The cure may be worse than the illness

Opinion: Letters To The Editor

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Far from being a major economic problem, we probably owe our "recovery," such as it is, to the large, roughly $1 trillion, federal deficit that is "injecting" demand not offset by corresponding "leakage" (taxes or fees), equal to about 1/15 of our $15 trillion GDP. Without this, we would very likely have continued contraction. Rather than cutting it, we should probably be expanding our deficit (as long as the world continues to accept dollars) to re-employ the roughly 20 million Americans who are unemployed or working part-time but looking for full-time work — this is the real deficit that we should be concerned about!

Moreover, in the absence of far-reaching structural change or another massive run-up of private deficits, our economy will continue to depend on a large federal deficit both in the short run and in the long run. Only by reducing our structural trade deficit (that is our full-employment trade deficit) and/or radically restructuring our taxing and spending through large increases in taxes on the wealthy (who spend a much smaller share of their income on current goods and services) and a major redirection of federal spending toward high employment generating sectors (like education and human services), can the fiscal deficit be reduced without harming the economy and increasing the real unemployment deficit — in the absence of a large increase in private sector deficit. This is more than a matter of short-term Keynesian stimulus; it's a result of the long-term national income accounting identity (see: www.cpegonline.org/multimedia/DeficitLinkages.ppt).

Yes, we will have to cut the federal deficit at some point when the world's appetite for dollars (or the interest rate on treasury bills, now at record lows, begins to increase) but right now we should focus on getting folks employed and long-term economic restructuring (see: www.cpegonline.org/documents/MayDayManifesto.pdf), not cutting the deficit!

Conclusion: Any effort to avoid the "fiscal cliff" which reduces long-term restructuring will harm the economy. It would be best to repeal the Bush tax cuts and increase the deficit by spending on economic restructuring (including a large federal jobs program, see: www.cpegonline.org/reports/jobs.pdf) until the economy is sufficiently "rebalanced" so that it is no longer dependent on a large federal or private deficit to keep folks employed (and still leave 20 million people out in the cold!).

Ron Baiman

Oak Park

Reader Comments

18 Comments - Add Your Comment

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MichaelO from Oak Park  

Posted: December 17th, 2012 2:16 PM

"Of course defense spending creates private sector jobs as they manufacture & provide what's needed." Our defense budget is almost a trillion dollars per year, rj. What exactly is "needed"? How many carrier strike groups is enough? Here's my loathsome liberal thought for the day: cut the blood sucking military industrial monster. Have at it.

John Butch Murtagh from Oak Park, Illinois  

Posted: December 17th, 2012 1:25 PM

Guns are not going to be banned in this country. What is being asked post-Newton is that the government find ways to reduce the gun slaughters. It is not recreational or security handguns or rifles that are being challenged. It is the excessively powerful, multi-round guns that have slain people in schools, hospitals, churches, malls, et al. this year.

rj  

Posted: December 17th, 2012 1:22 PM

You can't keep doing what Roosevelt did, which we are, and why we have a $16T debt

rj  

Posted: December 17th, 2012 1:18 PM

Ron- Of course defense spending creates private sector jobs as they manufacture & provide what's needed. G creates nothing but layers of bureaucracy which creates nothing but waste & unfunded public pensions, as will be the case with OCare. Layers of bureaucracy and taxes which won't come close to pay for it-therefore rationing. Frederich Von Hayek & Milton Friedman have it right. The past 4 yrs proves their point that G spending prolongs a stagnant economy as it has through history

Ron from Oak Park  

Posted: December 17th, 2012 11:31 AM

The vast majority of economists (and even Republicans with regard to "defense" spending"!) agree that Gov spending creates jobs. If the spending is on productive investment and services like infrastructure, education, human services, and health care, these will be productive jobs. Contrary to UCLAs Cole and Ohanian, most economic historians agree that Roosevelt's switch to "budget austerity" in 1937 caused a renewed economic collapse until he abruptly switched back to raising government spending

rj  

Posted: December 7th, 2012 12:35 PM

Two UCLA economists content the Depression would have ended in 1936 instead of 1943 had the government not intervened with misguided policies. "History repeats itself, first as tragedy, second as farce". Marx. Pretty much sums up the results of the Roosevelt, Johnson & Obama regimes.

Tom from River Forest  

Posted: December 7th, 2012 9:18 AM

Also Ray, while your comments about services adding nothing to GDP is completely wrong, you should know that Marx agreed with you that in the end, the only value to an economy was a tangible good. Are you turning pink Ray?

Tom from River Forest  

Posted: December 7th, 2012 9:15 AM

Ray, did you take any history or economics classes at all? You wrote: "No one seems to understand that big government spending of borrowed money never solves employment problems for any period of time." Big government spending from 1933 until 1946 made this country the leading economy in the world. Come on Ray, as our president has reminded the GOP countless times, you are entitled to your own opinions but not your own facts.

Ray Simpson from Oak Park  

Posted: December 7th, 2012 8:36 AM

No one seems to understand that big government spending of borrowed money never solves employment problems for any period of time. Our history shows that as companies grow and make a profit they add employees so they can make more profit. Jobs are a commodity, not a product. GDP is where the jobs are and the last word is PRODUCT which means something tangible. A car is a tangible product that has thousands of tangible pieces that are made up of raw materials and the labor to convert them into a thing of value. Without profitable business models there would be no reason to exist and government punishing companies for their profits is self defeating. The only solution to our fiscal problem is for our government to stop wasteful spending and create a business friendly atmosphere and then let the engine run. If a CEO runs a company that is profitable and employs hundreds of employees , at all skill and wage levels, makes 100 times what the janitor makes, would any one of those people give up their job so the boss would make less? Service jobs are necessary, but add nothing to the GDP. The cost of services must be covered by a tangible product that has value added at multiple manufacturing steps. While services are nice to have and often necessary they only add overhead to the value of that widget that hangs on a peg hook at your local Target store.

Unfortunately,  

Posted: November 30th, 2012 3:45 PM

Part 2. Ron, put another way, why not have annual deficits of $3Trillion? If "deficits don't matter," then why should we limit or restrict them at all? Weimar Germany, Argentina, etc? Or do you believe in the "this time it's different" philosophy?

Unfortunately  

Posted: November 30th, 2012 3:42 PM

Ron, it would help if you could provide some successful real-world examples of your philosophy. Otherwise, I'm only thinking of the failures of the USSR and Thatcher's "socialism works until you run out of other people's money."

Ron from Oak Park  

Posted: November 30th, 2012 2:40 PM

Red baiting aside - most of these comments miss the point. Federal deficits are NOT the same as households deficits. What matters for countries is employment and real income and production, not financial accounting and job reducing deficit reduction.

Fringie McLefterson  

Posted: November 27th, 2012 3:28 PM

Ugh.. among other things, in a long psuedoacademic ramble on their website, CPEG advocates for a neo-Marxist economy, Well, I guess anyone in that system who agitates about unemployment you can ship off to slave labor on the gulag - problem solved.

People First  

Posted: November 27th, 2012 1:44 PM

Are you calling Dick Cheney a liberal? He famously told former Treasury Secretary Paul O'Neil that "Reagan proved deficits don't matter". O'Neil was fired by the Bush adminstation when he expressed concerns about tax cuts for the wealthiest Americans

Common Sense  

Posted: November 27th, 2012 1:26 PM

Deficits don't matter? Really? Try not paying the mortgage and see how that works out for you. Liberals may have seized the media and academia to promote such fantasies, but they cannot change basic logic. Bills come due, and consequences suffered.

Keynesian Sugar High   

Posted: November 27th, 2012 1:20 PM

C'mon guys. Let our children pay. That's the Democratic plan and it keeps getting them reelected - see how well it has worked in Illinois. Keynesian sugar-highs are great politics! Right up until the sugar runs out and the rioting begins.

Bill from Oak Park  

Posted: November 27th, 2012 12:43 PM

C'mon Wednesday Journal. How about some disclosure that Mr. Baiman is a "group member" of the organization (Chicago Political Economy Group) he cites throughout the article? see (http://www.cpegonline.org/aboutus/)

Dan in Oak Park  

Posted: November 23rd, 2012 4:01 PM

This reads like the nation is a drug addict, hooked on debt. We know we need to quit, but it feels so good to keep spending. We get the false sense that with more spending things will even get better. We need two weeks with Dr. Drew followed by a stint in a sober living facility.

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