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November 24, 2008

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Nato

Eventually everything that goes around comes around, so whatever China choses to do with its money (besides wasting it) will eventually improve the US economy. I think the timeline under discussion is much shorter, however, and carries with it a demand-only view of growth. Basically, no one wants to invest in US assets right now and if the American people finance the deficit then the amount being given to the people is just borrowed back from them, leaving the economy with no net growth in consumption. It makes sense, I suppose, though I don't think it helps anything so much as distributes some of the current pain into the future. Now, perhaps extremes are wasteful and so it would actually result in savings, but this whole way of approaching these kinds of problems worries me. Yes, if there's no demand, there'll be no investment, but the demand side of this seems to owe entirely to the popping of the asset bubble, and the less government involvement with that side of things the better. The rest of the crisis has to do with liquidity making investment funds too hard to get. That's were economic efforts should go. Interest rates are already about as low as they can go so we may be tapped out on that monetary instrument, but I don't see how the government facilitating the flight of investment dollars to government debt helps things.

Providing some sort of tax advantage to investment seems the way to go right now. One thing I can think of that might be helpful on that score is the suspension of the hike in the top rate that Obama proposed. If ever there was a time for supply-side economics, this would be it. Also, direct investment by the government in emerging industries would perhaps also be a good move, if it's done intelligently. I'm not sure if this has ever happened, however.

I don't know. I really just think this crisis cries out for a monetary response, but we are disarmed in that respect. That is probably the scariest thing about this recession to me.

Nathan Smith

re: "Providing some sort of tax advantage to investment seems the way to go right now."

You mean, like what McCain wanted to do?

re: "Also, direct investment by the government in emerging industries would perhaps also be a good move, if it's done intelligently. I'm not sure if this has ever happened, however."

Which is no accident. Government isn't the right kind of vehicle to invest intelligently in emerging industries. It doesn't have the right internal incentive structure.

Nato

"You mean, like what McCain wanted to do?"

Sort of. His tax policy was more investment positive, at least over the short term (which is the timeline under discussion) but some of the others didn't make any sense to me. E.g. why would we want a temporary capital gains tax cut? To encourage people to sell their solid investments now before the tax rate rises? That didn't make sense to me, and I presume was offered under the expectation that it would eventually be made permanent. I'm glad Obama hasn't insisted on keeping the $250k+ bracket hike.

" Government isn't the right kind of vehicle to invest intelligently in emerging industries. It doesn't have the right internal incentive structure."

We are in total agreement here. What the government could do would be to create a market through subsidizing the purchase of emerging industry goods. The track record on this is not as terrible, but still bad enough to imply that there must somehow be room for improvement. It may be that the solutions are fairly straightforward but are politically impossible. Such setups don't allow politicians to distribute largess, so there's a strong disincentive to set them up well.

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