Thursday, March 31, 2011

Austerity is not the Answer

It is difficult to say in my own words why I believe cutting deficits is not the solution to our economic problems. I read a lot from the blogosphere to see what the "expert" economists (libertarians, progressives, moderates, Keynesians, Austrians, monetarists, etc.) are saying and have concluded that cutting deficits would not be good for the economy.

First, it is important to distinguish long-term fiscal sustainability from short term sustainability. Many economists have noted that projected Medicare costs are unsustainable. Yet, many also say that addressing that issue by cutting deficits now would only make things worse. I have come to believe that we need deficits now, and reduce them later. This can come through tax cuts, spending increases, or both. I’m more in favor of tax cuts with a more progressive allocation of government spending. It has been noted that our tax system is more progressive than European nations, but that our transfers and distributions are less progressive.

Other economists are in favor of more monetary stimulus, something that is vehemently opposed by staunch libertarians who want to oust the Fed. But the Fed is necessary to stabilize prices, the gold standard, or any other standard won’t work. This is accepted by an overwhelming majority of economists. Those in favor or more monetary stimulus think that inflation should be pushed higher to make up for the disinflation we’ve experienced that past few years and that the Fed should explicitly target nominal GDP growth of 5%. Quantitative easing is sort of attempting this kind of monetary policy, but these economists point out that more can be done.

Cutting deficits now will only worsen unemployment, investment, and expectations which are important for planned investment and loaning purposes among other things. Part of the reason deficits are as high as they are is because of the large drop in tax revenue caused by falling overall wages and profits. The stimulus isn’t the major reason for the deficits; in fact, it only merely offset the falling state and local government expenditures. Cutting back that spending now, will only further reduce revenues and overall spending in the economy, making deficit and debt projections worse. The cure is growth and revenue, not cutting back on government.

Government, in my view, should be allocated more efficiently and progressively. It should be made to meet societal goals and not so much economic goals. There are many ways to increase government spending in efficient ways beneficial to the whole society and more importantly to those who need it the most. One of those is an employer of last resort program that employs the unemployed for a modest wage to do something beneficial for the community rather than simply receive an unemployment welfare check. Another would be to invest in high-speed rail or fiber optic cables to improve the country’s overall infrastructure. Everyone who drives a lot knows the need for better roads and bridges. These projects keep people working and infrastructure from falling apart.

Another idea that I think is good is allocating funds to states and local governments to prevent cuts in education and police forces. This is a more efficient way of spending government money than through federal bureaucratic systems, it helps maintain safety and security in trying times for many, and prevents that fallout in education that only sets the poor back at a further disadvantage and even affects the well-off. Education is very important to the long term health of the economy and the society as a whole.

Cutting back on welfare programs are not a good way of meeting the societal goal of taking care of the poor. There are problems with welfare programs, but these people cannot be forgotten or simply cast out as being lazy or unwilling to work or as evildoers. Some fell on hard times not of their own doing and some made bad decisions and need support to get back on their feet. Welfare alone does not accomplish this, but it can enable the personal charity and support that our poor really need.

I think monetary policy is our best bet yet. We need to increase inflation and nominal GDP growth to “grease the wheel” so to speak. Deficits through either tax cuts or better spending through the ideas I outlined above would also be good ways to boost our economy, but taking the route of austerity now that so many others have taken before in the midst of high unemployment and low growth will simply pull us back down. I don’t believe the “inflation hawks” or the “bond vigilantes” have made good arguments about runaway inflation or the possibility of extremely high interest rates on government debt. I believe those outcomes are possible at a future date if long term deficit issues aren’t addressed; but those issues are only made worse by doing what seems to be the obvious cure: cutting back now.

The real sacrifice passed on to our children and future economy is the price of not producing our capabilities now in addition to the hits in education that they will bear. Debts are not the threat, unemployment and lack of production is what should worry us.

Amidst all this, I want to emphasize that our real goals should be ordered toward the spiritual and material welfare of persons throughout the world. Policies that emphasize material growth only or domestic growth only I think are misguided in their goals. Economic health should be one of our goals, but only as a means to the end of spiritual health or our ultimate goal of heaven. Economics is not outside the bounds of morality, and because it is a social science it is far from the predictable “laws” of physics or chemistry. Humans are often irrational and unpredictable. Capitalism hasn’t been around that long and as I’ve said before, there is no reason to expect it to stick around forever either.

I want for everyone to have the ability to work, receive an education, provide for one’s own needs and the needs of one’s family, be taken care of in times of great need, but more importantly to recognize that there are more important things than riches and stuff. I want people to refuse the temptation to own more than they need in favor of supporting those who have less than they need. I want people to work for the prosperity of everyone and not simply for better pay for oneself. I want people to stop attacking each other and each other’s beliefs and instead engage in friendly, respectful debates that are based more on facts and less on lobbyist-swayed political ideologies.

I believe these goals line up with the goals set forth by the Church are what is truly best for society, but that they can’t be achieved simply by better government policies. It takes the effort of every individual to commit oneself to these goals and sometimes in the face of policies or popular sentiment and belief.

Here are some links to the things I have been reading that led me to my conclusions. A lot of it may be difficult to understand for those who aren’t economic-jargon proficient and the list is far from comprehensive, but I hope it may answer some questions you may have and help you understand where I am coming from. To be clear, I don’t agree with all that is said in these links, but I believe these links provide valuable arguments.

Deficit Spending -- Kelton
Why I didn’t sign the deficit letter -- Joseph Stiglitz
Progressive Wishful thinking – Sumner
FAQs -- Sumner
Romer-Klein interview post
Austerity Delusion -- Krugman
Austerity Games -- Krugman
Contraction is Contractionary -- Krugman
Letter of Unsustainable deficits
Progressive taxation data
Principles and Guidelines for Deficit Reduction -- Stiglitz
Two years too late – Sumner
Modern Money Theory and Krugman's Objections -- Tchernova

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