Saturday, May 18, 2013

Numerators and Denominators

Brad DeLong, economist and real smart guy:

As long as interest rates stay low and economies stay depressed, more government spending now will produce a healthier economy in the short run and is highly likely to produce a lower long-term debt burden in the long run, for the debt-to-annual-GDP ratio has a denominator as well as a numerator. [emphasis added -mb]

This is why we teach our children arithmetic. Read the entire post here.

Thursday, May 09, 2013

Repeating Europe's Mistakes

The economies of advanced countries worldwide are in shambles. Bad as things have been in the U.S. since the meltdown of 2008, the tepid U.S. economy has, by the standards of the euro zone, been a stellar performer. At least we've experienced continuous if unimpressive growth. Even so, our economy remains unambiguously depressed, with millions out of work desperately needing jobs.

Why has the U.S. managed to eke out a dismal record of growth, even as Europe descends ever deeper into severe recession? From the beginning, Europe has hopelessly mismanaged its affairs. Ideologues in the EU and ECB (and also in Britain) have crushed the European economies under a regime of tight money and severe austerity, with results that economists duly predicted in advance. The euro zone-wide unemployment rate has now hit 12%. In badly bleeding countries such as Spain (which, it must be noted, had low debt and a budget surplusas did Ireland—on the eve of the crisis) the rate is far higher. Europe is now in territory that rivals the devastation it suffered in the Great Depression of the 1930s.

Those of us watching the horror unfolding in Europe at least consoled ourselves that we could not be that stupid. Unlike the ECB, the Federal Reserve has used practically every tool of monetary policy at its disposal to support a very sick economy. (Analysis of The Great Depression has been one of Ben Bernanke's professional specialties.) And the economic stimulus of 2009, though far smaller and of shorter duration than what was needed, was at least able to somewhat offset the fiscal retrenchment occurring in state and local governments. The U.S. picked its way through the minefield, if not adroitly at least without blowing off its legs.

But political dysfunction, somewhat delayed, inevitably rose to its rightful place in our economic affairs. It turns out we have our own ideologues who, though never silent, were dramatically empowered after the 2010 midterm elections. Thus began a mindless political dance that unfolded as one needless, manufactured, and destructive crisis after another, with one side seemingly bent on wreaking economic devastation with the giddy purpose and religious certitude of a kamikaze pilot.  

Inexplicably, with the economy still languishing in the fever swamps, the focus (such as there was) turned from depression and jobs to deficit and debt.  Even after Europe demonstrated the frightful fruits of austerity, we decided to go ahead and take a nice big bite for ourselves. Yes, we can be that stupid. 

And so it seems our political system is determined to drag this depression out as long as possible. Even as economists understand what needs to be done, politicians work mightily to do the exact opposite. The practice of bleeding the patient in medieval medicine is an apt metaphor for the ignorant economic malpractice now being conducted by our government.

So where was the president in all of this? Obama's principal failure was in acquiescing to the debate as framed instead of calling bullshit and clearly explaining the economic reality. Enough, already, of the inanity about families having to cut back, so government should too. Not, mind you, that there was an obvious way forward in relations with an rabidly irrational Republican House, a House that was more than happy to sacrifice the nation's economy and its financial standing on the alter of mindless ideology. That House would have enthusiastically taken the nation into outright default in the dreadful summer of 2011.

Who knows what Obama's calculus was?  Did he feel it politically necessary to pay lip service to the spending-is-the-problem formulation which, after all, has such a long and prominent place in the conventional wisdom of American political discourse? Did he think he could finesse the discussion to a reasonable outcome, even though he disagreed with its terms?  Or did he intellectually embrace, at some level, the need to pivot now, at least in part, to deficit and debt? We may never know.

What we do know is things aren't working out so well, and the mess has more or less exploded in Obama's face—his being the most prominent face available for the purpose—while Republicans demonstrate some combination of cluelessness, economic nihilism, and calculated political stratagem. The fiscal cliff threat, which offered a temporary respite from the 2011 debt ceiling fiasco, became the de facto fiscal consolidation of 2013, thanks to an intransigent Republican House. The combined effect of the sequester and the payroll tax increase is projected to shave 1.5% off already anemic GDP growth this year, at a time when that growth is desperately needed. The cost in jobs of the sequester alone—never mind the payroll tax hike—is projected to be 700,000 this year.

According to a report in today's New York Times, economists inside and out of government say the economy would be far better today but for gross political mismanagement. The unemployment rate would be nearly a point lower, and GDP substantially higher. Economists say now is not the time to cut government spending, because that spending buttresses demand in a still weak economy. That's a lesson Europe has learned the hard way; they did the experiment, so we shouldn't have to. "But Republicans," says the article, "have insisted on spending cuts alone and smaller government as the key to economic growth."  Yes, it's true: John Boehner apparently takes it as self-evident that "after four years of mediocre job creation, it's obvious that we don't need more tax hikes and more government spending."

That's how it is with ideologues, on both sides of the pond.

Postscript: Nobel Prize winning economist Paul Krugman explains why this is a very bad time for fiscal austerity.  Economist Brad DeLong is pessimistic that our political system is up to the task of dealing with this depression, and calculates that before the economy returns to normal the sum total of economic devastation in the U.S. will approximate that of the Great Depression.

Copyright (C) 2013 James Michael Brennan, All Rights Reserved