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Krugman: Gee, the sky really is falling

By Owen Paine on Monday November 17, 2008 06:42 PM

"The main thing to realize is that for the time being we really are in an alternative universe, in which nothing would be more dangerous than an attempt by policy makers to play it safe"
This line, by the latest faux-Nobelist econ man, Auntie Paul of Krugspielenschaft, very nicely captures the flavor of cutting-edge respectability right about now.

In the blog post from which this morbidly panicked line was culled, there is also this:

[Goldman Sachs] then turn to an estimate of likely changes in the “private sector balance” — the difference between private sector saving and private sector investment. And it’s stunning:

The GS house price forecast combined with current equity prices and credit spreads implies a rise in the private sector balance from +1% of GDP in the second quarter of 2008 to +10% in the fourth quarter of 2009 -- a rise of 9 percentage points, or 6 points at an annual rate.

You may ask me: "Owen, what the geek does this mean to imply?" After feeding these numbers through my own special parametered virtual job multiplier, I take it to imply that if we hold all else in a paralytic grip, then we're in for a ride past 15% unemployment before the sun rises once again over America.

Yes, Virginia, we're headed down a continent-wide rabbit hole -- unless, that is, our dear ole Uncle Sawbuck, the stricken cyclops of planet Earth, takes some super-bad, mighty bold and bodacious countermeasures, and takes 'em pronto.

Again St Krug:

"What’s the answer? Huge fiscal stimulus, to fill the hole. More aggressive GSE lending. Maybe a “pre-commitment” by the Fed to keep rates low for an extended period -- that’s a more genteel version of my “credibly promise to be irresponsible.” And maybe large-scale purchases of risky assets."
Yeah, Paul, and maybe a lot more besides.

Note on the relative meaning of "huge fiscal stimulus": to Paul it's prolly on the order of 800 bills in increased fedral deficit. Which is piffle, a mere pigeon drop. It might-oughta take us, on highest estimate, and with a tail wind from Asia, if we're extra lucky, and all hits just right -- about halfway across the canyon.

Comments (3)


here's pauly girls calc
using his multipliers
parmeters apparently
since the neoliberal
heavy metal mind meld
circa 1980

"So what kinds of numbers are we talking about?
GDP next year will be about $15 trillion,
so 1% of GDP is $150 billion. "

so far so good eh ??

"The natural rate of unemployment is, say, 5% — maybe lower."

natural rate ..nice touch you butch goo goo u

"maybe lower" indeed
but the ouput gap he uses starts at 5 %
not say vickrey's 1.5 %
"Given Okun's law, every excess point of unemployment above 5 means a 2% output gap"

here we have finger prints of this antique modeling
it was dembot double domers
like arthur Okun
that put the approval stamp
on the 70's stagflation hoax
"Right now, we're at 6.5% unemployment and a 3% output gap .."

using the vickrey friction rate
of 1.5
of course ..you get an additional 7 gap points

"..but those numbers are heading higher fast. Goldman predicts 8.5% unemployment,
meaning a 7% output gap. That sounds reasonable to me."

sounds way low to me obviously
after adding in vickreys 7% more
to get 14 % and to round up lets
go for 15 %
"So we need a fiscal stimulus big enough to close a 7(15)%output gap."

by using krug's own
" add 50% " rule
he's already offered to obamas people

that becomes a 11% gap or 22% using vickrey numbers

"When I put all this together, I conclude that the stimulus package should be at least 4% (10%)of GDP, or $600 billion (1.5 trillion) "

or 900 bills using his 50 plus rule
and 2.2 trillion using vicks plus k's 50

"Remember, if the stimulus is too big, it does much less harm than if it's too small."
indeed sooooo
lets score 2 trillion

tax cut part
i trillion pay roll tax rebate
plus tax credits for earned income based
income taxes of another trillion

note :
" What's the multiplier? Better, we hope, than on the early-2008 package. But you'd be hard pressed to argue for an overall multiplier as high as 2 "


my guess the output multiplier from a payroll tax holiday and a prior pay in rebate tax
far frrom 2.0
will be closer to 1.6 or so
very feeble

but is that so wrong ???

its the debt pay down stupid

the rebuilding of household solvency

a large trillion or so
net household debt pay down
and transfer to uncle's tax based credit card...what's not to like about that
consider this :

after the obama fools' krieg ends
and its dusting of fools gold settles
the wall street journal no less
income taxes
will be paid only by top halfers
--that's the flow that now services the national debt---

at any rate

look for(old bizz week phrase)
long run lasting
positive household spending effects

blah blah blah

Peter Ward:

But the moral of the story is, if the economy requires massive state intervention to function clearly it is defective, from the perspective of the priests of the Freemarket, i.e., and something different is needed.

Almost certainly, one way or another, the auto industry (and other affected industries) will be rescued--i.e., socialized--a lot will still suffer, but not quite as many could have, and everyone will join the charade of calling it a triumph of capitalism.

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