So how do we fix it?
First and foremost, we need to focus on what matters: jobs. And right now, the focus, both left and right, is primarily on deficit reduction. You actually hear people say from time to time things like "we need to cut spending and reduce the deficit so we can increase the number of jobs in our country." That's like saying "we need to eat more waffles, so we can rotate the tires on our cars." It's like saying "we need to stop watering our lawns, so we can spay and neuter our pets." It's like saying (I can do this forever) "we need to ride our bicycles, so we don't get wet when it rains." Deficit reduction is a good thing, but it has nothing whatever to do with job growth. Nothing whatever.
In fact, there's no evidence at all suggesting that high deficits are currently harming our economy, not in any way. If deficits were harming our economy, we'd see it in inflation and in rising interest rates. Anyone out there try to buy a car lately? I don't know that I've ever seen interest rates this low. The deficit could become a problem, at some undefinable point in the future. It isn't doing harm right now.
(At this point, I suppose it's also worth pointing out that the Romney/Ryan proposed tax cuts are not balanced by their proposed spending cuts, and that their plans will, by the best non-partisan economic analysis available, increase the deficit from about 1 trillion dollars a year to about 3 trillion. So even if the deficit were a serious problem right now, the Romney/Ryan plans will make it considerably worse. Just sayin'.)
No, what's needed is more stimulus. What's needed is more money pumped into the economy. More money circulating, more money spent by consumers, more demand. More demand equals businesses expanding, new business start-ups. We're in a liquidity trap caused by a demand-side recession. Liquidity traps can last for years; they don't just solve themselves. (Ask Japan; their demand-side recession lasted twelve years.) Government spending cuts pull money out of the economy. We need more money in the economy.
We can see it right now. The single biggest factor holding back our current recovery is public sector layoffs. The private sector has been creating jobs--not as many as we'd like, but job growth has been fairly strong. But private sector job growth has been counter-balanced by layoffs by state and local governments. Teachers, firefighters and cops. And that has all sorts of other negative implications, like an education system where class sizes have never been higher, preventing good teachers from being effective.
So what we need is not cuts in federal spending. What we need to do is to spend more, not less. The federal government can stimulate through paying for infrastructure improvements (always a good idea anyway). The federal government can give money to states and municipalities that are hurting, allowing them to re-hire cops, firemen and teachers. I think mortgage debt relief and student loan debt relief would also prove stimulative.
Where is that money going to come from? Well, we'd borrow it. And it's not true that we're mostly borrowing money from China. Most of our debt is held domestically, by Americans. The federal government can, under these present conditions, borrow money at essentially zero percent interest; that's how favorable the rates are.
I know this is all counter-intuitive. Debt is bad. Families can't survive if they spend that much more than they bring in. I happen to live with a deficit hawk; my wife manages our personal finances with steely-eyed vigilance; if we need to make a purchase, we can and do pay cash. (In fact, we're not spending very much, which makes us part of the problem!) But the federal government is not a family.
Federal debt is not a bad thing. Deficit spending is what defeated Hitler. Deficit spending is what created the federal highway system. Deficit spending is what created the infrastructure that created the wealthiest nation in the history of the world, with the strongest middle class, and the greatest possibilities for rags-to-riches success stories that the world has ever seen.
But aren't we piling debt on our grandchildren's shoulders? Is it sustainable, won't we have to balance the books eventually? Sure. But I'm less worried about my grandchildren than I am with my children, with the current generation of college graduates who can't find jobs, who did everything right, got into good schools, worked hard, got good grades, and still have to live at home with their parents in a kind of suspended half-way house to prosperity. I'm worried about families right now who lost their jobs and are over-qualified for the only jobs available. I'm worried about unemployment and underemployment right now. I'm not saying 'the future will take care of itself.' But full employment will increase the tax base, and deficits will fall.
Keynes said (I'm paraphrasing) the time for austerity is during a boom, the time for spending is during a bust. Counter-intuitive or not, we need more stimulus. We need to stop this focus on deficit reduction and focus instead on jobs, on the middle-class, on making it possible for our kids to live the American dream. That's what both parties are saying right now; those are the rhetorical themes that dominated the Republican convention and that will dominate the Democratic convention. But their plans have to match their rhetoric.
There's also a lot of talk in both conventions about 'bold leadership' and 'new ideas' and 'making the tough choices.' Let's start by questioning all the current conventional wisdom. Mainstream analysis in the media says 'it's time for more spending cuts.' 'It's time for austerity, time to tighten our belts.' Most mainstream commentary agrees that the deficit is the big issue we need to address right now. Most economists disagree. In my next blog, tomorrow, I'll talk about those economists, the ones who have a track record that suggests we should listen to them. In the meantime, at least keep an open mind. We need jobs. That needs to be the priority. Not deficit reduction.