AND THEN…

Posted in Rants on October 25th, 2010 by Ed

Mike has a great piece up on the fallacy of austerity of a means of spurring economic growth. I encourage you to read it. Playing off of last week's discussion of the Magic Black Box theory offered by Carly Fiorina and Ron Johnson, let's do a quick thought experiment on this topic.

It's the morning after the election. Teabagger America has delivered. The GOP has won not only the seats predicted before the election but dozens and dozens more. Almost every Democrat in America has lost. When the new Congress is sworn in on January 3rd it will have 75 Republicans in the Senate and 380 in the House.

Immediately the new GOP Supermajority goes to work on the Federal budget, just as they promised. Through a series of cuts ranging from the draconian to the merely brutal they manage to debride the budget of over $1.3 trillion in just a few short weeks. Although it seems unthinkable now, the budget is successfully brought into balance. Huzzahs abound.

So, great. Now what? (Cue the Dude, Where's My Car "And then…" skit.)

What changes? What gets better? No one has been willing or able to explain what the benefits of "lower spending" will be, either in the real-world or abstract economics textbook sense. The Ron Johnsons of the world can't explain how their magical remedy will reduce unemployment. I mean, are there businesses in the U.S. right now that aren't able to hire because the Federal government spends too much money, especially bearing in mind that a vast portion of the private sector depends on government contracts? How will the balanced budget make up for, let alone stimulate, the drop in consumer demand that will result from kicking millions of people off of their current benefits (which would presumably be necessary) such as unemployment compensation, Social Security, and so on?

This dilemma speaks directly to a fundamental misunderstanding – or should I say misrepresentation – of the core economic issues in the current crisis. Unemployment is not high because of the deficit. Interest rates aren't high because of the deficit. In fact, they aren't high at all. They're mind-numbingly low, with 30-year fixed rates available at just over 3% and the Federal funds rate still pegged at zero. Property values have not plummeted because Congress spends too much. The only relationship between the Federal budget and any of these problems is that they would be worse if Washington and our various state capitols were not propping up a sizable portion of our economy.

The problem, the one whose name we dare not speak, is that 30 years of stagnant wages (except for the top 10%, they're doing great!) have killed demand. The void was filled with cheap, easy credit concurrent to political and technological changes that persuaded growing industries to expand in China or India rather than in the United States. And that's why this whole argument is so very, very stupid independently of the absurd notion that Republicans are going to do anything but nibble at our budgetary issues. Congress spending less doesn't solve any of these problems. Cutting taxes? Yes, that might provide a cheap, transient bump in demand, which will certainly be a boon to the Chinese factories churning out all of our consumer products. And then?