If deficits get too high then we will see the effects of MUCH higher interest rates, high inflation, and currency devaluation. Yet interest rates and core inflation measures are still very low. (And remember, commodity prices are not a very good indicator of inflation because they are highly volatile. So when you feel a hole burning in your pocket at the gas pump, that's not the inflation I am talking about. Those prices are of great importance and are something to be concerned about, but are not a good indication of inflation).
Fear of these things has had drastic consequences for millions of American citizens and the country as a whole (which also has a major impact on the rest of the world).
From Krugman:
Unemployment isn’t just blighting the lives of millions, it’s undermining America’s future. The longer this goes on, the more workers will find it impossible ever to return to employment, the more young people will find their prospects destroyed because they can’t find a decent starting job. It may not create excited chatter on cable TV, but the unemployment crisis is real, and it’s eating away at our society.
The problem in our economy right now isn't the deficit, inflation, or a weakening dollar, it is underutilized resources and high unemployment. These fears have frozen our ability to improve the economy and help those in need, especially the unemployed. This has drastic consequences on the health of our economy, but even worse implications for the health of our society and the fulfilment and development of persons within our society (as I wrote about in this post).
Why should we fear that which is not happening? or that which no matter how many times it is predicted (without solid reasoning) still hasn't happened?
David wrote in Psalm 27: "The LORD is my light and my salvation; whom do I fear? The LORD is my life's refuge; of whom am I afraid?"
I believe he meant that no matter what we face here on earth, we have nothing to fear for God is always with us and because we "believe [we] shall enjoy the LORD'S goodness in the land of the living."
Unemployment IS happening and it is making life unnecessarily difficult for many millions of people. We CAN do something about, but we aren't. Having a job and developing as person are too important to let them be vanquished by fear.
Despite all the suffering caused by unmeployment (and the fears that perpetuate it), David is right, the Lord is always with us, of what should we be afraid?
It strikes me there are two points of dispute here:
ReplyDelete1) While it's true that we're not seeing the high interest rates and inflation which would indicate that the deficit is now "a problem", I think it's fairly prudent of people to want to not wait until high interest rates and inflation show up before doing something about the deficit. After all, those are pretty lousy things to live with, and by the time they hit we'd arguably have to take even more drastic action in order to reign in the deficit, whereas right now it can be done comparatively painlessly. (At least, a hell of a lot more painlessly than what folks in the position of Ireland are facing.)
2) I don't think it's as unreasonable as is being suggested to question how much real, practical ability the government has to stimulate job creation through spending. Especially when folks like Krugman are in the habit that the only level of spending which would suffice is one so high as to be very politically unlikely. If the result is instead to muddle along taking some "middle road" in which we increase the deficit but don't spend on the level that hard core Keynesians would like, we could end up (even by a Keynesian reading) with just about as much unemployment and and deficit crisis down the road.
Darwin --
ReplyDeleteI agree that we don't want to wait until interest rates and inflation do become a problem to act on them. My main point is that there are people RIGHT NOW dealing with unemployment and that something should be done about that problem instead of waiting for problems that MAY happen. I am still not convinced that they will happen.
Which brings me to your second point. Higher spending is indeed politically very unlikely, which is why I'd prefer a tax cut to those who need it (also politically unlikely, though I don't think as unlikely). Also, the government can stimulate job creation directly, by hiring anyone who wants a job. Such programs are often called Employment of Last Resort or ELR programs and would give a reasonable income to anyone willing and able to work. The ELR program could replace unemployment insurance, so that instead of doing nothing and receiving payments, the unemployed could produce something for the economy and fulfill their need to work. They would also have less trouble getting back into the private sector because they would make themselves more hirable than if they remained unemployed for a long period of time. I don't pretend to know all the details of how such a program would work, but it does seem more beneficial than our current unemployment insurance and would act as a more efficient means of counter cyclical spending than our slow, inefficient stimulus bills.
I do not desire a middle road, nor do I believe we are in a deficit/debt crisis. We are potentially in a "will they increase the debt ceiling?" crisis, but most importantly I think we are in an unemployment/low demand crisis that has the markings of a lost decade similar to Japan's.
Decreasing spending now in response to potential inflation or high interest rates, in my opinion, will only make things worse. Deficits will not be reduced and I believe inflation and interest rates will continue to muddle around their current values or fall. If deficit reduction is your goal, then I think our best bet is to grow the economy through demand stimulation.
You can call it "hard core Keynesian" if you want, but no one else is suggesting an alternative policy that will bring our economy back to full employment. All I've heard is that "we need to reduce deficits because interest rates and inflation are going to sky-rocket" and "it will fix itself if government stays out." We have yet to see any of that happen.