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Crossposted from http://leftbankblog.org

I'm amazed that, in both parties, there are so many people who believe that our financial crisis was caused by debt and the deficit (which has shrunk in each of the last 3 years and is projected by the CBO to shrink even more in 2013).

You don't try to pay down debt and the deficit when the economy is weak. This is basic Economics 101 - like the first day at airline pilot's school when the instructor tells the students "Don't shut off the engines while you are still in the air!"

As England, Ireland, and other European countries are learning to their great pain, austerity has only deepened their recessions, lowered their GDP, and heightened joblessness. Austerity causes economic contraction and recession, and the only force that can cushion that contraction is monetary policy support from the FED. Given that interest rates are now, for all intents and purposes, zero, the FED has no room to maneuver to stave off the destructive consequences of austerity.

Basic economic theory (as opposed to the fringe Austrian School, a heterodox economic philosophy that was considered pretty much a joke among economists until Ronald Reagan and succeeding Republicans embraced it) says that the ONLY way to strengthen a weak economy is to spend money on job creation and other investments in the future. Only when the economy is strong enough to withstand the negative effects of debt and deficit reduction should these LONG-TERM problems be addressed.

This is the BEST time to be borrowing money to expand the economy, given that money is virtually free to borrow. We should be borrowing and spending on job training and creation, improving public education (EVERY student deserves a quality education, not just selective charter or private students - and to remain competitive, the country needs it too), increasing PELL grants for middle-class college aspirants, giving loans to entrepreneurs and small businesses (the big banks have their doors welded shut), and, perhaps second only to job creation, rebuilding our corroding infrastructure.

Every dollar we take away from economic investment and put toward debt reduction results in something like 2 dollars lost to GDP according to the newest IMF studies - and, before this study, they had a long history of approving of austerity policies they are now rethinking.

The largest taxpayer-financed, government-managed work stimulus plan in the country's history was World War II. During the war, our deficit-to-GDP ratio was over 2 and a half times the current ratio - and joblessness was about 1% !!!

Out of this stimulus, we saw the birth of the comfortable middle class, a financially stable working class, and the best economic period in our country's history. Since 2001 (with the exception of Clinton's semi-Keynsian economic policies that turned record deficits into record surpluses and lowered a 7.8% jobless rate to 3.9%, everybody except the top fringe of the top quintile has lost ground, as has the country as a whole.

The bottom 80% of Americans currently own only 7% of the nation's wealth, while the top 1% have 42% of the wealth and, adding in the next 4%, the top 5% have  something over 74% of the wealth.  Nobody is going to risk being a "job creator" if the middle class is unable to afford to pay for increased products and services.

If the situation is so "dire" that the GOP "needs" to cut critical programs that support the most vulnerable, but doesn't feel any necessity to touch the taxes of those who can more than afford to pay them, then there is something going on in that party that simply does not pass the "stink" test.

When 93% of the money from rising GDP in the last couple of years goes to 1% of the people, we DO have the money we need - it's just amassed in too few hands to benefit the entire society.  Ayn Rand's "individualism fetish" is the path to anarchy, chaos, and, ultimately, dictatorship, unless paired with a social contract and equally strong sense of community throughout the society.

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Comment Preferences

  •  Tip Jar (21+ / 0-)

    "When plunder becomes a way of life for a group of men living in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it." --Frederic Bastiat, French writer and economist, 1850

    by Beartooth Bronsky on Fri Feb 08, 2013 at 03:02:07 PM PST

  •  Every theory has its limits (2+ / 0-)
    Recommended by:
    Sparhawk, slowbutsure

    There are probably times when increasing the supply of capital through tax cuts will help to booster the economy, but I believe you are correct that in general it isn't a great theory.  Government spending certainly does stimulate the economy, but unless the spending is spent on something that will benefit the economy in the long term, it often just leads to a worse boom and bust cycle.

    OTOH, the idea that since we are not growing very fast (a developed economy does not often grow much more than 3%) means we need to keep spending ignores the fact that our GDP/debt ratio is approaching 1:1.  At some point interest rates will increase, and the payments to the debt will balloon.  Cutting too much will cause an austerity spiral, but spending too much is not sustainable, and can eventually require cuts that will inevitably spiral down.  That is a real lose lose proposition.  

    What we need to be focused on is taxes and spending that are the most efficient and productive.   Kind of like changing lanes on a crowded freeway, we need to accelerate to get in front of the guy behind us, but not us much that we run over the guy in front of us.

  •  Most Leadership Understands This. (5+ / 0-)

    They're pushing austerity because of what it will do, ultimately leading to eliminating the social safety net and entitlements.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Fri Feb 08, 2013 at 03:44:06 PM PST

  •  BBronsky - we haven't "paid down the debt" (0+ / 0-)

    since the Clinton administration and neither the Republicans or Democrats have any near term plans to make debt repayments. Both parties support continued deficit spending at very high levels which have added to the debt every year since President Clinton left office. The political battle is about how large will the current year deficit be, with the Republicans favoring a somewhat smaller deficit.

    It looks like the sequester will be implemented which will reduce the deficit by about $100 billion a year out of a total US federal budget of about $3 Trillion.

    "let's talk about that"

    by VClib on Fri Feb 08, 2013 at 04:05:17 PM PST

    •  It is the debt service ratio and (0+ / 0-)

      its relationship to nominal GDP growth that is the most important factor in determining whether the debt and deficits are sustainable. If treasury interest is greater than GDP growth, only a budget surplus will prevent unbounded growth of debt service. If GDP growth is greater than treasury interest, persistent deficits lengthen the time to equilibrium and increase the upper bound, but are sustainable with debt service settling at a constant percentage of GDP. An examination of 1953-2012 data shows that interest was less than GDP growth from 1953 to q3-1979. We entered a high interest rate regime from q4-1979 thru 2000, with potentially unbounded growth in debt service until Clinton produced surpluses. Government sector surpluses are by definition private sector deficits - in Clinton's time financed by asset bubbles in real estate and equities. From 2001 on we went back to a low interest rate regime which except for q4-08 to q3-09 has been lower than GDP growth. Consequently, even with the current deficit and additional needed stimulus, we are on a complete sustainable path.

      The argument that interest rates are set in an open market and could go up on the whim of "bond vigilantes" is founded on a fundamental misunderstanding of the monetary system. The Fed sets interest rates in the overnight market. They control the rate because they control the reserves on which the rates are founded. The term structure of the bond market is anchored to the overnight rate, and the Fed announcements of future intentions which factor in inflation, unemployment and other parameters. So the interest rate on the debt is not a market rate, it is a policy decision.

  •  Well, we could be using clean, cheap (0+ / 0-)

    thorium power, but we are just too stupid:  

    http://www.thoriumenergyalliance.com/
    But don't worry, China's already eating our lunch:  
    http://www.telegraph.co.uk/...
    Hard to explain the dismal science to regular people.

    ...Son, those Elephants always look out for themselves. If you happen to get a crumb or two from their policies, it's a complete coincidence. -Malharden's Dad

    by slowbutsure on Fri Feb 08, 2013 at 04:15:38 PM PST

  •  It makes sense once you realize (0+ / 0-)

    It's not about the debt.
    It never was about the debt.
    It never will be about the debt.

    It's about getting rid of programs conservatives don't like.

    The debt debate is just a means to that end.

    If the pilot's good, see, I mean if he's reeeally sharp, he can barrel that baby in so low... oh you oughta see it sometime. It's a sight. A big plane like a '52... varrrooom! Its jet exhaust... frying chickens in the barnyard!

    by Major Kong on Sat Feb 09, 2013 at 06:17:01 AM PST

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