Posted by Michael A. Kamperman on December 19, 2010
The biggest error those advocating Austrian Economic policies like austerity make is that it doesn’t work in a modern economy for a national government. It sounds like common sense on the surface, but in fact it makes no sense at all. The advocates of the Austrian School of economics argue that the federal government needs to live within its means and cut spending to match revenues, just like Mom and Pop have to sit around the kitchen table and make cuts to live within their means. Making an argument that seems to make sense on the surface doesn’t mean it is in fact sensical. People can easily understand and relate to the analogy that if they cut spending they will reduce their borrowings, and if they cut spending enough they can get into the position where they are actually reducing their debts. Most family incomes are fairly fixed rather than variable. But modern economies are not constructed based on the dreams of libertarians. Modern states have social safety nets. As unemployment rises and tax revenues decline the costs of the social safety net actually rises. If in response to the economic downturn a national government makes spending cuts of its own, then it actually raises unemployment higher thereby further eroding tax revenues and increasing the number of people to be added to the social safety net. Mom and Pop don’t see their income decrease and their expenses increase when they cut spending whereas national governments of modern economies do. To argue for austerity is to argue for an end to the social safety net. While many advocates of Austrian Economis are arguing for just that, they fail to mention to Mom and Pop that they too will probably wind up unemployed based on the highly signficant ensuing drop in economic demand when the social safety net ends. And, since the debts remain constant, it becomes more and more difficult to payoff debts when the economy contracts rather than grows.
Ireland is being forced to encounter just such a reality right now. One would think that taking tough measures would improve their credit rating and lower their borrowing costs. However, in a paradox not explained by the Austrian Economists Irish debt has been downgraded and Irish borrowing costs have risen. This is because the markets’ recognize that the more Ireland cuts spending the more liabilities wind up on the Irish governments balance sheet. The solution to Ireland solving its debt problems is via growth, not austerity.
Mom and Pop could probably understand Keynsean Economics better if they understood it as the way to run a business rather than as a way to run a household. In business the old axiom is it takes money to make money. In business it is O.K. if expenses are rising as long as sales are rising just as fast, or faster. The key to a successful business is creating strategies to create demand. Often times these strategies include increasing spending to increase growth and increasing borrowing to pay for it. National governments in modern economies need to be run like businesses where spending can increase revenues, as opposed to being run like households where increased spending doesn’t increase revenues.
Posted by Michael A. Kamperman on December 12, 2010
Bernie Sanders is so right, yet so wrong, on how to help the unemployed. There can be no doubt Senator Sander’s heart is too big, not too small. His filibuster was brilliant and had me applauding. However, raising taxes on the rich to support social services is pre-depression thinking and unfortunately Senator Sanders, like most of our Washington leaders, is fighting the last war, which is now the wrong war. We have an almost $1.5 trillion annual deficit because of a lack of demand resulting in massive unemployment. Taxing the rich another $70 billion or so isn’t going to materially change the federal government’s finances, and it isn’t going to help the unemployed. The unemployed need jobs, period, end of story. Everything that helps to create jobs needs to be on the table. The only saving grace from the last couple of weeks is we have confirmed that few in Washington are really serious about deficit reduction. They just want to use the debt and the deficit as a tool to beat back the oppositions proposals and advance their own. Sorry Senator Sanders and Rush Limbaugh, but a gridlocked stalemate is not in the country’s best interests.
President Obama should have driven a much harder bargain with Republicans by dangling the carrot of a permanent extension of the Bush tax cuts combined with an elimination of the estate tax. Imagine what he could have gotten if he gave Republicans their Christmas wish list. For starters, he could have gotten an agreement to maintain extended unemployment benefits until the official unemployment rate is below 7% for an average of 90 days. You want permanent tax cuts, I need unemployment insurance as long as necessary rather than for just one year. He also could have negotiated a 6.2% payroll tax cut until the unemployment rate is below 7% for an average of 90 days, rather than just the 2% he negotiated. He could also have negotiated a substantial infrastructure bill focused on roads, bridges, and sewer and water lines. He could have added a federalization of Medicaid benefits, though that idea has yet to perculate in Washington. He also could have included a major fix of the housing market. Yes he traded off the world’s biggest bargaining chip for $24 worth of trinkets. The President went minimally in the right direction for the right reasons. Senator Sanders is suggesting he head in the wrong direction, for the right reasons. Now is not the time to hold fast to your side of the debates of the past, now is the time to cut big deals and get the country moving again.
The deal the President cut is far better than gridlock, but it will not move the needle on unemployment as he and his advisors believe. For starters there is nothing in the deal to solve the housing debacle. Despite the rhetoric no one is getting a cut in their income tax rates in 2011, they will be getting the same rates as they paid in 2010, 2009, 2008, 2007, 2006, 2005, 2004, and 2003. Plus, people were already receiving extended unemployment benefits in 2009 and 2010. How can extending existing 2009 and 2010 tax and unemployment policy in 2011 produce a meaningful change in the almost 10% official unemployment rate? The answer is it can’t. And after the summer the aid to the states from the original stimulus bill will be gone. In Texas, they are now talking about a $28 billion two year budget shortfall and plan to lay off elementary school teachers ala most other states. Much more is needed, but at least the lightbulb has finally been turned on in the Whitehouse.
Posted by Michael A. Kamperman on December 5, 2010
We are witnessing the last throes of the idolatry of hard money. The era of hard money officially ended when the Federal Reserve correctly decided we needed to print our way back to prosperity. Yet few have noted the end of the era, and fewer still understand its implications, because of the wailing and knashing of teeth from the ardent disciples of hard money. They scream hyperinflation and want to back the currency with gold. They are confused with the concept that the federal government’s dollar resources are not finite, but infinite. Hence, they fear deficit spending and federal debt despite the impossibility of the federal government ever defaulting on debts it owes in dollars. Many mistakenly believe if the federal government prints money it increases rather than decreases the national debt. Hard money religion is our historical heritage, but it is not our future, and is no longer even our present. The sooner we can come to terms with the end of the hard money era, then the sooner we will be able to heal our self-inflicited fiscal wounds with the new tools of the soft money era. The hard money idolatrists are taking us down the austerity path that will break our society apart. Society will come to its senses and exile the idolatrist to the scrap heap of history. Ireland is about to do so because they have been asked to absorb too much pain for someone else’s gain. It is only a matter of when we do the same here. Since our current political leadership is comprised mostly of hard money idolatrists, including multiple priests of the religion, it will take time for change to come.
Hawaii has cut 17 school days to save money. Yet the state has the buildings and the books, the parents want the kids to go, and the teachers want to come and teach. How can we be sitting in the twenty first century and everyone agree we need something we already have the resources for and yet we throw up our hands and say we can’t do it? The reason is the idolatry of hard money and the mistaken belief that dollars are a finite resource for the federal government. All Congress has to do is pass another stimulus bill to send aid to the states, and these problems will be solved. Yet hard money idolatry has us staring at the print button and saying we dare not touch it. Now we are staring at the state of Arizona cutting Medicaid patients out of transplant programs to save money. A 32 year-old father in need of a liver transplant has been removed from the waiting list because he is poor and couldn’t show up at the hospital with $200,000 in cash. The hospital and the doctors are there, yet access is denied. Again, federalising Medicaid would end this nonsensical atrocity.
Fortunately for us many of the priests of hard money who are railing against debts and deficits and runaway spending, such as our President and most of our Republican and Democrat Senators and Congressman, are actually false prophets and charlatans. As politicians, they are willing to tell us anything to maintain their own base of power and the perks that come with it. Otherwise, we would not be looking at an all-but-certain extension of all the tax cuts enacted by both President Bush and President Obama along with an extension of unpaid for unemployment benefits in the midst of trillion dollar deficits. Most of these so-called deficit hawks are not true believers. They simply manipulate the beliefs of others to gain votes. When the polls change, they will change with the polls. This is actually our saving grace. All it will take to bring about true change is to change public opinion. And as President Obama has found out, the public can change opinion fast.
