Stimulus Overload
Neither of these men is willing to do what it would take to solve our dire economic problems.
Finally, a Serious Economist admits what appears to be an obvious point to some of us lay people: as much as everyone hopes and wants Obama’s $1 TRILLION (or thereabouts) stimulus plan to work, it’s yet another stopgap non-solution that will only make the inevitable pain we’re facing that much worse.
The situation is really quite simple. The debt cupboard that we’ve been living on for years–make that decades–is now bare. Actually, it’s not just bare, it was smashed up for kindling and burned along with the rest of our national wealth long ago. From William Buiter at The Financial Times (via Naked Capitalism):
Even before the crisis erupted, around the middle of 2007, the US economy was in fundamental disequilibrium. The external primary deficit (the external current account deficit plus US net foreign investment income) was running at around five or six percent of GDP. The US was also a net external debtor. Its net external investment position (at fair value, or the statisticians best guess at it) was somewhere between minus 20 percent and minus 30 percent of annual GDP. The US economy managed to finance this debt and deficit position quite comfortably because it gave foreigners an atrocious rate of return on their investment in the US - a rate of return much lower, when expressed in a common currency, than the rate of return earned by US-resident investors abroad.
Translation: It’s not like we were in all that great a shape before the recent collapse. We were already a spendthrift, debtor nation strutting all over the globe like some maxed-out dandy ducking into alleyways and taverns to avoid the loan sharks and bagmen coming down the other side of the street.
The only reason we were able to live so profligately for so many years is because the Chinese and the Saudis and all the rest of our world bankers have been willing to accept ridiculously low returns on their investment. When Visa or Master Card have a customer who keeps spending over his limit, they tend to raise that limit–at least for awhile–to push him deeper in hock. But eventually, they tighten up and demand payment, and a higher rate of return:
The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally … the US will have to start to pay a normal market price for the net resources it borrows from abroad. It will therefore have to start to generate primary surpluses, on average, for the indefinite future. A nation with credibility as regards its commitment to meeting its obligations could afford to delay the onset of the period of pain. It could borrow more from abroad today, because foreign creditors and investors are confident that, in due course, the country would be willing and able to generate the (correspondingly larger) future primary external surpluses required to service its external obligations. I don’t believe the US has either the external credibility or the goodwill capital any longer to ask, Oliver Twist-like, for a little more leeway, a little more latitude.
What does all of this mean? A long overdue crash in the dollar that will make our recent troubles look like mild indigestion compared to colon cancer. And the more debt-financed spending we do now, the worse it’s going to be.
What is the solution? As usual, neither of our two stale old parties in Washington has it. The Democrats want more deficit-financed government spending. But you might as well give an emphysema patient a carton of Marlboros. The Republicans don’t have the answer either. We can’t keep believing in their pie-in-the-sky tax cuts and giveaways to Wall Street either.
What Buiter says we need is what we here at Captive American have been saying we need for … well, for awhile now: namely, discipline and sacrifice. We have to stop putting off the pain. That’s only making the pain to come worse:
First, there will have to be some combination of higher taxes as a share of GDP or lower non-interest public spending as a share of GDP. Second, there will have to be a large increase in national saving relative to domestic capital formation.
Spending less. Saving more. Balancing our books as a nation. Wow. What concepts. Who says economics is hard to understand? Of course, all three of those urgently needed solutions are complete anathema to the career politicians in charge of our government.
Telling Americans the truth about how bad it is, asking them to sacrifice some of their comforts, and actually saying “No!” to special interests and government spending all make it rather difficult to win reelection. And these government lifers simply will not risk the end of their political careers. Politics is all they know. Most of them have never worked a real job. Given all that, is it any wonder that the two parties in power continue to push discredited but pleasant-sounding ideas like tax cuts and debt-financed spending?
Make no mistake: until we change them out, we’re not going to see the kind of change we’ve been promised and we’re not going to climb out of the massive hole they’ve dug for us.
Hey, I enjoy your writing as I see you are learning like me from some decent webblogs like Yves Smith: Naked Capitalist.
Now, politically though I detect a little limitation perhaps as that was my specialty back in the day. Just blaming the Average American for supporting Republicratic leadership just will not do. Calling for sacrifice and letting go of comforts doesn’t reflect just what’s going on.
For one, sacrifice and comforts are being eschewed as we speak…but only by the ‘victims’ of our system: lower middle class and working people. They already are sacrificing…involuntarily.
The Real unemployment rate is already 12 percent and will hit 20 percent soon enough. This ‘depression’ (contraction) however will only affect the middle and lower classes. I suspect the real cause of the downturn is the decline in average incomes during all of the Bush years. The contraction will only make things worse in income inequality which by the way was deemed the real cause of the Great Depression when farmers and workers were already under great stress all through the boom years of the ’20s. (read the The Great Crash by JK Galbraith). Americans have been again oversold on buying into debt…but now with jobs disappearing they cannot repay debt. Now it remains to be seen if wealthy Americans (such as yourself…I suspect) are willing to pony up for their country…or are they going to again write more tax cuts for themselves?
If the sacrifices are only being suffered by the underemployed and unemployed…then nothing will change except greater despair and crime…(like in Naftatized Mexico)