"Conventional wisdom" vs. reality

So let's talk about "conventional wisdom". What you find, looking at the data, is that "conventional wisdom" typically is nothing of the sort. It's passed-down superstitions and talking points with no basis in fact, no supporting data, no reality.

So let's look at Nathan's "conventional wisdom" from my post on unemployment below:

Instead of lasering in on unemployment as the lone bogeyman, I think we should look at the entire basket of problems.

The problem is that employment is necessary in order for people to consume, and consumption is necessary in order to employ people. Hmm, circular relationship there, right? But in any event, if we're going to wean the economy off of government intervention, clearly focusing on employment is the way to do that, because only increasing employment can increase consumption enough to remove government from the role of "consumer of last resort".

1. we need to deleverage the economy and get back to saner levels of personal and savings,

Indeed, and that is happening. That is the cause of the problems with the banks and deflation, deleveraging by definition decreases the money supply via increasing the effective reserve ratio of the banking system (see: fractional reserve banking). The problem with deflation is that past debts are unpayable with today's lower incomes caused by deflation, causing more defaults, more bank failures, more deflation, wash, rinse, repeat. In short, while deleveraging is necessary, the deflation caused by deleveraging is harmful and must be addressed via monetary expansionary efforts, which are ineffective when we are in liquidity trap territory because any printed money just goes under mattresses because it will be worth more later (as the currency in circulation further deflates). Thus the requirement for fiscal stimulus and deficit spending to draw that money out from under mattresses and put it to use, otherwise the freshly-printed money would just disappear under mattresses where it does nothing to foster employment and investment -- just as what happened in Japan during the 1990's, causing their 'lost decade'.

2. we need to own more of our debt as a nation.

As long as the debt is owed in dollars that is irrelevant. If China was so stupid as to call in their debt, we'd simply print dollars (by issuing new debt that was purchased by the Federal Reserve with freshly printed dollars) and give them to the Chinese and say "okay, here you go!". If we wanted to be *really* mean, we'd deliver it as freshly printed bales of $100 bills, and let the Chinese figure out the logistics of how to get several freighters full of cash from the wharfs in Oakland to Beijing ;).

3. the trend toward higher spending has no end in sight. Is government spending the only hammer in your tool box?

Utter nonsense. We are using government right now as consumer of last resort to provide consumption necessary for full employment. We need full employment in order to prevent the sort of human misery that results in social disorder, violence, and the breakdown of society -- people do *not* voluntarily starve to death. Once employment is on the rebound the amount of government consumption can -- and will -- be reduced because rising prices as economic activity causes a resumption of lending and thus decrease in effective reserve ratio and thus inflation will naturally shift resources away from fixed-price government contracts back into the free market (i.e., $1 of government money will no longer buy as much). We have equations on how this happens that have accurately described this behavior during past recessions. We don't need speculation, talking points, or "common wisdom" here, we have data.

4. everyone knows the phrase "no pain no gain",

Talking point and "common wisdom" borrowed from the sports world that is actually contradicted by facts. What exercise physiologists have discovered is that if you are in actual pain while training for an athletic event (as vs. mild discomfort), you are overtraining. Athletes who train to the point of pain perform more poorly in athletic events than athletes who train to the point of mild discomfort. In short, "no pain no gain" has been utterly discredited and refuted by science -- if you have pain, what that means is that you're causing muscle breakdown, and muscle breakdown is *never* good if you're trying for optimal muscle performance.

As is true for physiology, so is true for economies. Unemployment beyond the amount needed in order to keep human resources mobile is *never* good. Mild discomfort (i.e., unemployment around 5-6%) can be good for an economy because it allows the economy to shift resources around to what's most in demand, but once you pass into actual pain, you are contributing to the sort of deflationary cycle that is not solvable via pure capitalism.

Blessing like belt tightening, going back to school, providing venues for humility and charity, focusing on what in important in life, *a smaller carbon foot print!*, slowing the pace of urban sprawl, and restructuring society for future sustainable growth.

Some of these are undoubtedly good things. But people do not willingly starve to death. Real unemployment is now somewhere around 20%, and those people are starting to run out of resources as food pantries and soup kitchens become overwhelmed and run out of food and family and friends become overwhelmed and unable to provide further support to the unemployed. They will do whatever it takes -- WHATEVER it takes -- in order to avoid starving to death. We will need some sort of government intervention here because capitalism has no -- zero -- mechanisms for solving the problem other than "let them eat cake", and that works no better today than it did during the time of Marie Antoinette. The French Revolution was a disaster not only for the French aristocracy (who all lost their heads -- literally), but for the people of France, since it led to the rise of the despot Napoleon and the death of probably 25% of adult Frenchmen in Napoleon's endless wars of conquest. I think we need to avoid that example, thank you very much. If it means that I'm going to be taxed a few percent higher in order to provide food stamps to people currently not eligible for food stamps, well, so it goes. Better that than lose my head (literally).

Come on people, look at this thing holistically. I don't buy that the end of the word is nigh if we don't spend 2 more trillion. Let's start taking our lumps and quit whining.

Who's whining? I'm talking about facts here. The fact is that without serious intervention in the economy, we are going into a deflationary spiral that will result in the collapse of capitalism much as happened multiple times during the 1800's and almost happened in 1932. If capitalism collapses unemployment is likely to peak at around 50% before things start getting better, and the only reason they'll get better is because America and Americans will be so impoverished by then that we'll be living like the Mexico City garbage dump inhabitants who survive by scavenging rotting banana peels and such from the piles of reeking garbage, i.e. they'll get better because it will be impossible to get worse.

We do not live in the agrarian nation of the 1850's, and we cannot survive severe depressions and the collapse of capitalism today by hunkering down on our farms and growing our own food. In the 1850's it didn't matter if capitalism failed for a while and reduced the economy to a barter economy for a few years. But we don't live in that world anymore. For better or for worse we hitched our horse to capitalism, and if capitalism fails today, the suffering -- and outright death toll -- would be horrific. What that means is that we have to do whatever it takes to keep capitalism from collapsing, and the first thing that has to be done is prevent a deflationary spiral, which means we have to figure out some way to get that $2T of disappeared dollars back into the economy -- and circulating, NOT under mattresses, where it's useful for nothing other than mattress stuffing. Since capitalism has no mechanism to do this, we are, by default, stuck with government doing it. If you have some other mechanism in mind, tell us.

-- Badtux the Economics Penguin