

Warren Buffett: 2nd Stimulus Needed, Expects Longer Recession - jakarta
http://abcnews.go.com/print?id=8039651

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Locke1689
This is essentially what Paul Krugman has been saying in the New York Times
for a while now. Essentially the idea is this: in a bubble, or period of
economic growth, large amounts of deficit spending is a bad thing. In a
recession or depression, John Maynard Keynes famously argued that,
counterintuitively, it may be highly beneficial to enter a short period of
extreme deficit spending. The idea behind this is that in a recession or
depression, the entire economic system contracts. In a period of success,
everyone's a little more loose with their money: everything's goin great out
there, why not take a risk? The opposite happens in a recession: people are
worried, so save , save, save.

Troublingly, this is the exact opposite of what is needed to get out of a
recession. In order to increase employment and restore growth, spending needs
to increase, not decrease. If consumer spending is at an all-time low, why
would corporations hire _more_ people, instead of less? This is where Keynes
came in. He argued that, unlike corporations, the government wasn't limited by
the temperamental swings of the market. In fact, the government had the
ability to do what very few corporations can: go into a very large amount of
short term debt. The idea behind this is to commission large projects which
force corporations to rehire and increase expenditures. As such, employment
increases and salary for those employees does as well. Once consumers have a
sufficient amount of disposable income, the other sections of the economy are
revitalized as well.

There are a couple easy pitfalls with this, though. First is the debt aspect
-- if you choose the wrong projects to invest in, then the government may end
up in permanent debt. Consider two projects: one requires high capital
investment, but it will spur greater economic growth and profits in the long
run. The second also requires high capital investment, employs a lot of
people, but it's essentially a one-time product. A great example of the first
is infrastructure projects like the Tennessee Valley Authority. It cost a huge
amount to build, but it also provided cheap electricity to the area,
generating revenue, and also provided a great place for businesses to relocate
to (because of the cheap electricity) and increased employment and income
rates of almost everyone in the area. An example of the latter would be
something like an advanced jet fighter (with no war going on). The problem is
that once built, the jet fighter is essentially done. A high capital
investment produced a short term investment, but it generally has a low rate
of return. Of course, the reason why this worked in WWII is fairly simple: we
were the world's bankers and manufacturers.

Therefore, the problem thus far has been crippled because it is essentially
half-hearted. Stimulus spending, to be effective, must be a large proportion
of the country's GDP (around 4%). In contrast, $3.27 trillion is about 2.1% of
our ~$15 trillion GDP[1]. For a more accurate (but still back of the napkin)
calculation, Krugman wrote this in January of this year[2]. I believe that
Krugman also overlooks many of the problems with the spending projects
themselves: to be effective in the long run stimulus spending should be
focused towards long term improvement projects. Infrastructure development is
a great example of that, but so are things like alternative energy and
scientific R&D. Too much money I think is spent on things like super-high
performance military jets. While this satisfies the short term criteria, F/A
18E/F Super Hornets probably don't increase consumer spending as much as
equivalent infrastructure spending over 10 years.

That said, I still agree with Keynes and most modern economists that stimulus
spending is probably the best way the government has to help the economy. It's
not a magic bullet, but we do have a sizable amount of historic evidence in
favor of stimulus spending and against other things. (Consider that Keynes's
theory of economics did not come about until the late 19th-early 20th century.
Prior to that, government did not go into debt. As a result of that and lack
of regulation, recessions were harsher, more frequent, and lasted longer.) Of
course, macroeconomics is mostly guesswork, mingled with shreds of
enlightenment that don't add up to all that much anyway.

[1] [http://blog.heritage.org/2009/02/12/true-cost-of-
stimulus-32...](http://blog.heritage.org/2009/02/12/true-cost-of-
stimulus-327-trillion/) Really, this is a pretty generous calculation anyway,
considering that this is over 10 years and some of the stimulus will probably
come back in taxes. [2] [http://krugman.blogs.nytimes.com/2009/01/06/stimulus-
arithme...](http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-
wonkish-but-important/)

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jerf
Yeah, but in reality, even if we accept Keynesian economics as a given (which
I don't, but I will for this post), the question is not really "Which is
better, do nothing or do another Keynesian stimulus?", it is "Which is better,
do nothing, or let Congress write _another_ crappy bill using Keynesian
economics as cover?"

The "first" stimulus (not really first) had extremely little content that even
conforms to your explanation of good stimulus spending. Thus, by Keynesian
economic standards, it should have failed. It has failed so far and I see no
reason under either Keynesian economics or my preferred economics to think
that will change.

What will a "second" stimulus change? Will our government do an actual
Keynesian stimulus, or will it pay lip service to an ideology it believes
tells it to do what it wants to do anyway (always dangerous!) and just spend,
spend, spend? And if your answer is the former, I ask you, on what evidence do
you base this belief since all evidence seems to point against it?

Explanations of how Keynesian stimulus works are pretty irrelevant in a world
where we aren't actually using them. People who think the government should
cut back may be wrong in the sense that it is not optimal, but it may still be
the best course that we can actually bash Congress into following. It isn't a
chamber where "nuance" does very well.

I have read vast swathes of the "first" stimulus bill. I invite you to read it
and come to your own conclusions about exactly how much of it is actually
Keynesian. I didn't find much that was unambiguously Keynesian, much that was
unambiguously not, and a lot of other things that are basically slush funds
that seem pretty unlikely to go to Keynesian things.

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drewr
Well said. Most of the money won't be spent for another two years and what has
been spent hasn't been in the private sector. If you're going to propagandize
Keynes, at least have the policy match the propaganda and let's see if it
actually works.

Perhaps none of it matters. All of this assumes that Congress knows what it's
voting for in the first place.

"If every member pledged to not vote for it if they hadn’t read it in its
entirety, I think we would have very few votes." --Stenny Hoyer, referring to
a 1,500-page health-care reform bill coming up in the House
([http://www.cnsnews.com/public/content/article.aspx?RsrcID=50...](http://www.cnsnews.com/public/content/article.aspx?RsrcID=50677))

How can any of this giant, sweeping legislation be any good?

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TrevorJ
I still can't wrap my head around the idea that the US borrowing money to give
consumers can get us out of trouble caused by borrowing too much money in the
first place.

It's kind of like giving a skydiver a shovel so that when his 'chute fails he
can just dig a hole in the ground so fast that he never has to touch bottom.

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jonknee
I think the idea is that everyone is nervous right now and not spending (which
means business is down which means layoffs happen which means people get more
nervous and spend even less), so by starting off spending the gov't is trying
to restart the engine. No one wants to jump off the diving board first so to
speak. I'm not an economist though, so I'm sure it's a huge over
simplification.

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ivankirigin
Planning on spening money a year from now doesn't stimulate anything for quite
some time. But it does increase interest rates, at a time when lending is
getting killed.

Buffet is a great investor and manager, but you can't map that ability to
public policy magically.

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gaford
Good point about the inappropriate delay in spending the stimulus. That said,
if fiscal policy were pushing up interest rates the Federal Reserve could
simply lower them and use monetary policy in place of extra fiscal policy.

This would present the risk of inflation, but if there were inflation (rather
than deflation) we would not be in a liquidity trap requiring fiscal stimulus.

I think Krugman has gone over all of this. It's fairly well spelled out in
Keynes as well.

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systemtrigger
The interview, sans cruft and sped up a bit:
<http://2009.s3.amazonaws.com/buffett.mov>

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ErrantX
People should listen to Buffet a lot more, it's been clear since the dot com
bubble (and before) he knows what he's talking about.

~~~
roc
What Buffett actually said was: "we could've used a stimulus in the first
place and didn't get it. So, sure, we could still use one".

He's backing the concept and trashing the reality in the same breath. That's
not exactly a ringing endorsement of the idea that an actual government
stimulus is going to get us out of this.

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drawkbox
Wow, interesting way to put it:

"Our first stimulus bill ... was sort of like taking half a tablet of Viagra
and having also a bunch of candy mixed in ... as if everybody was putting in
enough for their own constituents," he said. "It doesn't have really quite the
wall that might have been anticipated there."

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tybris
Probably it'll last to about the end of Obama's second term.

[http://bigpicture.typepad.com/photos/uncategorized/100_year_...](http://bigpicture.typepad.com/photos/uncategorized/100_year_dow_bull_bear_periods.jpg)

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bunni
We've already had two stimulus bills...

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tybris
No, balance the budget.

