Our Debt Trap

The "new" economy: workers have no rights, and are paid a few dollars over minimum wage. They have to pay for an American lifestyle: a decent rental, at very least, a car, insurance and gas, cable and phone, electricity, medical care and food, going up almost as fast as gas.

I have friends who are barely making it, working full time; they're good at what they do, highly valued by their employers, yet they're paid too little to afford the minimal American lifestyle.

Prices go up, although Bernanke tells us we don't have meaningful inflation, that deflation is the danger. Deflation is a danger, not just in the housing market, where prices are marching downward, but in the labor market. Workers are paid less and less, because everything, including rent, goes up--except their wages. The result is that people have less and less money to spend; they economize. In the country, people only drive to the store when they have multiple tasks; gas costs too much for multiple shopping trips, so there is less money as demand for goods and services.

Meanwhile, corporations are sitting on piles of cash, much of it from foreign earnings, and from squeezing more work out of fewer workers. The rise in unemployment (from 8.8% to 9.1%) is driven by labor deflation, i.e. people don't have enough money to maintain the demand necessary for businesses (small and large) to hire more workers.

No tax cuts for corporations and wealthy investors will stimulate job creation when there is flagging demand for the goods and services those businesses sell. No lay offs of public employees (Federal, state and local) is going to create more jobs; the opposite is true; layoffs drive demand downward.

Two policies would create jobs: resolving the housing collapse by allowing people to stay in their homes and renegotiating mortgages based on their homes' current value, and/or subsidizing housing payments. And, government creating needed jobs directly. Our crumbling infrastructure alone indicates that WPA-type jobs would be positive investments in the nation's future. It doesn't matter where the money comes from, but only the Federal government can make a political decision to invest in jobs.

Instead, governments slash jobs and spending, suddenly reducing money available for goods and services. The result is a debt trap. Fewer jobs mean less money being spent. This results in lower tax revenue and higher expenditures on services to the unemployed, which then forces cuts of even more jobs. This self-reinforcing deflation, is a debt trap. Deficits will rise as expenditures are cut; debt will increase as unemployment rises and as people spend less. That's not a paradox, it's how things work.

Rome was caught in a debt trap in the 4th century--and never got out of it. Keynes and FDR found a way out in the 1930's. Why don't we?

Cut The Deficit?

Cut The Deficits?

An overwhelming majority of small businessmen polled in northern New York, said that their greatest concern was the government's growing deficit. They said the government needed to cut expenditures, not increase them. It should also (somehow, not specified) encourage business. Analogies were drawn between a household and the government; one couldn't live beyond one's means as a family; nor could government, they insisted.

It's as if Keynes never existed!

A healthy portion of the deficit is from automatic stabilizers, like payouts for unemployment; the more unemployed, the more payments. Two benefits flow from this: people are not thrown into utter misery, and they still buy things, thereby sustaining some demand for goods and services. Without unemployment insurance, food stamps and other support payments, the Great Recession could easily have become the Second Great Depression.

How do you stimulate business when there is too little demand in the economy for whatever reason--in this case because of financial collapse? Do you cut government expenditures?

How, logically, would this help? If consumers aren't buying and businesses aren't selling--or buying materials, etc., how does cutting government expenditures solve this problem? Doesn't it make more sense that if government bought things (highway paving, bridge materials, labor), it might stimulate business, even if it meant a short-term increase in the government deficit?

Governments are not households; that's a false analogy. Households can't create money, or destroy it; governments can and do. Furthermore, if one household saves money, it is being thrifty, but if everyone saves money, if nobody spends, everyone becomes poorer. This is called 'the paradox of thrift.' It's what happened in Japan for the Lost (two) Decade(s): savings rates were too high. Business floundered.

It could happen in the US, and will, if there is no further stimulus and real jobs bill, or, if the only growth in the national budget is for "Defense." Defense spending is a poor stimulus. Not only does it use large amounts of capital for each job, it spends much of it abroad--"stimulating" Okinawa, for example, or Afghanistan. Also, it doesn't make the nation more productive, except at killing.

And yet, no politician would dare suggest cuts to "defense," the largest discretionary item in the budget.

Obama pretends he's listening: he's cutting discretionary spending in about 1/8 of government--for 2011--and yet he knows that what the nation needs is more stimulus. The government should spend more, not less, until we're in a solid recovery and unemployment is steadily receding. If there were no more stimulus to promote business, or prevent state and local government lay offs, then demand would fall and we'd be right back where we started: it's called a "double-dip" recession. That happened in 1937, and in the Third Century.

In Rome, that double-dip went on for hundreds of years.