When recession becomes an issue, as it now is, the remedy involves increasing total spending, or aggregate demand, to match the capacity of the economy to produce goods and services at full employment.
One way to view aggregate demand is by its spending components such as consumption, investment, and government spending. This "Keynesian approach facilitates a focus on fiscal policy.
Comments (0)Because of the financial crisis and the deepening recession, more economic literacy is being recommended once again. When I was there, the Dallas Fed had several programs to teach economics to teachers so they could teach it to their students. Teachers often asked me what were the most important economic concepts to teach students who wouldn't be taking additional courses in economics. Here are my Top-10.
"There ain't no money in poetry. That's what sets the poet free.
I've had all the freedom I can stand."
Guy Clark, Cold Dog Soup
In the beginning, there was the stretch for yield that led to subprime, best described in a Japanese Haiku:
If regular loans
Don't earn enough to suit us
Maybe bad loans will.
We've all heard of guilt by association. I've recently come to realize that its first cousin is guilt by classification. The phenomenon isn't new to me, but the label is. It came to me last Sunday (December 14) while reading an article by Gretchen Morgenson in the New York Times. I admire her work very much. Her articles have taught me much, especially in the early months of the subprime crisis, and most especially by personalizing its villains and its victims.
My quick reaction to the Fed's shock and awe policy actions on Tuesday may be found at Forbes.com.
Prior to the FOMC's announcement, when the entire focus of expectations was on the target Fed Funds rate, I anticipated a reduction of 50 basis points, but I didn't think it mattered much since the Fed Funds rate was already trading below its target rate of one percent. See CNBC's Squawk Box interview. Going all the way to a zero to quarter percent target range was a bold move in itself, but the more important part of the action was the purchase of mortgage-backed securities and agency debt and reiterating the coming help for consumer credit shortly. The FOMC clearly is willing to do whatever it can to pull us out of this dangerous financial crisis and minimize the damage of the recession.
The American Spectator (online) has been running an excellent series of articles on the damage mark-to-market accounting has been doing to our financial system. They have some real heavyweight authors, plus myself. I'm a heavyweight in a different sense.
The series is introduced by Editor-in-Chief, R. Emmitt Tyrrell, Jr. accessible from my article. Once there, you can follow the trail to the following:
Newt Gingrich,
Brian Westbury, FT Advisors
Edward Yingling, President of the American Bankers Association,
William Isaac, former director of the FDIC
Gary Wolfram, Professor of Economics, Hillsdale College
The word "Keynesian" is usually used pejoratively in the crowd I hang around with, intellectually speaking. It connotes to them, too much reliance on the government to stabilize the economy, leading perhaps to too much government over time, and less individual liberty that goes with that territory.
While spending and investing billions of dollars-or is it trillions?-trying to heal the sick credit markets, the government continues, inexplicably, to ignore the low-hanging free fruit of suspending or modifying mark to market accounting. We are hoisting ourselves on our own petard by adhering strictly to accounting rules that unnecessarily threaten to put thousands of viable financial institutions out of business.
The business cycle dating committee of the National Bureau of Economic Research today announced their determination that the peak of the last expansion occurred in December 2007, coinciding with the peak in employment. This means the recession started in January 2008, the month employment began to decline. Although they consider other factors as well, the labor market was the primary factor in this case.
This means that we've already been in recession longer than the past two recessions, which were relatively shallow as well as brief. Commentators would make a mistake, however, if they start applying rule of thumb to this recession using the January 2008 beginning date since the employment losses were relatively modest for a recession period through August. In September and October, 2008, employment losses steepened and, judging from new applications for unemployment insurance, will have continued to do so in November. That will likely be confirmed Friday morning, December 5th.
What I mean about not applying rules of thumb is that for the first 9 months or so, the recession was mild; and it's becoming much more serious now. For some purposes, September might be a more relevant starting date than January. You might think of it as a recession within a recession.
The Business Cycle Dating Committee of the NBER will likely say the recession began in January 2008, when total employment started dropping. However, the net job losses accelerated this September and October likely signaling a steeper rate of decline.
Payrolls declined 240,000 in the October after a revised decline of 284,000 in September. The household survey showed a larger 297,000 decline in October, which, combined with a labor force increase of 306,000, drove the unemployment rate up from 6.1 to 6.5 percent. Total payroll employment has fallen by 1.2 million in the first 10 months of 2008, with over half of the decline in the past three months." We are clearly experiencing a nasty inflexion point in the economy.
My latest New York Times post goes through the traditional categories of spending, asking the question: Where is the strength to pull us out of the recession going to come from? The answers aren't encouraging. You may find that post here.
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