Economic Good Sense

Sadly there is too little "good sense" among politicians. But Mark Thoma has written an article that provides much of it. Here's the bit that caught my eye:

Boom times and recessions for entire economies are much the same. During boom times it is very costly to divert resources to construction and repair of the infrastructure necessary to promote economic growth. But during the economic winter, i.e. in recessions, when large quantities of labor, equipment, and raw materials are idle, the cost of such activities is relatively low. Governments that take advantage of this will be in a better position to compete in the global economy than governments that allow labor and other resources to sit idle waiting for things to improve. It does require an increase in the deficit, but if we follow the farmers’ lead and pay off the debt during boom times – something we’ve had trouble doing – we will be better off.

That last sentence is the killer. The politicians have failed to pay off the debts during good times. Clinton piled up surpluses but Bush came along and used Greenspan to argue that "these surpluses will mean the bond market will wither away, we can't allow that!", so Bush handed out tax cuts to his buddies, the ultra-rich. Bush did that just at the start of a bad recession, the dot.com bust. So the surpluses quickly disappeared. Now the US needs funds to stimulate the economy, but it is in a deep, deep hole because the Bush ideologues purposefully drove up the debt in their effort to shrink government. Yep, they've hamstrung government. So now in lean times when millions of people are desperate for help from the government, the cupboard is bare. The right wing ideologues got what they wanted: a hamstrung government unable to assist citizens!

There is much wisdom in Thoma's article:

Analogies between the government and the private sector are a popular means of justifying austerity, but government’s ability to print money and impose taxes invalidates many of these comparisons. Government can use its powers to smooth fluctuations in economic activity. During bad times, the government can offset lost private-sector demand with spending that increases the deficit. Reducing the deficit in a recession – Obama’s belt-tightening analogy – reinforces the decline in private sector demand instead and makes an already bad situation worse.

Sadly politicians don't listen to economists. Instead, politicians are guided by ideology: deficits are bad. But if this was seriously believed, nobody would buy a house. You would work all your life and somtime in your late 50s you could afford your first house. That is crazy.

The modern consumer society was born in the 1920s with consumer credit. The big new factories of the booming 1920s needed customers so they created consumer credit. That mean people could have things they needed earlier in life. You smoothed your economic life out. In your 20s when you found a family you are short on cash and need many things. In your 50s and 60s your children have moved out and you are cash rich and have nothing to spend it on. Building a consumer society around credit smooths all that out. But the ideologues of today want to go back in time. Before the booming consumer times of the 1920s, back to the relentless grinding depression after depression of the late 19th century when gold was "real cash". That was a time when most of the population was dirt poor, where the wealthy had servants, and the "little people" knew their place!

If you hanker for the "good old days", then read this post by Maxine Udall entitled "We've Come a Long Way". Read her post. It will help you understand the debate between the "haves" and "have nots".