Wednesday, June 15, 2011

Creationist Economics

From CounterPunch, economist Dean Baker on the irrationalities inherent in the bizarre beliefs of deficit hawks:

There is a standard econ 101 story about how reducing deficits can boost the economy. The theory goes that if the government reduces its deficit, and therefore borrows less, it will reduce interest rates. Lower interest rates will in turn give firms incentive to invest more.

Lower interest rates should also cause the dollar to decline, since it will make U.S. government bonds and other dollar assets less attractive to foreign investors. If the dollar falls in value then our goods will be more competitive on world markets. This will cause us to import less and export more, thereby creating jobs.

However is this what the deficit hawks believe will happen now? The interest rate on 10-year Treasury bonds is already down to 3.0 percent. Assuming a 2 percent inflation rate, this translates into a real rate of about 1 percent.

How much lower do the deficit hawks think interest rates will fall if we were to sharply cut the deficit? Furthermore, how much more investment do they think we can induce even if we got a large (e.g. 0.5 percentage point) reduction in real interest rates?

Do they think that this sort of decline in interest rates will send the dollar tumbling and thereby improve our trade balance? Against which currencies will a lower interest rate cause the dollar to fall sharply?

Neither of these stories really passes the laugh test.

More here.

The bottom line here is that the conservative voices driving forward the public discourse on economics are totally incoherent. We're in an ongoing recession with historically high unemployment, so the conservative solution is to take money out of the economy? I mean, that's what cutting government spending does. It takes money out of the economy, which is really fucking bad during an economic downturn because that's the problem already.

Of course, it's much more complicated than that. "The economy" is quite big, and even during a recession there is indeed a lot of money in it, and cutting government spending, coupled with all those wonderful right-wing tax cuts, really just kind of shifts it around. It's probably better to say that people and businesses aren't spending money, which means they're sitting on it, which means the economy doesn't grow. But the government is spending money. Taking government money out of the equation does nothing but make the problem much, much worse. Conversely, increasing government spending, on a scale much larger than Obama's meager stimulus spending a couple of years ago, makes the problem much, much better.

Conservatives, and increasingly a lot of people who think of themselves as liberal, simply don't acknowledge this dynamic. Instead, they harp on the deficit and how horrible it is to keep borrowing money on such a massive scale. Needless to say, the deficit is a problem, but one that is, at the moment, not nearly so dangerous as years and years of ten percent unemployment.

Indeed, one of the major factors keeping the economy from really gearing up is that people who aren't working, or are desperately afraid of losing their jobs, a much bigger percentage of the work force than those who simply can't find work, don't spend their dollars on anything except the bare essentials. Instead, they save their money for emergencies: a big part of the deficit is loss of tax revenue from the unemployed and underemployed. Fixing the economy, and thereby lowering the unemployment rate, is virtually the same thing as fixing the deficit.

So for now, what the government needs to do is to borrow and spend a whole hell of a lot more money than it has been willing to in the recent past. This will jump start the economy, which will massively increase tax revenues, which will, in turn, greatly lower deficit spending.

Instead, we're going in the opposite direction because our leaders are either stupid enough to think that government debt is the same thing as personal or business debt, or are evil enough to see this economic crisis as an opportunity to transform our society into third world feudalism. Either way, we're fucked because the entire fucking establishment is in on the game.

This is one of the things I think about when I consider bringing children into the world.