Monday, April 22, 2013

Austerity and Deficits

Austerity Is Based on Fear and Greed, Not Theory
This is long overdue. There is more at the link, but this is the meat of the message.  

I saw a Twitter message that said the only reason the US doesn't have austerity as severe as that in Europe it that the administration and its Congressional opposition cannot agree on how severe to make it. 
The brouhaha about Reinhart and Rogoff’s influential and now (partially) discredited paper on the effects of national debt on long-term economic growth misses the point about austerity. In the euro zone, austerity had little or nothing to do with the theoretical arguments about optimal debt loads and everything to do with Germany not wanting to pay other people’s bills. 
Carmen Reinhart and Kenneth Rogoff have been at the forefront of research on sovereign debt, and their 2010 paper “Growth in a Time of Debt” was a theoretical cornerstone for many in arguing that, ultimately, austerity is justified in the face of high levels of national debt. That’s because, the paper found, debt levels above 90% of GDP are associated with stagnant economies over subsequent periods 
Unfortunately, the R-R methodology and data analysis seems suspect. A critical recent rebuttal found that including bits of data R-R left out either by accident or on purpose showed that debt loads above 90% of GDP resulted in only modestly lower growth than sub-90% national debt, rather than the falling-off-a-cliff outcome suggested by the original R-R paper. 
For those who have long argued against austerity, like the Nobel prize-winning economist Paul Krugman, the refutation of the R-R paper was a victory.
I don't follow macroeconomic theory much. And when I do it makes no difference. Even if I or someone else finds the equivalent to a macroeconomic Rosetta Stone or an airtight Theory of Everything the academic and political types slogging around in that swamp would deny it was valid. Sometimes I think they are worse than climate change deniers. 

This is not rocket science, folks. 

Any good homemaker (and all those smart entrepreneurial types -- mostly women incidentally -- taking advantage of microlending in the undeveloped world) would agree that deficits are a matter of discipline. But the discipline has to do with management of available resources in a way that uses them judiciously, not squeezing them off.  

The way out of debt is more wealth, not less. 
And more wealth comes from more productivity, not less. 
Austerity LOWERS productivity. 

Deficits are not a function of income but "outgo."  In other words, spending more than you can afford is what causes deficits. 

Poor people are better stewards than rich ones because they have no options. Sure, they spend proportionally more for gambling, cigarettes and beer than their economic "betters" but unless someone is stupid enough to extend them credit for real estate, expensive cars or other high-priced luxuries they are not apt to hurt anyone but themselves. 

I spent my whole life in business as a general manager, working hard to squeeze a nickel or dime out of every dollar of revenue. It's not easy but it can  be done. It can even be done, though less impressively, on a very small scale. But there is no way to make money from zero income. The arithmetic just won't allow it. 

But the manner in which money is spent is more important than how it is earned. Earnings from a revenue stream may come from goods or services, both of which are scalable, meaning the more you do it the more you get -- sales, products, performances, fees, whatever... But it can all be pissed away in a flash by poor management at the top. 

And that is where deficits are made. At the top, not the bottom.  

The goal of rational economics should be to maximize the proportion of wealthy people in a population  by minimizing the number of poor people. That formula produces a positive symbiotic relationship that creates increased greater supply and demand. I takes a real knucklehead to imagine that clamping down on everybody improves an already bad situation. 


This issue is related to minimum wages but the dynamic is too threatening for most business types to grasp. Any time that minimum wage laws are mentioned there the usual tired arguments are trotted out about how they "cost jobs" or "cause inflation."  But the simple truth is that wages are subject to the same laws of economics as supply and demand for goods and services -- more availability leads to lower prices, and as demand diminishes so do supplies. (That's why we no longer have buggy whips, arm garters for men or 45 rpm records.)

Unfortunately, in the case of wages it is people -- not goods and services -- which are part of the mix.

Demand = Jobs
Supply =  Employees
Prices = Wages. 

Clearly as the number of jobs (demand) diminishes the number of available potential employees (supply) increases, with the result that wages (prices) goes down.
The big picture (can you spell MACRO-economic?) is that those at the bottom of the wage scale get trapped in an ever-downward feedback loop.  

This is how share croppers, miners and mill workers remained trapped in their respective cages. They were latter-day heirs of serfs and vassals, bound for generations to the land owner, mill owner or lord of the manor for protection and survival. And this is the same dynamic that keeps todays employees handcuffed to their respective sources of employment, from corporate, civil service or military environments to entrepreneurial ventures they dare not leave lest those creations collapse without their imagination and leadership.

Those toward the middle or top of the economy may complain, but they have the advantage of not being at or near the bottom, and so they tend to hold fast to their respective places. And those at or near the bottom, even those with little or nothing to lose, will not risk losing what little they have as long as they have what the Romans called bread and circuses.

These reasons are why a decent minimum wage and strong social safety net are not only minimal to civil behavior but essential to a flourishing economy.

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