Friday, May 28, 2010

Buried ledes

Two tiny stories hidden in a column-inch apiece deep inside the A-section of today's San Jose Murky News: Congress has decided to let the COBRA subsidy expire, so that the unemployed will lose their health insurance. And Congress has decided to add 200,000 teachers to the unemployed next school year by allowing the teacher money in the current stimulus bill to expire at the end of July.

Supposedly all of this is because of "the deficit". But we don't actually have a real deficit right now, because the current "deficit" is an accounting thing where one account at the Federal Reserve is debited and another is credited -- i.e., it's just moving ones and zeros around on a hard drive somewhere. A "real" deficit is when the Federal government is taking away lendable funds that could be used to invest in private production, but that is not the case here -- 0% Treasuries, and prime rates not much higher, means there's no shortage of lendable funds, just a shortage of viable things to invest them into given the collapse in consumption caused by unemployment.

As I've pointed out in the past, in the current situation, where we have roughly 15% slack in the system (people who have part-time jobs but want full-time jobs, and unemployed people who want a job), it is quite a viable thing to print money. This won't cause inflation as long as the money goes to mobilizing goods and services back into the economy rather than sitting idle, because inflation is caused when more money comes into the system than goods and services coming into the system. Indeed, the inverse of that is why we've had massive deflation over the past three years -- over $8 trillion lost in housing asset values alone -- yet prices have not gone down. Yes, the amount of money flowing in the economy has gone down significantly, but so has the amount of goods and services flowing in the economy. Thus the money<->stuff ratio has remained the same, and prices pretty much remained the same, despite massive monetary deflation.

So anyhow -- as long as we see no signs of inflation, i.e., as long as interest rates remain near 0 and prices remain stable and unemployment remains high -- there's no problem with "printing" money to "finance" the deficit by just moving 1's and 0's around in the Federal Reserve. Keep those teachers employed, keep those unemployed people insured, and everybody's better off and all it costs is a few bytes on the Fed's hard drives. This can't go on forever -- eventually all the slack will work its way out of the economy, and we'll have to make the hard decision to raise taxes to fund the government services we want -- but as long as the economy is running well below its capacity, there's nothing wrong with doing this. The fact that Congress is populated with morons who can't see this clearly obvious economic reality is not new. Of course, the fact that the field of economics is populated with similar morons is similarly not new... John Maynard Keynes was making much the same complaint during the mid 1930's, for much the same reason. Sigh. Human stupidity. It's the one thing that never seems to change.

-- Badtux the Economics Penguin

7 comments:

  1. That's why we are heading toward a really major depression, fascism, blood in the streets, or a major world war - quite possibly all of the above.

    I see no sign of optimism anywhere.

    lo siento,
    JzB

    ReplyDelete
  2. That they are morons is a rather charitable conclusion, Mr. Tux. And not because I think they are even less intelligent. This is another assault on living standards, a trial balloon to measure public resistance in anticipation of the deeper cuts to come in SS and govt services. Quality of schooling has been in decline for some time, just as real wages have. This is a feature, not a bug. Reps no longer feel bound to execute their constituents wishes due to almost guaranteed reelection. They do what they want in the interests of the super rich (Bush tax cuts, etc.,) and in the absence of civil unrest will continue to do so. Whether those put upon will react to this and other provocations remains to be seen. I'm not holding my breath.

    ReplyDelete
  3. DA, I would agree with you if it were only U.S. legislators doing these idiotic things. But European ones are doing the same idiotic things -- and believe me, in most European countries there *will* be unrest if the government tries to do the sort of wholesale depressing of living standards that you describe. Greece, for example, is likely to go back to being a military dictatorship if the rioting and unrest get any worse, because no democracy can survive that kind of thing. Not even American democracy, in the end, which is somewhat terrifying when the alternative is fascist military dictatorship.

    In short, people are idiots, world-wide. Unless it's a global conspiracy, something that I don't find credible, that's the only conclusion I can come to.

    - Badtux the Non-conspiratorial Penguin
    Never ascribe to conspiracy what can be adequately described by stupidity.

    ReplyDelete
  4. I don't mean to imply a conspiracy. Since the post-war boom ended in 1973 profits have been falling all over the western world. So we have bubbles, crazy spending on defense, wars over decreasing supplies of fossil fuels, etc., as the major players fight over pieces of an ever shrinking pie. The latest chapter is trying to extract more from the middle and lower classes. The bailout did some of that. The Thatcherite cutting of govt services, SS, crushing of unions (mostly in Europe) etc., is another part. It's not like this is done in unison. Some have to be dragged along (coalition of the "willing,") some have to be saved from themselves (Greece) lest the whole house of cards collapses.

    Sorry for sounding like a Marxist, but I don't think govts around the world are idiots. They are desperate to maintain their hold on power so they can continue to serve their elites (a class of which they are also members.) Hence the lurch toward fascism, with industry/finance basically controlling govts. Continued unemployment is a gamble that creates the old (sorry) surplus army of unemployed to drive down wages even further. The risk is civil unrest, but the stronger govts can manage that, what with the surveillance society like in the UK and the PATRIOT Act in the US, which gives the govt access to anyone's communication they deem necessary for "national security," but can be used against anyone attemption to organize an opposition.

    This is not unlike the 1930s, where a worldwide depression (except in the USSR, not that they didn't have their own problems and methods for dealing with them) resulted in the major powers going to war over access to resources -- energy, food, empires -- where the aggressors were fascist dictatorships.

    Obviously the analogy isn't perfect, and I don't want to overstate the case. But there are parallels between Japan & Germany then, and the US, China and Russia now. Not to mention the collapse of the USSR, which resulted in the re-colonization of Eastern Europe by rapacious banksters, and the aggregation of most of the money, power and resources into the hands of a small band of oligarchs in Russia through market fraud.

    Uh, yeah, so not really sure where I'm going with this, apart from my usual vague socialist bleatings. For me, it's always about profits, and control of govt is the route they have chosen to increase profits, as ever.

    ReplyDelete
  5. Human stupidity. It's the one thing that never seems to change.

    Yet, so little of it has any effect on my life being as I saw it all coming and prepared for it.

    I bitch a lot, put I'm actually sitting pretty. On the other hand, I don't expect a hell of a lot.

    Dry roof over my head - check

    Food for me and the cats - check

    Extra money after the bills are paid - check.

    The real gauge of when things are really bad is if you can't afford cable TV or high speed internet.

    Count your blessings.

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  6. I don't mean to imply a conspiracy.

    That's good, because there isn't one, there is just shit that happens.

    It's not a problem, it's just something to do. To figure out how to deal with.

    ReplyDelete
  7. Dude,

    Can I make the assumption that greed and lust for power fall under the general heading of "stupidity?" I only ask because I'm under the general impression that those parts of humanity never change either.

    ReplyDelete

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