From: guido@island.COM (Guido Marx)
Subject: Re: Economic Stimulus and the Benefits of Recessions
Organization: Island Graphics Corp.  San Rafael, Ca.
Distribution: ba
Date: Thu, 27 Aug 1992 17:35:29 GMT

In article <z2bn9tf.tcox@netcom.com> tcox@netcom.com (Thomas Cox) writes:
>guido@island.COM (Guido Marx) writes:
>>Well, this is one area where Mr. Bush and I disagree with you.  I think
>>that the government should take corrective action to get the country
>>out of its current recession.  This is especially true because it is
>>that same government which got us into this recession.  
>
>This contains no logic.  "This is the man who broke my leg, so this
>man should also be the one to set it and put it in a splint."

Try this logic - here sits a man who drove over me with his car,
do you think that he should move his car off my leg now that he
realizes that he has done this ?


>>In particular,
>>this recession was caused by excessively tight monetary policies by
>>the Fed, and tax law changes.
>
>How fascinating.  Do please explain how this works, won't you?

Simple, the Fed makes money too expensive via numerous mechanisms
which they have at their disposal (open market operations primarily).
For further explanation I would suggest any introductry text on
macro-economics.

>Seemed to _me_ that the Fed's policies have kept down inflation.  Low
>inflation has helped keep the economy as healthy as it is (not very,
>but it could be a lot worse).

Then you concede my point.  The Fed has kept inflation low by stomping
on the economy (this is called "causing a recession").  If the Fed
wishes to take credit for low inflation (in fact, we are seeing
deflation in real-estate, something worse than inflation IMHO) then
they must also take credit for the sick economy.  One causes the
other.  The Fed now has the problem that the economy has become so
bad that banks are unwilling (and in many cases, unable) to lend.  This 
means that their stimulus measures have become virtually useless.

>One other small problem with your scenario: any Fed action will affect
>the economy 6-12 months after it is taken.  Other government actions
>have even longer delays.  Any action taken now won't help in the near
>term.  And the current recession will most likely end within 6 months
>(from what I've read in _The Economist_).

Oh, I suppose that the reason durable good orders fell last month
and inventories rose is because we are bracing for a big rebound
in six months, right ?  Funny how this big recovery has been 
"just around the corner" for the past two years.

>So, tell us, O Guru Guido, what "corrective action" would you have the
>government take?  And why should we do without the economic benefits
>of recessions, and what will we replace them with?

The "economic benefits of recession".  Thats rich, it must be like
the "health benefits of cancer".  Yes, I enjoy banging my head against
a wall because if feels so good when I stop.  Recession - by 
definition - means a contraction of the economy.  What is the 
"economic benefit" of having the productive capacity of your economy 
idled ?

As for corrective action, well the Fed should lower interest rates
further.  Congress should repeal the tax changes making "passive
losses" not deductible.  A long-term capital gains tax cut would
help, as would the kind of investment tax-credit which Bill Clinton
has proposed.  We might also consider loosening the capital 
requirements for banks (at least temporarily) to give them some
room to make loans.  That would be a good start.


Guido