According to Paul Krugman’s Op-Ed the world may well be moving into a Third Depression rather than out of the Great Recession. Here in Massachusetts, a prime mover in creating that Third Depression is our own Senator Scott Brown, by failing to vote in favor of extending unemployment and failing to extend medicaid stimulus funds – the so called “FMAP”- and thereby throwing 10,000 Massachusetts residents a week off a financial cliff.
As Krugman says
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost – to the world economy and, above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world – most recently at last weekend’s deeply discouraging G-20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.
But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment – especially long-term unemployment – remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
Essentially, by rendering the long-term unemployed destitute, the building trades will remain in a depression in this country. Today the head of the Massachusetts Building Trades Union stated that of his 75,000 members, 25,000 are unemployed. I was there to hear this in front of the JFK Building at the protest attempting to wake Senator Scott Brown up and have him act like “the people’s senator” rather than a Wall Street Pawn. That is unemployment of 33% in the building trades. I guarentee you, not only will new home sales plunge and the tentative improvement in home prices stall – but a next wave of foreclosures is being created by the failure to extend unemployment compensation.
If 10,000 Massachusetts residents are losing 100% of their income due to Scott Browns filibuster – maybe he feels he is so popular he can flush 10,000 votes a week down the toilet. I cannot imagine those folks voting for Brown – no one can be THAT stupid as to follow a pied piper off a cliff.
But Krugman says it well:
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks – but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity – but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.
Who knew that Hoover would be the channeled guru of 2010’s fiscal policy? Not like he had great success in 1929.
Personally, I truly hope Krugman is wrong when he says (bold is mine):
It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
The picture in Europe is quite discouraging — particularly with the recent Tory win in Britain coupled with Germany’s move toward belt-tightening. Counter-cyclical spending has to be somewhat international as it is impossible for stimulus to confine itself to a single country. Thus, Europe’s policies are troubling.
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p>Here at home, though, the Party of No has been beating the drum about how we’re “out of money” and cannot spend anymore or else we’ll turn into Greece. The markets on the other hand are not demanding high interest rates on long-term U.S. debt — those rates have even dropped recently. So in the real world, the Republicans are simply wrong about us “running out”.
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p>Putting the humane reasons aside — because I’m a wonky sort of liberal, counter-cyclical spending will make the economy grow sooner so that the U.S. economy will eventually grow faster than its debt. If you owe $10,000 and are worth $100,000, you owe a lot; but if you are worth $1,000,000 but still only owe $10,000, the debt has in some sense shrunk. This, in fact, is some of what happened to the U.S. debt after World War II.
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p>Finally, there are numerous contributors to U.S. debt. Dealing with out of control healthcare costs by moving toward evidence-based treatment as opposed to a system that encourages the medical industry to game the system and patient’s fears for maximum profit is an essential component of keeping the U.S. fiscally sound.
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p>With their superior message discipline, the Republicans, alas, are creating a culture in which hard decisions cannot be made.
Remember Obama and his spending freeze? Promising to cut the deficit in half? In general, it’s always difficult to move beyond the ridiculously simplistic “well, my family has to balance its checkbook, why not the government?”, and Obama doesn’t seem to want to go there, to encourage that economic understanding that we really need.
If the Democrats had been able to make a solid, full-throated case for stimulus spending and incurring some debt during a recession, Obama the consensus seeker would not wandering around trying to look tough on near-term deficits.
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p>The Democrats: the party sort of for health care reform, kind of in favor of reversing climate change, tending to want to ameliorate unemployment, seriously considering human rights for detainees, and open to withdrawing from Iraq.
“Putting the humane reasons aside – because I’m a wonky sort of liberal, counter-cyclical spending will make the economy grow sooner so that the U.S. economy will eventually grow faster than its debt.”
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p>Tis a far far better thing for paying off your credit cards and mortgage that you get a raise than win some scratch tickets.
Just got this from Center on Public and Policy Priorities.
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p>and on and on.
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p>More evidence for the Wonk
It could be that the Europeans are wrong to think that austerity can promote investor confidence and lead to growth, and that Krugman is wrong to think that we can continue to use deficit spending to stimulate the economy without a debt crisis. There may be no good answer. Now, we can blame this on the profligacy of the Bush years if we like, but who’s to blame doesn’t change the facts we face.
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p>TedF
and we need more spending. Given the fact that this country has never fully committed to the Krugman route to get us out of recessions. For sure, we’ve tried spending cuts and tax cuts and, for sure, those have never, ever worked. Lots of spending did seem to help get us out of the Great Depression, on the other hand.
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p>It would take a massive amount of spending, over a massive period, to send us in a real debt crisis. If we want to avoid that, cutting military spending and getting out of these wars is the only way to do it without hurting the economy. It’s time people realize that America isn’t strong because we have the strongest military — not when 5 people hiding out in a cave can force us to spend billions — we’re strong because of our economy. If our economy fails, America fails, and it’s Fing time for us to realize that.
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p>I’m not sure how you say this with such assurance. I think the fact of the matter is that no one knows.
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p>TedF
We’re big and we print our own money. That’s how.
Which is exactly why a lot of debt raises the risk of significant inflation, resulting in high interest rates, resulting in decreased economic growth, resulting in more debt, resulting in more inflation, etc.
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p>A debt sovereign debt crisis is not a default, like you missing your mortgage payment (unless you are Greece, and don’t have the luxury of printing your own money). A sovereign debt crisis involves printing money, inflation, high interest rates, and economic stagnation.
and it unlikely will be one in the near future. We can control inflation much easier than we can job loss. In fact, one of the best things in the world for big debt holders is a healthy amount of inflation. Suddenly, that debt you have isn’t so bad. We should be much more worried about entering a new depression than becoming the next Argentina — there’s a far greater chance of the first happening than the second. Let’s not be obtuse.
Yes, inflation is not a problem, right now. It seems to me that the deflationary risk is passing, if not passed, so long as credit markets stay reasonably liquid.
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p>But: you are way, way, way to cavalier about it, because the only way to “control” inflation once it exists is to manufacture a recession; see 1981-82.
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p>A “healthy amount of inflation” is only great for debtors if their debt is long term at fixed interest rates, something that most American debt is not. Most people do not have fond memories of being stuck with mortgages at 20% during the 70s.
There’s an excellent historical and economic basis for thinking that austerity in a depression will not lead to growth. And that deficit spending is the right response to a looming depression.
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p>Not so for the “could be” that “Krugman is wrong.”
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p>I mean, he could be wrong, I’ll grant you. But he is just articulating what history and economic thinking suggest.
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p>I think most economists would agree that the ability to deficit-spend out of a depression is not infinite, but that historical experience suggests we are nowhere near that capacity now.
You may be right. But what got us in to trouble the last time around was people’s faith that the markets would act tomorrow like they acted yesterday.
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p>TedF
We’ve learned a thing or two since then. When we put them into practice, things go well. The point Krugman brings up right now is that we’re not putting what we know into practice — we’re doing the bizarro world approach.
…your overconfidence is your weakness.
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p>Look, I like Paul Krugman as much as the next BMGer. I just think that it’s possible the chances of a debt crisis are more real than he lets on in his columns. Here is a famous economist making the point:
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p>Who’s that economist? Paul Krugman.
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p>TedF
we have two courses of action.
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p>We recognize historical fact that we need a large amount of government spending during epicly bad recessions and depressions, until there’s economic recovery. Or, we need ignore that historical fact and “save” now, which could spiral us into a depression. If we go into a full-scale depression, one that lasts many years, not only do we have a long-lasting jobs problem, not only did we lose our opportunity to recover… but we still have that same, old debt problem, because now government revenue is going to be way down.
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p>Stopping spending now, when we’re on the cusp of double dipping, is like being batted with a stupid stick.
Not this year. Krugman has been consistent for years about the problem of only using monetary policy and no fiscal policy. As well as the irresponsibility of the Bush tax cuts and not paying for the wars…precisely because we made the help in the short run sometime to turn around a recession.
You seem to be trying to make the case that the risk of a debt crisis is more serious than the risks of a double dip recession and the prolonging of the current crisis.
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p>Taking Krugman at face value, the debt crisis you fear requires more than just a given level of debt. It requires a loss of confidence.
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p>It seems irresponsible to let the current crisis fester, or become worse, in order to prevent a later crisis whose risk can be to some extent managed.
I’m not saying that. I’m not making any case for any policy. I’m just saying that to those of us who think there’s an easy answer to this problem, and that we can spend our way out of the recession without incurring the risk–just the risk, not the certainty–of a debt crisis, I think that’s too optimistic. My own view is that it’s probably better to continue to run deficits, along the lines folks here are suggesting, for a while longer, and that it’s worth the risk. I’m just saying we ought to recognize the risk. I read some of the comments on this thread as saying there is no real risk, or else, as Ryan puts it, there may be a risk but if the risk comes to pass we can just devalue our currency to deal with it, which is, in my view, much more serious a step with much more dire consequences than he seems to think.
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p>TedF
We got into trouble because of the opposite–because the nations’ leadership pretended that yesterday didn’t happen.
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p>That Glass-Steagall wasn’t necessary. That regulation wasn’t necessary.
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p>They’re still doing it!
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p>It is precisely that willful obliviousness to history and reason that I object to in your “could be” post.
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p>Yeah, could be. But what is your basis for thinking so? Why, in the face of history should we think so?
I’m not saying I know better than anyone else about this. I do think, though, that for a country like the US, which borrows in its own currency, a debt crisis is primarily a psychological thing–a matter of confidence–and it’s not implausible to me that confidence and thus liquidity could quickly and maybe irrationally leave the market.
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p>TedF
versus the much larger likelihood of the economic havoc a depression or double dip would do. We’ve got to get our ducks in order, then we can get the debt in control. If we don’t spend now, we go into depression or a double dip, then all hell is loose. If we spend now, likely 3-4 years from now we’ll be able to start going after the deficit.
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p>Hell, if we can’t manage to be intelligent about this, at least cut from the right places. Spare public spending, spare state budgets, spare employment benefit cuts… and send the axe to the military.
I think I can respond as he would.
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p>The argument about stimulus spending isn’t either/or. It’s how much. And not just how much, but how large of a pecentage of our GDP we can dedicate to dedicate to stimulus. He argues that we can afford more before we turn to fiscal austerity. His ultimate concern is jobs and the pain that unemployment causes.
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p>There are equations and stuff for this, not that I know them. And the world economy does have a factor on what happens here.
that government spending is anything other than a palliative under these circumstances. That doesn’t mean that the palliative isn’t a good thing, but it shouldn’t be oversold as a cure.
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p>While it is nice to be cavalier about deficits, talking about deficits obscures the issue of expanding public debt, which is indeed dangerous over the long term. A little deficit this year in return for less debt next year is great, but it really isn’t so clear that this is happening.
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p>Yes, persistent low interest rates indicate that the market hasn’t deemed US debt risky, yet. But that is largely because things are priced relative to others– US debt is presently viewed as safer than European debt, and money is flowing in, driving the price down. While this is a dandy development in the short term for us, we found out in 2008 that it can change in a matter of hours. If we convince ourselves that there is no problem with expanding US debt until interest rates climb, it will be too late.
You don’t have to take my word for it Without protecting public jobs and services, in fact, there will NOT be a recovery; without preserving as many jobs as possible, here come the next wave of what I fear will be a “Long Depression”.
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p>Just keep throwing working folks off cliffs all over the world, including Massachusetts, and keep spooking traders and hiring partners…and down we go; the roller coaster ride ain’t over.
There may well be a long recession. I don’t see that simply pumping public spending does anything other than make the recession better for people today. It certainly seems that it doesn’t do much to end the recession.
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p>People and business have a large, historically large, debt overhang after the credit bubble. The report to which you link comes right on the heels of reports that the US savings rate has been climbing for several quarters. Why increased saving? Paying down that debt.
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p>Increased savings means less consumption, which is the engine of the economy. That means that to the extent that stimulus spending made its way to the wages and salary of people, people used that income to pay down debt, and not to buy stuff or services. In other words, the “multiplier” of the government spending is close to 1, or at least low enough to prevent it from restarting the economy, which means that government spending isn’t going to fire up the engines so long as that debt is being worked down. Every time there is a little surge of economic activity, it will likely fizzle because of this, which is what we have seen so far.
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p>What is more, having the government just simply issue debt to fund palliative measures that don’t improve the economy– even for well-intentioned policies like unemployment, or the defeat of the Taliban for that matter– slowly increases the risk of a Greece scenario.
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p>There is no government policy that is going to end the recession in the short term. It is a hangover and like all hangovers must be penitently endured. That is lousy news for the Democrats in Congress, who aren’t really to blame, but them’s the breaks.
The question is more complex than a yes or no regarding a government stimulus. As Krugman pointed out while the original stimulus was being considered, it is important that the stimulus be sufficiently large. He was concerned that the original stimulus was probably not large enough to make a lasting difference and that it would be difficult politically to engineer a second stimulus.
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p>There are two possible reasons for the stimulus to not have worked for the long term: such a policy could only help in the short term (your assertion), or that the stimulus was not large enough to have a lasting effect (Krugman’s opinion).
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p>The nation’s situation in 1937 serves as a historical precedent. The economy had started to improve as a result of large government stimulus a few years earlier. Bowing to political pressure, the stimulus was cut back in 1937, or at least greatly reduced. The economy went downhill again, only to be finally rescued by the massive deficit spending (= stimulus) during World War II.
too much of the stimulus went into tax cuts as part of an attempt to win Republican votes. Tax cuts are better than nothing in a recession, but there are plenty of other policies with better multipliers than tax cuts.
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p>CentralMassDad is correct in focusing our attention on multipliers.
It is an article of faith among conservatives that tax cuts, alone, are sufficiently stimulative to fix any economic ailment. This is faith misplaced: I, like many others, used my Bush tax rebate to pay off a credit card. Applicable multiplier to that rebate, for me: zero. Some people bought themselves a TV or re-did their kitchen, so the aggregate multiplier is greater than zero.
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p>Really, the fundamental problem is that there is a lot of debt in the economy, taken on when people thought that assets would appreciate at absurd levels forever. (I just read in the Economist that the California pension board doesn’t consider pension benefits to be costly because it assumes that the value of its investments will pay for it all, including an assumption that, if true, would put today’s DOW at 25,000. When this proves untrue, the state has to cut a check to pay the debt.)
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p>I’m not sure that there are easy fixes:
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p>Inflation to reduce the value of the debt? Sure, but floating interest rates will make that painful for debtors, and in inflation is always painful to the people.
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p>Tax incentives to increase savings? Might work the aggregate number down, but will decrease consumption and thus suppress the economy.
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p>Tax incentives to decrease savings, increase consumption? Okay, but insufficient savings played a role in inflating the bubble, and this doesn’t reduce the balance sheet problem.
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p>The one thing, not much noted, that the administration has done that will be very helpful in time (but produce no political benefit for Obama) is getting China to move a few inches toward allowing the yuan to appreciate against the dollar. This, if sustained, may begin to move China away from a produce-madly-for-export economy, and toward more domestic consumption, which would be very good for all.
Neither you nor me nor any state or local government can print money. That means that you, me, and every local or state government has to ultimately pay off any debt we create.
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p>The federal government is different. It is different because it can (not should, but can) print money. The federal government therefore does not ever have to pay off its debt.
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p>This is why “micro-economics” is different from “macro-economics”.
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p>This is the fundamental arithmetic that made the “Laffer curve” so laughable — it is derived from a basic (and incorrect) assumption of a fixed money supply, which doesn’t apply to the federal government. The “conservatives” of the Reagan era didn’t understand basic macro-economics then, and the irresponsible tax cuts of Ronald Reagan produced the largest explosion of national debt in history (followed by a significant tax increase that conservatives don’t like to talk about). The “conservatives” of the Cheney/Bush administration didn’t understand (or lied about) this, and we got the Great Recession of 2008.
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p>Today’s “conservatives” are so hell-bent on destroying President Obama and the Democrats that they’ll drive us into yet another full-bore crash out of pure spite.
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p>Consumers and voters who demand that the federal government manage its budget using the (irrelevant) intuition developed from personal experience are misguided and need to learn more about macro-economics.
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p>Leaders of government and industry who do the same are simply lying and should be exposed for doing so.
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p>Paul Krugman is right — in 1937 the “deficit hawks” of that era caused the worst of the Great Depression by throttling back federal (deficit) spending exactly when it was most needed. Scott Brown and today’s GOP would have us do the same today.
You are correct that a government that can control its own currency (like the US government, and unlike Greece) can simply print money to pay make payments.
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p>Another way of phrasing this is “currency devaluation” or deliberate inflation.
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p>But it wouldn’t work for the United States. First, a significant portion of the US debt is in the form of government debt securities, all of which are constantly being rolled into new issues. In the aggregate, the effect of this is, from the debtor government’s perspective, is that the interest rate on the debt is indexed. Second, the major remaining government debt is in the form of entitlement payments under social welfare programs, such as Social Security, Medicare, etc., and all of these are COLA-indexed.
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p>So, the clever government that attempts to pay its $100 debt by devaluing the currency by half will find that the debt is $300 before the $100 can be paid down, and must now manage a debt of $200.
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p>Governments that have attempted this policy have attempted to make the process move very fast, so that the $100 un-inflated debt can be paid with $50 un-inflated dollars, before being caught out by indexing. Very rapid, very severe inflation is generally not considered to be good for the long term-health of the economy.
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p>Worse, inflation of this sort would be a disaster for most Americans, whose life/retirement savings is in dollar-denominated assets, or (worse) a fixed income. Taken to extremes (which would be necessary for a “successful” attempt to solve debt by devaluation) this would make most Americans entirely dependent on those COLA-indexed welfare programs.
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p>Of course, we could also manage the debt by both (i) significantly raising taxes, and (ii) significantly reducing entitlement payments, such as means-testing Social Security, raising the retirement age to 75 or 80, and increasing the payroll tax rate and/or cap. Doubtless politicians will be anxious to endorse such measures. The politically “painless” expedient way out is, indeed, inflation.
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p>That is the kernel of truth that fuels much of the tea-party angst that is presently extant, even if many or most of the people venting that angst don’t know it. They are correct that uncontrolled inflation could, in a worst case scenario, make everyone dependent on “socialist” welfare programs. Hence the energy behind the “socialism” rants, and also the seemingly bizarre focus on the Federal Reserve system, which would be the thing that would print all of those green portraits of dead presidents. Also, that is why they want a return to the gold standard, because the Fed wouldn’t be able to print money willy-nilly if the paper has to be backed by gold reserves.
Macro-economics isn’t about “printing money”. The “money supply” is more than the number of dollar bills in circulation. When a Federal Reserve bank issues a loan secured by funds on deposit, the money supply is increased (with no paper being printed).
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p>Unless you are suggesting that the feds should return to a silver or gold standard (where each piece of paper can be redeemed for a corresponding weight of physical gold or silver), then you are arguing a strawman.
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p>America (along with the rest of the world) left the gold standard behind in 1971, when Richard Nixon ended the “Bretton Woods System.” The value of the dollar is determined by the supply and demand for money, together with the supply and demand for goods and services in the economy. The commitments of the United States government are backed by the full power and force of the United States government. So long as that remains true, the rest of argument is senseless demagoguery.
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p>A return to a “gold standard”, as advocated by the Tea Party crazies, would trigger an economic disaster — the consequence would be a catastrophic deflation. That is why no honest and rational person who understands macro-economics advocates such a move.
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p>There is nothing “painless” about inflation (or deflation, for that matter). The claim that President Obama or the Democrats seek “painless inflation” as an “expedient way out” is a despicable lie.
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p>I suggest that a necessary starting point for a debate like this is a refresher course in sophomore-level macro-economics. Sadly, far too many “populist” right-wingers (together with a great many mainstream journalists) are apparently unwilling to take this rather elementary first step.
I sometimes wonder if you approach these discussions in good faith, or just deliberately misrepresent the discussion in order to denounce some “despicable lie” uttered by hypothetical people not engaged in the discussion.
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p>My original contention was, and remains, that government expenditure (both tax cut “expenditures” and direct government spending) will not be effective to end this recession because it cannot be great enough to reduce the overall debt hangover in the economy without placing the government itself in a dangerous amount of debt, and therefore should, at best, be considered a palliative. In other words, selling a new stimulus spending package as a means to “end” the present “depression” is, at best, a snake oil sales pitch.
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p>Nonsense, says you, there is nothing dangerous about government debt:
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p>Whereupon I explained at some length why I believe that this is fallacy, and how it would be catastrophe if the federal government ever behaved in such an irresponsible manner, prompting your reply:
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p>Yet it was you who contended that the federal government need not ever pay its debt because it can “print its own money.” That sounds like you think that federal spending is a free lunch. So, either YOU are advocating future “painless inflation,” or YOU are advocating future painful inflation.
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p>It might also be useful to respond to some of the other, slightly off-topic points you made above, if for no other reason than that I believe it useful for consensus building purposes that Side A understand the concerns of Side B, even if Side B is uninterested in same.
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p>Laffer Curve. You grumble about an assumption about a fixed money supply, which makes me think that you intend to criticize supply-side theory, not the Laffer Curve itself. While the tax cut/more revenue theory was is a significant pillar of supply-side theory, it also rests on an argument that inflation is best controlled not by attempting to manipulate aggregate demand through fiscal policy, but by manipulating the money supply (hence the name).
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p>The central, profoundly un-conservative (and profoundly wrong)aspect of Reaganomics was the notion that these things could be divorced in this way: that the government could, on the one hand, stimulate the heck out of the economy with large tax cuts unaccompanied by cuts in spending (inflationary), while controlling inflation with monetary policy of high interest rates and a tight money supply. This was a huge departure from conservative economics, which is why it was opposed by Milton Friedman and called “voodoo economics” by the elder President Bush, and also why it flopped.
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p>Nevertheless, the Laffer Curve itself is almost certainly true, and is certainly not a “despicable lie.”. If marginal tax rates approach 100%, then why would people bother to work for no benefit?
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p>The problem with the Laffer Curve isn’t that it is false, but that it is grossly misrepresented. Today’s politicians treat the curve as if it is a rule: that lower tax cuts always increase revenues, which conveniently ignores the question of where the economy is on the curve. If the economy is on the left side of the curve, a tax cut is a revenue cut: if the curve is a bell curve, marginal tax rates of 1% produce the same yield as marginal tax rates of 99%. So, even if true, it doesn’t necessarily offer any insight into choosing an economic policy at any given time. Discussion of the Laffer Curve is therefore little more than a discussion of angels on the head of a pin.
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p>Gold Standard. I think it useful to understand why there is a sudden, populist interest, even fervor, about the Federal Reserve and the gold standard. (At least if the goal is to see the implementation of a successful policy, rather than merely to poke opponents in the eye with a sharp stick).
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p>Fundamental to the right wing (not necessarily conservative academic economists, but the rank-and-file) is the notion that inflation is something to be feared above all else, even more than recession. Inflation, in their view, destabilizes democratic and/or republican governments and raises the risk of fascist government, as demonstrated most notably in the Weimar Republic. Inflation, by destroying private wealth, makes individuals highly or completely dependent on things like COLA-indexed Social Security (that is, government) to survive. Yes, this is a simplified view of the afflictions of Weimar Germany, but it is not without a grain of truth.
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p>Given that inflation is considered a great evil, the gold standard is– perhaps because of its misperceived simplicity (if the currency must be backed by gold reserves, then the money supply is necessarily limited, which ipso facto controls inflation)– viewed as an important defense against evil inflation.
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p>As evidence, they point to Nixon’s termination of Bretton Woods (was a pseudo-gold standard), which he needed to do to pay the increasing national debt incurred for large increases in the welfare state during the 1960s and for the war in Vietnam. So, relieved of Bretton Woods, the government printed a lot of money to pay these debts, and we would up with a whopping decade of painful inflation.
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p>Of course, this ignores that the Great Depression was made much, much worse by the the then-extant gold standard, because the government could not respond to a liquidity crisis, thus missing the opportunity to keep a bad recession from becoming the Great Depression. Once FDR forced the abandonment of the gold standard, the economy began to improve. Here is where 1930 parts company from 2008: in late 2008 and 2009, the Fed vastly increased the money supply, and thus (along with buying a lot of toxic assets, which, along with the bailouts, ensured that we still have a financial sector) averted a protracted liquidity crisis.
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p>The Federal Reserve is rather specifically disliked by these folks because (i) it is not democratically accountable; (ii) it is quite secretive; and (iii) it controls the money supply, and thus inflation.
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p>That is where rational thought among the teabaggers ends, and crazy conspiracy theory begins. Again, the oversimplified assumptions containing grains of truth are:
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p> (1) Inflation, left unchecked, destroys private wealth, thus causing private wealth (my 401K, my defined benefit, pension plan) to be insufficient for support, making individuals dependent on government.
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p>(2) Inflation, left unchecked, leads to a collapse of democratic or republican government and the rise of fascist dictatorship (Weimar again).
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p>(3) Expanding government debt must lead to inflation, and if the debt is great enough, to severe inflation.
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p>From these three assumptions we get the crazy conspiracy that by advocating increased government debt through expansion of the welfare state, the Libruls are, in a socialist conspiracy deliberately setting up future inflation to make us all dependent on the state, with the secret mot
ive of creating Weimar conditions in order to establish fascist government. Therein lies the curious phenomenon of the Obama as socialist Hitler posters, of Glen Beck, and of the sudden vitriol toward the Fed.
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p>The rational and cogent point buried in the conspiracy is that, like LBJ and Nixon, Bush and Obama have been engaged in (i) significant expansions of the welfare state simultaneously with (ii) a war. I don’t see any reason that the economic effect of this should be expected to be any different this time than it was then. The 70s are coming.
Do you understand what I mean by “money supply”? Increasing the money supply is not the same as inflation.
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p>You wrote:
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p>Inflation is caused when the growth of the money supply exceeds the growth in the goods and services it chases. Inflation can also be caused by a decline in the supply of goods and services.
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p>The claim that increased government spending (growth in the money supply) automatically causes inflation (which appears to be the assumption you present above) begs the question it purports to argue. Argue that increased government spending won’t accelerate a growth in goods and services if you like; you can’t, however, then cite “inflation” to support your premise — to do so makes your argument circular.
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p>The proponents of increased spending suggest that the increased money supply will bring about increased goods and services (that’s what “recovery” is, after all). That, in turn, results in no inflation.
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p>The government can “print its own money” by allowing or encouraging the money supply (M1, M2 or M3, your choice) to grow. So long as that growth is accompanied by a corresponding growth in the supply of goods and services, no inflation — painful or painless — results.
Did we change what we are arguing about?
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p>I never said that government spending won’t provide demand, and thus growth, to the economy. (I did say that I don’t think that the “multiplier” is as magic as liberals seem to believe, but it is at least marginally better than tax cuts for reasons discussed above.)
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p>I did say that government spending (or huge tax cuts) at the scale that are currently implemented and proposed are quite dangerous, because none of it is paid for. It will become debt. Spending is not inflationary, debt is inflationary.
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p>That is because, as you ably pointed out, the government can print money (paper or electronic) in order to pay its debt. Of course, it could, I suppose, significantly increase taxes, or dramatically cut spending (especially entitlement spending). So, in a theoretical world, debt may not be inflationary.
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p>But in the real world, no government will do those things. It will print money. Increasing the money supply to match growth in the economy won’t solve the debt problem, so it will print more than that. Excessive government debt is therefore inflationary.
I don’t think we’ve changed anything about our discussion. In your initial comment that I responded to, you wrote:
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p>You then offered the following “solution”:
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p>I observed, in my initial comment, that you are conflating personal debt and federal debt. I stand by that observation.
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p>It seems to me that the essence of your argument is wrapped up in your final paragraph (emphasis mine):
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p>I agree that excessive government debt is inflationary. You argue, however, that any increase in federal debt is “excessive”. You make an unsupported claim: “Increasing the money supply to match growth in the economy won’t solve the debt problem, so it will print more than that” and then advance the circular argument that this is inflationary.
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p>I suggest that the increased federal deficit proposed by President Obama will, in fact, spur an accelerated recovery that will bring about an associated increase in the supply of goods and services. That will (a) not cause inflation and (b) ultimately decrease consumer debt by increasing the actual wealth available to consumers.
Remind me to not vote for your guy in the election.
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p>When I said floating interest rates will make it more difficult for debtors–the debtor in question was the United States Government. Floating interest rates will make it difficult for the US government to repay debt without significantly scaling back social welfare programs, significantly raising taxes, or both.
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p>I suggest that increased federal deficit spending will, like the last round, have no effect other than to help private balance sheets be slightly less bad. See, Japan, economy of, 1992-2010.
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p>Enjoy the remainder of your holiday weekend.
That the government had more fiscal room to maneuver in the 30s than it does now, because there wasn’t the same degree of government debt at that time.
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p>The only way to make a stimulus sufficiently large is to pile on debt, which will decrease the effectiveness of the stimulus.
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p>Wartime spending was a convenient solution to the problem because it involved (i) drafting a shitload of the labor force, thus reducing unemployment, while (ii) spending a shitload of government money that in a stimulative way that (iii) was patently short-term. That means that the bond markets had reason to expect that the war would end, the spending would end, and the debt would be paid down, and priced the debt accordingly, and the labor surplus was rapidly removed from the workforce.
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What’s the most important thing for the economy now?
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p>JOBS.
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p>How do you get jobs?
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p>Have government spend money to hire people. These people spend their paycheck money, and so private businesses hire to service these people. People get jobs, and the recession ends.
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p>That’s what FDR did from 1932 to 1937. In 1937, he tried to cut the deficit, and unemployment rose.
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p>If most people have no way to make a living, what difference does anything else make?
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p>A lot of vested interests WANT the economy to be in the toilet, and they push budget balancing now. That way, people stay unemployed, and they can get away with paying low wages as well as “cracking the whip” at the workplace.
has nothing to do with the Illuminati Plan to Destoy America. The deliberate outsourcing started in 1993 with the SHAFTA agreements and the inconvienient ruse of China and India being named “carbon exempt” decades before it was made a household word by Big wifeless Al Gore.
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p>The Bilderberg agenda is out and the trends in it’s G20 enforcement mechanisms are also transparent. Global control of money is the goal here and they don’t care how many useless eaters are taken out.
It’s not the Illuminati, it’s the reptilian humanoids!
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p>Read David Icke for the sake of the planet! The real enemy are right now masquerading as human beings so they can breed with us and contaminate the human bloodline. All of this is part of an conspiracy to take over the universe. Take over the world, sheesh. Think big for the sake of America!
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p>The Build-a-berger agenda is old news. They started with the Build-a-Bear workshops, laying their reptilian eggs in the stuffing of unsuspecting cuddlies so children will acclimate to their reptilian smell.
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p>First, the Klingons came for us, and I said nothing. I’ve read “Hamlet” in Klingon and eventually the Federation made friends. Then the Cardassians came, and I said nothing. I was not a Bajoran. Then the Romulans, with the stinking cloaking devices came for us, but I placed my trust in Captain Kirk and all was okay. Then the Borg tried to assimilate us, but I didn’t care. Captain Picard destroyed them. But who was there to save me from Data? He said he was an android, but I can spot a reptilian humanoid at 50 paces.
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p>Surfing the galaxy of conspiracy so you don’t have to…
David Leonard, writing in the Times today:
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p>
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p>It’s here.
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p>