Mike the Mad Biologist

One of the really difficult things for me to comprehend is why the idea of ‘Fiscal Austerity’ is so popular among politicians, especially too many Democratic ones, when Fiscal Austerity will lead to high unemployment. The null hypothesis of “people are fucking morons”, while personally appealing, just doesn’t seem to have explanatory power. However, Digby, as she is wont to do, clarifies things tremendously:

I have thought from the beginning of the crisis that this [the erroneous belief that budget cuts will create jobs] was a problem. I could tell from some conversations I was having that people were under the misapprehension that the deficit caused the recession and that ending the deficit is the only way to fix the economy. Many wingnuts are making that explicit claim.

I agree with Digby–mostly. Before I get to why, let me state for the record, as I have many times before, deficit spending is the only way (barring a reversal of our massive trade deficit) out of this mess. With that having been said….

I think believing budget cuts will help, rather than hurt, has a certain logic to it, even if it is wrong. Why? Because our current problems are, in part, due to deficit spending. Now, it’s not the usual story. The usual deficit/austerity story is a biblical story worthy of the prophets: we have been gluttonous, we have sinned, now we must wear sackcloth and repent.

Lord, forgive us for the sin we have committed before Thee.

This is silly. But deficit spending did help get us here. As I’ve discussed before, deficit spending increases aggregate private savings. Note the word aggregate. Different kinds of deficit spending will have very different effects–for some people versus others. For example, deficit spending to rebuild our infrastructure, improve our schools, and fund scientific research will provide lots of middle income jobs. On the other hand, deficit spending that provides tax breaks to wealthy individuals so they can buy crap no one needs and lowers corporate taxes to provide higher dividends (which disproportionately go to the wealthy)–what we’ve done for the last 25 years–will lead to rising income inequality.

At a personal level, this makes many things, particularly inelastic goods (i.e., housing, college education), more expensive or unattainable. And it played a role in the collapse of Big Shitpile (along with many other factors). Income inequality is one of the preconditions for asset bubbles–that is, surplus piles of capital looking for a home.

The problem here is that how one creates deficits matters. To a considerable extent, the manner by which we created deficits ignored problems that needed to fixed and also created more problems. This creates a very difficult political problem: deficit spending helped get us into this mess, yet fiscally responsible deficit spending is the only way out of what was once considered near-catastrophic unemployment.

I can’t really blame people too much for the belief that deficit reduction will restore jobs: many people have watched deficits increase due to tax cuts for the wealthy and to crony capitalism. Can you really blame them for thinking that the way to solve our economic problems is to cut deficits.

We have our work cut out for us….

Comments

  1. #1 Eric Lund
    June 30, 2010

    Paul Krugman has been trying to make this point for quite some time. Austerity would be the correct response if the so-called bond vigilantes were driving up interest rates on government bonds (or about to do so) and thereby making further deficit spending very expensive. That is the opposite of what has been happening: yesterday yields on the 10-year and 30-year Treasury bonds dropped below 3% and 4% respectively. The reason for that is, as you mentioned in the post, the large amount of money looking for an investment *somewhere*, and Treasuries are among the few things out there that currently offer both return on capital and return of capital.

    More specifically, according to Krugman, we can look at the Euro-zone. Ireland has embraced austerity, while Spain has been highly reluctant to do so. According to the austerity model, Spain’s debt should be riskier than Ireland’s and therefore its interest rates should be higher. Mr. Market says the opposite is true: Ireland’s austerity measures are likely to reduce government revenues and therefore make it harder to pay its debts, so you should and will get a higher interest rate on Irish bonds to compensate for the risk.

  2. #2 Moopheus
    June 30, 2010

    It’s not precisely true that we have to have government deficit spending. But in order to reduce the deficit and not cause a crash, we would have to either eliminate the trade deficit or increase private spending, a lot. Neither of those things seems likely to happen soon. Households are still tapped out and can’t increase debt levels. Many (not all, obviously) businesses, on the other hand, are sitting on piles of cash that could be used for capital investment, but isn’t, in a corporate form of the paradox of thrift that Krugman keeps going on about. How deficits occur doesn’t change the affect on private savings.

  3. #3 hansragnar
    July 1, 2010

    you say the null hyp. x work, (people are f-ing morans) and then quote digby saying essentially that and refute yourself… sheesh…