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Reconciliation

Recap: We should be careful with the planet; we have more consensus than we think on stimulus; and we need the right regulators.

Elsewhere:

1) Can America create jobs if it outsources the work of bringing innovations to market?

2) More on the same topic.

3) Why are firms saving so much?

4) Scott Sumner vs. Raghuram Rajan.

Recipe of the day: I'm feeling some tortilla soup.

By Ezra Klein  |  July 6, 2010; 7:00 PM ET
 
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Comments

Item #3 is a must-read.

Not to be a pessimist, but there is some foreseeable trouble ahead and it's difficult to downplay the effect of regulatory initiatives. For example, what are firms now paying only 50% of employee health insurance costs expected to do? In practice, the firms must soon cut wages or cut jobs.

Posted by: rmgregory | July 6, 2010 7:55 PM | Report abuse

"1) Can America create jobs if it outsources the work of bringing innovations to market?"

Although I'm not an economist, this is something that has been bothering me for quite a while now. I suppose it means I'm small-minded that I can't grasp the value of the "free market" if it doesn't produce good jobs, but I can live with that.

One of the follow up posts: http://economistsview.typepad.com/timduy/2010/07/why-is-the-american-jobs-machine-broken.html

also really resonated.

When we talk about trying to stimulate an economy that has been failing us for decades, I find it difficult to be optimistic. The idea of going back to, what I perceive to be, the substandard situation of the last nine or so years isn't very promising. And even if we had a clear path forward to a more substantial economy, I'm thoroughly unconvinced we have the ability to follow it.

So, I guess the only thing left to do is just sit in the windowsill and wait for the rapture to come. Popcorn anyone?

Posted by: slag | July 7, 2010 12:37 AM | Report abuse

Ezra, on the question of why firms are saving so much, take into account that many of the same firms were also sitting on record mountains of cash in 2007. This sitting on piles of cash is not about this recession. On the contrary it's a symptom of the cause. Only Hal Varian gets it right that the reason for the cash is there is no market to invest in. They're not intentionally saving it, they just don't know what to do with it. So why is there no demand? Because companies have gotten so good at squeezing workers, and we have an excess of workers with all the rural people around the world moving into cities to get jobs, and we've abandoned our own New Deal policies. So there is no middle class to buy anything. Companies have succeeded in squeezing workers to the point of killing their own market. The normal cycle of capital is constipated and all the money is stuck at the top. Those New Deal policies that grew a middle class actually did the investors a favor, it forced them to create a market. Something they won't do in a laissez-faire system. Oh, and what do they do when they have all that cash they're desperate to put to work but don't have a market to invest production in? They play high finance poker with it, that's what. And that's the ground work for the next crash.

Posted by: TomCantlon | July 7, 2010 2:51 AM | Report abuse

Why are firms saving so much?

Well, the U.S. Treasury has issued a lot of debt recently. In order for the Treasury to issue debt, others must save in order to purchase those bonds. It appears firms are part of that group.

Looking at table OFS-2 we see that total public debt surged from $9,229.2 billion in December 2007 to $12,311.4 billion in December 2009. The amount of debt held by state and local governments (both pension funds and otherwise), intragovernmental accounts and foreign lenders increased from $7,887.0 billion to $9,674.4 billion. This means that the U.S. private sector increased its holdings from $1,342.2 billion to $2,637.0 billion over the same time period.

U.S. private sector savings had to increase, because U.S. public sector debt soared and foreign investors only accounted for part of the increase. Note that from Dec 2007 to Mar 2010, 'other investors' holdings increased from $272.1 billion to $1,001.1 billion, and if you look at the footnote this category includes corporate and non-corporate business (also banks).

Anyway, this is what people are talking about when they talk about 'the Broken Window fallacy'. Money has to come from somewhere. If you break a window, the glass maker gets more business but the tailor might see less. The new business for the glass maker is visible - this is what is seen - and the lost business for the tailor isn't as noticable - this is what is unseen.

The benefits used to pay unemployment insurance created a liability for the U.S. Treasury that is now an asset for a person or business. Any stimulus has to be in net of what that lender would have done with the money had the U.S. Treasury not borrowed it in the first place.

OFS-2 under 'Ownership of Federal Securities'

http://www.fms.treas.gov/bulletin/index.html

Posted by: justin84 | July 7, 2010 11:45 AM | Report abuse

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