New American Paradigm

Weaponized Keynesianism

Rep. Barney Frank, ever the streetfighter, came up with a classic name for the bizarre cognitive dissonance exhibited by Republicans when it comes to the jobs created by government spending:

These arguments will come from the very people who denied that the economic recovery plan created any jobs. We have a very odd economic philosophy in Washington: It’s called weaponized Keynesianism. It is the view that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation.

This strikes at the heart of the flawed logic that many have in opposition to the stimulus package.  We know for a fact that government spending can have a stimulative effect in a recession.  One need only look to the last depression.

When FDR's New Deal spending began, the GDP grew and unemployment shrank.  When Republicans forced him to balance the budget too quickly, the economy dipped back into recession.  Then we finally climbed out of our economic funk when the US entered WWII and kickstarted the manufacturing sector in building our war machine.

The notion that we should balance budgets in recession and rack up deficits during the good times is totally foolish.

National Debt Growing Too Large to Ignore

Yesterday we played "whose to blame" on our current deficit problems.  Not to get all partisan, but the correct answer is Bush and Congressional Republicans.  Congratulations, collect your free cookie at participating Subway's (note, none are actually participating to my knowledge.)

Today I just wanted to point out how dire the situation is.

To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals.

National Debt: How We Got Here

Everyone is suddenly a deficit hawk.  While it's predictable that politicians would point the blame somewhere other than their own feet, it seems to be a particularly popular sport these days.

My rule of thumb, the ones wailing the most are usually overcompensating for something (see Sen. Larry Craig.)

What's strange about it is that normally recessions are the last time to be concerned with deficits.  Keynesian economics, which is by far the dominant political economic theory no matter what a handful of conservatives like to pretend, basically states that the government replaces business and consumer spending in rough times, and pays down that debt during good times.

The latter part is what we seem to have trouble with.  Democrats and Republicans both have programs they like to lavish money on in good times, and Republicans also REALLY like tax cuts.  Tax cuts to stimulate the economy, and tax cuts when the economy is well. 

Prosperity Without Growth Money Quotes

It's rare that you see a government agency in this country or any speak the truth when "conventional wisdom" is so diametrically opposed to what needs to be said.  In this case, the "conventional wisdom" is that we can continue to seek constant economic growth in a sustainable way.  It's a myth all of us repeat to each other almost as though our existence depended on it, because the signs are all around us that this simply is not possible.  I guess constant reinforcement is necessary to maintain mass hallucinations.

Despite all that, our cousins in the United Kingdom have had a commission reporting directly to the Prime Minister that is attempting to do just that.  You can read the whole report here, but I'm going to share some of the money quotes.

Americans Saving More, Investing Less

We've mentioned before the marked increase in personal savings before.  This is, of course, a very good thing.  Low personal savings are unhealthy in the long term, so it's only natural that this trend reverse.  Usually though, there are opportunities for investment and that's eventually what brings economies out from under recession.  People start businesses, buy equipment, or otherwise develop the infrastructure necessary for making money.  Otherwise they supply capital in the form of stocks or bonds so that others can do so on their behalf.

Unfortunately, that does not appear to be happening now.  Paul Krugman notes:

That saving ought to be translated into investment, but the investment demand is not there. Housing is flat on its back because it was overbuilt; housing bubbles collapsed not only in the United States, but across much of Europe. Many businesses cannot get access to capital because of the breakdown of the financial system. But even those that do have access to capital don't want to invest because consumer demand is not there. Between the housing bust and the sudden decision of consumers to save, after all, we have a world with lots of excess capacity. The GDP report that just came out says that business-fixed investment, non-residential fixed investment, essentially business investment, is falling at a 40 percent annual rate.

Debt and Foreign Policy

Last week the big news in Sino-US relations was the harassment of a US spy ship near a Chinese nuclear submarine base by the Chinese Navy. I use the term harassment a bit tongue in cheek since it consisted of mooning the American sailors rather than the sort of menacing behavior we might normally expect.

Anyway it should sound familiar to those of us at least old enough to remember when Nirvana was still recording because China through a similar hissy-fit over a US spy plane in the first few months of the Bush administration. That incident turn more serious since our people were essentially held hostage for a week and a half, but ultimately cooler heads prevailed and we went back to patriotically buying shoes made by Chinese slaves. I should point out that in both cases our spying was on the up and up since they were in international airspace or waters, however imagine how nervous we would be with Russian ships cruising around 30 miles off the Pacific coast.

That said, the incident drowned out coverage of a much more disturbing and potentially dangerous bit of diplomatic saber rattling coming out of Beijing. Premier Wen Jiabao demanded that the US "guarantee the safety" of China's $1 Trillion in US debt.

"We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets… To be honest, I am definitely a little worried."

Make no mistake; this is a direct shot across the bow. Combined with the spy ship incident it's clear they are testing President Obama's resolve and demonstrating their position of strength. With Secretary of State Clinton just back from her Friendship "Please please please keep buying our debt and we'll stop talking about human rights" tour, the intent couldn't be more clear.

So how did they end up with so much of our debt in the first place? It's actually a strategy China has employed to keep their currency deflated compared to the US. Since we have a trade deficit with China they end up with extra US dollars. Most countries would use this to build up their economies, make new investments, and raise the standard of living for their people. However, that would mean their currency would rise relative to the US making Chinese manufacturers less cheap. And let's face it, cheap is the only attractive thing about dealing with the Chinese government. Not being concerned in the least for the average Chinese worker gives their government an opportunity to pursue a strategy most other nations would never think of employing. So to keep their currency from rising they buy US Treasuries by the boatload. This keeps their currency rising and falling with our own. It also helps out the US because an eager buyer for our debt means interest rates remain low and cheap debt helped fuel our consumer driven economy.

However, this also gives China enormous leverage over the US. How? China can wreck what's left of our economy by selling off all their Treasuries at once, sending the dollar into a freefall. There's actually precedent for this sort of behavior. During the Suez Canal Crisis in the 50's the US was demanding that the United Kingdom cease hostilities (isn't it cute that we used to try to keep the Brits from going to war?) Upon their refusal President Eisenhower announced that he would sell US reserves of the Pound as well as their debt. The threat had immediate effect and the crisis ended. How could we respond to some action by China if they threatened to sell off our debt crashing our economy? Is Taiwan's independence more or less important to us than another Great Depression?

In this regard our political leadership, Democrat and Republican, undermines US foreign policy and security by refusing to bring spending and taxation into balance. They do so at the behest of unrealistic voters who alternately want cut taxes from Republicans and increased spending from Democrats. Perhaps our current situation is a good time to reevaluate those conflicting demands.