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The Ghetto Economist on dangers of the Deficit Hawks

The hysteria over the deficit by the Republicans which spread to the Democrats now seems to have become part of our collective general wisdom. And it’s unnecessary and it’s also wrong. First, much of the deficit is due to our economic downturn and the resulting Automatic Stabilizers kicking in. We have a progressive tax system, as wages lower the tax burden drops correspondingly. As an economy grows and wages rise, tax receipts rise too. Similarly, when the economy falters transfer payments (unemployment insurance/food stamps/people collecting Social Security) increase. When the economy improves transfer payments drop, along with an increase in tax receipts this lowers the deficit. The deficit is NOT due to Obama spending.

The link to a chart below shows an increase during TARP then govt spending (consumption expenditure) normalizing.

Automatic Stabilizers

Comparing the govt to a household or business is not a valid comparison, unlike the private sector a sovereign govt with a floating currency can create money at will, and can deficit spend. Where the comparison becomes valid, in a sense, is when one considers the economy as a whole. If the private sector spends more than it saves, like in a bubble, the government can run a surplus and save more than it spends. When the private sector is hurting like it is now and is paying down debt and saving, the govt MUST deficit spend in order to spur demand. We’re a consumption-based economy.

The gap between optimal production of goods/services and real consumption of goods/services is called the output gap. So with the private sector not spending, should the govt curtail spending (balance the budget to cut the deficit) the output gap will widen further. Less demand, falling consumer confidence, double dip recession.

The President absolutely MUST increase spending and he MUST get it across to the American people why he is doing it.

Congress is currently working to deliver a financial reform package. I have my doubts on how good it will be but there are some encouraging signs. But whether or not the package we end up with is a good one, unless the federal govt picks up spending we will go into another recession. And the Republicans will seize the opportunity to blame the double-dip on the Democrats financial reform package. The only way to confront this head on is for the President to pursue the necessary fiscal policy and to keep pounding the message to the American people so Republican misdirection can be thwarted.

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Posted by on April 25, 2010. Filed under NEWS. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry
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9 Responses to The Ghetto Economist on dangers of the Deficit Hawks

  1. fourdinners Reply

    April 25, 2010 at 6:38 am

    We’ve got the Watford Gap…but that’s a motorway service station so probably doesn’t apply here…

    Don’t you just love seeing the words politician and hysterical together?

    Double dip recession eh? We could blame McDonalds for that!

    If the Prez must he undoubtedly won’t. Bet you ten pounds.

  2. Holte Ender Reply

    April 25, 2010 at 10:01 am

    When I get beyond managing my own finances, things become a little hazy. I only know what I read, and don’t understand half of it. What is consistent among non-partisan commentators is, Governments can’t cut (spending) their way out of recession, which, I think, is what your post says. Most of the politicians who shout about deficit reduction are not in power, when they get back into governing, all goes quiet and the other mob start up.

    • osori Reply

      April 25, 2010 at 11:02 am

      you’re exactly right in your analysis man.

  3. SJ Reply

    April 25, 2010 at 10:35 am

    @Holte, -right on.
    One thing Oso is also getting at in this post is that attacks on the ‘funding’ of programs, which Republicans predictably call “spending” on programs when it suits them (i.e. anything that helps out the poor and middle class, which they consider no more than raw material or an employment pool to hire and fire from) are purely contrived tactics to oppose legislation and government action that doesn’t directly benefit them and the interests they actually represent. They’re all against big government when it doesn’t line the pockets of the industries they are indentured/bonded to. But if takes and “spending” is directed at let’s say, subsidies for big business? Well then the GOP is glad to use the term “funding” again.

  4. MadMike Reply

    April 25, 2010 at 10:41 am

    They are discussing just this subject on Face the Nation at this very moment. Moments before the notorious Ben Stein actually carried water for the president, something he rarely does, on the upcoming bill.

  5. Bee Reply

    April 25, 2010 at 2:28 pm

    Great post, Oso – you’ve really got knack for this economic stuff. Just imagine if McCain had won…we’d be a country of tent cities by now.

  6. Gwendolyn H. Barry Reply

    April 25, 2010 at 3:18 pm

    I keep wondering… when will flow begin again? For all of us it’s territorial, I know. Still, we’re slumped. I fear this new bill will fall terrible short of reform needing… like the HCR bill…infrastructure really needs to begin again… I know that! Everywhere… no money in the states. Did you know? The states are each sorta quickly going broke…will reform help?

    Ta for the illumination Oso…

    • Bee Reply

      April 25, 2010 at 5:49 pm

      Here in Virginia, at the community bank I work for, we’re starting to lend again. I’m in the commercial department, where we lend to businesses for near about whatever they need. That is a very good sign.

      • osori Reply

        April 25, 2010 at 7:21 pm

        That’s good to hear Bee. We need it desperately, to turn the cycle around and create jobs.

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