JDN 2456203 EDT 19:44.
Most of my posts lately have been either personal stuff or reflections on gender and sexuality (or both), so I thought for a change I'd do something wonky and economical.
Right now the conventional wisdom in the US, among both Republicans, Democrats, and Libertarians—one of the few things they all agree on—is that deficits are bad, we must end the deficit, cut spending, raise taxes, do something to make the deficit go away. (The Green position on deficits is more nuanced, which is part of why I like the Greens. That, and global warming will kill millions of people if we don't do something right now.) You can't get Republicans and Democrats to agree on much; but you can get them to agree that deficits are bad.
And yet, this conventional wisdom is completely wrong. In fact, when I say this I'm not even speaking as the heterodox behavioral economist social democrat I am. I'm speaking on behalf of the mainstream consensus of economics, the neoclassical-Keynesian synthesis. That mainstream consensus says, without hesitation: Deficits are good.
Or, I should say, deficits are good... sometimes. And right now, coming out of the worst depression in fifty years, is one of those times. We need to get the economy moving again, that means stimulating aggregate demand. There are two big ways to stimulate aggregate demand: Spend money and cut taxes. Both of these things will raise the deficit, there's just no two ways around that.
Republicans will try to tell you cutting taxes can lower the deficit, it's simply not true. It would be true only in extremely bizarre circumstances that the US has never actually been in. It's more of a theoretical notion, like Giffen goods. In fact, it's basically the taxation analogue to a Giffen good. Cutting taxes may grow the economy, and that's good, and why we should do it sometimes, but except in very unusual circumstances it does not grow the economy enough to make up for the lost revenue. It increases the deficit.
It's also possible to stimulate demand without raising the deficit, if you move spending from less-productive to more-productive sectors. Obama is a master at this. It's really astounding how little he has added to the deficit, given all the health care reforms, infrastructure repairs, and alternative energy programs he has invested in. The US government is now more cost-effective than it has been since at least World War 2, and may be actually at its most cost-effective ever. For example, the drone strike program is definitely the most cost-effective military intervention in human history. It's really quite amazing to watch; Obama is cutting fat we didn't even know we had.
There are even some really good ideas Obama had that would make our government even more efficient and stimulate the economy even more, which have been blocked by Republicans. Examples include a public option for health insurance, eliminating oil subsidies, cuts to defense spending, removing tax loopholes on offshore investments, and increased funding to food stamps. (Food stamps don't just save lives; they also pay back $1.80 in GDP for every $1.00 you spend on them. They shouldbe a no-brainer, as they have basically no downside.)
We should be spending, and cutting taxes, and not worrying about the deficit right now. But isn't it bad to go into debt? Well, no, it really isn't actually. Not if you're going into debt for a good reason.
Think of it this way: Is it bad to get a mortgage? Is it bad to get a car loan? Is it bad to get student loans? It is bad for a startup to get small business loans? These are going into debt, aren't they?
But debt can be a fine thing, as long as you're using that debt to invest in something that will yield returns in the future. Yes, using your credit cards to buy fancy clothes is probably not a good strategy (especially if you can't pay off those credit cards later). But that's not what the federal deficit is. It's more like a student getting a loan to pay for college, or a business getting a loan so they can invest in a new factory. We use debt now to finance investment that will pay off later, which we can then use to pay off the debt.
In fact, the government is in a uniquely wonderful borrowing position. They can borrow basically unlimited funds, and do so at extremely low interest rates. Yields on 30-year Treasury bonds rarely go above 3% or 4%; imagine what you could do—the investments you could make, risks you could take, opportunities you could exploit—if you were able to take out a loan for your annual income at 3% and not pay it back for 30 years. This is what the federal government is able to do. That's why its AAA credit rating is such a big deal, and why it's absurd that the Republicans jeopardized that with their posturing.
And yes, it was posturing. The debt ceiling is raised all the time, and it's raised whenever the federal government decides that it would be wiser to spend more this year than is being taken in with tax revenue. This is not like defaulting on a credit card; on the contrary, not raising the debt ceiling would be more like that. The closest analogy would be raising your limit on your credit card so that you can make another purchase, which credit cards do all the time if you have good credit. Except credit cards charge horrible rates like 16% or even 24%, while the government has to pay, remember... 3%. (Because it's exponential, this difference is even bigger than it sounds. In 30 years, 3% makes you pay 2.4 times your principal, 16% makes you pay 85 times your principal, and 24% makes you pay 634 times your principal. Yes, 634.)
Yes, at some point we will want to cut spending, raise taxes, and close down the deficit. We will want to do that after the economy has fully recovered, when unemployment is down to 5% and GDP growth is back at 3%. Indeed, Bill Clinton did exactly this, and it worked; at the end of his presidential term, the federal debt was on track to be paid off in about 10 years. There were literally economists worried about this: They weren't sure what would happen if there weren't enough Treasury bonds for investors to hedge their portfolios with.
That's how it's supposed to work: You're supposed to run a cyclical deficit, deficit in bad times, surplus in good times, to smooth out the business cycle and keep the economy running smoothly. When tax revenues go down because of a recession, that's okay; you let that happen, and maybe even add some spending to support it, because you want the economy to recover as quickly as possible. Once the recession ends, tax revenues will return and you can cut the spending. This is what Keynesian economics is all about, and as Milton Friedman so eloquently put it: “We're all Keynesians now.”
But then, apparently we aren't. At least, the people actually running things aren't. I know a fair number of economists, and they all think that deficits are good in recessions. But people aren't listening to these economists, they're listening to the radical few out there who are Austrian or whatever and think that deficits are bad, bad, always bad.
Want to know why the economy isn't recovering very fast? There's your answer. We need more deficits.
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