Progressives and the Budget Deficit
The budget situation today looks hugely worse than it did two years ago. The reason for the deterioration is not that the country has suddenly embarked on a massive new round of social spending, undertaken another major military adventure or even emptied the coffers through tax breaks. The reason that the deficit situation looks hugely worse than it did two years ago is that the $8 trillion housing bubble that had been driving the economy finally collapsed and threw the country into the worst downturn since the Great Depression.
The tragedy in this story is that the collapse of the bubble and its devastating consequences were entirely predictable. Had policymakers recognized the housing bubble and its dangers, they could have easily taken measures to avert this disaster, preventing the surge in unemployment, the flood of foreclosures and the huge budget deficits that characterize this downturn.
Unfortunately, the sociology of the economics profession and economic policy-making is structured so that the voices of those who raised concerns about the housing bubble were largely excluded from public debate. Federal Reserve Board Chairman Alan Greenspan and other leading lights of the economics profession insisted that everything was fine. As a result, nearly all the properly credentialed "experts" marched in lockstep behind their leaders, also insisting that everything was fine.
Remarkably, even after this collapse, nothing has changed in the structure of debates over economic policy. Nearly every day of the week an organization in Washington sponsors a policy session on the budget deficit or some other important economic topic and every last "expert" is among that distinguished group that somehow could not see an $8 trillion housing bubble.
This would be like hosting a session on the future of US military involvement in Iraq in which every participant had confidently predicted in 2003 that the United States would cakewalk to an easy victory. Even the Republicans wouldn't be foolish enough to host a panel like this. Yet, there seems to be a bipartisan consensus that completely missing the biggest economic calamity in almost 80 years doesn't call into question your competence as an economic analyst.
This should scare people. There is no reason to believe that people who were incapable if independent analysis before the bubble collapsed are now capable of thinking for themselves. In other words, the vast majority of the so-called experts who pontificate on economic policy are still people who are more accustomed to deferring to authority than doing their own analysis. This means that a great deal of silliness is likely to be perpetuated, just as was the case before the housing bubble collapsed.
The basic story on the budget deficit is very simple: We need badly need large budget deficits in the short term. They are the only force that can sustain demand in the economy after the collapse of housing construction and the loss of the consumption that had been supported by $8 trillion in illusory housing bubble wealth.
In the longer term, we will need to reduce our trade deficit to replace this demand, but this can only be brought about by a reduction in the value of the dollar against the currencies of our trading partners. If our budget experts had been capable of independent thinking before the crash, they would have pointed out the over-valued dollar as a main cause of imbalances in the US economy. Unfortunately, most of them are still incapable of recognizing the obvious.
The other big oversight that the budget experts commit is the failure to recognize the positive role that moderate rates of inflation can play in our economic recovery. Sustained inflation in the range of 3 to 4 percent will be the quickest way to rebuild the balance sheets of households who saw most or all of their wealth disappear with the bursting of the bubble.
Modest inflation will also help to erode the debt burden the government was forced to take on due to the housing crash. For those old enough to remember, inflation was also a major factor in reducing the burden of the huge debt that the country incurred as a result of World War II.
Of course in the long term, if we don't fix health care then the deficits will be unbearable, but this calls for discussions of health care, not budget deficits. If we don't fix health care, the economy will be wrecked regardless of what we do with the budget.
But, we won't get a more serious discussion of these issues until we have budget experts who actually form independent assessments of the economy. As it stands, the debate is dominated by a follow-the-leader crew who could not see an $8 trillion housing bubble.
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Seems like the Cult of Cupidity and Reaganomics is NOT GOOD for the country!
The Uber-class is still living in the quaint "What is good for GM is good for America" mentality of the Fifties. The S&L scandals, Enron, and now the aftermath of the flip-this-house fad is knocking the American economy back into the Stone Age. WE THE PEOPLE can fête on cake whilst the limbaughnistas rile up our yahoo brethren..
To pay off debt with debased dollars hurts everyone. "Stimulating" an ecomony by propping up demand with freshly printed money only delays the real economic pain that must one day be faced. Increasing (inflating) the money supply means that the value of the current dollar in your wallet, savings account, 401k, and the reserves accounts of America's foreign creditors, is worth less and less. This is not creation of capital, only the attrition of the value of money. The dollar has no link to any valuable substance or commodity; its worth is subject to supply and demand. The perception that the country has the ability to create capital, pay off debts, and attract investment will affect demand, and the Fed printing more money for spending will greatly increase supply. This will create intense stagflation.
This is a monetary policy recommendation evidenced in the Weimar Republic, or Zimbabwe.
You apparently believe the U.S government creates our money supply, that the government of the Weimar Republic created the flood of money in the German hyperinflation of the 20's, and that
price stability requires that the money supply be tied to a commodity, like gold.
As Mark Twain said, "It's not what you don't know that hurts you, its what you know for sure that just ain't so".
To find out what actually IS so, in contrast to these widely believed falsehoods, see www.webofd
Thom,
Thanks for the reply. I checked out your recommended websites, they're pretty thorough, especially www.moneta
I don't believe the U.S. Government creates our money. The Federal Reserve, a private entity as Zarlenga states in the second paragraph, controls the money supply and therefore the dollar's value through printing money. But we know this (just like the fact that the Reichsbank in Weimar Germany was a similar institution to the Fed- also with the ability to print money). Remember that the Fed bought $300 in long-term Treasuries last March. Where does it get this money? Out of thin air. Why would the Fed do this? Perhaps because smart foreign creditors won't give the Treasury money to burn, so the Geithner has to consult his old colleague, "Helicopter".
Article 1, Section 8 of the Constitution states: "The Congress shall have Power to coin money, regulate the value thereof, and of foreign coin..." If the dollar was fixed to some commodity with inherent value, not just gold, it would be harder for it to devalue.
Reiterating my original idea, here's a quotation from a great admirer of Mark Twain, Ernest Hemingway: "The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunis
Thanks
I think they did see. I think they probably had a very good idea what would happen--people would refinance, and then, based upon technicalities in the agreements, their mortgages would become prohibitive, and then the banks foreclose and get a house. If it didn't make sense, the banks would stop foreclosing on people. Therefore, the housing bubble was a good thing for these banksters.
Why do you think they all still have their jobs? It's not because of incompetence. It's because of they were competent--at making more money no matter the actual human cost. Their concern is money, as in, taking it. And they've been quite successful at that.
One could possibly legitimately make a case for running a deficit for a year or two in the face of such severe economic problems, and the need to provide stimulus to the economy. But what Dr. Baker, Dr. Krugman and others are suggesting is running deficits forever, or at least for the foreseeable future. There simply is no need or reason for that. Despite all of its problems, the US still has the largest economy in the world, and, for that matter, the largest in human history. There simply is no reason for a nation with a $14 trillion or larger economy to not be able to pay its bills and balance its budget. The only reason I can think of is that there are people who profit enormously from the interest being paid on these debts. In 2008 that amounted to over $400 billion of taxpayer money, nearly as much as the entire military budget. The CBO projects that this will be over $800 billion by 2019. That is a monstrous amount of money, and it is money that is then not available for other purposes. This money goes straight into the pockets of the banksters and other corporate parasites. And it is simply not necessary. It is a massive scam.
As a handsome 38-year-old stockbroker, I agree with this column. The benefits of inflation to guys like me are many, while the peons who've been saving in the downturn will be hit hard as they see their savings become worthless; my derivatives-based debts, meanwhile, will be zeroed out. And as for my savings, hey, I"m rich and connected, they'll already be converted into Gold and stashed away before the inflation comes. Keep the columns coming, Dean.
I've seen the future brother...
http://www
Dean -- Isn't the deficit also larger because of several (significantly large) expenditures being moved from supplementals onto the budget proper? Obviously your main point holds, but the fact remains that this distinction should inform whom is trusted in terms of policy proposals to address the deficit.
The 8T$ Housing bubble, is the total lost value of real estate. only some 2% of the loans are in default. They could have been rescued with the Bankster Bonuses.
"Yet, there seems to be a bipartisan consensus that completely missing the biggest economic calamity in almost 80 years doesn't call into question your competence as an economic analyst."
Perhaps, but there is an almost unanimous consensus that congress is incompetent and/or evil, which is always a healthy sign.
No. Congress has always had low approval ratings... which doesn't seem to prevent Congresspersons from getting re-elected. All it does is bring out the crazies who want to lynch some poor census taker.
Our economists didn't miss anything - they were too busy making money. Their reassurances - soft landing, my booty - were always transparent. Did you expect them to call a real estate bubble? Reduce prices? Puh-lease!
Now anyone can see hyperinflation on the horizon - except these same guys, who are trying to jawbone the world out of dumping dollars.
The public has lost the power to discriminate between truth and lies. Thus, reliance on experts, even when they have been proven wrong is a natural thing.
We need to cut our defense spending by at least 80% to get deficits under control. Without a massive cut in this sector, we doom ourselves to economic perdition.
not only to get the deficits under control, but to get our whole future under control. the military/industrial complex that Eisenhower warned us about 50 years ago has been allowed to run amok since WW2. i remember when the Soviet Union collapsed thinking, okay, we can finally disarm ourselves, no sooner had the thought formed in my head that i saw on TV some jerk from the Pentagon talking about how we had something like 14 new vital missions for the military, and it was easy to see that cutbacks were not in the plan.
i used to think lawyers were the worst parasites on our economy but now i realize it is the military. last years budget of $490 billion is probably not even half of the true wealth that this humongous leech sucks from our economy. and for anyone who wants to believe that the military provides jobs and thus helps the economy is overlooking the fact that if these people were not employed by the military they would instead be employed creating additional wealth for our society.
Not only does it make us less wealthy and prosperous and put our children in harms way, but the sick irony is this military makes us less secure. we are a threat to everyone in the world who doesn't see things our way. violence begets violence. we are hated around the world because when we come, death and misery are quick to follow. we are the Evil Empire.
Only economist who follow the Fed's party line are allowed to be considered "reputable
However, your proposed solutions to our current economic problems will do nothing but delay the inevitable corrections that have to occur, and the longer they are delayed, the more painful they will be.
"Modest inflation will also help to erode the debt burden the government was forced to take on due to the housing crash."
Oh, yes--"modest inflation.
It's not departure from the gold standard that makes our present system inherently inflationary. It's the fractional reserve banking system that must have ever-increasing debt, which is to say an ever-increasing level of "credit money" - and increasing that level is inflationary.
The role of the Fed is therefore not to prevent inflation but to oversee a money system that must have it.
Proof: during the Clinton administration, on an occasion when the SS surplus was sufficient to handle the US deficit, the Fed asked for issuance of US debt anyway - because Wall Street needed it.
See Stephen Zarlenga and Ellen Brown on this. also www.moneya
Consider the Connection to:
Going in a NEGATIVE (-) or POSITIVE (+) Direction
(-)___R___(+) direction the choice is ours.
Our health and planet are N D balance.
(sigh) it is hardly short of CRIMINAL, that President Obama has selected as his "economics crew" men who were part & parcel of this ECONOMIC NIGHTMARE -
< The budget situation today looks HUGELY WORSE than it did two years ago. The reason for the deterioration is NOT that the country has suddenly embarked on a massive new round of social spending, undertaken another major military adventure or even emptied the coffers through tax breaks. The reason that the deficit situation looks hugely worse than it did two years ago is that the $8 trillion housing bubble that had been driving the economy finally collapsed and threw the country into the worst downturn since the Great Depression. >
Just 9 months into his presidency, it is an open question if the president who really, truly has "SOCIALIZED" the losses of Wall Street - AT THE EXPENSE of main street and suburban homeowners - will be able to last to the end of his term.
(to put the economics in simple terms, Obama has GIVEN 20+ TRILLION dollars to Wall Street & bankers - http://www
that's nearly TWICE the ANNUAL GDP. Normally, when you spend THAT kind of money, you will have FULL EMPLOYMENT to show for it... as America's OVERNIGHT WWII industrialization did.
Obama's banksters COULD NOT MAKE that TWENTY TRILLION$$ VANISH more effectively, IF THEY TRIED !!!
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