Tuesday, August 31, 2010

Don't Get Fooled Again

During my freshman year at William & Mary, my freshman seminar class had a debate between a country lawyer Democrat and an Wall Street Republican.  In the debate, the Republican crushed the Democrat when he attacked Bill Clinton over the weakening dollar.  Now, the beating didn't occur because the Republican was right, but rather because the Democrat didn't have the foggiest understanding of economics.  And when the Republican came to our class the next day, I managed to get the Republican to admit he was bullshitting about the weakening dollar because he knew the Democrat had no knowledge of economics.

From that moment on, I realized that if Democrats were going to win debates about the economy, they have to know economic theory, or else they'll get rolled by Republicans.  And finally, we're in a situation where knowledge of economics is a good thing, and we end up getting cowed by the Republicans again.  This tweet by John Boehner is the single most ignorant thing about the economy ever.  He wants to create jobs by cutting government spending. . .Ugh.

Here's the problem with Boehner's prescription - we're not in an inflationary cycle, we're in a deflationary cycle.  Yes, the Budget Deficit is huge, and normally that would mean that there would be large inflationary pressures, but there aren't.  Inflation is phenomenally low at 1% (ish), and the economy still sucks.  That's because we have a demand side recession - businesses and customers aren't spending - rather than a supply side shock - where there's no money to invest.  Or, think 1940's instead of 1970's.  So cutting government spending is like giving a laxative to someone who has diarrhea - its only going to make things worse because now no one will be spending.

Cutting taxes is a less stupid idea, but not exactly brilliant either.  Again, there is no problem with the money supply - if anything, there is too little money in the economy right now, so increasing the monetary supply through tax cuts won't help at all.  It might encourage some people to spend a little more, but not enough to help.

No, the only thing that will work here is a massive increase in domestic spending.  Maybe not New Deal big, but close.  That way, government spending will increase overall demand, and people will have jobs, etc.  Now, I understand the whole, if we spend it, we'll end up spending it for a lifetime theory, so write in Sunset clauses into the spending legislation.  But do something.

And ultimately that's the problem - right now there's no Democratic leader who's saying this.  They're all cowed by the GOP rhetoric on the economy, even the dumb rhetoric.  If I was Obama, I would make this case in a national address every single week until Congress passed the right legislation.  Of course, what I'm saying is exactly what Paul Krugman, a NOBEL PRIZE WINNER IN ECONOMICS has been saying for the PAST YEAR AND A HALF, but what the fuck to we know.  Ugh.


  1. There is no Democratic leader saying this because it is a bad idea. The only way out of this Demand Recession is to create an environment of certainty. I am not spending...not because I don't have cash, but because I am scared to death of what rule, regulation or punitive punishment lies around the next corner.

    I am not alone. My company, a fortune 100 company, is not spending or lending. Why? Because we really are concerned that there is no way to accurately measure risk in this environment. Provide some certainty and the flood gates open.

    If the government is going to spend more money, then i am going to hold on to mine even tighter. I already know that I am going to be "Punished" because I am moderately successful, I just don't know how badly. If this administration ramps up spending even more, then I am going to hold even tighter because I know it is going to be more painful down the line.

  2. Those are good points on certainty. If you found out tomorrow that the marginal tax rate was going up to 70% in the next five years, you'd would be pissed, but you'd also be able to adapt to the certainty of the tax increase. This stop-start shit is ridiculous.

    That said, I should be clear that I don't think of the income tax as a punitive measure on the wealthy (though that argument exists). For me, the income tax works because the government needs to pay for stuff, and it makes sense to tax those who can most afford it first.

    Also, if there was a high marginal income tax rate, rich people would invest more in small businesses (or just go to Vegas), because fuck it, its not like you're going to keep the money anyway.