Sunday, June 20, 2010

The Idiocy of the "Deficit Hawks"

Ezra Nails It:
Unemployment may be at 9.7%, but the Senate is moving on

Or, at the least, they care about the deficit more. By a vote of 52 to 45, the Senate rejected a jobs package that would've extended unemployment insurance, offered some tax breaks to individuals and businesses, kept doctors in the Medicare program and more. "$77 billion or more of this is not paid for," said Sen. Ben Nelson, "and that translates into deficit spending and adding to the debt, and the American people are right: We've got to stop doing that."

No, sir, they're wrong, and we don't. It's hard to say this loudly enough, but it really doesn't make sense to offset stimulus spending, at least in the short term. The point of the money is to get the economy moving faster, to give people cash to spend. This isn't like health-care reform, where you're purchasing something and you should pay for it. When you're trying to expand the economy, you need to use debt to put more money into it than would otherwise be there. If you're just moving a dollar from one purpose to another, you may be using that dollar better, but you're not expanding the total amount of demand in the economy by very much. You're just moving it around. It would be like bailing water from a boat, but throwing it into another part of the boat.

There'll come a time when we need to start reducing the deficit. If we can get the economy back into gear, that time might even be soon. But for now, increasing the size of the deficit isn't some nasty side effect of stimulus spending. It is, quite literally, the point of the enterprise.

But Nelson isn't the only one throwing up some odd rationalizations for his vote. Other politicians, as Arthur Delaney explains, have decided that unemployment insurance is just "too much of an allure" for people. It keeps them from going back to work. In theory, you could imagine unemployment benefits so lavish such that that would happen. But in America, benefits are 36 percent of the worker's average previous wage. Imagine living on one-third of your income. That sound "alluring" to you?

Unemployment is at 9.7 percent right now. It's extraordinarily high. And it's extraordinarily high because not enough jobs are being created to absorb all the workers who got laid off during the recession. Killing their unemployment benefits wouldn't magically make more jobs appear. It would just make those people poorer, and because they'd be poorer, they'd have less to spend, and because unemployment is geographically concentrated, that would mean the economy in areas with lots of unemployed workers would tank further and thus it would take longer for it to create jobs.
The big debate now is whether or not we should be spending money to create jobs, or if we should be focus on cutting the deficit. Krugman gets into a bit of the details:
What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.

Here’s roughly how the typical conversation goes (this is based both on my own experience and that of other American economists):

German hawk: “We must cut deficits immediately, because we have to deal with the fiscal burden of an aging population.”

Ugly American: “But that doesn’t make sense. Even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity you’re pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.”

German hawk: “I won’t try to argue the arithmetic. You have to take into account the market reaction.”

Ugly American: “But how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?”

German hawk: “You just don’t understand our situation.”

The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can’t and won’t justify their stance with actual numbers — because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.

So the real motivations for their obsession with austerity lie somewhere else.

In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
It's also worth pointing out that the people behind cutting the deficit are the exact same people who have been wrong about the economy for the past 30 years, where as those arguing for job creation are the same people who have been largely right in predicting this economic crisis.

As of now it's looking like all the important people are listening to the same geniuses whose ideas destroyed the economy.

If people keep listening to them, it's not hard to figure out what happens.

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