Sat Feb 23, 2013, 06:58 AM
eridani (49,424 posts)
Dean Baker | Fix the Debtís Fuzzy Math
Similarly, the $8 trillion in bubble-generated housing equity led to a consumption boom, with the savings rate pushed down to nearly zero. Now that this equity has disappeared, the savings rate has risen to a more normal level of close to 4 percent of disposable income. This higher level of saving has cost the economy more than $400 billion in annual consumption demand. In addition, the loss of tax revenue from the collapse of the housing bubble and resulting downturn has forced well over $100 billion in state and local government cutbacks.
It is this gap in demand of more than $1 trillion that we are trying to fill. We can love the private sector to death, but people will not consume more just because happy Republicans are smiling at them. Nor will firms invest more when they see no demand for their products. In fact, investment in equipment and software is almost back to its pre-recession share of GDP, which is impressive given the large amount of excess capacity in the economy.
There is no plausible story whereby private demand would increase if the deficit were to shrink. Over a longer term, we can look to have net exports fill this hole in demand as the trade deficit moves closer to balance. But that will not happen tomorrow, and the process will not be hastened to any substantial degree by a lower budget deficit.
This means the people who want to reduce current deficits want slower growth and higher unemployment. They may not know it, but that is the implication of their position taken to its logical conclusion. This makes it indefensible; if someone spreads gasoline all over a barn and tosses a lit match on it without understanding the implications, it hardly affects the outcome.
2 replies, 1142 views
Always highlight: 10 newest replies | Replies posted after I mark a forum
Replies to this discussion thread
Dean Baker | Fix the Debtís Fuzzy Math (Original post)
Response to eridani (Original post)
Sat Feb 23, 2013, 08:41 AM
DonB (53 posts)
2. The almost perfect definition of the gop governing philosophy
"This makes it indefensible; if someone spreads gasoline all over a barn and tosses a lit match on it without understanding the implications, it hardly affects the outcome."
The only exception is that they do understand the implications!