Saturday, February 14, 2009
Who voted for and against the Stimulus Bill?
Click here to see who voted on Friday Feb. 13th for the President's debt-busting stimulus package. Cross-posted from Obama Alert.
Friday, February 13, 2009
Democrats muscle huge stimulus to brink of passage
WASHINGTON (AP) — In a major victory for President Barack Obama, Democrats muscled a huge, $787 billion stimulus bill to the brink of final passage Friday night in hopes of combating the worst economic crisis since the Great Depression. Republican opposition was nearly unanimous.
The vote in the House was 246-183 for the package of tax cuts and federal spending that Obama made the centerpiece of his plan for economic recovery.
The Senate was following suit in a roll call that was without suspense but extended into the night. That was to allow time for Democratic Sen. Sherrod Brown to fly back from Ohio, where his mother died earlier in the week. His was the decisive 60th vote for the bill.
Obama is expected to sign the bill soon.
Supporters said the measure would save or create 3.5 million jobs. House Majority Leader Steny Hoyer conceded there was no guarantee, but he said that "millions and millions and millions of people will be helped, as they have lost their jobs and can't put food on the table of their families."
Vigorously disagreeing, House Republican leader John Boehner of Ohio dumped a copy of the 1,071-page bill to the floor in a gesture of contempt. "The bill that was about jobs, jobs, jobs has turned into a bill that's about spending, spending, spending," he said. No House Republican voted for the measure.
The legislation, among the costliest ever considered in Congress, provides billions of dollars to aid victims of the recession through unemployment benefits, food stamps, medical care, job retraining and more. Tens of billions are ticketed for the states to offset cuts they might otherwise have to make in aid to schools and local governments, and there is more than $48 billion for transportation projects such as road and bridge construction, mass transit and high-speed rail.
Democrats said the bill's tax cuts would help 95 percent of all Americans, much of the relief in the form of a break of $400 for individuals and $800 for couples. At the insistence of the White House, people who do not earn enough money to owe income taxes are eligible, an attempt to offset the payroll taxes they pay.
In a bow to political reality, lawmakers included $70 billion to shelter upper middle-class and wealthier taxpayers from an income tax increase that would otherwise hit them, a provision that the nonpartisan Congressional Budget Office said would do relatively little to create jobs.
Also included were funds for two of Obama's initiatives, the expansion of computerized information technology in the health care industry and billions to create so-called green jobs the administration says will begin reducing the country's dependence on foreign oil.
Asked for his reaction to House passage of the bill, Obama said "thumbs up" and indeed gave a thumbs-up sign as he left the White House with his family for a long weekend in Chicago.
Congress cast its votes as federal regulators announced the closing of the Sherman County Bank in Loup City, Neb.; Riverside Bank of the Gulf Coast in Florida, based in Cape Coral; Corn Belt Bank and Trust Co. of Pittsfield, Ill.; and Pinnacle Bank of Beaverton, Ore. They raised to 13 the number of failures this year of federally insured banking companies and were the latest reminders of the toll taken by recession and frozen credit markets.
The day's events at the Capitol were scripted to allow Democratic leaders to fulfill their pledge to send Obama legislation by mid-February.
"Barack Obama, in just a few short weeks as president, has passed one of the biggest packages for economic recovery in our nation's history," said House Speaker Nancy Pelosi, anticipating final Senate passage.
The approval also capped an early period of accomplishment for the Democrats, who won control of the White House and expanded their majorities in Congress in last fall's elections.
Since taking office on Jan. 20, the president has signed legislation extending government-financed health care to millions of lower-income children who lack it, a bill that President George W. Bush twice vetoed. He also has placed his signature on a measure making it easier for workers to sue their employers for alleged job discrimination, effectively overturning a ruling by the Supreme Court's conservative majority.
Obama made the stimulus a cornerstone of his economic recovery plan even before he took office, but his calls for bipartisanship were an early casualty.
Republicans complained they had been locked out of the early decisions, and Democrats countered that Boehner had tried to rally opposition even before the president met privately with the GOP rank and file.
In retrospect, said White House chief of staff Rahm Emanuel, the White House wasn't "sharp enough" in emphasizing the benefits of the bill as Republicans began to criticize spending on items such as family planning services, anti-smoking programs and reseeding the National Mall.
Senate Majority Leader Harry Reid faced a different task _ finding enough GOP moderates to give him the 60 votes needed to surmount a variety of procedural hurdles. To do that, he and the White House agreed to trim billions in spending from the original $820 billion House-passed bill, enough to obtain the backing of GOP Sens. Olympia Snowe and Susan Collins of Maine and Arlen Specter of Pennsylvania.
As the final compromise took shape in a frenzied round of bargaining earlier this week, it was trimmed again to hold the support of the moderates, whose opposition to a new program for federal school construction caused anger among House Democrats.
In the end, a compromise was reached that allows states to use funds for modernizing schools. But in a display of displeasure, Pelosi decided to skip the news conference last Wednesday where Reid announced a final agreement.
In addition to tax relief for individuals and businesses who purchase new equipment, lawmakers inserted breaks for first-time homebuyers and consumers purchasing new cars in an attempt to aid two industries particularly hard-hit by the recession. In response to pressure from lawmakers from Pennsylvania, Indiana and elsewhere, the bill was altered at the last minute to permit the buyers of recreational vehicles and motorcycles to claim the same break as those buying cars and light trucks.
In the House, all 246 votes in favor were cast by Democrats. Seven Democrats joined 176 Republicans in opposition.
The vote in the House was 246-183 for the package of tax cuts and federal spending that Obama made the centerpiece of his plan for economic recovery.
The Senate was following suit in a roll call that was without suspense but extended into the night. That was to allow time for Democratic Sen. Sherrod Brown to fly back from Ohio, where his mother died earlier in the week. His was the decisive 60th vote for the bill.
Obama is expected to sign the bill soon.
Supporters said the measure would save or create 3.5 million jobs. House Majority Leader Steny Hoyer conceded there was no guarantee, but he said that "millions and millions and millions of people will be helped, as they have lost their jobs and can't put food on the table of their families."
Vigorously disagreeing, House Republican leader John Boehner of Ohio dumped a copy of the 1,071-page bill to the floor in a gesture of contempt. "The bill that was about jobs, jobs, jobs has turned into a bill that's about spending, spending, spending," he said. No House Republican voted for the measure.
The legislation, among the costliest ever considered in Congress, provides billions of dollars to aid victims of the recession through unemployment benefits, food stamps, medical care, job retraining and more. Tens of billions are ticketed for the states to offset cuts they might otherwise have to make in aid to schools and local governments, and there is more than $48 billion for transportation projects such as road and bridge construction, mass transit and high-speed rail.
Democrats said the bill's tax cuts would help 95 percent of all Americans, much of the relief in the form of a break of $400 for individuals and $800 for couples. At the insistence of the White House, people who do not earn enough money to owe income taxes are eligible, an attempt to offset the payroll taxes they pay.
In a bow to political reality, lawmakers included $70 billion to shelter upper middle-class and wealthier taxpayers from an income tax increase that would otherwise hit them, a provision that the nonpartisan Congressional Budget Office said would do relatively little to create jobs.
Also included were funds for two of Obama's initiatives, the expansion of computerized information technology in the health care industry and billions to create so-called green jobs the administration says will begin reducing the country's dependence on foreign oil.
Asked for his reaction to House passage of the bill, Obama said "thumbs up" and indeed gave a thumbs-up sign as he left the White House with his family for a long weekend in Chicago.
Congress cast its votes as federal regulators announced the closing of the Sherman County Bank in Loup City, Neb.; Riverside Bank of the Gulf Coast in Florida, based in Cape Coral; Corn Belt Bank and Trust Co. of Pittsfield, Ill.; and Pinnacle Bank of Beaverton, Ore. They raised to 13 the number of failures this year of federally insured banking companies and were the latest reminders of the toll taken by recession and frozen credit markets.
The day's events at the Capitol were scripted to allow Democratic leaders to fulfill their pledge to send Obama legislation by mid-February.
"Barack Obama, in just a few short weeks as president, has passed one of the biggest packages for economic recovery in our nation's history," said House Speaker Nancy Pelosi, anticipating final Senate passage.
The approval also capped an early period of accomplishment for the Democrats, who won control of the White House and expanded their majorities in Congress in last fall's elections.
Since taking office on Jan. 20, the president has signed legislation extending government-financed health care to millions of lower-income children who lack it, a bill that President George W. Bush twice vetoed. He also has placed his signature on a measure making it easier for workers to sue their employers for alleged job discrimination, effectively overturning a ruling by the Supreme Court's conservative majority.
Obama made the stimulus a cornerstone of his economic recovery plan even before he took office, but his calls for bipartisanship were an early casualty.
Republicans complained they had been locked out of the early decisions, and Democrats countered that Boehner had tried to rally opposition even before the president met privately with the GOP rank and file.
In retrospect, said White House chief of staff Rahm Emanuel, the White House wasn't "sharp enough" in emphasizing the benefits of the bill as Republicans began to criticize spending on items such as family planning services, anti-smoking programs and reseeding the National Mall.
Senate Majority Leader Harry Reid faced a different task _ finding enough GOP moderates to give him the 60 votes needed to surmount a variety of procedural hurdles. To do that, he and the White House agreed to trim billions in spending from the original $820 billion House-passed bill, enough to obtain the backing of GOP Sens. Olympia Snowe and Susan Collins of Maine and Arlen Specter of Pennsylvania.
As the final compromise took shape in a frenzied round of bargaining earlier this week, it was trimmed again to hold the support of the moderates, whose opposition to a new program for federal school construction caused anger among House Democrats.
In the end, a compromise was reached that allows states to use funds for modernizing schools. But in a display of displeasure, Pelosi decided to skip the news conference last Wednesday where Reid announced a final agreement.
In addition to tax relief for individuals and businesses who purchase new equipment, lawmakers inserted breaks for first-time homebuyers and consumers purchasing new cars in an attempt to aid two industries particularly hard-hit by the recession. In response to pressure from lawmakers from Pennsylvania, Indiana and elsewhere, the bill was altered at the last minute to permit the buyers of recreational vehicles and motorcycles to claim the same break as those buying cars and light trucks.
In the House, all 246 votes in favor were cast by Democrats. Seven Democrats joined 176 Republicans in opposition.
Democratic group targets Leonard Lance's vote against stimulus
by Jessica Coomes
www.lehighvalleylive.com
Originally published Feb. 2, 2009
Less than a month after U.S. Rep. Leonard Lance, R-Hunterdon, took office, a national Democratic organization is airing ads in his congressional district, criticizing his vote against an $819 billion economic stimulus package.
The radio spots, which debut today and will run for a week, are paid for by the Democratic Congressional Campaign Committee, the same group that provided significant financial support on behalf of Democrat Linda Stender, Lance's opponent in the November election.
The Democratic committee now is targeting ads at 28 Republican House members, all of whom joined their party in voting against a Democratic-sponsored stimulus bill last week. No House Republican supported the package, though the Democratic majority was able to pass it.
On Monday, Lance's chief of staff, Todd Mitchell, reiterated why the congressman voted against the stimulus bill: "The House-passed stimulus legislation is a $1.1 trillion spending package that was not developed in a spirit of bipartisanship. The Democrat leadership should follow the lead of President Barack Obama in being willing to consider Republican ideas that reduce wasteful spending and help create jobs for middle-class families and small businesses."
When Lance voted against the bill, he called the package "wasteful spending," citing provisions that would not stimulate the economy, including $1 billion for the upcoming census, $650 million for digital TV converter boxes, and $600 million for government vehicles.
"I hope the stimulus bill that moves through the Senate contains improvements and suggestions from the Republican side of the aisle," Lance said at the time. "I will review it when it comes back to the House of Representatives to see if it has become a better bill. We can do better."
The Senate this week is taking up its version of the stimulus bill.
Lance is the only Republican in New Jersey or Pennsylvania to be singled out in the Democratic Congressional Campaign Committee's latest ads.
"We will continue to go district by district to hold Republicans who continue to vote in lockstep with party leaders and against the folks in their districts accountable," Brian Wolff, the committee's executive director, said.
The Democratic group released a transcript of the short radio spot: "Did you know Congressman Leonard Lance voted against economic recovery to immediately create and save over 171,000 New Jersey jobs? Times are tough; tell Leonard Lance to put families before politics."
Ryan Rudominer, a spokesman for the Democratic Congressional Campaign Committee, would not say how much the organization spent on the Lance ads.
Rudominer said the committee is choosing not to say which radio station or stations in New Jersey are running the spot.
Despite the Democratic committee's efforts on behalf of Stender during the 2008 election, Lance won the district to replace retired Republican congressman Mike Ferguson.
www.lehighvalleylive.com
Originally published Feb. 2, 2009
Less than a month after U.S. Rep. Leonard Lance, R-Hunterdon, took office, a national Democratic organization is airing ads in his congressional district, criticizing his vote against an $819 billion economic stimulus package.
The radio spots, which debut today and will run for a week, are paid for by the Democratic Congressional Campaign Committee, the same group that provided significant financial support on behalf of Democrat Linda Stender, Lance's opponent in the November election.
The Democratic committee now is targeting ads at 28 Republican House members, all of whom joined their party in voting against a Democratic-sponsored stimulus bill last week. No House Republican supported the package, though the Democratic majority was able to pass it.
On Monday, Lance's chief of staff, Todd Mitchell, reiterated why the congressman voted against the stimulus bill: "The House-passed stimulus legislation is a $1.1 trillion spending package that was not developed in a spirit of bipartisanship. The Democrat leadership should follow the lead of President Barack Obama in being willing to consider Republican ideas that reduce wasteful spending and help create jobs for middle-class families and small businesses."
When Lance voted against the bill, he called the package "wasteful spending," citing provisions that would not stimulate the economy, including $1 billion for the upcoming census, $650 million for digital TV converter boxes, and $600 million for government vehicles.
"I hope the stimulus bill that moves through the Senate contains improvements and suggestions from the Republican side of the aisle," Lance said at the time. "I will review it when it comes back to the House of Representatives to see if it has become a better bill. We can do better."
The Senate this week is taking up its version of the stimulus bill.
Lance is the only Republican in New Jersey or Pennsylvania to be singled out in the Democratic Congressional Campaign Committee's latest ads.
"We will continue to go district by district to hold Republicans who continue to vote in lockstep with party leaders and against the folks in their districts accountable," Brian Wolff, the committee's executive director, said.
The Democratic group released a transcript of the short radio spot: "Did you know Congressman Leonard Lance voted against economic recovery to immediately create and save over 171,000 New Jersey jobs? Times are tough; tell Leonard Lance to put families before politics."
Ryan Rudominer, a spokesman for the Democratic Congressional Campaign Committee, would not say how much the organization spent on the Lance ads.
Rudominer said the committee is choosing not to say which radio station or stations in New Jersey are running the spot.
Despite the Democratic committee's efforts on behalf of Stender during the 2008 election, Lance won the district to replace retired Republican congressman Mike Ferguson.
Wednesday, February 11, 2009
No alternative to inflation
By: John Kemp
http://www.reuters.com/
-John Kemp is a Reuters columnist. The views expressed are his own –
Every budding economist is taught the distinction between nominal variables (expressed in terms of contemporary cash values) and real variables (adjusted for inflation and expressed in constant-dollars).
An oil price of $50 per barrel in 1980 is not the same as an oil price of $50 a barrel in 2009 because inflation has steadily eroded the purchasing power of the currency in the intervening years. Moreover, economists are taught that real values are more important than nominal ones — because “money is a veil” (to use the phrase of the Austrian economist Joseph Schumpeter).
Prices are important because they perform a signaling and allocating function, encouraging supply and rationing demand. What matter are relative prices not absolute ones.
If all prices and wages double, there is no impact on the distribution or quantity of production and consumption because the relative prices remain unchanged. Money is a veil and focusing on nominal values risks succumbing to money illusion — believing that purchasing power or wealth has increased simply because it is expressed in more units of a devalued currency.
When the US Department of Commerce releases its updated National Income and Product Accounts at the end of each month, investors focus on the real growth rate in GDP, adjusted for inflation. You would be hard pressed to find the nominal GDP growth rate on dealing screens, or for that matter in the Commerce Department’s press release.
But surely that doesn’t matter, because we are only interested in how much output is produced, how many cars, how many homes, not their selling value.
Wrong.
Because one set of important relationships in the economy is almost always expressed in nominal terms, not real ones: debt.
If household incomes double in nominal terms, and the price of a representative basket of goods also doubles, purchasing power has not changed. But the proportion of household income spent servicing and amortizing old debts is halved.
Nominal values become crucially important in a dynamic economy where time as well as price is important, and where debt contracts such as mortgages and firm loans are fixed in nominal terms rather than indexed.
Prices have two functions: a static function allocating resources among producers and consumers; and a dynamic function generating incomes, saving and a flow of payments on debt contracts. For the static function, what matters is real or relative prices. But for the dynamic one, nominal prices are more important because they determine the sustainability of the fixed debt contracts.
NOMINAL GDP GROWTH STALLS
The nominal income or cash flow received by households determines how easily they can repay debt contracts fixed in nominal terms. In the same way, the nominal income or cash flow received by companies determines how easily they can repay debt contracts in fixed currency.
At the most general level, nominal GDP is in some sense the “national cash flow” — and determines how easily the economy as a whole can support an overall debt structure fixed in nominal terms. Nominal GDP growth becomes exceptionally important, especially at times when debts are at a high level.
The attached charts show quarter-on-quarter and year-on-year growth in GDP in both nominal and real terms since 1947.
Chart 10 shows the quarter-on-quarter growth in real GDP (expressed at annualized rates). Real GDP growth is very variable. Declines in real GDP during recessions are common.
Real output has fallen in 37 quarters since 1947 (about 15% of the time) and risen in 207 quarters (about 85% of the time).
But look at Chart 11, which shows the quarter-on-quarter growth in nominal GDP. Nominal output has only fallen 13 times since 1947. The last quarter-on-quarter decline in nominal GDP was in Q3 1982.
Before that, you have to go back to Q4 1960 to find a quarter in which GDP declined in nominal terms. Chart 12 shows nominal GDP growth on a four-quarter or year-on-year basis. Nominal GDP growth has not been negative year-over-year since Q1 1961.
From the late 1960s through until the current decade, relatively high rates of inflation ensured that GDP continued to grow in nominal terms even when it fell in real ones during cyclical recessions. Even during the deep recessions of the 1970s and 1980s, nominal GDP was generally growing because the decline in real output was more than offset by relatively high rates of price and wage inflation.
Payment ability for households which experienced unemployment and firms that experienced a sharp drop in demand for their products was often severely impaired. For these few, homes were often repossessed and individuals and companies could be made bankrupt.
But for the majority of households that remained employed, and for companies that experienced only a moderate decline in demand, wage and price inflation continued largely unabated, continued to raise their nominal cash flows, and make it easier to pay off debts incurred during the previous boom.
The combination of falling output with rising prices (labeled “stagflation” ) is usually seen as the worst possible outcome for the economy. Well, the worst except one: debt-deflation.
Because stagflation in the 1970s and 1980s ensured that, for most people, the real burden of debt remained manageable, or even improved, despite the recessions. The misery was borne by the minority of workers who became unemployed and the minority of firms that became insolvent. For the rest, inflation continued to boost nominal cash flows and increase debt-service capacity.
The strong, consistent growth of nominal GDP between the late 1960s and the late 1990s was mostly the product of persistent inflation. Before the mid 1960s, in the 1940s and 1950s, inflation rates were much lower, and nominal GDP growth was much more variable, turning negative on ten occasions between 1947 and 1960.
But in the current lower inflation world, the risk of nominal GDP turning negative has increased. During Q4 2008, nominal GDP growth turned negative for the first time in 25 years. Inflation (essentially zero) was not enough to offset the decline in output in real terms (-0.9% compared with the previous quarter).
Output looks set to decline further in Q1 and probably Q2 2009, and price inflation will probably turn negative. So at some point during H1 2009, nominal GDP growth will turn negative year-on-year for the first time since 1961.
NEED TO REKINDLE INFLATION
It is the sudden shrinkage of GDP in nominal terms which presents the greatest threat to the solvency of the banking system and the rest of the economy in the coming year. Because if GDP starts shrinking persistently in nominal terms, the already high burden of servicing debt contracts fixed in nominal terms will rise further.
Every job that is lost and every factory that is closed or put on short-time reduces real output. But every wage cut and price reduction is also reducing the cash flows which households and firms need to pay their debts, deepening the crisis.
Governments and central banks are now under intense pressure to sustain nominal GDP, and restart nominal growth, by boosting employment and fueling at least a modest pick up in inflation.
The target is shifting from restarting real growth to restarting nominal growth. Economist Samuel Brittan has written previously in the “Financial Times” about the need for the government and the Bank of England to have a target for nominal GDP growth (rather than a narrow focus on consumer price inflation). But the same is true for the other G20 economies.
Fiscal and monetary policy needs to create enough real demand and inflation; sustain employment and wage levels; raise output and prices.
In some sense, rekindling inflation has become a necessary and inevitable part of the solution to the current crisis.
http://www.reuters.com/
-John Kemp is a Reuters columnist. The views expressed are his own –
Every budding economist is taught the distinction between nominal variables (expressed in terms of contemporary cash values) and real variables (adjusted for inflation and expressed in constant-dollars).
An oil price of $50 per barrel in 1980 is not the same as an oil price of $50 a barrel in 2009 because inflation has steadily eroded the purchasing power of the currency in the intervening years. Moreover, economists are taught that real values are more important than nominal ones — because “money is a veil” (to use the phrase of the Austrian economist Joseph Schumpeter).
Prices are important because they perform a signaling and allocating function, encouraging supply and rationing demand. What matter are relative prices not absolute ones.
If all prices and wages double, there is no impact on the distribution or quantity of production and consumption because the relative prices remain unchanged. Money is a veil and focusing on nominal values risks succumbing to money illusion — believing that purchasing power or wealth has increased simply because it is expressed in more units of a devalued currency.
When the US Department of Commerce releases its updated National Income and Product Accounts at the end of each month, investors focus on the real growth rate in GDP, adjusted for inflation. You would be hard pressed to find the nominal GDP growth rate on dealing screens, or for that matter in the Commerce Department’s press release.
But surely that doesn’t matter, because we are only interested in how much output is produced, how many cars, how many homes, not their selling value.
Wrong.
Because one set of important relationships in the economy is almost always expressed in nominal terms, not real ones: debt.
If household incomes double in nominal terms, and the price of a representative basket of goods also doubles, purchasing power has not changed. But the proportion of household income spent servicing and amortizing old debts is halved.
Nominal values become crucially important in a dynamic economy where time as well as price is important, and where debt contracts such as mortgages and firm loans are fixed in nominal terms rather than indexed.
Prices have two functions: a static function allocating resources among producers and consumers; and a dynamic function generating incomes, saving and a flow of payments on debt contracts. For the static function, what matters is real or relative prices. But for the dynamic one, nominal prices are more important because they determine the sustainability of the fixed debt contracts.
NOMINAL GDP GROWTH STALLS
The nominal income or cash flow received by households determines how easily they can repay debt contracts fixed in nominal terms. In the same way, the nominal income or cash flow received by companies determines how easily they can repay debt contracts in fixed currency.
At the most general level, nominal GDP is in some sense the “national cash flow” — and determines how easily the economy as a whole can support an overall debt structure fixed in nominal terms. Nominal GDP growth becomes exceptionally important, especially at times when debts are at a high level.
The attached charts show quarter-on-quarter and year-on-year growth in GDP in both nominal and real terms since 1947.
Chart 10 shows the quarter-on-quarter growth in real GDP (expressed at annualized rates). Real GDP growth is very variable. Declines in real GDP during recessions are common.
Real output has fallen in 37 quarters since 1947 (about 15% of the time) and risen in 207 quarters (about 85% of the time).
But look at Chart 11, which shows the quarter-on-quarter growth in nominal GDP. Nominal output has only fallen 13 times since 1947. The last quarter-on-quarter decline in nominal GDP was in Q3 1982.
Before that, you have to go back to Q4 1960 to find a quarter in which GDP declined in nominal terms. Chart 12 shows nominal GDP growth on a four-quarter or year-on-year basis. Nominal GDP growth has not been negative year-over-year since Q1 1961.
From the late 1960s through until the current decade, relatively high rates of inflation ensured that GDP continued to grow in nominal terms even when it fell in real ones during cyclical recessions. Even during the deep recessions of the 1970s and 1980s, nominal GDP was generally growing because the decline in real output was more than offset by relatively high rates of price and wage inflation.
Payment ability for households which experienced unemployment and firms that experienced a sharp drop in demand for their products was often severely impaired. For these few, homes were often repossessed and individuals and companies could be made bankrupt.
But for the majority of households that remained employed, and for companies that experienced only a moderate decline in demand, wage and price inflation continued largely unabated, continued to raise their nominal cash flows, and make it easier to pay off debts incurred during the previous boom.
The combination of falling output with rising prices (labeled “stagflation” ) is usually seen as the worst possible outcome for the economy. Well, the worst except one: debt-deflation.
Because stagflation in the 1970s and 1980s ensured that, for most people, the real burden of debt remained manageable, or even improved, despite the recessions. The misery was borne by the minority of workers who became unemployed and the minority of firms that became insolvent. For the rest, inflation continued to boost nominal cash flows and increase debt-service capacity.
The strong, consistent growth of nominal GDP between the late 1960s and the late 1990s was mostly the product of persistent inflation. Before the mid 1960s, in the 1940s and 1950s, inflation rates were much lower, and nominal GDP growth was much more variable, turning negative on ten occasions between 1947 and 1960.
But in the current lower inflation world, the risk of nominal GDP turning negative has increased. During Q4 2008, nominal GDP growth turned negative for the first time in 25 years. Inflation (essentially zero) was not enough to offset the decline in output in real terms (-0.9% compared with the previous quarter).
Output looks set to decline further in Q1 and probably Q2 2009, and price inflation will probably turn negative. So at some point during H1 2009, nominal GDP growth will turn negative year-on-year for the first time since 1961.
NEED TO REKINDLE INFLATION
It is the sudden shrinkage of GDP in nominal terms which presents the greatest threat to the solvency of the banking system and the rest of the economy in the coming year. Because if GDP starts shrinking persistently in nominal terms, the already high burden of servicing debt contracts fixed in nominal terms will rise further.
Every job that is lost and every factory that is closed or put on short-time reduces real output. But every wage cut and price reduction is also reducing the cash flows which households and firms need to pay their debts, deepening the crisis.
Governments and central banks are now under intense pressure to sustain nominal GDP, and restart nominal growth, by boosting employment and fueling at least a modest pick up in inflation.
The target is shifting from restarting real growth to restarting nominal growth. Economist Samuel Brittan has written previously in the “Financial Times” about the need for the government and the Bank of England to have a target for nominal GDP growth (rather than a narrow focus on consumer price inflation). But the same is true for the other G20 economies.
Fiscal and monetary policy needs to create enough real demand and inflation; sustain employment and wage levels; raise output and prices.
In some sense, rekindling inflation has become a necessary and inevitable part of the solution to the current crisis.
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