Economic Rescue Program to the Rescue!

In the research that I have come across, it seems that the only offered alternative to the stimulus was tightening up the national belt and riding out the economic chaos to avoid the long run costs of rescue.  That would essentially be the government saying, "I could throw you this lifeline, but then we'll have to fix the line in the future and we're both going to drift ashore anyway."  This type of inaction, or worse, policies that worsened the short run economy at the sake of sparing long run economic gain, are exactly what Keynes himself was adamantly against.  "In the long run, we're all dead," he said. 

Educated professionals, incidentally, were most vocal in their dislike of the rescue plan for the current recession.  Ironically this group denied that there even was a recession for the longest time because it is a group most insulated from the effects of the recession.  The arguements against the rescue plan from the side of the working class have taken a new socio-political rhetoric; namely, that such a government takeover is a step toward Socialism.  This is quite unfortunate, since this group is most rescued by the plan and also the group least individually responsible for paying for it.

The working class group is also most helped by the bailout of the financial institutions, since that group was more likely to have a sub-prime mortgage or go into default to begin with.  Without government or any other action, loss of investment capital would quickly have shrunk the GDP and the standard of living for the working class group would have decreased dramatically.  The invisible hand would have kicked in to set things in motion again eventually, and the advantage would have been economic growth without the offset of paying for the economic rescue.  So it is true that we are making things significantly worse for future generations by handing them a huge deficit that we made that their taxes and investments will have to go toward paying back instead of just going directly to pay for all their current government expenses.  This would not, however, erase some of the severe social problems that come with the level of poverty that we'd be facing without the rescue plan, such as homlessness, domestic violence, alcohol abuse, hunger, drug dealing, and theft.  These issues go beyond social in that they are costly to society in terms of money: costs of police interventions, jail, property loss, even lowering home values.  Many are spared this hardship because of the rescue plan, and future generations should be grateful for that.

From Bad to Worse: Reaction to Arthur Laffer

Read the WSJ article by Arthur Laffer, "Get Ready for Inflation and Higher Interest Rates", at the following link:  http://online.wsj.com/article/SB124458888993599879.html

Mr. Laffer makes a convincing sounding arguement to contract the monetary base in order to stem the tide of inflation.  However, in his last paragraph he grazes over the "sharp pain of a deepened recession" that would result in the short run if money supply were contracted.  He seems to neglect a few key things: the expanded money supply is meant in the short run to get us out of the recession, and that the Americans who would feel the sharp pain of this are real people. 

Contracting the money supply is a tool that the Fed can use prevent inflation, and Mr. Laffer argues that the increased money supply we have now is not necessary in order for banks to lend out assets, so this will be fine.  He also says that a decreased demand for money (liabilities) will result in inflation and higher interest rates.  The short run inflation rate and interest rate increases will encourage economic growth, however.  It is favorable to the borrower to use the money for investments in this circumstance, since higher inflation rates in the future mean that the real value of the loan is now lower than when they originated it, though the nominal value stays the same.  Investment is a key aspect of stable economic growth in the long term future.  Contracting the supply at this point would put the borrower at a disadvantage and discourage investment.  High interest rates also increase savings investment.  Contracting the monetary base would greatly stunt economic growth, which is the key reason the monetary base was expanded during the recession in the first place.

Keynesian economists would say that the contraction of supply should only occur when the economy is consistently growing.  At that point, it would prevent too much growth and reduce inflation and interest rates, at a time where supply is high enough that inflation distortion and high interest rates are no longer needed as incentives to invest.

Management and the Market: An Overview

In a competitive market, managers are motivated by the ability to keep their own jobs and succeed in them by maximizing profits at market prices.  In essence, this means keeping costs down, and workers and supplies represent a lot of the variable cost in a firm.  When a market shrinks, laying off workers becomes (on paper) an easy way to trim costs, but much of the time this decision seems to be avoided if at all possible.  Practically speaking, this may do more harm than good if workers are trained and skilled in their jobs, though I think no one would disagree with letting workers go that consistently are performing poorly or lack the necessary skill set.  Public opinion of a firm directly influences business however.  Managers in competitive enterprises are therefore kept "honest" I think by the threat of losing shares of the market to companies that seem more fair to their workers.  This type of market seems to value employee satisfaction, and if absolutely necessary, socially responsible ways of cutting worker costs are used, including freezing of new hires, reducing overtime, putting workers on hourly wage and fixed hours, or reducing salaries and demading more hours. Rather than lose qualified workers or have them under-perform, managers now can see the marginal benefit of training seminars, buying birthday cake, recognizing achievements, etc.

For a monopoly, this all breaks down.  We all know about disgruntled Postal Workers and DMV workers, and from the management side, it makes sense: There is no other DMV in town to take their skills to and the jobs/benefits pay well enough that each worker could be replaced.  Furthermore, cutting costs by cutting workers would, at least initially, actually increase business.  For example, if the Celtics decided to lay off all of its ticket booth workers to lower ticket prices, people would probably buy more tickets.  However, there still would be a limit; if they started laying off everyone at the stadium, there would be no concession service and no T-shirts and no half-time entertainment etc and people would go less frequently because the experience wasn't too great.  But the managers in a monopoly basically aren't kept in line by public opinion the same way competitive markets are, and this is part of why people see them so unfavorably.  I think this becomes especially apparent when managers make cuts in the workforce to trim costs but don't take any sort of pay decrease themselves, like the US airlines did recently.  The public is well aware of this and doesn't take kindly to it, but the cheaper seats on flights keep customers buying more anyway.