Catastrophe averted?
In these pages I rarely offer commentary on current events. It seems to me that our culture is obsessed with present-mindedness. Instead, I try to offer a historical perspective.
Still, as a citizen, and indeed one whose pension arrangements are tied to the economy, I cannot help noticing certain things in the grim present.
It seems that with the incipient passage in the Senate of the bill raising the debt ceiling (and ostensibly including radical measures about the economy) we have dodged the bullet. Only temporarily I fear, for when one looks past the smoke and mirrors, the new legislation simply sets the stage for a continuation of the profligate policies that have brought us to this pass.
How's that again? Doesn't the legislation shred the safety net, destroying the hopes of tens of millions of the aspiring and disadvantaged? Well, I would agree about the shredding of the hopes part, but the bill will do very little to achieve the needed fiscal reform.
Following a long-established form of chicanery, the savings are mostly "backloaded"; they are to occur in the out years. During the first year only $21 billion dollars will be saved, if that; even less in the following year. The remainder of the supposed 917 billion would have to be approved by successive Congresses. Given the mood of the electorate to "throw the bums out," the composition of the next House of Representatives will probably be very different from the present one; it can simply decline to approve the ambitious frugalista agenda.
Increases in revenue are desperately needed. These are fervently opposed by the Tea Partyites and their dupes, but also, more covertly by the left, which believes in the mirage of "growing the economy." Alas, the unemployment rate is not likely to come down soon, maybe ever because so many of the jobs have gone to Asia, gone for good.
If the absurd Bush tax cuts were simply allowed to disappear en bloc next year, a lot would be accomplished. However, Obama has already muddied those waters by saying that only the taxes on the rich should be restored. The thing can only be done if it is all or nothing, and that means a positive utilization of the crippling powers of governmental grid-lock.
Another pie-in-the-sky provision is reduction in military spending. A little later, when we get to that juncture, it will be found that "for pressing reasons" of national security we cannot do that. The real reason of course is that the military-industrial complex is ensconced in too many congressional districts.
In short, very little has changed--or is likely to change. We will continue spending beyond our means, and our economy will continue to fall behind that of other, more dynamic countries.
I will probably get lynched for saying this, but I believe that in some ultimate sense the Tea Party is right. We cannot just keep putting money on the national credit card, promising that we will pay our bills in the "out years." That is what the English call the never-never.
Still, as a citizen, and indeed one whose pension arrangements are tied to the economy, I cannot help noticing certain things in the grim present.
It seems that with the incipient passage in the Senate of the bill raising the debt ceiling (and ostensibly including radical measures about the economy) we have dodged the bullet. Only temporarily I fear, for when one looks past the smoke and mirrors, the new legislation simply sets the stage for a continuation of the profligate policies that have brought us to this pass.
How's that again? Doesn't the legislation shred the safety net, destroying the hopes of tens of millions of the aspiring and disadvantaged? Well, I would agree about the shredding of the hopes part, but the bill will do very little to achieve the needed fiscal reform.
Following a long-established form of chicanery, the savings are mostly "backloaded"; they are to occur in the out years. During the first year only $21 billion dollars will be saved, if that; even less in the following year. The remainder of the supposed 917 billion would have to be approved by successive Congresses. Given the mood of the electorate to "throw the bums out," the composition of the next House of Representatives will probably be very different from the present one; it can simply decline to approve the ambitious frugalista agenda.
Increases in revenue are desperately needed. These are fervently opposed by the Tea Partyites and their dupes, but also, more covertly by the left, which believes in the mirage of "growing the economy." Alas, the unemployment rate is not likely to come down soon, maybe ever because so many of the jobs have gone to Asia, gone for good.
If the absurd Bush tax cuts were simply allowed to disappear en bloc next year, a lot would be accomplished. However, Obama has already muddied those waters by saying that only the taxes on the rich should be restored. The thing can only be done if it is all or nothing, and that means a positive utilization of the crippling powers of governmental grid-lock.
Another pie-in-the-sky provision is reduction in military spending. A little later, when we get to that juncture, it will be found that "for pressing reasons" of national security we cannot do that. The real reason of course is that the military-industrial complex is ensconced in too many congressional districts.
In short, very little has changed--or is likely to change. We will continue spending beyond our means, and our economy will continue to fall behind that of other, more dynamic countries.
I will probably get lynched for saying this, but I believe that in some ultimate sense the Tea Party is right. We cannot just keep putting money on the national credit card, promising that we will pay our bills in the "out years." That is what the English call the never-never.
Labels: the economy
posted by Dyneslines at 6:44 AM
18 Comments:
Pardon me for doing a little lynching, but you've got it wrong. The country is nothing like a household, and the federal debt is nothing like a household debt, let alone a credit card.
When can a household print its own money? Never. But the federal government can. Thus its limit is inflation, not debt or insolvency. Right now and for the foreseeable future, (until unemployment is resolved), inflation is low, so what we should be doing is spending (and borrowing) more, not less. I can excuse the TP'ers for not knowing any macroeconomics in their zeal to serve the upper classes and their worker-destroying policies, but you should know better.
Ask yourself- what led to the prosperity of the 50's and 60's? It was Keynesian economics, pure and simple, jumpstarted by the enormous expenditures and debts of world war 2. A little intellectual engagement with economics would go a long way.
Here is a helpful primer, if you are interested.
The "national credit card" is only a metaphor, silly. Lynching denied.
Paul Krugman and others of today's Keynsians restrict themselves to observing half of the English economists principle: they want to spend, spend, spend--offering a corrective only at the Greek calends (another metaphor, if you will).
Their guru is Dick Cheney: "deficits don't matter."
Ultimately, they do.
You have correctly identified Krugman as someone who "gets it". One might also note that he has consistently been correct in his predictions about general conditions. For instance, the Austrians predicted hyperinflation by now, from all the Fed easy money. What we see is the opposite- deflation. This is critical to understanding the role of the deficit.
The metaphor of the credit card is far more pernicious than you make it out to be. It stands for the whole naive equation of federal debt to household or private debt, which is a fundamental misunderstanding.
Ultimately, deficits do indeed matter. They matter on the upside when they can be constructively used to put people to work. And they also matter when they are reduced in response to overheated conditions.
You might appreciate some economic history. How long has the US been in debt? Since its founding- Hamilton's primary reason for a strong government was to assume the debts of the colonies and the war, and issue more debt. When have we ever paid back the national debt? Never.. it has been growing more or less continuously, because it represents private wealth (bonds) that people are very happy to hold. What happens when the Government runs a surplus? This has happened only rarely, soon followed by recession, because it means that the government is sucking money out of the private economy. Typically, the private economy needs additions of extra money to support growth and saving.
Bottom line- the Federal debt is very healthy and not a problem. Japan has three times the debt we have (per GDP) and is doing fine.. the sky does not fall.
Thanks for letting me run on!
Please tell me, according to your best calculations, when we may expect the Greek calends? Will it come in 2019, 2050, or 2100?
If you can't answer, BB, I sentence you to go and live in Japan.
Japan would be lovely!
The question I detect is - when will all this debt will ever be paid back. There again, you seem to go right back to the household analogy, as though the federal debt is some kind of mortgage that "should" be paid off.
No, and never. That is the answer. It is the deficit we should be paying attention to, adjusting it in relation to inflation and unemployment, and not worrying about the debt at all. Bond holders like to hold bonds, just as long as the currency remains stable.
Indeed, one might go an extra step and assert that the issuance of debt is unnecessary- an archaic relic of the gold standard days that should be scrapped. The government could then just print its money as needed without all the debt rigamarole. That would work very well also, but is a separate argument.
Somewhere around the house I have some Monopoly money. Will that do?
If my best friend hadn't had his Confederate money stolen, I suppose that work just as well.
It will do for a brief demonstration of fiat money. Suppose that you lived with a few other people in your household. You could create rules by which they receive monopoly money for doing chores. You demand monopoly money in return for services like meals or TV time. In no time, you would have a functioning economy, where your monopoly money is highly valued and worked for.
The others could trade the "money" among themselves, and perhaps save it. If they save alot, you might find that fewer people are eating, and your money that you were giving out was not coming back. You might fire your cook, due to insufficient demand for his share of chores, and pay out less yourself. He would eat less now as well, and the spiral would go downwards.
One way to fix this mini-depression (i.e. find work for the cook) might be to develop a new industry to attract the savings of the other people- gardening for flowers, perhaps. Another way might be to increase the amounts you pay out so that everyone starts eating again, on top of the savings they seem to feel are so important, even though the interest rate over at the monopoly money bank is zero.
Where do you get this extra money? You just make it up. You have no limit in how much to make- your goal is simply to keep everyone working, and to keep the value of your monopoly currency stable over time. To you, there is no such thing as "saving" in this currency, or indeed of going into debt in it. It is yours to print at will, or destroy at will.
Sorry to go on, but dollars are indeed quite similar to monopoly money, with some rules that we all play under. And it all works very well, with no need for "balanced" budgets at the federal level.
Just to extend that last bit slightly, the money issuer is often compared to a bowling alley. Where does a bowling alley get its points from?
From nowhere! They just make them up, yet the points may be highly valued by their customers.
The fact that we have an elaborate system to sell pieces of our "point debt" as bonds to rich people and pay them interest... that is an unfortunate complication, but at today's rates, a rather minor one.
A couple of weeks ago, I had the pleasure of entertaining a house guest, an anarchist who was returning from Porc-fest, a big jamboree in New Hampshire, Some people there refused to accept US currency, but would take various other forms of valuta, including little strips of silver. My friend brought me back a coin, a Lakota dollar, which apparently circulates on that reservation. Then there is something called (I think) bit money, purchased on line, and which can be used with others who are willing to recognize it.
All this reminds me of the monetary cranks I knew in college, some of whom gravitated to the Freigeld of Silvio Gesell, others to the Social Credit of C. H. Douglas. What are these these theories? Don't ask.
Since about 1970 all currencies in the world (just about) have been fiat money--that is to say, their value depends entirely on people accepting the illusion that they have value. It is a little like Roadrunner who chugs off the cliff, but is fine--until he realizes that he has gone over the cliff.
Printing money ad lib and running endless deficits will eventually invoke the Roadrunner principle, part 2. Think Germany in 1922, or Zimbabwe today.
As a linguist, you must be familiar with the magical way symbols can gain meaning. It isn't an illusion, really, if the law says that taxes are due in the currency of issue. That is what begins the process of making a dollar valuable.
With respect to Zimbabwe and other hyperinflations, the issue is indeed inflation. Where is inflation now? Nowhere to be seen. Is Japan suffering from inflation? No, from deflation. When it comes to printing money, the inflation/deflation balance is all you need to know.
Incidentally, a wrinkle in this whole story is that banks have the power to print money as well- they create it out of thin air when they make a loan. That is why control of interest rates is important as well in monetary policy- that can speed up or slow down bank lending. Right now, banks are not lending, even at very low rates- no one wants to invest.
This again puts the burden on the government to spend and create more money... i.e. deficits. It is great that you and the Republicans feel all righteous and moral about reducing debt, paying our way, balancing books, etc. But that isn't how macroeconomics works, indeed, the depression was a depression precisely because of that kind of thinking.
Keynes turned all that around by pointing out the various fallacies of composition involved in making that household - to - maco analogy. Keynes won the debate and is winning it again empirically, even as Europe and the US don't seem to be listening. State policy has to be counter-cyclical if our system is going to work over the long run. That means more state debt now so that other indebted parties (homeowners, businesses) can deleverage.
Keynes-worship is enjoying a recrudescence. I do not share it.
Hyperinflation is one result, though not the only one, of collapse of confidence in the currency.
Pursuing Krugmanite policies will certainly erode this confidence. Btw, the chances of Krugman being anything more than a voice from the peanut gallery are minute.
Since the yen is a currency of refuge, inflation is not a problem in Japan. Economic stagnation, amounting to a kind of zombie economy, is the Japanese disease. I know because I have been there.
I would never want to live there, as all economic creativity and dynamism has fled. Italy seems to be going down the same road.
When was hyperinflation ever the result of Keynesianism? You are repeating nostrums, not making sense here. The inflation in the US in the 70's was hardly hyperinflation. We would love to have the kind of low unemployment they had then. That would be a dream world compared to what we have now.
What is a currency of refuge? That also makes little sense as far as I can tell. The dollar is much more of a currency of refuge, to put it that way. Can't you tell how far we are from any kind of inflation right now? The rabid focus on inflation is deeply immoral disservice to those whose lives are being destroyed by the current depression/recession, via unemployment. Spare a thought for them, if you will.
By conflating paragraph one and paragraph two of my posting,you have misconstrued what I said. Hyperinflation results from a collapse of confidence in the currency, not from Keynsianism.
Keynsianism is indeed a crock, but that is a different story.
Given the present climate of throughout the Western world, your ideas have zero chance of implementation. They are purely a "thought experiment." Or to put the matter more rudely: a flight to cloud-cuckoo-land.
Ah, there you also have it wrong.. confidence is lost in a currency only after inflation happens. The path of events is inflation first, then loss of confidence. Otherwise, there is no reason to lose confidence.
All this stuff is very interesting, but we have drifted rather far from my original point. It has been succinctly put by Senator Tom Coburn of Oklahoma, who remarks as follows about the bill: "It does nothing to address the real drivers of our debt. It eliminates no program, consolidates no duplicative programs, cuts no tax earmarks, and reforms no entitlement programs."
Some may rejoice at this nonaccomplishement. I do not.
We have not drifted off at all. I was taking you through the intellectual engagement required to deal with the reality of our debt, which is quite different from the nostrums you are repeating. Indeed diametrically opposite. I would urge you to think twice about blogging about topics that you don't seem to be willing to engage in seriously.
As I indicated at the outset of my original posting, I was writing as a citizen and not as an expert. So far, the comments I have seen by way of response are of the same non-expert character.
My main purpose in composing the posting was to reassure the liberals that they have lost nothing of substance in this supposed defeat, and are not likely to suffer much loss in the future. The "permanent government" in DC will make sure that things stay pretty much as they are.
This standoff means that the US economy will continue sluggish, while the dismal unemployment rate is something we are stuck with. It may be that radical intervention, whether from the right or the left, could change this situation for the better, but that is not in the cards.
Ca ira.
This cannot succeed in reality, that is exactly what I suppose.
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