Earlier in the day in Newton, Bachmann told reporters the economy would start to improve almost immediately after she becomes president because she would implement conservative economic policies to slash the nation's debt, stop tax increases and cut regulations.I'm not sure what signals she thinks she will be sending to the marketplace, but there really is only one that the marketplace cares about: sales!
"It won't take that long if we send signals to the marketplace," she said, standing by an earlier comment that the improvement would begin within the first quarter
Many large and small businesses are sitting on large piles of cash and reserves and all businesses can borrow more at extremely low rates, yet they don't because sales are low. NOT because of increasing taxes (who has increased taxes?) or because of tighter regulations.
If her plan is to "slash the nation's debt" by reducing deficits then I think she will be sorely disappointed in the results.
Conservative policy CAN help our recovery, however. If we just cut taxes without cutting spending then I think we would see things turn around, but all we hear from both sides is cutting deficits and paying down debt.
Why is it assumed that the government must cut its deficits? The disagreement has been over HOW to reduce the deficits, not WHY we need to reduce them.
They all just assume that if we don't, turmoil will ensue just like it would for you or me if we ran up a bunch of debt. I say: based on what? When I describe how a government's finances work then everyone cries "inflation!" Yet we are having trouble staving off deflation right now.
So if you don't believe me or my reasoning that inflation won't ensue until we get near full employment, then why not at least see if I'm wrong? Why not try some increased deficits? If it leads to high inflation, you can say "I told you so" and then we can reduce our deficits. But why worry about potential high inflation when we are experiencing high unemployment right now?
If you want less government demand a tax cut right now from your congressmen! If you want more government tell them to spend more and what you want them to spend it on!
Me? I'm in favor of a job guarantee program and a complete payroll tax holiday for both employers and employees until the economy gets back to full employment.
First off: Yes, Bachman is engaging in magical thinking and is not to be taken seriously on that point.
ReplyDeleteSo if you don't believe me or my reasoning that inflation won't ensue until we get near full employment, then why not at least see if I'm wrong? Why not try some increased deficits? If it leads to high inflation, you can say "I told you so" and then we can reduce our deficits. But why worry about potential high inflation when we are experiencing high unemployment right now?
The answer to the first question is fairly straight forward: The higher the stakes, the more risk averse people become. There are arguably a huge number of very interesting experiments we could make in regards to federal spending, taxes, regulation, etc., but people are highly averse to testing things which they aren't sure will work. Thus the, "Why not try it?" argument never goes anywhere, no matter what the topic, on things this big.
Next up, there's the issue that we're already running very large deficits, and people aren't exactly finding this to be getting us where we want to be. As you point out, this hasn't caused inflation yet (though the price index has nudged up somewhat lately) -- despite both heavy deficit spending for the last three years and a great deal of monetary easing by the Fed. According to an orthodox understanding of economics, this would be because otherwise the economic slowdown itself would be highly deflationary, and so only the big inflationary pressures are keeping us stable.
Given that, why not run deficits? Well, I think a lot of conservative wonks (as opposed to conservative activists) would be fine with running a deficit during a recession -- due to taxes being lower than usual because of decreased incomes and expenditures on things like unemployment being higher than usual. The problem is that many of the things that have our deficit high right now are more or less indefinite commitments. This seems like a problem to people because we assume that:
- There is a finite demand for US Treasuries, as in we can't sell more than there are dollars out there looking for a saving vehicle.
- We'll need to keep paying interest, and this will eat up more and more of our budget.
- The deeper we get into debt now, the less ability we have to do so in the future (because of point 1) and thus we should be cautious how far into debt we go without a Very Good Reason.
Darwin,
ReplyDeleteYou are right about my "why not?" argument. I suppose it was a "your argument didn't work so why not try mine?" attempt, but you are right it is a weak argument, I hope that my other arguments are enough.
We are running large deficits, yes, and they seem even bigger because all dollar amounts are bigger now than they were because of growth and inflation over the years. So people are hearing "trillions" and are thinking thats a big number. The important number is % of GDP, which is still big, but not near as big as WWII. I argue as do many other economists that the deficits of WWII helped pull us out of the Depression, and I really hope that it doesn't take another war for us to figure out we can run high deficits without financial ruin. But the question pertinent to us is "what debt/GDP ratio do we need to pull us out of recession?"
I don't know the answer to that, but since it isn't happening, I would say more than what it is now. Note that orthodox economics says both that we need more and that we already have too much depending on what orthodox economist you are listening to.
I believe inflation actually ticked downward lately.>>http://krugman.blogs.nytimes.com/2011/08/05/that-was-the-inflation-scare-that-was/
Still not enough demand, so yeah, the slowdown is deflationary. The reason deficits are inflationary is because they boost demand. I'm not convinced QE has had a huge effect there, but it's still something I'm looking into.
Our deficit is also very high because of a large drop in revenue and an increase in automatic stabilizers which I couldn't find data for.>>http://www.heritage.org/budgetchartbook/growth-federal-spending-revenue
First bullet point: Yes that is true. We can either not issue treasuries or the Federal Reserve can "buy" them.
Second bullet point: Yes, but interest paid to bond holders is income/savings to bond holders.
Third bullet point: This is really what I'm trying to argue with MMT.>>We have the ability to go into very large debt. The point at which we can't go further is when inflation spikes because we pushed demand past the point of full employment. At that point taxes aren't high enough for the amount the government is trying to spend.
And really this is my greatest point: we DO have a Very Good Reason. Millions of people are unemployed, which means more than just lost output (the real burden we are leaving for our children, NOT higher taxes) it means that there are millions of people who are unable to work to provide for themselves and their families, to grow as a person in virtue, and to act in the image of God as a creator.
Thanks again for your comment.