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With head-snapping speed, the echo chamber abandoned recovery last week. Yes, the much-ballyhooed recovery engineered by the three amigos Baffled Ben Bernanke, Gofer Tim Geithner, and Tiny, Timid and Temporary Larry Summers, with their trillions in support to the banking sector and not one dime to households. That recovery. What? Didn’t happen. In the area roped off for recovery deniers, Demand Side has been lonely. Now there are plenty of people around. The echo chamber is ringing with recovery deniers, and frankly it’s uncomfortable. We used to have a nice little table here, Keen, Stiglitz, Roubini, Shiller. Now you have to stand in line for the bathroom. Of course, they’re not looking at us. No. But they’re sitting on the couch and checking out the fridge.
After Q2, the forecasters began moonwalking back their predictions of 4%. Now it’s a scramble, no grace to it. An incredible pile of bull has been simply abandoned, ignored, forgotten. Actually, there’s a little bit clinging to their shoes and messing up our carpet.
You will remember, Demand Side was the outlier, a minority of not one, but not more than a dozen, for our baseline forecast of bouncing along the bottom, with downside risks and negative growth in the second half. Aggregate demand is the driver of the economy and aggregate demand is fading – from cuts to states and municipalities, growing real debt burdens on households, and the paralysis of government to invest. This scheme is still not the mainline, by any stretch. The current mainstream is kind of a cross between the Fed’s favorite, “It was worse than we thought,” and the ever-popular “flock of black swans.” There is no absence of interest in flogging the whipping boy of government, either.
Rather than debate, today, we’re going to take some prerogative from being right and restate the position. Then we’re going to look at other canards from the echo chamber. Simple facts of conventional wisdom that will sooner or later be rescinded without a backward glance.
The consumer economy is dead. It is buried under a mountain of private debt. The only way out is to socialize investment, as Keynes said, putting people back to work doing things that need to be done. Essential, not optional, are writing down this private debt (either directly or by inflation) and reconstituting public goods and services that are currently the object of a thousand cuts. That is government – teachers, police, firefighters, and a new millennium of infrastructure. We have an incredible challenge to meet in climate change and we have the spare capacity available to put to work.
This is not going to happen, we are afraid, because the current economic institutional framework is basically that the corporate control regime runs the governments, central banks, and dominates business economics with its market fundamentalism. Three years ago, when a complete collapse of the economy was prevented only by massive government intervention, it was difficult to imagine how the financial sector and corporate elite could survive. Now the institutions which created the last bust are back in charge: ratings agencies, central banks, IMF, and the fundamentally insolvent financial sector. It is difficult to imagine how they are going to be dislodged before a new and deeper collapse occurs.
So, our listeners are likely members of the choir on this and we won’t go into detail here. The principle lesson from this new validation by the echo chamber is that your analysis should ignore them. That view has absolutely no correlation with eventual outcomes. Most of their effort goes into explaining why what they said would happen did not happen because of a new extraneous factor and anyway if you look at it more closely, actually they didn’t really say what we thought they said. Besides which nobody else saw it coming either.
So. What else is reverberating in the echo chamber that is worth rejecting?
Ah. The S&P downgrade of U.S. debt is a big deal. Not so. As you will see tomorrow with the rush into U.S. debt. The ratings agencies are like Inspector Clouseau who was repeatedly baffled and caught off guard and could only get the drop on Cato by sucker punching him. The real red flag here is that the same ignorant voices that were in charge during the last financial debacle – S&P here – still get a hearing.
Another favorite which gets reverberation on the Left side of the echo chamber is that an expansion of the payroll tax reduction will create jobs. This has history. Tax cuts in the Bush stimulus of 2008 and the Obama stimulus of 2009 and the 2% reduction currently in place all ended up in paying down debt, not increasing employment. Increase employment by hiring people. The multiplier out of new jobs will be three times that out of another $50 in the average monthly paycheck. What is two percent of annual payroll taxes? A minimum, I would guess, of $100 billion. You could hire three million Americans at decent wages for that. And they would immediately start paying payroll taxes. That’s two percent off the unemployment rate. You are not going to get two percent off the unemployment rate by beating around the bush.
What else? Here’s one. Tax increases will kill jobs. Here again the confusion derives from the sound bouncing off both political walls. Not all tax increases are jobs-killers. Just as not all tax cuts increase jobs. A carbon tax, for example, would do much less damage to the pump price than has oil price speculation. The price quoted on one web site said gasoline went from $2.10 to $3.40 in just the past year. Tax revenues could produce funding for jobs, not rents to resource extractors. Tax increases on the rich don’t cut spending because the rich spend out of accumulated wealth, not income. A Tobin tax on financial transactions only captures some of the losses inherent in speculation. Eliminating the cap on payroll taxes creates a flat tax instead of a patently regressive tax and at the same time gives people confidence in their social security, so they will not hoard against uncertainty. Capping the mortgage interest deduction at $500,000 and one home will push money into productive uses, not in indulgences for the already opulent.
Our favorite call and response was that the crash in the markets had nothing really to do with the debt ceiling circus and the outcome extorted by the Tea Party. That was just a distraction. To be fair, we said something similar, that the public was fascinated by a schoolyard shouting match and was ignoring the oncoming bus. But to say that the austerity extracted in the debt ceiling debate had no effect is not very convincing. After all, the markets crashed the very next day.
In fact, some of those losses may have come from investors who share our view, that millions of jobs will be lost as a result of no balanced approach. Cutting off government investment as a means of cutting the deficit works only hypothetically, only on a spreadsheet constrained by bad assumptions. Investment by government is the road out. Cutting it is blowing the road up. Since we are kicking the can down this very road, that really doesn’t make any sense in anybody’s metaphor.
We are going to have deficits. They will happen either because we restart the economy with much-needed public investment or because we crash the economy by the madness of austerity.
Next year, we’re going to look like Greece. Remember, the Greek people swallowed Austerity One. When it didn’t produce stability, but rather a major downturn in their economy, they protested that probably more of the same would produce more of the same.
So, echo chamber says, Austerity is good, but the markets are looking elsewhere. Survey of reality says, Austerity is throwing gasoline on the fire. There is no possible way that austerity will lead to debt reduction. We need to earn our way out, not starve our way out.
The only way out is, reducing private debt, creating jobs with a full spectrum demand profile, and bringing some market discipline back to the banking sector. We can try all the austerity, all the market fundamentalism, all the shoving money at the banks we want. It is not going to work, because it cannot work. The economy operates from the demand side.