On the Contrary

Last night was fairly entertaining watching Lawrence O’Donnell on Last Word look into the camera and tell us he told us so.  He is talking about Trump and Huckabee not running.  He had predicted it months ago.  The best part was to watch him rail on political pundits which he basically called morons.  He ran clips of all these folks talking about how serious these candidates were while he had said Trump would withdraw on 16 May when NBC announced their new season lineup and that Huck had not been kicked off the air by Fox indicating he was not serious.  Is was so much much fun to watch him point out that the so-called experts were talking nonsense.

I would argue that about 95% of the “experts” we see on TV informing us about our economic choices are also talking nonsense.  Opinion reigns supreme in the face of facts.  What even further muddies the reality of our economic choices is that along with opinion, ideology is paying big bucks to twist reality.  When you start looking at some of our most prestigious economic schools, they are highly endowed or their leadership earns a second income provided by the conservatives who have an interest in reinterpreting history.  See revisionist attempts to claim that the Depression era spending didn’t help.  See how these “independent experts” did not see the coming banking collapse.  So in light of all that, I would like to lay out a simple look at where we are today and how we get out.

Let’s start with the conventional wisdom.  What is commonly accepted right now is that in order to save our economy we have to get control of our deficit.  This is common to both sides of the political isle.  So both are talking about major cuts in government spending.  The Republicans believe in flow-down which says that if the rich have more disposable income they will invest it, creating jobs.  The Democrats argue that flow-down doesn’t work, you are robbing the poor to provide tax breaks for the rich, and that in order to get control of the deficit we must also raise revenues, or said plainly raise taxes.  So the only difference here is how to pay for the deficit, not looking at whether cuts will be counterproductive.

The second part of this conventional wisdom is the Confidence Fairy (Thank you Paul Krugman).  It would seem that both sides believe that with businesses flush with money, the reason they won’t spend is a lack of confidence in the government’s ability to get control of its deficit thus driving up interest rates and making this a bad environment for business investment.  If government just gets control of its deficit by cutting/taxes, the Confidence Fairy (CF) will spread confidence dust and everything will be okay.  So the only argument we are having right now is how to handle the deficit, assumed the root problem, with both sides believing in the CF.

So is the deficit the real problem or simply an effect of the real problem, lack of demand/spending?  Econ 101 tells us that in a severe recession (which we all agree we are in), what we learned from the Depression was that when the private sector does not have the wherewithal to prime the economic pump, the government must do that through deficit spending.  Waiting for the private sector to start spending could take years (Stagflation in Japan) and so the idea is to get the economy humming again to increase revenues into the government and decrease spending in unemployment insurance and other services to aid the unemployed.

That says we should not be cutting right now at all.  And in fact history has provided us with several examples, called double dips, where this has been proven out.  One  is in our own Depression when things started to pick up and the deficit hawks won the argument and cut back on the stimulus spending.  The other was in Japan in their lost decade.  In both cases the economy was starting to recover and then a large cutback depressed everything.  California is now supplying another example in that new revenue projections just cut the deficit in California in half.  In other words in order to deal with the deficit problem we should be looking at stimulating the economy, not in cutting.  The fact that the austerity programs don’t work is being demonstrated in Ireland, Greece, and Britan.  All we have to do is look.

So what about the confidence fairy?   The problem with this concept is that the interest rate is at one of the lowest points it has been in history for borrowing, and business are flush with money.  So where is the spending?  Why are not business spending now and investing all their accumulated cash?  It has nothing to do with confidence and everything to do with a lack of demand.  They have existing capacity that is not being used and they are not going to crank it up, much less make new investments, if nobody has the money to buy their products.  Consider the road we are on.  In California we have closed 70 Parks and in the Sacramento area alone, laid off 1200 teachers.  That doesn’t even take into account the firemen, police, and state workers that are taking the hit.  Extrapolate that to the entire state and other states who are doing the same thing through cuts, and the large cuts that the Republicans are trying to implement at the Federal level and then explain to me why confidence is going to hold sway when no one is making money to buy stuff.

Now no one is arguing that we should not get control of our deficit, but our approach is counter productive.  That counter productive solution is being sold to us by people (the wealthy) who benefit from continuing to transfer wealth to the wealthy falsely claiming that the money flows down.  Remember the Bush Tax Cuts.  Even in  a much better economy they did not help and their long term impact on our deficit makes the stimulus package look minor.  See below.

What this tells you is that the Bush Tax Cuts, our depressed economy, and our unfunded wars are the biggest contributors to our deficit problems in the out-years.  Taking money out of the middle class and passing it on to the rich has not stimulated our economy.  In an interesting study about the impact of government cuts on private sector cuts, the result was that for every $1 cut, the economy shrank $2.

My point is simple:  We believe things about the economy that have no empirical proof, we have selected to solve the wrong problem (the deficit), and that the arguments about how to solve the wrong problem (Cuts), will make it worse.  And I wonder when we are ever going to start having a rational discussion instead of just more opinion mongers pushing their ideology.  Lawrence, you want to make any predictions here?  I have more faith in you the most of the rest of them.

The solution is simple and there is tons of data out there that support that it will work.  Here it is:

• Repeal the Bush Tax Cuts, all of them
• Offset with real stimulative spending – aid to states to stop the layoffs and unemployment extensions as a first step, and real infrastructure spending to get things rolling.  Think Trillions
• Get an energy policy that is part of the stimulus package
• End the Wars in the Middle East
• Revise the tax codes and quit subsidizing those that don’t need it or things that hurt our economy
• Time for a public option for everyone and make it mandatory (if we paid what other nations pay for health care, we would not have a deficit problem)
• In light of the above put together a best practices panel to look at effective treatments
• Medicare, Social Security are here to stay and we need to pay for them so make them cost effective, not cut them.  That says limiting government spending as a percentage of GDP is stupid and counter productive
• Get real banking regulation where no one is too big to fail.  Then we have leveled the playing field and we will never have another TARP
• Everyone has to accept that there is a level of investment in education, infrastructure, and the welfare of our citizens that is absolutely necessary to keeping our economy running.  We simply have to pay it.

The path forward isn’t easy because we have well paid ideological morons in Washington who are invested in keeping things just the way they are.  But most of us should see the truth and the simplicity of  the solution but we don’t.  Why is it so hard to face reality?  Why do we keep trying to twist reality into form that will fit our ideology instead of our reality.  It could be the demise of this country.