More Evidence That the Deficit Hysteria is Misguided and Destructive

[Joanne98]

The drumbeat of press in favor of visibly failed austerity programs is simply astonishing. We have compelling evidence that they backfire in countries with heavy debt load, with Ireland and Latvia the poster children. By contrast, Iceland, with the mind-numbing debt to GDP ratio of 900% (some have put it at even higher levels at its peak), stiffed many of its foreign creditors (who should have taken notice that things were a wee bit out of balance, although glowing reports from the likes of Fredrick Mishkin may have blinded them to that fact). It also depreciated its currency and its voters turned down an IMF rescue which would have required Iceland to repay the foreign creditors of bust Icelandic private banks, to the tune of €12,000 per citizen.

Loans are also risk capital, but modern bondholders have rewritten the rules: “Heads I take a risk premium, tails I get taxpayers to eat my losses.”

As John Mauldin points out, forcing creditors to take their lumps is the right course of action. Iceland is already showing GDP growth, while Ireland, which is following the austerity playbook to perfection, is imploding.

But as Joseph Stlglitz points out, the advocates of austerity have a lot in common with medieval bloodletters. When it’s pointed out that their programs made matters worse, their response is that they simply weren’t implemented aggressively enough.

That is not to say we don’t have a lot of spending that could and should be redirected in the US. America spends more on its military, broadly defined, than the rest of the world combined. We have a heavily subsidized agricultural sector. We also subsidize banking heavily, when by any rational calculus we should either tax it aggressively or regulate the hell out of it. But in the austerity debate, these favored sectors (well, ex the sacred cow of banks) are being included on the theoretical whackage list, along with a whole bunch of other stuff, most notably Social Security, which the phony branding of the necessity of shared sacrifice.

To illustrate how badly discourse has been commandeered by misguided moralizing, consider the piece by Matt Bai in today’s New York Times. A representative section:

After all, generations of Americans have sacrificed plenty for the nation’s cause, and there’s no reason to think we’ve lost the capacity. What makes this case for sacrifice so much harder to embrace, perhaps, is that it goes to our national psyche, threatening our self-image as a land with limitless potential. While past generations have readily sacrificed for national greatness, debt reduction — at least in the gloomy way its advocates argue for it — feels like a call to sacrifice in the name of our national decline.

This is unadulterated bunk. Let’s start with the fact that it accepted budget trimming now as a necessity, and therefore took the goals of the deficit commission as a given. But that’s barmy. When households are deleveraging and businesses are saving, having the government also try to reduce deficits is a prescription for contraction (the only way to square this circle would be for the US to move into a significant trade surplus, something no one expects any time soon)

And let’s also get the targets right. Why have deficits in the US gone up? The big culprits are easy to spot: the Bush tax cuts to the rich, the Iraq war, and biggest of all, the financial crisis. The beneficiaries of those policies are a small sector of the population. In particular, the executives of the TBTF banks have engaged in a brazen and continued program of looting on an unheard-of scale. But no, the deficit commission and its pious mouthpieces like Bai would argue we all have to pay for the extortion of a few, and to add insult to injury, the application of leeches now is certain to leave all of us much weaker.

Moreover, the idea that government spending is inevitably unproductive is also a canard. Continuing extended unemployment insurance would increase 2011 GDP by 0.6%. The Internet and the US pharmaceutical industry are both build on the back of substantial government research and investment. The return on government spending on technology investments is 30-40%, the very level venture capitalists target.

http://www.nakedcapitalism.com/2010/12/more-evidence-that-the-deficit-hysteria-is-misguided-and-destructive.html

[stray cat]

1. So states don't have to worry about their debts and not having trillions to pay pensions?

[On the Road]

2. The Deficit Does Need to be Controlled

Not even Reagan believed that "deficits don't matter."

But growth is the only way out of this recession. Austerity just digs the hole deeper. The time to do it, however, is after the economy has recovered.