Ricardo Hausmann calls for an end to the whining about recession

Mr CC - couple of vaguely related questions for you...

1. Back in school, I learned that one of the greatest assets a central bank had in fighting inflation was the reputation for being an inflation fighter. By raising expectations that inflation will be dealt with aggressively the collective action of the econmy is to keep inflation in check to a degree, thus reducing (not eliminating) the need to take actual action (and reducing the amount of action needed in one step). the examples given were Fed in the 80s and the old german bundesbank...But once lost, this reputation takes a while to rebuild...do you think Ben and the Fed have just blown that reputation away by what might be considered panicked attempts to avoid recession while ignoring strong inflationary data?

2. Same question but substitute reputation of being calm port in a stormy crisis....(LTCM crash vs. current crisis - tho scales are obviously different)

3. Unrelated - what happened to the mortgage rescue package. I seem to recall Paulson announcing a deal was close..and then...nada..primary wall to wall coverage with some tax rebate coverage thrown in... Is this as dead as the government SIV thing? or are things working through the system?

Morning Justin, great post, of course I'm no economist, and I was awful at economics in my college days. Yet while I think Hausmann has some valid points in regards to policy points that can have significant impacts on industries that need to become more efficient and move capital quickly and easily where its needed.
But Hausmann's logic seems to disregard the importance of the US Consumer spending on the US economy, hell for that matter the world. It is still the largest contributor to the GDP and that demand creates an incredible effect all the way up the production line when a consumer spends their hard earned money.

Oh and a thought on your point about international economists and specifically him being Venezuelan and served there. That actually makes his point more suspect - consider the HUGE, and I think you will agree HUGE difference in the financial spectrum from the elite to the poor, with a minimal middle class in existence there. It's no surprise his view is on the industrial side, its not as if when he was an economic minister he helped alleviate the tremendous desperation across the economic spectrum, instead, Venezuela has enjoyed tremendous economic growth it would seem at the expense of the majority of its population.

Any way, what do I know, but just my two cents.

. Hausmann teaches at Harvard, but he's Venezuelan who has served as his country's minister of planning and as a member of the board of its central bank. Does he know something his less-well-traveled colleagues don't?

yeah, he knows that the biggest cause of this recession is the inflationary impact of the weakened dollar --- consumer spending was up an extremely weak 0.2% in December, which doesn't come close to compensating for the 3.5% inflation rate (let alone what you would expect from population growth itself.)

And since Fed rate reductions further weaken the dollar, giving checks to everyone increases the budget deficit further weakening the dollar, and a lot of the money that will be spent will be on imported products, further weakening the dollar, the attempts to prevent a recession may have some short term impact, but they make the long-term problem worse.

(Off topic --- but could you discuss the implications of the fact that the capital gains tax rate cut is set to expire at the end of the year?)

@That Anonymous Dude: I think the Bernanke Fed is certainly risking losing its inflation-fighting cred but that'll depend a lot on how the next year plays out. If we have a significant recession despite all the Fed's efforts then I think it will look like Bernanke was just doing what he had to do. As for the Fed's reputation as a port in the storm, I think the better comparison is probably with the early 1930s and the Bernanke Fed is doing better than those guys. That mortgage rescue package was mostly a private effort--negotiated by Paulson--and it's up and running. It even has a website: http://www.fsround.org/hope_now/hope_now.htm

@YMM: It's not just Venezuelan economists saying this. My previous post on the subject cited a Dutch guy teaching in England, and a Frenchman. For whatever reason, economists outside the U.S. seem less freaked out by the prospect of an economic downturn than those here.

@mediasux: I'm willing to grant that the Fed's response is complicated by the weakness of the dollar. But the weak dollar isn't the cause of our economic problems. It's a symptom. And I didn't realize the cap gains cut was expiring so soon. That's verrrry interesting.

Well Justin, thanks for the reply, but again, it seems foreign economist may not understand our economy as they like to think considering this:
http://www.nytimes.com/2008/01/31/business/31cnd-econ.html?hp

They just think we're weenies. The U.S. hasn't seen a quarterly drop in consumer spending since 1991. Most Western European countries have had lots of them.

Agree - however the problem is this time - businesses have an option in Chindia to move away, which is unlike Japan in 80s and 90s are far bigger and self reliant economy :(

17 thousand jobs lost this month in January; we’re not going into a recession we’re going to actually financially bottom out (depression). The one hundred and forty five billion dollar stimulus package is an illusion and joke, its like when you’ve won every bodies money in the room and your exit is block by all the losers who money you’ve took. How do you make it to the exit that’s blocked by all the sore losers? Simple, you need a divergent. You take a hand full of money and throw it up in the air, the losers know that this is not the cure, but their instinctual behavior makes them react and grab for this temporary money that’s coming down in the air, because a drowning man will reach for a pointed sword. So in the confusion of desperation, this gives the winner enough time to find the exit and get the hell out of that room. In other words, President Bush is trying to buy enough time for him to exit the white house. The financial (bandage) stimulus package will prop the exist door up just maybe long enough for his escape.
It was nobody faults but our own, they say the biggest fools are the educated one because they should’ve had enough sense. It doesn’t take a rocket scientist to know that Bush and his energy boys rape the U.S national treasure, its simple mathematic. Who came out smelling like a rose in the Iraqi war? The oil companies and OPEC was the only ones who are enjoying the benefit and the strategy of the war. The Iraqi people and their country is in turmoil, and America is about to go under financially do to the oil organization greed. I was watching a program on TV, The oil barons in the east was paying six and ten million dollars for a license plate of status, and one of the oil barons said that when the license plate number One comes out; he will bid 15 to 20 million dollars for that license plate of status to put on his car. They got so much money they don’t know what to do with it, and who made that possible; President Bush who is tie-up so deep in the oil industrial that he wage war in the behalf of profit. We Americans, got to be the most gullible people in the world.

Dear Readers,
As a Maine native who has lived and worked in The Netherlands for some time, may I share with fellow Americans a few thoughts about the precarious state of our debt-ridden country. I see two underlying currents driving the debt mania: one being the world's costly policeman and the other being an economic model of "excessive consumption" which accounts for a very high 70% of GNP today.

We are floating with an economic model that has brought our spending to a level approximating 134% of national income. The results show in huge credit card and government debts together with ballooning trade deficits exasperated by rising oil prices. All this in the face of a national savings rate below 0.5% compared to 5.5-6.0% now and for some decades in The Netherlands.

This means the solvency of many lower and middle-class American families deteriorates relatively quickly whenever an economic crisis (e.g., sub-prime lemding) or downturn occurs. Banks can't do much because their weakened liquidity and structurally low savings deposits force reduced lending for short and long-term investments that could act as an ongoing stabilizing cushion during economically problematic times.

Contrast this with the Dutch (and Scandinavian) economic model that has a solid 5-6% savings rate and a well-managed (kept in balance) Social Net to temporarily support those suffering financial difficulties in good and bad times. This system brings general financial stability allowing Dutch banks to continue funding investments and consumers to continue spending -- granted at more moderate levels -- in an economic downturn. Thus, economic declines here are much less severe and sporadic while recoveries are somewhat slower than in the U.S.

Dutch people fundamentally accept this pattern because the quality of life is kept in better contunuity, vacations are still possible, affordable health care is there for all, social-infrastructure investments remain up-to-date. Yes,all this requires higher taxes in Holland than in America. But people generally accept this
also as being right because they receive concrete value and benefits in return and...without gigantic debt generation! The commercial dynamics
thrive as the impressive worldwide presence of Dutch firms attests to this fact (as does a consistently low unemployment growth rate in the 5% range).

My point is that the extreme version of our American "consumption model" appears economically inherently unstable when combined with a pauper's savings rate of less than 1% (and even negative recently). It contributes to the growing gap between the haves and have nots while at the same time intensifying normal cyclical downturns. Then shareholder greed, under the guise of "dynamic growth through destruction," kicks in to add to the pain and insecurity of the hard-working middle-class. We thus encourage a nasty, UnAmerican culture where there is no balanced concern for the welfare of the community as well as vested individual interests; where wage-earner interests and loyal contributions to company
success come more in last place to management and shareholder interests.

Consequently, we've become a first-class world military and innovative force, and explorer of the universe ... but a third class provider of quality health care, pre-college education, social-infrastructure investments, concern for the middle class, environmental protection, and a financially sound, transparent government and social security system. Social stratification and an almost cultural narcissistic greed is being nurtured by a self-destructive economic model that promotes consumption, consumption, consumption -- borrow, borrow, borrow .. with "no saving."

Our society desperately needs some bright, new thinking for social-economic reforms that correct these systemic malfunctions in our tired and increasingly dehumanizing economic model. This is not a plea for Marxist socialism from someone who has been an independent enterpreneur his entire life. It's a plea for a better balance among Consumer, Shareholder and Worker interests that is based on equitable, sound financial norms and principles. The social-economic paradigm of low taxes, agressively high consumption, no savings, weak social-infrastructure investment, a costly military establishment, and endless borrowing is a structurally contradictory recipe for further economic pain and injustice for middle-class America. This may even presage a serious general collapse oneday if reforms are not soon undertaken.

The supply-side economics model is bankrupt. It's destroying the ability of the investment cycle to go forward in bad as well as good times, thus not providing an added stabilizing influence when the consumption cycle inevitably slows down. The egregious mistakes noted herein, fortunately, are not part of the The Netherlands and European social-economic model.