Explaining Basic Economics

There are a lot of right wing fanatics running around complaining about Keynesian spending. They are in full panic because they claim you can't produce dollars out of nowhere. If you spend a dollar that means that somewhere else a dollar won't be available to be spent. They have a crazy notion that dollars are a "fixed" resource. But they aren't. They are simply promissary notes. When the economy is in the doldrums you are not stealing bread out of the mouth of a baby by spending a borrowed dollar. That baby would have no bread because the parent is unemployed. Only by spending the dollar can you goose the economy and put a dollar into the hand of the parent.

The right wing fanatic is right when the economy is running at full capacity. At that point, An extra dollar of expenditure can't magically make production spring into existence. But when there is unemployment, that dollar can put unused resources to work! That's the very point of Keynesian spending.

Here's a bit from a blog posting by FT economics writer Martin Wolf expanding on this point:

“You can’t cut debt by borrowing.” How often have you read or heard this comment from “austerians” (a nice variant on “Austrians”), who complain about the huge fiscal deficits that have followed the financial crisis?

The obvious response is: so what? Shifting debt from people who cannot support it to those who can - the population at large, both now and in future - seems to make a great deal of sense if the alternative is an economic collapse that leads to a loss of output and investment now and so of income in the long term. Indeed, under the latter alternative, even the fiscal deficits may end up little, if any, smaller if one tries to slash them, as the UK could be about to discover.

Before leaping to that conclusion, however, let us approach the issue of de-leveraging - or debt reduction - analytically. Between 1994 and 2007, total US non-financial private debt rose from 118 per cent of gross domestic product to 173 per cent, the highest level in US history. Over the same period, US financial sector debt rose from 54 per cent of GDP to 115 per cent. A great deal of this leveraging up of the economy (matched elsewhere, notably in the UK) was based on false premises: borrowers and lenders thought that the assets against which they had borrowed would be worth more than turned out to be the case.

How, then, can people reduce their indebtedness or restore their net worth, after an unforeseen fall in asset prices? There are three mechanisms: sale; bankruptcy; and frugality. Let us consider each of these, in turn. But remember that, at the global level, debt cancels out: net debt is zero. So, in paying down debt, one is also reducing credit by an equal amount.

There is more, go read the whole article.

What is particularly infuriating about all this noise and screaming by right wing fanatics over "deficits" is that...

• They had no problem with Bush running up huge deficits to give tax cuts to their ultra-rich buddies. One estimate is they added $1.7 trillion to the long term debt.


• They had no problem with Bush running up a half trillion dollar long-term deficit for the Medicare Prescription Drug bill.


• They had no problem with Bush declaring a "war of choice" in Iraq that will cost of three trillion dollars.

Obama is allowing the US federal debt to grow to keep people employed. But the political right is outraged. They hate to see money spent to feed, clothe, or house the poor. They had no complaints about long term debt increased to cut taxes for the rich, to provide a drug benefit to buy votes, or to fund an unnecessary "war of choice". The ordinary American should be outraged that the political right's agenda is so anti-people but pro-spending money to give money away on useless things that benefit questionable recipients.