Sunday, July 11, 2010

99 Problems But The Debt Ain't One

This summer we're seeing the next political death match du jour (werewolves vs. vampires excluded), the question of whether the economy is best served by major increases in Federal spending or by cutting back on spending so as to allegedly enable more private sector growth. What's so problematic about this, of course, is that while the cable news networks are reaping the rewards of unqualified political hacks pontificating on the issues and fictional economic theories, actual humans are getting their asses handed to them by a Lohan-esque economic downturn.

The argument we're hearing from the conservative perspective essentially circles around 3 major concepts:
  1. The government is spending too much money and needs to stop borrowing to keep it up.
  2. Borrowing creates a larger total debt (aka Federal deficit).
  3. The deficit is bad because eventually the amount of interest gets too high, becomes too expensive for us to repay, and the lendors will stop lending money. There's an inflation argument in here as well, but I'll address that in a follow-up post (in short, this is a bogus argument and the problem we're facing is deflation from inaction, not inflation--this is just a garbage scare tactic ala Death Panels and Obama re-education camps).
The beauty of this position, and what the GOP/Tea Party has seized upon, is basically that it makes sense from what most people see in their own financial mechanics, and it makes sense to punish the country for what people see as some sort of national wrongdoing. Hey, I get why this makes sense to a lot of people. If you run out of money and max out the Visa, you don't get any more (there's an argument that bankruptcy fixes this somewhat, but the Tea Party ain't big on nuance). And I get that.

I understand that it seems, intuitively, that we shouldn't try to fix a debt/growth problem by spending more money--and in our own house, that's possibly true. But we don't have a national economy in our living room and our checkbook doesn't have anything to do with structuring the GDP. If we all had a canoe, we wouldn't try to solve problems on a cruise liner by telling people to paddle harder and throw off deck chairs. And yet that's exactly what this "austerity" solution is doing (Note:I love how they all use "austerity" instead of "not giving money to laid off workers to eat and keep the lights on" because it sounds smarter). Paul Krugman recently stated this well, noting [paraphrasing here] that it all makes visceral sense that we should have to tighten down on everything. But we need to make economic policy with out minds, not our viscera.

The fact remains today, as it did in 1937 and 1941, that the key to a solid recovery from a crisis of this magnitude is a major jump in Federal outlays, even if the debt goes up dramatically. I use 1937 as a reference point because that was the year in which FDR halted the economic recovery dead in its tracks by stopping many of the government spending programs that had been helping to drag the economy upwards. The same sense of back asswards economics that had been the cause and an escalator of the Depression suddenly came back into vogue, and brought the Country right back where it had been trying to escape. It was the start of WWII that ended the Depression, plain and simple. And obviously nobody wants a war. But the point is that going to a global war was an enormous outlay of Federal spending, and that's what put the gears of recovery into motion. Whether it's a tank or a solar power facility, somebody's going to work.

The economics of all of this makes sense, but it does require more thought than most red states want to offer (this is, by the way, the simplified Keynesian view). The national economy is essentially based on a certain level of overall economic activity that creates jobs, profits, and thus tax revenues. When times are good, the government can ease up on spending, and make more money available for private sector investment and purchasing. People have money, so they spend it, creating increases in demand and supply, as well as innovation. This pattern basically played out in the Clinton administration when he was running budget surpluses. When the economy goes into a downturn, private sector spending decreases along with investment and jobs. If a worker loses a job, he stops spending, and because he stops spending, the suppliers stop making as many products and cut jobs and input resources. Rinse and repeat after that, and we have 2008. The Fed will try to cut interest rates to make investing easier and cheaper, and while that can help to a smaller degree, alone it's not enough for major problems. By this point, borrowing funds from the Federal Reserve comes with about zero interest.

Here's where the government spending comes into the picture. If the Federal government can spend enough to overcompensate for the decline in the private sector, this will buy time for the overall economy to normalize and re-energize the investment cycle. This comes through in multiple ways. You have the obvious manner of unemployment insurance, which keeps consumer spending up while the person finds new work or training. There is direct government lending to small businesses, who in turn make more capital investments and hire workers. Similarly, Federal dollars can go to the States to help them from making huge cuts in beneficial spending and education. My favorite is government development of national infrastructure projects that make the larger economy work. Power plants, communications, roads, mass transit, water projects--all of these create enormous advances in the ability of the economy to expand and streamline. Was it Socialism when Eisenhower pushed for the Interstate highways and when FDR brought power to rural areas in the 1930s? Of course not.

Obviously, spending like the country needs to will create an immediate Federal debt. No doubt about it. And while running a debt isn't a great situation, it's a means to a better end. By investing now, the economy stays afloat and then grows, paying off the debt accrued. You keep people at work and allow businesses to grow, which lays the groundwork for the next big jump. Conversely, cutting the spending does nothing to help the situation and is a killer for actually emerging from the problem. The biggest danger we face is seeing a contraction of the economy, cutting national output, consumer spending, and tax revenue. Businesses aren't worried about Federal regulation and taxes, they're worried about people (and other businesses) not walking in the door and buying. The solution to the debt is expanding the economy so that the government doesn't have to spend as much, and the private sector can stand on its own. When it does, the debt goes down and the federal spending goes back to normal.

As for the issue of other countries suddenly stopping all lending and suddenly demanding their money loan-shark style, it's just not realistic. If we were way worse off than all the other countries and were also seeing an increase in the treasury bond prices, maybe this would be a concern. But we aren't. The rate on the loans were taking through the securities is still only about 3%, and foreign countries are eating that up because they're more confident on our economy than their own. We're still the best bet in town, even if the corporate-funded hacks on talk radio are looking for the hordes to come riding in looking for their money. Screw it maybe we should just go buy gold from Glen Beck.

As I said earlier, the simple idea of cutting the federal spending and money magically showing up just doesn't make sense in economic terms. Cutting spending seems workable if the same amount of money is coming in the door, but for the country as a whole that's not happening and the necessary level of growth isn't going to just spontaneously pop up. It's an investment people, and we need it now. This Hoover plan of "austerity" was a trainwreck in 1930, just as much as it is now. Hoover could say that at that point they didn't know any better. What's our excuse?

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