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.

A Wild and Crazy Way to Stimulate the Economy

Okay, so with everyone freaking out about spending (including Germany's totally insane request for all governments to cut spending), and with the World (save South America) still in economic doldrums, and with long-term unemployment booming, let me add my two cents.

First, cutting government spending right now is madness.  There are three reasons to cut government spending: 1) Inflationary pressures, as in there's too much money in the economy and prices are going up; 2) High interest rates - Government is crowding out private investment by increased spending; or 3) No one will lend the country any money (See Greece).  Right now, NONE of these reasons exist.  Inflation is nonexistent (and deflation is still a threat), interest rates are low, and we still have countries willing to give the US money (and given the fact that we have the world's most powerful military, no one is really going to cut us off). 

Given that a national economy is a mix of consumer spending, business investment and government spending, cutting government spending when consumers and businesses aren't spending is a recipe for economic doom.  In fact, the Great Depression was extended by several years when FDR decided to cut government spending.

That said, I don't necessarily like the idea of having people on unemployment for as long as they are.  Unemployment payments are, by their very nature, temporary solutions.  Right now, unemployment benefits are stretching 99 weeks - almost two years.  And so, I don't think we can continue to go down this path.  Moreover, many of these long-term unemployed are long-term unemployed for a reason - the jobs they lost are, most likely, gone forever.

But that doesn't mean that we should lose hope.  I have one of those wacky, no-one-will-ever-consider-it ideas.  Let's give these long-term unemployed individuals small business loans of $10-$20 thousand dollars (or more, depending).  Give these people the capital to start their own business.  Now, most of the money, without question, will go down the drain.  But even if one-tenth of one percent of the loans actually works out, it'll be worth it because for that short period of time, we will have hope.

In the meantime, the U.S. should invest heavily in infrastructure improvements, and encourage local governments to streamline their regulatory processes.  Anyway, that's my idea.  Your thoughts?

So, how do we stimulate the economy?