, is an emphasis in the US from 'free' market to government intervention and back again, and so on. With each repeat the burden on government grows as it is looked to for solutions to the ills of the market. The effect is to couple the state and administration with market forces, the political with the economic. The political/government though require legitimation and a degree of mass loyalty to function properly in a democratic society, something not required of markets.

    As the shift of the pendulum back to government intervention restarts, the questions of legitimacy, not only of government effectiveness, but more importantly of democratic functionality itself, ensue. What happens then as 'free' market forces lead to problems for which the state is ill prepared to handle, due primarily to the lack of public consensus to act, a lack that is certainly evident in the comments here?

    With the coupling of the political and the economic, the fate of each is tied together, and with apparent failure to resolve societal issues, blame is very likely to fall on the political sphere, with the solution pointing to the magic of the invisible hand. This sets up an increased bar for future government effectiveness. With real and perceived government failure, the level of mass loyalty necessary to succeed is all the more diminished.

    Perhaps some blend of the political and the economic will evolve, as it will probably be necessary to address future societal needs.

  24. Hello Hellasious -

    M3-Anon again.

    A "targeted jobs program" - that's what's gettin' me. It implies (to me) the Federal gov't dictating where people should go and what to do. I actually do understand and, to some extent, agree with your infrastructure-investment argument (some programs, like the highway building in the 1950's, were not profitable to private companies but the U.S. still benefits greatly by their Federal-gov't-paid creation). But a "targeted jobs program" - that gives me the willies especially with regard to the sphere your focusing on (the Green stuff - it is already heavily subsidized without your program with questionable results - I know, "think longterm", but what about what could occur if the Invisible Hand was left to deal with the longterm?). Why not Healthcare ? That is a much more concrete concern (there is doubt even within the scientific community itself with regard to humans' causation on "Global Warming" - but virtually everybody with an interest in the matter see's the growing Healthcare problems - but even a "targeted jobs program" in this direction makes me wonder).

    With regard to FDR I am not sure if he was a Communist but he definitely liked some of the tenets and FDR had also had some avowed-Communists working for him through his years in office. There also was a lot of corruption during the FDR years and Administration - the recent Amity Shlaes book lists a lot of this yet gives an objective portrayal of FDR (though I believe she does refer something to the FDR-wanted-us-to-get-into-WW2-to-employ-the-masses idea that makes me uncomfortable - that is something I don't want to know is true if it is).

    Thanks again Hellasious - enjoy the weekend!

  25. The triumph of hope over experience. This is the republican phenomena we now see.

    Small government? Decrease in federal spending? Free market capitalism? What a joke. The reality is socialism for the corporatists and hard-nosed capitalism for wage-earners.

    A trillion dollars per year for the military. A trillion or two for Junior's little blunder in Iraq. For what? Maybe to protect our "strategic interest" AKA oil? That money is down a rat-hole doing the opposite of good will.

    Time for energy self sufficiency and drastic cuts in military spending--it is in our strategic interests.

    I don't give a damn if government intrusion into the mythical "free market" is inefficient. Swimming to the shore is more inefficient than floating and letting the tide bring you in to safety, but when you are bleeding with sharks all around you , swimming is recommended. It is a matter of survival.

  26. Re: anonymous said . . .

    (though I believe she does refer something to the FDR-wanted-us-to-get-into-WW2-to-employ-the-masses idea that makes me uncomfortable - that is something I don't want to know is true if it is).

    Are you naive? Let me repeat what I said back on Tuesday:
    "The last two major cataclysmic recessions/depressions in the Twentieth Century were seen off by two major World Wars. Let see if capitalism can pull the hat trick this time round."

    Of course he did! He struggled for seven years to put an end to massive unemployment and nothing worked. I suggest you remove your head from out of the sand heap.

  27. Hellascious
    I've been reading your blog for months and I really appreciate the insightful analysis you provide on a regular basis. I share your opinion of the US needing to invest in energy efficiency and environmental remediation. I also agree with your take on the need to address the income and wealth inequalities that have developed since the Reagan Years. I freely admit to being a Leftist, but I have grave misgivings about the Govt being able to directly pick which programs would most efficiently achieve these goals. I think the Govt should concentrate on getting prices throughout the economy right, so that private actors get the correct signals. Otherwise the free market comes up with less-than-optimal outcomes. This would involve eliminating subsidies for corn ethanol and the oil producers. It also entails internalizing all externalities. A Carbon Tax is just the start. How about Congestion Pricing, Weight-Distance vehicle fees, and taxes on local vehicle pollution. These measures would raise revenue while making the market operate more efficiently. Modifying the current auto insurance system by introducing per-mile rates would also effectively internalize what are essentially enormous externalities which encourage over-use of vehicles (see Arron Edelman's papers on auto insurance and see Todd Litman at VTPI for a comprehensive analysis of the costs, many of which are externalities, of operating motor vehicles. One direct government intervention into the market that could be justified is to mandate a gradual reduction in the maximum weight of vehicles to improve mileage while at the same time preventing drivers of lighter vehicles from being killed in collisions with much heavier vehicles. In addition to the above, we could encourage the neccessary switch from consumption to savings by replacing the income tax with a progressive consumption tax (as proposed by Frank in Luxury Fever).

  28. By the way, how is this going to be funded?

    How about using the $15 billion a month we spend in Iraq & Afghanistan?

  29. H. Thanks for your thoughtful reply. The following are some few words for the contributors.

    "Your man Smith - him of the Invisible Hand", wrote the following about two contemporary economies, Britain and Bengal, [AD 1776].

    'The difference of the genius of the British constitution which protects and governs North America and that of the mechantile company that opresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of those countries'.
    [Wealth of Nations; Bk. I].

    Seems like the Free Market, lacking regulatory restraint, got a tad out of hand and reduced the Bengalis to subsistence servitude. Is this what will pan out for the majority of families in the US of Today? The Robber Barons have returned?

    The US must 'manufacture' itself out of it's economic predicament. No other option! Made in the USA must mean exactly that - made in the USA, not a re-cycled import.

    I have often been shocked at the lack of understanding many Europeans have about the US. They fail to adequately appreciate your overwhemling national patriotism, your great inventivness and your productive genius. You can, and should, dig yourselves out of the economic hole you are in. Won't be easy with energy becoming scarcer and more costly. But don't try to tell me you can't do it!

    Question is: How will you get the charismatic leader you need? Your current system seems somewhat lacking in this respect.

    Admiral Yamamoto warned Japanese military leaders that he was concerned that their attack on Pearl Harbour, "Had awakened a slumbering giant". They sure had!

    Your giant, morbidly obese, is slumbering on the couch in front of the telly. Rouse him up, put him on the Atkins, and hopefully things will come right. Good luck!

    Brian P

  30. How about:
    1. Infrastructure repair & improvement
    2. Educational improvement on all levels - so the next generation has different choices
    3. R&D funding to strengthen US economy
    4. Intelligent immigration reform to utilize global IQ.

    1. Tax the rich
    2. Stop the Iraq and Afghan wars asap.
    3. Cut gov corruption

    It can all happen peacefully now or not-so-peacefully later as the bellies shrink.

  31. Hellasious: This is a thoughtful recommendation that you have proposed. Whether others want to agree or not, you are offering solutions whereas other blogs are just criticizing and complaining.

    I have a son who is a scientist in training. There are so many research programs in place now at the nation's Universities that are being funded by private business. The government could expand on these programs.

    I find it interesting that politicians and business leaders cry about the lack of scientists, mathmeticians and engineers being trained in this country while schools are offering more scholarship money to musicians and athletes.

  32. What Marcus said!

    The market gives us $590-million retractable roof baseball stadiums while, nearby, an Interstate Highway bridge collapses into the might Mississippi. Not that I wouldn't rather see it replaced by a railroad bridge, now that it's gone.

  33. I'm not sure how you can raise real US incomes in the longer term, when the minimum wage in the US (300 million poeple) is $5.50 and as, you mentioned in a recent post, the average wage in China is 50 cents an hour (1 billion people).

    Whatever technology advantage is created in the short term will probably be quickly exported (whether legally or illegally- it seems to happen overnight these days) and the advantage lost. The world is global now and I don't see how the US can start projects that raise real incomes overall when its minimum wage is already higher than most of the worlds average wage. Simple and demand seems to show that US real incomes can only go down.

    Sorry I think the only way for the US is down. Empires come and the go. They rarely rise again from the ashes.

  34. Has anyone out here ever actually been involved in one of these government jobs programs? I was on the Whip Inflation Now program under Ford. I had a job through them and they even paid for a set of truck tires for me. Waste of money? I sure needed it at the time. I've seen a ton of government programs over the years that have wasted money in a lot worse ways that didn't benefit more than a handful of well-to-do folks.

    You cannot deflate wages the way we have in this country and reward corporations for outsourcing and somehow expect things to just chug right along. I am currently making $11 in the private sector (after going back to school, retraining and racking up 10 years of experience in the field). I made $10 working for the USDA as a laborer back in the late 70s and it went a lot further than what I make today. I'm not a lefty and I'd love to believe in free and open markets. But I guarantee you that if things continue on a downward slope, folks will start demanding government help and they will elect people who promise that help.

  35. The FDR New Deal came to life based on a consensus between Congress and the President. For any serious modification of the existing economic political fundamentals to change, will require a great deal of pain upon all elements of the society first. Only when faced with the reality that endless FED cuts and targeted tax breaks don't bring back the good economic times will the political establishment along with the corporate world as it exists then be able to forge new models of economic possibilities.
    Americans live the most energy intensive lifestyle earth. Cheap energy has been the main driver of this lifestyle. Given the increased usage by emerging countries regarding energy its doubtful that we can depend on cheap energy to fund our economy in the future thereby creating a high probability that we as a society will experience a lower level of consumer lifestyle.
    We face new and interesting challenges in our economic lives. I hope our generation can achieve something greater then endless economic growth based on nothing more then consumer spending. Thanks for your ideas H and the chance to comment on them.

  36. Dear HELLasIOUS,

    I love your idea. I have been avocating something similar for at least 2 years. The private sector cannot and will neither bear the risk nor the cost of funding a project with such scope as a new energy delivery/infrastructure regime. All political ideologies aside, it is vital for government to take the lead on something that could be considered a national preservation strategy. I believe the government of Australia has done something along these lines of acting as venture capital for energy innovation. The funding was something like $10B for a recent project, the specifics of which escape me. Sorry. Also, any success would be a huge win for that country's currency.

    Thank you again Hell for your vast wisdom,


  37. Hellasious...

    As I read your wonderful posting today: “We need government-sponsored action on a scale several times bigger than the Manhattan or Apollo projects” I was struck by the irony of it. Your ‘plea’ to science to solve the problem is wonderful (you even proudly associate yourself with the scientists in your ‘about me’, i.e. trained as an engineer…), yet even you seem reluctant to accept those same scientist’s recommendations.

    When America was desperately in need of rescuing from Germany/Japan, it successfully called upon the world’s physicists to built the A-bomb. Today, those very same scientists-- the physicists’-- working in the fields like complex adaptive systems, evolutionary biology/evolutionary psychology and econophysics, have already arrived at significant conclusions as to the solutions to our problem.

    But unlikely the 1940’s, when society was able to pretend that ‘a bomb was just a bomb’ and that the existence of the A-bomb would not require any significant changing of our belief systems, today society (i.e. most of you) do not get off so luck when physicists apply their lenses to economics/your belief systems.

    And as has always been the case with science, most of you do not want to listen. Economphysicists present their solutions almost daily, yet their conclusions are either completely ignored by the world at large (“too academic”) or attacked from every imaginable political angle—in many ways similar to how Galileo was attacked by the PC crowd of his day. Their conclusions are not ‘clean’/do not completely parallel any existing special interest groups and usually come to the conclusion: “you are both right and wrong”

    So many thoughtful postings, so many illusions…

    I think I will stick with your analogy of the popping of the Japanese bubble as I know I need to keep it brief, I really do not want to hijack the blog.

    This ‘private vs. public’ debate is as dull as the nature vs. nurture debate argued by people who do not understand evolution. The fact many of you participate in this debate at all sometimes suggests many of you lack an understanding of the very issue the problem is trying to frame in the first place. Hellasious, you are absolutely correct in your follow up posting that there is no magic bullet in the ‘private vs. government’ issue, there is only ‘what works’. If a government program will truly solve our problem, then we should do it. If a private sector program will solve our problem, then we should do that.

    The correct choice of government/economic system has been endlessly looked at in scientific circles—for those of you who read on these things, one of many books I would suggest is Davis Landes’ classic The Wealth and Poverty of Nations. The answer is there is no answer, there is only what works. And competition over long periods of time does seem to be a very good idea. But hey, if some of you are dogmatic on the total free market approach, there was a wonderful lecture at The Cato institute today I highly recommend. I may even agree with on just this topic-- evolution and free markets. But if you are a closet Socialist, just to continue on the Japanese theme, I recommend just about anything on the Meji reformation as it too will clearly support you view. I may even agree with you too.

    Hellasios, I would be careful recommending a big government program. Your parallels to Japan and its debt deflation problem-- including even parallelling Japan’s actual failed approach to solving their problem is getting a little scary for my taste.

    In an attempt to spend its way out of its deflation cycle, Japan took on more public debt than any other nation in the world (>130% GDP according to I think interest on their debt alone now costs more than the profits of their entire economy (you can check my figures but I am pretty sure they are correct). As a result they remain in an endless cycle of deflation-recession and will continue to do so until they either default on their debt, or save enough to pay it down to the point where their economy actually makes some profit.

    A single bad ‘big program’ decision can be economic ‘hari kari’ to a country if it does not work. That is also clear from Lande’s work. Again, the issue is not government vs. private, it is what works vs. what does not work. One bad big decision and its all over.

    From my own perspective, I agree with the anon who said ‘lots of little programs’. If you are going to do something, the risk profile seems much more favorable. Having said that this, you are a little short on what that/these programs will actually be and make no mistake 'The devil is in the details'.

    Another Anon said… (and there seem to be an awful lot of anons so it is hard to keep you all straight… doesn’t anyone stand up for their beliefs with their own name anymore?) something to the tune of “I think we need to tax the rich more”. The problem behind this sentiment, even assuming it would work, is that ‘sticking it’ to one group in society over another tends to destroy the trust within a society necessary for non-zero sum cooperative economics in the first place.

    From an economphysicist perspective however, it is also clearly the triumph of hope over reason... the result of a human primate ‘tit for tat’ ‘fairness’ heuristic (for those of you who even know what I am talking about) using Gaussian logic as its benchmark of fairness over a fundamental fractal/scalability property of wealth distributions in information networks.

    Basically you are arguing with God.

    So go ahead and play your zero sum games if you will, I will steer clear of them... evolutionary psychologists have already clearly demonstrated that cooperation is fundamentally impossible in zero sum endeavors.

    But as recognizing this requires challenging so many aspects of conventional wisdom/illusions about the world, society and fairness, it is a lot more comfortable to pretend it is all some kind of ‘Social Darwinism‘ or 'too darn academic’ and just go back to a zero sum ‘fight’

    Best of luck solving that one… the anon who wrote "The last two major cataclysmic recessions/depressions in the Twentieth Century were seen off by two major World Wars. Let see if capitalism can pull the hat trick this time round" Understands the result of zero sum solutions.

    Do many of you?

  38. Though there are many Americans simply unable to go into more debt (since their debt-to-income ratio is too appalling for lender's parameters), I have hope that there are growing ranks of Americans simply unwilling to go into more debt to purchase unnecessary things.

    Perhaps media attention on environmental troubles and the disparity between America's consumption of resources versus the rest of the world's has hit home (finally) with the public.

    Its a finite planet.

    And now for something completely different- I found Hellasious' brilliant site though That site is not brilliant, but you can find gems in the randomness. Though there is the occasional mention of mortgage insurance companies not being able to possibly pay the potential claims coming, I've never heard talk of Fannie Mae/Freddie Mac/GMNA's ability to back their guarantees. Seems like that could devastate the government faster than Medicare... Any insight out there?

  39. Regarding the idea that wealthy people, in the face of rising taxes, can move their assets abroad and thereby avoid the higher taxes:

    Not so- not legally at least. The U.S. government created a web of laws and regulations that now make it impossible to legally avoid paying taxes, even if one resides offshore and never visits the U.S.
    Among the countries of the world, the U.S. is almost unique in this regard. Moreover, even if a U.S. citizen renounces his citizenship and acquires citizenship in another country, he is required to pay U.S. taxes for the 10 years following his renounciation, and to file a return for each of those 10 years.

    Finally, there is legislation in Congress which, if it passes (it already passed in the House, I believe) would require the payment of an "exit tax" anytime a U.S. person seeking to expatriate transfers money abroad.

    It's only a matter of time before capital controls make it difficult or costly or impossible for a U.S. citizen to transfer their assets to another country.

    Wealthy people have already taken steps to transfer much of their portable wealth overseas, looking to the time when the situation in the U.S. becomes untenable.

  40. There is something seriously wrong in this country when you have areas like San Francisco, where less than 10% of the population can afford to buy the median priced home. (Even worse, the 10% that can afford the median priced home think they should be able to live in a mansion with what they earn!)

    As much as everyone screams "Socialism" -- that's exactly what you need to spread the wealth around. Unless you desire to live in a society where there is only rich and poor, you need to have some form of socialism to pry the $$$$ out of the hands of the wealthy (and the wealthy can be individuals or corporations).

    I find it quaint that people are concerned about the fortunes of the Gates and the Buffets and the Hiltons of this country. All of those people are leaving their fortunes to charity -- and many of the charities they've selected don't have much to do with the USA. Since the USA actually helped them to amass such fortunes, don't you think it would be nice if a little bit more of the charity were spread around here?