Saturday, July 30, 2011

What's the point?

So on Friday it hit me. It wasn't just that I disliked Reid's plan to solve the debt limit crisis, it was that it was clearly going to severely damage the economy and, thus, I started to question whether it even matters if it, or the slightly worse Boehner plan, actually passes or whether we "default".

Here are some random thoughts on the issue, which may or may not answer some of the questions I got after I tweeted the White House the same question.

Macroeconomic models

There are multiple schools of thought on the subject of what severe cuts will do to the economy. Virtually all modern macro-economics is descended from the Keynesian models. A disagreement occurred in the fifties and sixties about the effect of government borrowing and spending, with mainstream Keynesians arguing it has a positive affect during recessions, while a branch, Monetarists, arguing that it has the potential to "crowd out" private borrowing, but actually there's quite a bit of consensus outside of that argument. Both branches and their descendants are adamant that during a recession you have to increase the amount of money in circulation, they just differ on how to do that.

That "crowding-out" argument

Generally speaking, you use market interest rates to determine whether the government is borrowing too much. Interest rates are lower than they've been in a very, very, long time. Maybe that's too simple: the Fed's monetary policies also affect interest rates, so the flooding of the economy with QE/QE2 money might explain this - however, we can determine whether the Fed has pumped too much money into the economy by looking at so-called "Core Inflation". Core inflation is virtually non-existent, ergo the Fed's monetary expansion hasn't put in too much money, and interest rates being low is consistent with the government not crowding out private borrowing.

So it's safe to say that no monetarist is going to make the argument, and remain respected, that spending and borrowing cuts right now would in some way reduce any crowding out, as evidently crowding out just isn't happening. They would argue this in slightly different circumstances, but these aren't times that fit the model, any more than stagflation fits the original Keynesian model.

The affect of less government spending

Quite simply we're looking at contraction. No widely respected macro-economic model right now that applies to the current case - negligible interest rates, negligible core inflation, increasing unemployment - promotes reduced economic activity as a way to increase economic activity.

There's no "deficit crisis"

This is one thing that's annoying the hell out of me. There's a large deficit, and that's not good, but it's certainly manageable - get the economy going again, get some growth going, as unemployment drops start increasing tax rates, and a combination of reduced expenditures on things like unemployment relief programs (which are obviously somewhat less expensive when there's less unemployment) and increased revenues, will give the government a surplus it can use to pay down the deficit.

Unfortunately the media keeps promoting the term, which means we're sleepwalking into making the crisis work. You see, if we go for contractionary policies now, and reduce taxes, then we really will have a deficit crisis because there's not going to be growth, there's not going to be the revenues needed to build a surplus, and vital government support services will become ever more expensive.

The "Debt limit" combined with the current budget is clearly unconstitutional

Forget the 14th amendment, congress is clearly giving the executive conflicting mandates. Unless some extremely clever lawyer can determine a way to resolve both mandates, then one or other mandate is simply not legal.

Things that just don't make sense

The arguments for fixing the deficit now are:
  • We don't want to make things more difficult when we do start to pay it off
  • The debt causes uncertainty in the markets
  • We need to be more fiscally serious and disciplined to prevent this kind of thing from happening.
The people who are making the loudest arguments on this are:
  • Promoting contractionary policies
  • Demanding regular votes on the debt limit, often with utterly absurd riders or conditions, that'll result in this "crisis" occurring again, increasing "uncertainty" in a way that really is happening.
  • Promoting tax cuts at a time of historically already low taxes.
What I don't get is why any of these people are taken seriously.

Should we default?

No, we should raise the debt limit and increase spending for now.

Should we default if the alternative is decreasing spending?

No, we just shouldn't care. The idea that Obama is pushing Reid's plan is utterly ridiculous. Why waste the time? From what I can tell it's a stupid point scoring thing. If the debt limit cannot be raised in time, so be it.

What about the economy makes normal people lay awake at night? High unemployment, or government borrowing?

High unemployment.

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