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Hullabaloo


Tuesday, January 22, 2013

 
Larry Summers late to the party

by digby


You know, I'm just a dumb old country blogger who doesn't know nothin' 'bout no economics but what I learned as a stoned undergraduate back in the dark ages. (I may have read a book or two since then...) But I, like a lot of people, have been making certain common sense observations for several years now about the sheer insanity of our deficit obsession. (And was summarily dismissed because of it, I might add.) You don't need a PhD in economics to understand that this is a political and ideological obsession, not an economic one --- after all, it's economically counter-productive and all the evidence of disaster from austerity in the face of recession that we've seen in the last few years proves it.

Nonetheless, the Very Serious People refuse to change course, either because they are simply not very serious or because they are using this crisis to further shrink the already shrunken and starving welfare state and lower wages and living standards of average people. There can be no other explanation: they are either stupid or venal. Or maybe both.

Anyway, here's Larry Summers very late to the party, but better late than never:
Economists are familiar with the concept of repressed inflation. When concern with measured inflation takes over economic policy, and so drives the introduction of price controls or subsidies to hold down prices, the results are perverse. Measured prices may not rise, so the appearance of inflation is avoided. But shortages, black markets and enlarged budget deficits appear. The repression is unsustainable and when it is relaxed, measured inflation explodes, as happened with the Nixon price controls during the early 1970s.

Just as repressing inflation is misguided, repressing budget deficits can also be a serious mistake. Just as corporate managements that are measured on earnings can take perverse steps that are ultimately harmful to shareholders, government officials in the grip of a budget obsession repress rather than resolve deficit issues. When arbitrary cuts are imposed, government agencies respond by deferring maintenance, which leads to greater liabilities later. Or compensation is provided in the form of promised retirement benefits that are less than fully accounted for, with the ultimate burden on taxpayers increased. Or measures such as the recent Roth IRA legislation are enacted, encouraging taxpayers to accelerate their tax payment while reducing total payments over the long run.

As important as avoiding the repression of budget deficits is ensuring that the focus on the budget deficit does not come at the expense of other equally real deficits. Interest rates in the United States and much of the industrialized world are remarkably low. In real terms, governments’ cost of borrowing recently has been negative for horizons as long as 20 years. No one who travels abroad from the United States can doubt that this country has an enormous infrastructure deficit. Surely even leaving aside any possible stimulus benefits, current economic conditions make this the ideal time for renewing the nation’s infrastructure. Such investments, borrowed at near-zero interest rates, need not increase debt ratios if their contribution to economic growth raises tax collections.

Infrastructure represents only the most salient of the deficits facing the United States. Nearly six years after the onset of financial crisis, we clearly are living with substantial deficits in jobs and growth. Consider that if an increase of just 0.15 percent in the economy’s growth rate were maintained over the next 10 years, the debt-to-GDP-ratio in 2023 would be reduced by about 2.5 percentage points. That’s an amount equal to the much debated year-end fiscal compromise that raised taxes. Increasing growth also creates jobs and raises incomes.

As Krugman and Mark Thoma point out, however, the problem is that he brackets that salient point with the standard disclaimers about how deficits really do matter yadda, yadda, yadda, (which frankly, sounds like the typical right wing babble insisting "I'm not a racist, but....")

As Krugman says:

[T]hat’s the INK disclaimer — I’m Not Krugman. It’s supposed to establish Larry’s bona fides as a Serious Person, appeasing the deficit scolds so that he can get on with the substance of his argument.

I wish him luck, but don’t think he’ll get far. For the deficit scolds are unappeasable.

If you believed that the scolds were just honest citizens concerned about America’s long-run prospects, you might also believe that a careful, rational argument about how those prospects are better served by investing more, not less, while the economy is depressed could win them over. But to hold such beliefs, you’d have to have been living in a cave, reading nothing but the Washington Post editorial page, for the past four years.

The reality, first, is that the deficit scolds — who are, after all, making a living by scolding — depend on constant warnings of imminent fiscal crisis to drum up interest. Saying that it’s a longer-term issue, and not our first priority right now, is not something they can afford to hear.

Still, it's a good thing, I suppose, for Larry Summers to make the case against deficit fetishism. Unfortunately, it's a little late. This argument should have been had back in the beginning of the Obama administration when they were holding "fiscal responsibility" summits in the middle of an epic downturn and demagoguing debt as if it were a plague of locusts. That's how we ended up here.

Maybe Summers really cares about the fact that we are still struggling with crisis levels of unemployment and that we have already lost years and years of growth while the top 1% are gobbling up more and more of the world's wealth. But it wasn't as if nobody saw this coming.

But hey, Krugman is still shrill and John Maynard Keynes was a loser, so there's that.


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