Sunday, December 11, 2011

Stimulate THIS!

Over the past year and a half or so, the Obama Administration, Democrats, and most obviously, Republicans, have pivoted to what they see as the most pressing issue of the day--the current debt of the US. I won't say crisis because honestly, it isn't a crisis right now. Any country that can borrow at negative real interest rates (i.e. with inflation taken into account, pays zero to negative interest) isn't facing a debt crisis. Greece has a debt crisis. Italy has a debt crisis. The United States of America does not have a debt crisis. Yes, we have a lot of debt. Yes, it ought to be addressed. But just about the worst thing you could be doing during a recession (and yes, I still say we're in a recession, no matter what anyone says) is cutting government spending. A quick lesson in economics for those of you who don't know this sort of thing:

Total GDP, let's say is represented by Y, and the components of it are C (consumption), I (Investment) by businesses and whatnot, G (Government spending), and NX, which is Net Exports (Exports - Imports). When a recession hits, consumption and investment decline, and if it's worldwide, then NX is bound to take a hit as well because of depressed demand for goods elsewhere in the world. Because of automatic stabilizers like unemployment insurance and medicaid, government outlays go up while tax receipts plummet due to higher unemployment and a smaller tax base. That's largely the reason why our debt ballooned so much post-2008. So when people cry, "Obama's runaway spending!" they're probably not taking this into account. 

When C and I are still depressed, because they definitely still are, there's obviously going to be slack in aggregate demand. With depressed demand, manufacturers and service providers don't need to produce as much, so they hoard cash and keep around just enough workers to do what they're currently doing. With job growth not even close to keeping up with population growth, fewer people are able to go out and purchase things or buy new houses, etc. As such, consumption and investment are still well below what they ought to be. This creates an output gap in our GDP, where we're producing a set amount less than we have the potential to. So far the total is somewhere around $3 trillion. That's something we can never get back. That's one of the serious costs of this persistently high unemployment. The point of government stimulus is to help fill the output gap. But with a gap as big as it is, a $787 billion package will help, but it won't be big enough, let alone the fact that much of it was made up of tax cuts that probably won't help as much as direct government employment programs.

Okay, so now that that tangent is over, where do we stand now? Well, we're at 8.6% unemployment, job growth is still pretty awful, and only now are some policymakers coming to the realization that we need additional stimulus. Republicans have already pretty much made this impossible with their unbreakable focus on our deficits and regulation as being the original sin that looms over our job growth woes. As I said before, people are confident in the US's ability to pay its debts. They wouldn't be willing to buy up our debt for such low interest rates otherwise. As far as regulation goes, take a look at this graph:

Okay, so through all of the fancy jargon that the Fed likes to use in its database, the blue line is basically how much businesses are investing in new equipment and software, and the red line is how much investment there is in the housing construction sector. As you can see, businesses aren't being held back by regulation and uncertainty--they're investing at a faster pace than they were pre-crisis. To the extent that they're nervous about things its about the crisis in the Eurozone, the legal challenges to the health care law, and Republican brinkmanship. Moreover, that information about uncertainty is from a conservative economist. 

What's really holding our recovery back is a combination of two things: a huge household debt overhang, which could be remedied somewhat by allowing homeowners to refinance their mortgages to take advantages of these low interest rates. The other is a large slack in aggregate demand. So I ask you, all of you, what's the issue with passing even a modest stimulus, like Obama's American Jobs Act, when we're going to lose nearly $900 billion next year in output that we can never regain? Doesn't a one-time increase in spending seem justified in the face of such colossal losses? But it seems that Republicans, and to a much lesser degree, even Democrats, have this fixation on the debt crisis that doesn't exist yet (we do have to deal with it, but not during a recession, are we trying to emulate Herbert Hoover?) Just pass the American Jobs Act, get some of those unemployed construction workers back to work, increase the tax base, and that'll in and of itself reduce the amount the government has to pay out in unemployment insurance and Medicaid. You'd be trading much longer-term government payouts for a one-time burst in spending. But no, it seems that we're doomed to listen to Republicans lecture the nation about the debt while simultaneously crying foul when anyone tries to cut the defense budget because it'll kill jobs.

The irony is almost painful.