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Thu Nov 15, 2012, 07:48 PM

I hope we can Survive "Deficit Reduction"

We, as a nation, are currently engaged in negotiating a way to defuse the “austerity bomb”—a more accurate name for the fiscal cliff.

There is no way to talk about this issue honestly or accurately without recognizing that Obama and the Democrats are not right on this issue, merely somewhat less wrong than the Republicans.

In economics there are no right answers outside of their context. There is no moralistic “good.” Is breathing good? Usually… but if you are underwater trying to breathe will kill you. Context.

Is raising prices at your store good? It depends. Is buying better than renting? It depends. Should the dollar be strong or weak? It depends.

In the real-world context of today, the federal deficit is our economy’s life-line. We need it. The deficit is what has prevented a depression so far and the deficit is what will, with luck, keep us from being dragged by European austerity into another recession.

The deficit does not merely symbolize what is keeping us afloat. It is the literal thing itself.

Very early in Obama’s term one of his economic advisers made the gaffe of telling the truth about this. He was describing a stimulus plan and the TV host asked, “But how do you plan to pay for it?” The economist replied, “If it is paid for it wouldn’t be stimulus.”

Bingo. Stimulus is not just spending money on the right things. It is borrowing the money to spend on the right things.

Most Americans reject this economic fact. As a result, we pander to that error.

Both parties talk about the deficit like it is a bad thing. That erroneous view has caused much human misery needlessly, and is sure to cause more. (It may have been bad in the past, it may be bad in the future, but it is very, very good today.)

A year ago Obama and Boehhner struck a bargain to damage the American economy by reducing the deficit. I doubt Obama was thinking, here is an opportunity to whack the US economy. He was, I hope and assume, merely pandering to Americans' almost universal wong-headedness on the topic, with an eye to the election in 2012.

Reducing the deficit does not harm the economy in all circumstances, but it does in the world we live in today. Context. Sometimes the deficit is bad, but at this time it is not bad, and actually very good.

To see why, first we have to ask, if the deficit is bad, what is bad about it?

A huge deficit can decrease lender confidence. If people don’t think you can pay back what you owe they will charge higher interest rates, or not lend to you at all. A huge deficit can drive up everybody’s interest rates because the government is competing so hard for available money to borrow. A huge deficit can devalue your currency if people predict you will simply create new money to pay the debt.

None of those problems exist today. Remember when S&P downgraded the US? The interest rates we have to pay have gone nowhere but down since then. More people are lining up to lend us money at lower and lower rates. The downgrade was pure bullshit. We have no trouble finding money to borrow at the lowest interest rates since forever. The growth of our debt is being accomplished at those shockingly low rates which means that if the economy ever recovers we will have actually made money on all this borrowing.

There are no REAL deficit-caused problems anyone can point to. There are only imaginary problems that the non reality-based community of CNBC and the Wall Street Journal and Forbes and the Republican Party insist must be the case.

(Deficit-caused problems could develop, but the economic theories that demand that they will have been wrong everything so far, including that. And you don't have a depression to day to stave of a chance of a recession tomorrow.)

Since there is nothing notably bad about the deficit, what is good about it?

Every penny of the deficit is essentially importing money into the economy. The economy is still quite weak and we need to borrow that money to keep the thing running.

Our economic growth is quite sad… 1%, 2%… limping along. And that weak stream of growth includes the entirety of federal borrowing as part of GDP. Take that borrowing away and we would be looking a Japan’s lost decade or worse.

And that reduces tax revenue and increases the burden of the safety net.

Here in a nutshell is the thing the people refuse to accept. Cutting the deficit in the world we actually live in will probably make the deficit and debt larger ten years from today than they would be otherwise.

Cutting the deficit in the real world of today and tomorrow makes the deficit worse, as well as making everything else worse… wages, unemployment.

It is true that we cannot borrow forever. Context. Our current economy is unusual… as unusual as us being at the bottom of a swimming pool. It is true that you cannot hold your breath forever, but there will never come a point where that fact makes trying to breath underwater the right move.

We need to get above the water before we can reduce the deficit.

The deficit IS the economy. Obama and Boehner might as well be talking about a big agreement to eliminate American manufacturing, or how to increase unemployment.

It is craziness.

Now, some will ask, why don’t we tax the rich instead of borrowing? Wouldn’t that be even better?

Short answer, No. Not instead of. We can get some marginal increase in demand from Robin Hood policies but not enough to make up for the stimulative effects of the current deficit. (Which really is huge.)

The right answer is to both tax the rich AND keep the deficit high. That would mean a lot more government spending—spending the ongoing borrowed money plus the new tax revenue.

Now, that is probably not politically practical. I get that. But that does not make it any less true.

We are not going to do that, but it is the right answer. And that is some cognitive dissonance we have to live with.

It is never right to pretend the truth is not the truth just to make political necessities more palatable. A lot of people do that with global warming. If you figure there is nothing that can be done about it then there is less wear and tear on the mind to pretend it doesn’t exist.

But willful denial of reality cannot be the right answer.

Even if our leaders pander to us by pretending the deficit is the problem, rather than the solution (which it may well be if it was ever large enough in one year to really give the economy a kick in the pants) we should still know the truth, and lean in the direction of truth.

If there must be some sort of deficit deal then it should be as small and as put off into future as possible.

The deal that is now coming home to roost was an economic error. One can argue it was worth it as good politics, but it was certain to make the economy worse than it would be otherwise. (Unless we had experienced a gigantic and full recovery in the interim) If congress voted to make the whole 2011 deal go away that would be a good thing for the economy.

There is a right answer. Paul Krugman repeats it every day, even if doing so is like shouting into a well.

Increase taxes on the rich somewhat while also increasing federal spending overall, hopefully targeted to things that will make the economy better.

The deficit is like the canary in the coal mine. It is a rough indicator of how much net money is being imported into the economy by the government, and until the private sector picks up the slack we need it. If the deficit is going down then GDP will be reduced by that amount and more. If the deficit is going up then GDP will be increased by that amount or more.

And if cannot afford lower-than-otherwise GDP then we have no business playing deficit cutting games.

We, all Americans, should be hoping that the deficit deal will be, at most, flimsy window-dressing.

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Reply I hope we can Survive "Deficit Reduction" (Original post)
cthulu2016 Nov 2012 OP
Jackpine Radical Nov 2012 #1
cthulu2016 Nov 2012 #2
mike_c Nov 2012 #3

Response to cthulu2016 (Original post)

Thu Nov 15, 2012, 07:55 PM

1. excellent short analysis.

I would add that we can double the long-term impact of government spending by putting a bunch of it into new infrastructure. If we could come out of this greener, better connected, healthier, etc., we'd be that much further ahead of the game.

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Response to Jackpine Radical (Reply #1)

Thu Nov 15, 2012, 08:03 PM

2. True. For length reasons I didn't get into the multiplier effects, but they are implicit in

things I did say. Robin Hood policies can move money in the economy from non job-creating uses (like, ironically, being owned by the "job creators") into job-creating uses.

And that multiplier effect is an important part of every right answer.

A madman could probably devise a way to increase the deficit in ways that wouldn't do shit for anyone. It does matter somewhat what we do with the money.

But hypothetically, even paying people to dig holes and fill them back in would be highly stimulative. Repairing actual bridges is smarter because you get the employment plus a sturdy bridge.

Oddly enough, a dollar spent on food stamps is slightly more job creating than a dollar spent on infrastructure, but the infrastructure is a job-creating use today that also increases productivity going forward. A win-win.

(I am saying these things for other readers also, not lecturing you on things you surely know.)

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Response to cthulu2016 (Original post)

Thu Nov 15, 2012, 08:18 PM

3. rec this to the top, folks....

Ding ding ding. We have a winner! Excellent summary.

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