Forging Ahead

Dean Baker writes for the Guardian, and from his overseas vantage point in England he has a very clear picture of what ails us. It’s all about economics and the folks who refuse to relinquish the reins (or the chains) that bind us.

“President Reagan”, he begins, “once famously quipped that everyone who supports abortion has already been born. In the same vein, it is worth noting that all the policymakers who don’t think we should worry about 9.6% unemployment have jobs.

“This simple fact cannot be repeated enough times because it explains a huge amount about current economic policy. For the tens of millions of people who are unemployed, underemployed or have given up looking for work altogether, we are in a crisis. The economy is an absolute disaster, ruining their lives and also jeopardizing the futures of their children and grandchildren.

“But that is not the way that the people paid to contemplate economic policy in Washington see things. This gang is busy congratulating themselves because things could have been worse. They point out that if they had been even more incompetent that we could be in a second Great Depression with unemployment staying in the double digits for a decade.

“Instead of worrying about the millions of unemployed workers today, they are worried about their deficit projections for the years 2018, 2020 or even 2025. This crew, which could not even see the $ 8 trillion housing bubble that was about to wreck the economy, wants the whole country to genuflect before their projections of deficits for 10-15 years into the future. This situation would really be funny if it did not lead to so much unnecessary suffering.

“Obviously, we have to teach some elementary economics to the geniuses who design economic policy. The basic problem we face is lack of demand. Note that this is the exact opposite of the deficit fixation – budget deficits are a problem when we have too much demand.

“To better understand this demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $ 50 or $ 100 bills. Suppose this person printed up $ 2 trillion of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisors.

“What would be the effect of this counterfeiting scam on the economy?

“In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $ 2 trillion of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.

“That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $ 2 trillion in normal times, it likely would cause a serious problem of inflation. There would be more demand for cars, houses and other goods than the economy was able to supply. This would push up prices and wages, leading to a cycle of inflation that would persist until policy measures were taken to slow the economy – or the counterfeiter was caught.

“In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason we are not doing it is simply the lack of demand.

“But the interesting part of the counterfeiter story is that this $ 2 trillion of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter’s lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognize the dud notes.

“At that point, the $ 2 trillion will be grabbed out of circulation and destroyed. Assuming that the economy will be strong enough at this point to remain near full employment even as the counterfeit wealth disappears, then there would be no lasting damage from the episode. The fictional wealth had generated demand when the economy needed it, but then was pulled out of circulation at the point when it could have generated inflation and ‘competed away’ goods and services from others.

“While it is unlikely we will see a successful counterfeiter on this scale, the government and the Federal Reserve Board can imitate the counterfeiter’s actions. This is the story of fiscal stimulus: safe, fun and legal. Instead of putting people to work filling the counterfeiter’s frivolous whims, we could have them work to build up the economy and meet important needs. The list of necessary tasks is long and well-known.

“As is the case with the counterfeiter’s illicit stash, the stimulus spending need not even create any long-term debt burden. The Fed could simply buy and hold the bonds issued to finance spending. When the economy returns to more normal levels of employment, the Fed would raise the interest rates, as it always does, to prevent inflation from posing a serious risk.

“It’s all very simple. Unfortunately our Washington politicians lack the courage to take the necessary steps to get the economy back on its feet. That means that the best hope we have right now might be a very successful counterfeiter.”-

No, a successful counterfeiter would be our second-best hope. Our best hope – and, in fact, our only hope – would be for the legitimate counterfeiter – the “Fed” – to authorize the printing of sufficient amounts of their counterfeit dollars (because that’s what they are) so that we can revitalize our shipbuilding industry and provide employment for the tens of millions now walking the plank. That was the way FDR brought the first Great Depression to an abrupt end.

But like Jesse James, Al Capone, et al, it isn’t courage that Washington politicians lack.