Saturday, December 22, 2012

Another Economist Weighs In

(Copped from Facebook.)

House Speaker Boehner's bluff didn't work.  He couldn't get the votes in his own conference to pass "Plan B," which was intended to put more pressure on President Obama.  He pulled the proposal without a vote.  The result, of course, was to put Obama and the Democrats in a much stronger position.  The GOP doesn't really want to go over the "fiscal cliff," a cliff of their own making, because it would remove all of the Bush tax cuts.  So what does the president do?  He continues negotiating.

Presumably he is negotiating not only on tax cuts but also on spending.  Programs such as Social Security, Medicare and Medicaid, and other safety nets are apparently still on the line.  He apparently has drunk the kool-aid of deficit reduction and it must have tasted mighty sweet to him.  Such foolishness from a man who is supposed to be bright is confounding.

Nobel Prize Winning economist Paul Krugman of the New York Times has been writing for four years as to why this is exactly the wrong approach.  Instead of cutting government spending, the government should be increasing it to put people back to work and to put some cash in their pockets.   And he isn't the only one.  A recent op-ed piece by Stephanie Kelton, an associate professor of economics at the University of Missouri-Kansas City and the founder and editor of New Economic Perspectives, makes the same point and demonstrates the case with some historical facts.

Look, up in the sky! It's a "fiscal cliff." It's a slope. It's an obstacle course.

The truth is, it doesn't really matter what we call it. It only matters what it is: a lamebrained package of economic depressants bearing down on a lame-duck Congress. ...

... The question everyone's asking is this: On whose backs should we balance the federal budget? One side wants higher taxes; the other wants spending cuts. And while that debate rages, the right question is being ignored: Why are we worried about balancing the federal budget at all? ...

History tells the tale. The federal government has achieved fiscal balance (even surpluses) in just seven periods since 1776, bringing in enough revenue to cover all of its spending during 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, 1920-30 and 1998-2001. We have also experienced six depressions. They began in 1819, 1837, 1857, 1873, 1893 and 1929. ...

Why does something that sounds like good economics — balancing the budget and paying down debt — end up harming the economy? The answers may surprise you.

Spending is the lifeblood of our economy. Without it, there would be no sales, and without sales, no profits and no reason for any private firm to produce anything for the marketplace. We tend to forget that one person's spending becomes another person's income. At its most basic level, macroeconomics teaches that spending creates income, income creates sales and sales create jobs.

And creating jobs is what we need to do. Until the fiscal cliff distracted us, we all understood that. Today, we have roughly 3.4 people competing for every available job in America. The unemployment rate is like a macroeconomic thermometer — when it registers a high rate, it's an indication that the deficit is too small. ...

The effort to balance the books that's at the heart of the fiscal cliff is simply misguided. Instead of butting heads over whose taxes to raise and which programs to cut, lawmakers should be haggling over how to use the tool of a federal deficit to boost incomes, employment and growth. That's the balancing act we need.

Why is that so hard for the politicians in Washington to understand?  Is it that they don't want to understand?  I'm beginning to think that just might be the case.

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