Saturday, February 5, 2011

Economics Post - Part 3

WHAT NOT TO DO

What would hurt rather then help expand the economy?

The federal government can operate in the red, borrowing money to pay the bills and finance the recovery. State and local governments cannot run a deficit, and so when they run out of money they must raise taxes, cut spending, or both. Either of those options are bad in a recession: raising taxes takes money from people who would otherwise spend it. Cutting spending is the opposite of what you want to do-- you want to put more money into the economy. Spending cuts take the form of layoffs of teachers, firemen, police, public works employees. Not only are you directly creating additional unemployed with their attendant costs, you are losing the services they provide. Reducing other spending falls right into the vicious circle from Part 1. In order to sustain the state and local budgets, the federal government must supply funding by direct grants, funds tied to specific projects, or some other mechanism. This results less in a growing economy than a not-shrinking economy, but one need only look to California to see the consequences of a crippling state budget deficit.

The key is federal government spending. In the Great Depression the economist John Maynard Keynes said putting money in bottles and burying it, and requiring people to dig it back up, would help. Any spending would get money into the economy, but of course you want to get something useful in return, not just engage in a "helicopter drop." Hence the investment in infrastructure. Invest in green energy: something we KNOW is going to be essential in the future. Invest in an electric grid that won't be subject to brownouts and blackouts in the summer. Cars that require less or no oil-based fuel. This is coming. The money is going to be spent someday: spend it NOW, when it will provide an economic boost.

Inflation: another bugaboo. The concern now is DEflation. Interests rates are rock-bottom. A moderate inflation now would be a GOOD thing. The Fed has an inflation target: it is well below that with no signs of reaching it for years. Scare-mongers are jumping at short-term fluctuations in the numbers and ignoring the longer trends.

Balancing the Budget: If a family is not able to pay their bills, they economize: cut back their spending, tighten their belts, live within their means. Well, surprise: the government is not like a family. It has obligations to be met, and deficit spending is a tool to use to help control the economy. These are absolutely the times to borrow and spend: a rapid recovery is the one means to ensure future prosperity and reduce the burden on the coming generations. Shutting down the recovery now because of budget concerns will drag out the high unemployment, causing needless human suffering. It will cripple our future economy because of infrastructure requirements not met, or met later at higher cost. It will shove the United States back into the pack as China, India, and others take the lead in energy and manufacturing.

The gold standard. Come on-- this isn't even remotely credible. Nineteenth-century stuff. And "strong" and "weak" dollars are economic terms of convenience; it doesn't follow that "strong"="good" and "weak"="bad". In fact, right now in the world economy a weak dollar is desirable. Scare-mongers are counting on the public's ignorance to push bumper-sticker sound-bite slogans that sound good but are wrong. If economics were so easy and common-sense, there wouldn't be such disputes over what is right.

The bottom line is that spending by the federal government is the key. The Obama stimulus didn't fail: it wasn't large enough. Knowledgable people (such as Paul Krugman) said so from the beginning. Some of the stimulus was pissed away in tax breaks: better than nothing, but the least bang for the buck. Some of it went to state and local aid: necessary; not improving the economy but rather preventing it from getting worse. And yet the bit that did make it through as straight spending did have a measurable effect: it reduced the unemployment rate by one or two percent from what it could have been. Without a stimulus plan at all, we would be looking at Great Depression II: Santayana Was Right ("Those who cannot remember the past are condemned to repeat it.").

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