Weekend Economists Take Five: December 7-9, 2012

[Demeter]

18. How do we ‘pay’ for Hurricane Sandy? October 31, 2012 Marshall Auerback

http://macrobits.pinetreecapital.com/how-do-we-pay-for-hurricane-sandy/

As the costs of this once-in-a-generation storm mount for America’s east coast, there will invariably be cries that the country is bankrupt, and will therefore be unable to ‘pay’ the cost of reconstruction. Even now, as the news has been unfolding the mainstream neo-liberal ideologues have been out in force preaching that the US government was now facing a major fiscal crisis and its capacity to deal with this event was severely limited. Imagine the reactions of the people in shock after the event to hear the news bulletins telling them that their government was crippled and unable to help. It certainly didn’t go down well after Hurricane Katrina.

The reality is that the claims by the macroeconomists were not ground in any credible theory. It is bad enough they provide this misinformation and lies when unemployment is rising. But when thousands of people are facing the calamity of destruction of the sort being leveled by this historic storm, it is nothing short of being obscene lies – all courtesy of our neo-liberal economist brethren. As long as the budget deficits are filling the spending gap left by external deficits and private domestic saving (as a sector) and the economy is not over-stretching the real capacity of the resource base to respond to this nominal demand in real terms (that is, by producing output) any statements to this effect are to be interpreted as conservative ideological rhetoric.

When the US engages in a war, nobody ever invokes the issue of “affordability” or asks the question, “How do we pay for this?”. Yet somehow in anything having to do with social reconstruction, entitlements, infrastructure, disaster relief, the question invariably arises. But these same conservative ideologues will never, for example, suggest that we send our defence budget over to Beijing to see if those who allegedly “fund” the US will help pay for a war. Congress just appropriates the money, plain and simple. In fact, Wall Street, which has substantially cut its campaign donations for Obama and the Democrats because of their meager proposals to impose more regulation on the financial sector, has been leading this charge of affordability. Yet when the government intervenes with bailouts, Wall Street stands with hat in hand. And when the Fed created literally trillions of dollars to bail out Wall Street’s banks, nobody raised the issue of “offsetting cuts” to pay for. And that is because there is no problem (this is regardless of the question as to whether that was money well spent). The simple fact is that government deficits (facilitated by the central bank crediting bank accounts on behalf of the treasury and accepting some treasury paper for accounting purposes) can continue to fill spending gaps, the only constraint being real resources, rather than “fiscal sustainability” or “affordability”.

So all those commentators who think that Hurricane Sandy (or any other natural disaster for that matter) has exacerbated the US fiscal crisis – by which they mean – the government cannot afford to pay for the reconstruction – should now desist. The “problem” that has been keeping them awake at nights is solved. If the bond markets are sick of the corporate welfare that the issuance of government bonds provides them (that is, a risk-free annuity), then the Treasury can just ring up the Fed and tell them to keep crediting those bank accounts. To the extent that there is real problem for the US, it will be the lost capacity that has resulted from the extensive damage. This might limit the speed in which the economy can grow for a while. It is unlikely that there will not be enough real resources available to actually facilitate the reconstruction. If there are then the Government will free to purchase and mobilise them. That won’t stop many “Very Serious People” from using this natural disaster as an excuse to misinform the population on fiscal policy. Count on it.