Warren Buffett: 2nd Stimulus Needed, Expects Longer Recession

http://abcnews.go.com/print?id=8039651

by jakarta • 17 years ago

18 20 17 years ago

abcnews.go.com

ErrantX• 17 years ago

People should listen to Buffet a lot more, it's been clear since the dot com bubble (and before) he knows what he's talking about.

roc• 17 years ago

What Buffett actually said was: "we could've used a stimulus in the first place and didn't get it. So, sure, we could still use one".

He's backing the concept and trashing the reality in the same breath. That's not exactly a ringing endorsement of the idea that an actual government stimulus is going to get us out of this.

anonymousDan• 17 years ago

I can't work out if you're being sarcastic or not!

drawkbox• 17 years ago

Wow, interesting way to put it:

"Our first stimulus bill ... was sort of like taking half a tablet of Viagra and having also a bunch of candy mixed in ... as if everybody was putting in enough for their own constituents," he said. "It doesn't have really quite the wall that might have been anticipated there."

bunni• 17 years ago

We've already had two stimulus bills...

TrevorJ• 17 years ago

I still can't wrap my head around the idea that the US borrowing money to give consumers can get us out of trouble caused by borrowing too much money in the first place.

It's kind of like giving a skydiver a shovel so that when his 'chute fails he can just dig a hole in the ground so fast that he never has to touch bottom.

jonknee• 17 years ago

I think the idea is that everyone is nervous right now and not spending (which means business is down which means layoffs happen which means people get more nervous and spend even less), so by starting off spending the gov't is trying to restart the engine. No one wants to jump off the diving board first so to speak. I'm not an economist though, so I'm sure it's a huge over simplification.

asdlfj2sd33• 17 years ago

It's like giving a skydiver a winged suit, so that if his chute fails he can at least glide sideways and down instead of falling straight down, perhaps he can make it to water.

I agree with the shovel metaphor when it comes to the attempts to raise house prices and prop up the financial sector.

It's too bad that was such a big part of the stimulus and other investment like infrastructure was such a small one.

ivankirigin• 17 years ago

Planning on spening money a year from now doesn't stimulate anything for quite some time. But it does increase interest rates, at a time when lending is getting killed.

Buffet is a great investor and manager, but you can't map that ability to public policy magically.

gaford• 17 years ago

Good point about the inappropriate delay in spending the stimulus. That said, if fiscal policy were pushing up interest rates the Federal Reserve could simply lower them and use monetary policy in place of extra fiscal policy.

This would present the risk of inflation, but if there were inflation (rather than deflation) we would not be in a liquidity trap requiring fiscal stimulus.

I think Krugman has gone over all of this. It's fairly well spelled out in Keynes as well.

systemtrigger• 17 years ago

The interview, sans cruft and sped up a bit: http://2009.s3.amazonaws.com/buffett.mov

Locke16893• 17 years ago

This is essentially what Paul Krugman has been saying in the New York Times for a while now. Essentially the idea is this: in a bubble, or period of economic growth, large amounts of deficit spending is a bad thing. In a recession or depression, John Maynard Keynes famously argued that, counterintuitively, it may be highly beneficial to enter a short period of extreme deficit spending. The idea behind this is that in a recession or depression, the entire economic system contracts. In a period of success, everyone's a little more loose with their money: everything's goin great out there, why not take a risk? The opposite happens in a recession: people are worried, so save , save, save.

Troublingly, this is the exact opposite of what is needed to get out of a recession. In order to increase employment and restore growth, spending needs to increase, not decrease. If consumer spending is at an all-time low, why would corporations hire more people, instead of less? This is where Keynes came in. He argued that, unlike corporations, the government wasn't limited by the temperamental swings of the market. In fact, the government had the ability to do what very few corporations can: go into a very large amount of short term debt. The idea behind this is to commission large projects which force corporations to rehire and increase expenditures. As such, employment increases and salary for those employees does as well. Once consumers have a sufficient amount of disposable income, the other sections of the economy are revitalized as well.

There are a couple easy pitfalls with this, though. First is the debt aspect -- if you choose the wrong projects to invest in, then the government may end up in permanent debt. Consider two projects: one requires high capital investment, but it will spur greater economic growth and profits in the long run. The second also requires high capital investment, employs a lot of people, but it's essentially a one-time product. A great example of the first is infrastructure projects like the Tennessee Valley Authority. It cost a huge amount to build, but it also provided cheap electricity to the area, generating revenue, and also provided a great place for businesses to relocate to (because of the cheap electricity) and increased employment and income rates of almost everyone in the area. An example of the latter would be something like an advanced jet fighter (with no war going on). The problem is that once built, the jet fighter is essentially done. A high capital investment produced a short term investment, but it generally has a low rate of return. Of course, the reason why this worked in WWII is fairly simple: we were the world's bankers and manufacturers.

Therefore, the problem thus far has been crippled because it is essentially half-hearted. Stimulus spending, to be effective, must be a large proportion of the country's GDP (around 4%). In contrast, $3.27 trillion is about 2.1% of our ~$15 trillion GDP[1]. For a more accurate (but still back of the napkin) calculation, Krugman wrote this in January of this year[2]. I believe that Krugman also overlooks many of the problems with the spending projects themselves: to be effective in the long run stimulus spending should be focused towards long term improvement projects. Infrastructure development is a great example of that, but so are things like alternative energy and scientific R&D. Too much money I think is spent on things like super-high performance military jets. While this satisfies the short term criteria, F/A 18E/F Super Hornets probably don't increase consumer spending as much as equivalent infrastructure spending over 10 years.

That said, I still agree with Keynes and most modern economists that stimulus spending is probably the best way the government has to help the economy. It's not a magic bullet, but we do have a sizable amount of historic evidence in favor of stimulus spending and against other things. (Consider that Keynes's theory of economics did not come about until the late 19th-early 20th century. Prior to that, government did not go into debt. As a result of that and lack of regulation, recessions were harsher, more frequent, and lasted longer.) Of course, macroeconomics is mostly guesswork, mingled with shreds of enlightenment that don't add up to all that much anyway.

[1] http://blog.heritage.org/2009/02/12/true-cost-of-stimulus-32... Really, this is a pretty generous calculation anyway, considering that this is over 10 years and some of the stimulus will probably come back in taxes. [2] http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithme...

jerf• 17 years ago

Yeah, but in reality, even if we accept Keynesian economics as a given (which I don't, but I will for this post), the question is not really "Which is better, do nothing or do another Keynesian stimulus?", it is "Which is better, do nothing, or let Congress write another crappy bill using Keynesian economics as cover?"

The "first" stimulus (not really first) had extremely little content that even conforms to your explanation of good stimulus spending. Thus, by Keynesian economic standards, it should have failed. It has failed so far and I see no reason under either Keynesian economics or my preferred economics to think that will change.

What will a "second" stimulus change? Will our government do an actual Keynesian stimulus, or will it pay lip service to an ideology it believes tells it to do what it wants to do anyway (always dangerous!) and just spend, spend, spend? And if your answer is the former, I ask you, on what evidence do you base this belief since all evidence seems to point against it?

Explanations of how Keynesian stimulus works are pretty irrelevant in a world where we aren't actually using them. People who think the government should cut back may be wrong in the sense that it is not optimal, but it may still be the best course that we can actually bash Congress into following. It isn't a chamber where "nuance" does very well.

I have read vast swathes of the "first" stimulus bill. I invite you to read it and come to your own conclusions about exactly how much of it is actually Keynesian. I didn't find much that was unambiguously Keynesian, much that was unambiguously not, and a lot of other things that are basically slush funds that seem pretty unlikely to go to Keynesian things.

drewr• 17 years ago

Well said. Most of the money won't be spent for another two years and what has been spent hasn't been in the private sector. If you're going to propagandize Keynes, at least have the policy match the propaganda and let's see if it actually works.

Perhaps none of it matters. All of this assumes that Congress knows what it's voting for in the first place.

"If every member pledged to not vote for it if they hadn’t read it in its entirety, I think we would have very few votes." --Stenny Hoyer, referring to a 1,500-page health-care reform bill coming up in the House (http://www.cnsnews.com/public/content/article.aspx?RsrcID=50...)

How can any of this giant, sweeping legislation be any good?

Locke16893• 17 years ago

Couldn't agree more. My post was an advocate of a Keynesian stimulus -- this was certainly not one. As to politics, I have had enough. The Democrats could have made a stand, but didn't. Probably because half of them don't even believe what they're saying and are just trying to get their hand in the pot. I don't know what it will take to implement some actual liberal thought, but I have a feeling it's not coming soon.

Xichekolas2• 17 years ago

> $3.27 trillion is about 2.1% of our ~$15 trillion GDP

Not to nitpick an otherwise excellent comment, but I think you slipped a decimal somewhere in there.

Either that or you were claiming the total cost will be $3.27 trillion over 10 years, which would imply dividing by $150 trillion (10 years of GDP), which would be 2.1%. If that is the case, you might want to clarify.

Locke16893• 17 years ago

Yeah, I know. I was basically trying to find the highest reported cost for the stimulus bill and show that even that was not enough. $3.27 trillion is over 10 years, but really it should be considered as the majority paid upfront, even it is not exhausted immediately. I really did pull that $3.27 trillion number out of my ass -- I was originally going to use just the amount of cash from the stimulus bill (shocking, I know), but I figured I'd get a lot of flak for ignoring other spending (even if it's not stimulus). You saw my point though: the stimulus is horribly low for what we need and, if I may so myself, is an absolutely awful bill. I disagreed incredibly with many of the choices they made and was disappointed with the entire lack of regulation. I have no idea what caused this, Democrats fracturing or compromising, but it was disheartening.

I am liberal and call myself a Democrat, but I really hate the Democratic party. I feel like half of them are only Democrats because to be a Republican is to be unelectable. I would like to see some actually liberal policies put in place for a change.

tybris2• 17 years ago

No, balance the budget.

tybris2• 17 years ago

Probably it'll last to about the end of Obama's second term.

http://bigpicture.typepad.com/photos/uncategorized/100_year_...

Warren Buffett: 2nd Stimulus Needed, Expects Longer Recession

Related Stories