Thursday, August 5, 2010

Our Recession Continues...

The chart above (supplied by Greg Mankiw) illustrates one reason that our current recession is different from others: when people lose their jobs now, they lose them for a lot longer.

Another thing that's different now as our liquidity trap: the Federal Reserve's interest rate is effectively zero, and there's little left for the Fed to do to stimulate the economy, thus we're left with financial stimulus from our government (effectively financed through debt to other government). Though media attention has been on those who think this debt is out of line, Hale Stewart at 538 has a lengthy argument for why that's not the case. Summarized:
  1. This new found love of lower government spending is politically motivated. It has nothing to do with altruism or love of country. It's about the November elections. Period.
  2. Government spending has been and always will be part of the the GDP equation
  3. Countries that tried austerity are worse off for it.
  4. Countries that inject massive amounts of the proper stimulus (such as infrastructure spending) grow at high rates.

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