RE: The Politics of Recession

[moreno villanueva <movi273@xxxxxxxxxxxxxx>]

Maybe the next step will be to low the interest rates, and this event will
be followed by a downturn in the level of income.  The reduction in the
aggregate demand (more unemployment) will go along with the reduction of
imports and the subsequent reduction of the trade deficit.  I think the
gobernment should save the money they have now, in order to be able to
stabilize the labor market during the mentioned downturn.

-----Mensaje original-----
De: pkt-owner@xxxxxxxxxxxxxxxx [mailto:pkt-owner@xxxxxxxxxxxxxxxx]En
nombre de Sven R Larson
Enviado el: Miércoles, 20 de Diciembre de 2000 03:57 a.m.
Para: pkt@xxxxxxxxxxxxxxxx
Asunto: Re: The Politics of Recession


Henry,

The problem with the pending recession will not be private debt as such,
but payments on that debt. I disagree with you on the timing of tax
cuts: given that cuts are discussed early in 2001, announced before the
US fiscal year of 2002 starts next fall, and effected during that year,
households will have good reason to expect little impact on their
purchasing power. It will, in other words, keep them from making overly
pessimistic changes to their spending patterns. In other words: so long
as households can be given good reason to believe that they will still
be able to pay principals and interest on their debt even two years from
now, they will not turn whatever they have in assets into debt
reduction. (If they did, considering the strong wealth growth during the
Clinton years that could trigger an ugly acceleration of the recession)
The critical point of a downturn is precisely to keep expectations
healthy - so long as the downturn doesn't threaten to ruin the bulk of
consumer expectations it will stay mild.

Bush is better prepared than Gore to help households land softly in a
recession, as tax cuts are high on his agenda (even higher than budget
balancing was on Gore's...). His problem is to tune them towards the
middle class enough to get the right macroeconomic boost.

What America needs now is not more government spending, but lower taxes
to preserve household cash flow margins.


Have a Keynesian Christmas,


/srl


"Henry C.K. Liu" wrote:
>
> I have suggested that Bush and his team have every incentive to
> pin the inevitable recession solidly on Clinton.  The Fed
> decision today, which I have predicted in an earlier post: "My
> take is that the Fed in December will hold ff rate unchange and
> remove that inflation bias (balance of risk)", confirms that
> strategy.  If Gore were elected, Greenspan would have surely
> lowered ffr today, perhaps even by a full 100 basis points.
> Greenspan's record shows that he has been 6 mongths late in
> responding to recession signals and Fed data are generally 2
> months late.  Thus a reversal of Fed policy only after January
> 20 can be expected  with the perfect excuse of lag time.   At
> any rate, even if Greenspan cuts ffr to 2%, by next June, it may
> not help because of the dollar exchange rate problem.   Bush can
> use a mild recession to push through his tax cut anyway, except
> this one won't be mild by a long stretch.  Some very astute
> economists (easy, Allan, I have names) think that the surplus is
> the problem and that what the US economy needs at this moment is
> a healthy deficit, not from tax cuts, but from government
> spending.  I think these economists are on target, but even then
> it may be too late, because private sector debt is too
> overwhelming.  And the IMF is still going around the global with
> blindly demanding government surpluses.  Its going to get bad
> before it can get better.  The Japanese dceade-long drought
> looks likely to repeat in the US, unless the Fed is prepared to
> sacrifice the US banks, something the Fed has been telling the
> Japanese to do for years.
>
> Henry C.K. Liu
>
> confirm

--
Sven R Larson
PhD; Assistant professor of economics
Department of Social Sciences, Bldg. 22.2
Roskilde University
Pb 260
DK-4000 Roskilde, Denmark
Phone: (+45) 4674 2910