Feb 06 2013

John T. Harvey: “The Coming Recession: How Fiscal Responsibility is Economic Suicide”

(10 am. – promoted by ek hornbeck)

As you might have heard the economy is contracting while unemployment remains high inching higher especially in real terms again while Washington is too stupid or corrupt across the board to notice. I can’t say I didn’t see this coming even as just an above average layman. All this focus on austerity is detrimental. After all, spending is actually income and so are deficits which are the life blood of the private sector in the economy when it comes to those sectoral balances you hear me always harping about.

And on that point I refer to Post Keynesian economist Wynne Godley as he along with MMT economist L. Randall Wray predicted this crisis in 2000 and that matters. Therefore it’s safe to say the Post Keynesian school is pretty much vindicated. And part of this tradition can be read in Forbes magazine every month. Imagine that! I have thanks to discovering the work of the most excellent Post Keynesian/MMT economist John T. Harvey.

I have to thank NY brit expat for introducing me to John whom is not only a brilliant economist, but an all around cool guy who is very approachable and has an awesome taste in music. He stresses that the economics discipline hasn’t made economics very understandable to the general public and he’s right; however, you wouldn’t know that by reading his many excellent pieces on why everything people think they know about debt and deficits is absolutely wrong. As John points out, it’s not only wrong, it pervades this entire ignorant and corrupt political debate happening right now over this stupid sequester that was a creation of the White House and Congress.  

As you will read down below, this horrible self induced debt ceiling pro austerity political show where never is heard an encouraging word like full employment, but instead for Peter Peterson’s enjoyment, idiotic words praising deficit terrorism(budget balance and cutting our safety net) rule the day. It only amounts to economic decay and a likely recession on the way depending on how much deficit spending is cut in the coming days.

John T. Harvey has given me written permission to post his latest piece from Forbes in its entirety.

The Coming Recession: How Fiscal Responsibility is Economic Suicide

My colleagues and I have been writing endlessly about the ignorance of reducing government spending in our current economic straits. Unemployment is stagnant at just under 8% and over 12 million Americans are looking for work-and the latter does not count discouraged workers, those taking jobs well below their skill level, or individuals accepting part-time work when they needed full-time (they add another 10 million or so; Bureau of Labor Statistics). Firms are understandably reluctant to expand operations in an environment where households are debt-ridden and the financial sector continues to be marked more by a desire to get rich quick than facilitate the production of goods and services. Faced with short- and long-term problems, we are far from out of the woods.

It is in this environment that members of both parties are falling over themselves to show how fiscally “responsible” they are. And we achieved this lofty goal in fourth quarter 2012 by reducing federal government spending by 15%. The result? Real GDP shrank by 0.1% (Bureau of Economic Analysis; consumers were able to keep this from being even worse due to a surge in spending on durables, something that is not sustainable because once you get your new big-screen TV for Christmas, you don’t buy another one for a while). This is a preliminary figure, but it contrasts sharply with third quarter growth of 3.1%. Not coincidentally, during that period federal government spending grew by 9.5%. We are primed for another recession.

The only thing wrong with the debt and deficit is that they are too small. We need to be increasing government spending, not reducing it. What in God’s name are our policy makers thinking? Why do they believe that, when we already have over 20 million Americans unemployed or underemployed, a laid off federal employee would suddenly find herself swamped with job offers? And how will those in the private sector replace the revenues that resulted from soldiers, Marines, park rangers, NASA scientists, postal employees, etc., shopping in their store? The short answer is, they won’t. As you cut federal spending, the economy-including the private sector-contracts, just as it would if you cut any other kind of spending.

Nor are we saving ourselves some sort of long-term cost by enduring this short-term pain. The US cannot possibly be forced to default on debt denominated in its own currency, it is only inflationary if we are already at full employment (no need to worry about that yet!), large deficits and debt do not cause higher interest rates (stop by your bank and check current CD rates), and government deficits create private sector surpluses. What is debt to Washington is a financial asset for you and me. Government spending stimulates the private sector and makes profitable the production of goods and services at otherwise idle factories.

This is not to say that there are not types of federal spending that are wasteful. Of course there are, but that’s a problem even if we are in surplus. And, controlling our politicians by creating unemployment hardly seems just or efficient.

All these fiscal cliffs, debt ceilings, and threats of sequester have us poised for disaster. For the Republicans, the party that has traditionally been the least worried about the debt and deficit, budget cuts appear to simply be a means of achieving their end of destroying programs they don’t like. The Democrats, on the other hand, don’t seem to have any ulterior motive-they’re just ignorant. They also desperately want to continue to use the Clinton surpluses (a result, not a cause, of the long 1990s expansion) as a means of marketing themselves as the responsible party.

But there is nothing responsible about raising unemployment. Our economy is very weak, and the last thing we need right now is to reduce yet another component of spending. The worst may be yet to come. To add insult to injury, it appears that it is going to be self-inflicted.