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Dear fellow liberals, the GOP is flat out wrong about the deficit. It's time for liberals to stop buying into GOP rhetoric and make their own story.

Early this month, I received this letter in my inbox from CT Democrat Representative Elizabeth Esty:

Dear Friend,
Deficits matter. We need to balance the budget, but we must be smart about it. We shouldn’t balance the budget on the backs of seniors or at the expense of investments in infrastructure to create jobs In Congress, I’m working for smart, targeted cuts that take a few steps in the right direction.
She goes on to explain how she's cutting 11 billion in subsidies for Big Ag and getting rid of 79 million in wasteful defense appropriations. The mantra is the same as the GOP’s: reduce the deficit, reduce the deficit, reduce the deficit. Esty and other liberal Democrats like her would be smart to stop repeating it, and start pushing real progressive reforms, or at the very least reforms based on sound data.

Let's breakdown how ridiculous all this is—how the GOP is wrong about deficits and how liberal Democrats like Esty are unwittingly propping up GOP rhetoric while effectively doing nothing to change America’s economic situation.

First, Esty is talking about 0.89 billion and 11 billion dollar cuts as if these numbers were relevant to a debt worth 11,500 billion. If the overall debt was actually important, we wouldn't be trifling over such tiny bread crumbs.

Second, Esty is flaming debt fears in the presence of a stable debt. Countries label their debt and deficit as a percentage of GDP, since the only long-term target that matters is to ensure the debt does not grow faster than the GDP. In fact, countries rarely ever pay their debt down. More often they simply grow their GDP until the debt becomes small in comparison.
Before the debt debates began, the US's debt-to-GDP ratio was stable, with both the debt and the GDP growing in concert by 4% per year. The key word is stable. The people who claimed the debt was exploding on us were lying -- they were mostly all Republican. In her letter, Rep. Etsy is unwittingly playing the same con game as the Republicans: she is using the presence of debt as an excuse to pass legislation that's politically convenient to her. In order words, she is riding the coattails of the Republican's disaster capitalism.

The third is that the correct diagnosis for the current American economic woes is not that it has debt problems, it is rather this: American is stuck in a demand-slump recession so deep the central bank interest rate is slammed against the zero lower-bound, and thus the central bank has lost the primary lever they normally use to regulate unemployment. The short word for this is "depression". The United States is in a economic depression, though this one is not as deep and great as The Great Depression, economically speaking, it is the same phenomena.

In a depression, since the lever of interest rates is so-to-speak broken, economies behave in a powerfully counter-intuitive manner. It is one of the great achievements of Economics as a discipline to have been able to capture and demonstrate exactly how.

The main takeaway from these economic studies is this: In a depression, reducing government spending by 1% reduces GDP by more than 1%, making your economy worse. If your GDP is reduced more than your debt, your debt-to-GDP ratio begins to increase, and you are now in a worse place than you started. This is the catastrophe that has been unrolling across Europe as a result of austerity policies. It is a catastrophe so powerful, it is tearing the social fabric of Europe apart and leading to a re-emergence of nazi-ism (in Greece) and Totalitarianism (in Hungary). Very scary stuff. Trying to reduce deficits is a very dangerous and unnecessary path to go down, and the road to recovery is only made worse by cuts in government spending.

One reliable way to end a depression is to arrange a spending impulse which can quickly be rolled down once the economy gets out of depression territory. This is best accomplished with a short spike in infrastructure spending -- which would be perfect for our current situation, since the United States has overall failed to maintain its infrastructure to the tune of 2.2 trillion dollars. Our bridges are out of repair, our trains are outdated or outright missing, our energy sector needs to switch off of coal, etc.

Unfortunately, getting out of a depression is more usually accomplished by going to war (indeed, this is how the Great Depression ended) simply because most countries lack the political maturity to debate and act on the relationship between depressions and short spike in infrastructure spending.

Representative Etsy should be trying to explain this to her constituents, rather than letting herself be wrapped by the GOP's disaster capitalism narrative.

Diary by Linnea Paton and Guillaume Marceau.

Originally posted to nealinnea on Fri Aug 30, 2013 at 08:49 PM PDT.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  our president prefers to call it bipartisanship (2+ / 0-)
    Recommended by:
    psyched, Sunspots

    as he leads so the underlings will follow, trying to out cut the republicans

    Msongs www.hawaiilovesart.com batik, digital design, photography, songwriting

    by Msongs on Fri Aug 30, 2013 at 10:19:19 PM PDT

  •  Very fine diary (2+ / 0-)
    Recommended by:
    katiec, Sunspots

    Republished to Money and Public Purpose
    .


    For the first time in human history, we possess both the means for destroying all life on Earth or realizing a paradise on the planet--Michio Kaku.

    by psyched on Fri Aug 30, 2013 at 10:21:33 PM PDT

  •  Small correction (0+ / 0-)

    You wrote that US DEBT was a stable 4% of the GDP then give a link to the NYTimes saying the DEFICIT was a stable 4%.

    US Debt, per the US Treasury Dept. is 16,700 billion and the Department of Commerce puts the estimated 2013 GDP at 16,600 billion. A debt to GDP rate of ruffly 101%.

    Now, if we can keep the deficit to GDP low that will be great in the short (10 years) term.  But in the long term an ever increasing debt that never goes down just is not a good thing.

    Stupid question hour starts now and ends in five minutes.

    by DrillSgtK on Sat Aug 31, 2013 at 09:09:42 AM PDT

    •  Re: Small correction (0+ / 0-)

      Thanks for offering a correction, I appreciate it.

      The word "debt" in the sentence is correct, though on review I can see the sentence is not at all clear. I have changed the text to the following. Hopefully this removes the ambiguity that was present.

      > Before the debt debates began, the US's debt-to-GDP ratio was stable, with both the debt and the GDP growing in concert by 4% per year.

  •  Fiscal cliff realities (0+ / 0-)

    Rogoff's fiscal cliff analysis makes general sense.  

    There is no magic wand of unlimited funds/resources.   At some point, people stop lending you money and then you hit disaster.  This works for individuals, family units, corporations, counties, states and nations.

    Krugman's point is that Rogoff's It can't Happen Here had misplaced where the cliff was and the US still had room to safely borrow.   Krugman, to my knowledge but I'm pretty sure about this, did not deny that at some point the creditors determine they'll stop lending to the borrower--even a nation.   Krugman just thinks the US had more room to borrow and it was a bad time not to do so.  I agree with that.

    Living beyond your means is neither a good or sustainable long term strategy.  

    For politicians, it is very hard for them to look at long term problems since in the long run people are all dead and people tend to vote what they perceive as their self interests, consciously or not.

    A better criticism of the Republicans is that, at the Federal level, they have NOT been fiscal conservatives.  See, Stockman Triumph of Politics and Bruce Bartlett Imposter

     

    •  Re: Fiscal cliff realities (0+ / 0-)

      The argument goes like this.

      The size of the stimulus program required to avoid the 2008-2013 Little Depression would have amounted to a short-term increase of 4% of the country's debt-to-GDP ratio, from 72% to 76%. From here there are three main points:

      1. We have ample evidence that this is not anywhere near the country's limit of its ability to borrow. There is absolutely no fiscal danger.

      2. In the long-term, the trauma of the Little Depression structurally damages the GDP potential of the country, which makes the debt larger in comparison. In other words, in the long-term, the stimulus program more than pays for itself.

      3. The United States has ample inventory of deserving infrastructure work. Doing these as part of a stimulus program makes it possible to fund them using the low interest rates available during the depression, reducing their costs overall. In the long-term, this helps the fiscal position of the country.

      Thus if the goal is to secure the long-term fiscal future of the country, a short stimulus pulse would have been preferable. The question then is, if Republicans claim to be interested in the long-term fiscal future of the country, why did they oppose the stimulus?

      The answer is, their interests does not lie in long-term fiscal future of the country, but rather their goal is to reduce taxes on the rich. It has been so since the 1980s, with the creation of the "starve the beast" strategy. They are merely recasting and willfully misdiagnosing the the Little Depression in order to scare the population into supporting their ends. The repurposing of a national catastrophe in order to pass policies supporting the interests of the rich (more specifically, of the capital class) against the interest of the labor class is known as Disaster Capitalism.

      In my view, that is the better criticism of Republicans.

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