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View Diary: Wall of Shame: Republicans Lose Intellectual Cover for Austerity/Spending-Cut Policies (87 comments)

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  •  The Debt/GDP issue is more complex than the ratio (0+ / 0-)

    Why the ratio is high is critical.

    Indicators need to be evaluated in context.  The meaning of the rate a person breaths needs to be considered in context. A person who is breathing hard because she just sprinted 400 meters is very different that the person who slowly  climbed one flight of stairs.

    Consider three very different situations causing high debt/GDP:

      1) The country has been in a war of WWII proportions, where
           the economy shifted heavily to wartime production. But
          now the war has ended.

      2) Massive spending on needed roads, schools, universities, trade schools, ports, industrial centers, low cost energy, etc.,

      3) Massive spending on military equipment and bases from
          Congress seeking jobs for member districts.  More military
          spending outside the US because its cool to be a military
          superpower.  Heavy spending on healthcare for those sure
          to die in the next 6 months of life, providing incomes for
          the poor who are able to work, to live on but no useful
          work is received in exchange. Oversized pensions to
          government workers, while paying market competitive
          wages when they were working.

    In the first case, the debt/GDP is not that bad, as the cause for it has ended and the economy can bring the ratio down through GDP growth and deficits lower than GDP growth. .

    In the second case, the debt is financing what can enable higher GDP growth if other things work out.  This expansion of investment will continue to the extent that it proves effective at enabling private sector growth and will be cut back if not productive.  The high GDP/Debt is temporary as the later resulting higher GDP growth brings the ratio down.  However this can be sustained for a long time.

    In the third case, the debt is caused by current consumption that does not enable future higher growth rates.  The spending may have a strong humanitarian component to the poor and sick, but this is still debt financing consumption.  In addition, the people receiving funding for this spending will fight hard politically to keep the funding indefinitely, as they are dependent on it. This is not sustainable because it is not matched by higher private sector GDP growth and may cause lower GDP growth by higher taxes reducing private sector investment and government crowding out capital through its higher debt.  This spending may even crowd out valuable government spending that increases private sector growth as the items in case two do.

    The most important way to protect the environment is not to have more than one child.

    by nextstep on Wed Apr 17, 2013 at 11:09:10 AM PDT

    [ Parent ]

    •  Contention re: third case (1+ / 0-)
      Recommended by:
      Auburn Parks

      the debt financing consumption that would help the sick and poor (by the way money and spending are fungible, it doesn't matter where it comes from --whether debt financed or not) -- would go where?

      It would go into businesses, who are holding tons of cash and withholding investment based on sluggish demand.

      So if we pumped out stimulus to create jobs either through spending on humanitarian things or spending on investment in roads, either way -- it will boost demand and that money won't just disappear into some sick or poor person, it funnels THROUGH those people INTO businesses, triggering business processes systems that will then spur corporations to actually invest their cash sitting on the sidelines.

      The money is out there -- banks have excess reserves and are ready to lend, but we're stagnant, we need a JOLT, and no matter where that money goes to, it will increase aggregate demand to give us the kind of reinvigoration of the economy needed.

      This isn't about crowding out, or a misallocation of funds from productive activity or unproductive -- those are all vague Austrian economic terms that aren't empirically sound.

      There's under 80% capital employment, and U-6 is over 13% in the labor market. Every single day that we don't push our dollars to the market to mobilize this capital and labor is wasting money.

      But in general you're right about debt/gdp issue being more complex, that's one of the major problems with the R&R study--it oversimplified it and tried to create a physics-style "threshold" at 90% universally. But economics isn't physics, and we don't have rules like that :)

      Deficits don't matter, jobs do.

      by aguadito on Wed Apr 17, 2013 at 11:27:19 AM PDT

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      •  "money is fungible"...man you just beat me to it. (1+ / 0-)
        Recommended by:
        aguadito

        I rather enjoy Prof Stephanie Kelton's line...."cash registers don't discriminate"
        The only added benefit of scientific or infrastructure investment over direct cash transfers is the long term return on the money.   Don't get me wrong, I completely agree that both ought to be pursued but faster internet service or basic scientific R&D have compounding benefits above and beyond the immediate stimulative jolt, even if that jolt reverberates or is multiplied by the velocity of money (as the infrastructure investment spending etc has the same multiplier effect)

        "The Earth is my country and Science my religion" Christiaan Huygens

        by Auburn Parks on Wed Apr 17, 2013 at 11:35:28 AM PDT

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        •  by the way (0+ / 0-)

          have you seen the latest velocity numbers?

          hannah posted in a different story calling attention to it

          It is the loweest velocity figures we have on record TO DATE!

          it's so obvious that we need a nice fat stimulus package, to spend on ANYTHING, to fill the labor and capital unemployment gaps.

          btw i haven't heard Stephanie Kelton's line on cash registers, but I'm a bit fan of NEP and the UMKC researchers.

          i recall seeing one of her presentations where she described unemployed individuals and unemployed capital as "leaving money on the table"--which is what inspired me to create The Lost Output Clock -- which shows the lost production we face while we ignore the unemployed and slow growth and don't address the issue!

          Deficits don't matter, jobs do.

          by aguadito on Wed Apr 17, 2013 at 12:02:35 PM PDT

          [ Parent ]

          •  that is a terrifying graph no doubt about it (1+ / 0-)
            Recommended by:
            aguadito

            It makes perfect sense though, banks (in the form of interest payments on $42+ trillion of private sector debt or 300% of GDP) are where money goes to die.  All that money spent on interest overhead would go to buying productive goods and services instead of asset price increases for the wealthy.  What a shame.

            http://www.nakedcapitalism.com/...

            "The Earth is my country and Science my religion" Christiaan Huygens

            by Auburn Parks on Wed Apr 17, 2013 at 12:35:26 PM PDT

            [ Parent ]

      •  There is however a fundamental difference (1+ / 0-)
        Recommended by:
        aguadito

        between employing people through expenditures that enable higher GDP growth and expenditures that provide the unemployed income without receiving productive work in exchange.

        The most important way to protect the environment is not to have more than one child.

        by nextstep on Wed Apr 17, 2013 at 11:38:49 AM PDT

        [ Parent ]

        •  correct (0+ / 0-)

          but how do you define productive work?

          there are people who get paid to do absolutely absurd things, like harass innocent petty drug users.

          is that "productive" work?

          i'd say it's more productive to spend $50,000 on a social worker taking care of a guy with a drug problem, than to spend $50,000 paying a guy to beat the shit out of a pot-smoker and drag him over to a prison where we pay $10,000 to lawyers and judges to process him in a legal system, rather than giving him a living wage to consume that production of businesses, who will then have more money to invest out.

          It's different for private individuals than governments..

          If you're a PERSON and you finance consumption with debt -- then you've got a different kind of problem, because you're not contributing it to an investment that will produce income for you to pay of the debt.

          If you're a GOVERNMENT then you don't care, you're not paying for consumption that disappears, you're paying for Person A to consume goods produced by Person B who receives Income and then can invest or consume the money that the state has essentially produced out of thin air on a computer.

          So while you're right, we should avoid deficit spending on unproductive activity as a general rule -- try to put that into perspective with all the truly unproductive and anti-social spending we engage in. The issue here isn't over-spending on socially beneficial programs for sick and poor, it's a misunderstanding by many of what "productive" really means.

          Deficits don't matter, jobs do.

          by aguadito on Wed Apr 17, 2013 at 11:57:48 AM PDT

          [ Parent ]

          •  I was thinking more conventionally (1+ / 0-)
            Recommended by:
            aguadito

            I would oppose stimulus programs based on massive spending on police against victimless crimes, related criminal proceedings and building prisons.  Although, in California we have seen the prison workers union (surprisingly powerful for its size) effectively push for this in years past with "three strikes laws."

            The most important way to protect the environment is not to have more than one child.

            by nextstep on Wed Apr 17, 2013 at 12:13:56 PM PDT

            [ Parent ]

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